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GEOFF CORDWELL

UNDERSTANDING PERFORMANCE MANAGEMENT

Chapter 1
Financial and non-financial
performance management

This chapter is provided free to OpenTuition.com

More chapters are available at www.cordwellconsulting.co.uk

One of the big dilemmas of performance management is to decide which performance


measurements to use. The regulatory framework will almost always dictate that a business will have
accounting records to record historic profits (and losses), the assets and liabilities of the business and
record all cash movements. It is easy, therefore, to become obsessed by these financial measures
since they have to be produced for people outside the organisation in any case (shareholders, tax
officials and so on). This also means that we are familiar with them and there’s nothing like a comfort
zone to make us all reluctant to move.

The issue though is this. Is the past financial performance a good indicator of the future likely
financial progress? For some businesses it is true that year on year “steady progress” is made and so if
the results were plotted it might look as if the world is a predictable place.

30
25
20
15
Sales
10
5
0
Year 1 Year 2 Year 3 Year 4

The graph shows that year 4 results are more or less in line with the trend of the business. But if you
“stood” at the end of year 4 looking forward how confident could you be that the past trend would
continue? Many things can happen in business from one year to the next and these things can
seriously affect the financial results. For example if you were told that in the above graph the
business was involved in soft skills training. At the start of year 5 a recession hit and companies
began to look very hard at their discretionary expenses and the year 5 financial results showed a 40%
fall in sales and significant losses.

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GEOFF CORDWELL
UNDERSTANDING PERFORMANCE MANAGEMENT

You might think, therefore, that the future is just unpredictable and that the best strategy is to stay
flexible and react to what is thrown up by the market. Whilst there are elements of truth in this idea
an organisation that “sees it coming” is in much better shape to respond sooner.

The training company above might have been wise to be measuring enquiry rates from customers (a
non- financial measure of success) during the years 1 to 4. If it had it would have noted that
advanced enquiries were showing signs of badly tailing off as early as June in year 4. The courses it
delivered in the second half of year 4 were to customers that had booked some 4 months earlier (on
average) and so it wasn’t until year 5 that the financial figures started to reflect what was happening.

In some way that’s the point. The financial results reflect the end of a series of events. Organisations
that wait to see the year’s profit before “managing” the business are playing a dangerous game. There
are often other (commonly non-financial) indicators that will give a business advanced warning of
problems ahead.

Financial indicators tell you where you have been and are where you are now

Non- financial indicators tell you where you might be going

Let’s consider an example


Freg R Us Limited is a new business, selling high quality organically produced fruit and vegetables via
the internet. The managers are confident that in the modern society’s, home delivery of weekly
shopping of fruit and vegetables will be successful.

The average market growth for this market is some 120% per annum although this is likely to slow to
a more sustainable 70% in the future. Customers can buy a variety of different produce but have
choice in this competitive market.

The owners were prepared for a loss-making start. This meant that cash flow would be an issue and
cost control would be important.

Website development was seen as important but despite this the owners decided to use an
inexperienced website developer. All website development costs were written off as incurred in the
internal management accounts that are shown below in table 1.

The owners spent considerable sums on launch marketing in the first two quarters. It is not expected
that the marketing expenditure will continue to be as high in the future as the company name
spreads.

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The business’s trading results for the first two quarters are shown below in table 1

Table 1 – Financial Results for first two quarters of the business:

Quarter 1 Quarter 2
£ £ £ £
Sales 504,000 816,000
Cost of Sales 241,920 408,816
Gross Profit 262,080 407,184

Website development 144,000 108,000


Administration 120,600 180,768
Distribution 24,916 39,984
Launch marketing 72,000 48,960
Other variable expenses 60,000 96,000
Total expenses 421,518 473,712
Loss for quarter (159,436) (66,528)

Administration expenses above include manager’s and director’s salaries.

Some non-financial performance indicators are available for the early quarters of trading.
The data for the first two quarters management reports is shown below:

Table 2 – Non financial indicators for first two quarters of business:

Quarter 1 Quarter 2
Website hits* 828,947 1,036,191
Number of orders placed 33,157 46,628
Late delivery 3% 12%
Sales returns 8% 18%
System down time 2% 4%

*A website hit is automatically counted each time a visitor to the website


opens the home page of Freg R Us Limited.

The industry average conversion rate for website hits to number of orders placed is 3.2%.
The industry average sales return rate for internet based fruit and vegetables sold is 13%.

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Let us first consider the financial performance of Freg R Us Limited. In each case the text provides a
potential interpretation of the data and then considers (in a handwriting font) the learning points
that can be drawn from the analysis.

Sales Growth
Freg R Us has grown very quickly in its first two quarters of trade. The growth between quarter
1 and quarter 2 is a staggering 62% (see working 4). This can only be seen as impressive given
the stated competitive nature of the business.

New businesses can often struggle to get going but this does not appear to be the case here.

The industry also appears to be growing but at a slower rate. This means the Freg R Us is taking
market share from the competition. Whilst this is impressive it must be recognised that high
growth rates are difficult to maintain.

Sometimes performance management draws from experience. £504,000 of sales (and


over 33,000 orders placed) in the first three months of business “feels” good. You have
to know your subject in order to make these statements. In the real world an
accountant may have worked with many different clients and therefore has the basis
for this subjectivity.
Percentages are extremely useful in performance management. The sales have
increased by £312,000 which is small for a multi-million £ business but huge for
Freg R Us. The humble percentage conveys this well.
Performance can be measured by reference to the external market. Freg R Us has
increased sales (by 61%) in a competitive environment. This makes the absolute
increase more impressive. If the fruit and Vegetable market had been growing by 80%
per quarter then Freg R Us’s management would be looking for solutions to their
problems rather than celebrating success.

Gross Profit
The gross profit for the business is 52% for quarter 1 and 50% for quarter 2. We have no
comparable industry data provided so no absolute comment can be made. A reduction of 2
percentage points might not seem serious; however 2% of £816,000 is over £16,000 of profit
that could have been earned in quarter 2 alone. Falling margins should be guarded against by
the owners.

The cause of this fall is unclear. Competition could be forcing down prices. If Freg R Us is also
reducing its prices this would reflect on the gross profit margin. It could also be that the cost of
the fruit and vegetables are rising disproportionately. This market is subject to weather
conditions for example and this can lead to volatile prices. As the business has grown so
quickly, it may have had to find new suppliers at higher prices. Delivery costs could also have
risen. These could all reduce gross margins achieved.

Margin is key measure for many businesses. They buy goods in (or manufacture)
and sell on in the hope of profit. The extent to which they “add value” is a key
performance indicator. Equally, margins must be protected. A fall in margin means
that the business will have to work harder to make the same profit as before.

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The financial performance measure (in this case gross profit (or margin)) contains no
indicator of cause. In other words it is data not information. It merely shows you the
end result of a problem (or a success). The performance manager has to investigate to
find out why in this case the fall in margin has occurred. A financial performance
assessment has therefore to be at least 90% words not just numbers. In the real world
there is more likely to be a definite answer (with further analysis) in an exam you
have to theorise a little and use the clues in the question.
If you are going to guess – guess smart! In the above it is suggested that a rapidly
growing business such as this will be under pressure to meet demand and might
therefore have to pay higher prices to obtain supplies at short notice. The growth
information in the scenario guides the guesswork on possible causes.

Website development
Website costs are being written off as incurred to the management accounting profit and loss
account (or income statement).

Website development should be seen as a one off cost and should not be allowed to distort
the underlying performance of the business. If we add back all website development costs the
business produced a profit of £26,036 in the first two quarters of trade (working 5).

The wisdom of seemingly cutting back on website development is questionable. The website
is a core resource and must be reliable at all times.

The regulatory framework does not apply to a businesses internal management


accounts. It can, therefore adopt any accounting policy it likes in these accounts.
However in the real world many organisations will be reluctant to have two systems
running and so adjustments to the financial accounts may have to be made to get a
true picture of performance. These adjustments are not dealt with in this chapter.
Unusual or non-recurring expenses need to be adjusted in order to produce a
meaningful assessment of performance. Expenses such as website development are
investments in the future of the business. It is probably wrong, therefore, to “punish”
the current profit and loss statement with the whole charge. These matters are fully
explored in many financial reporting standards but here the main point has been
made.

Administration costs
These are 23.9% of sales in quarter 1 and only 22.1% of sales in quarter 2. This could be good
cost control which is impressive given the inexperience of the management team.

Also any fixed costs included in the cost will be spread over greater volume. This would also
reduce the percentage of cost against sales figure. This is an example of a business gaining
critical mass. The bigger a business gets the more it is able to absorb costs. Freg R Us may have
some way to go in this regard gaining a much greater size than at present.

The performance management point here is that although the % cost of sales is falling
this may be due to the fact that the business is growing rather than some cunning cost
control plan.

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There is no doubt that accountants are uniquely placed to reveal the mystery of
financial numbers. In the above an understanding of fixed costs is demonstrated. As
a business grows its fixed costs will be spread over greater numbers of units reducing
the percentage spend (in this case on sales) and improving margins. A good
performance manager will understand this dynamic and make comment. Some
organisations in some markets have to obtain a certain size in order to compete (they
gain a critical mass). In others, size may not matter as much (personal services such
as hairdressing for example). Again this is about knowing the market in which your
business operates in and being prepared to apply your technical knowledge.

Distribution costs
This is a relatively minor cost that again appears to be under control. Distribution costs are
likely to be mainly variable (postage) and indeed the proportion of this cost to sales is constant
at 4.9%.

The main performance management point here is that not everything is worthy of
detailed comment. A good assessment is a focussed one. In the real world some costs or
indeed revenues may not be discussed at all. This helps reduce the volume in a
financial report to (say) the board. In an exam it represents an easy way to score a
mark. One sentence in a minor area can earn a mark quickly.

Launch marketing
This is another one off cost that should be allowed to distort the performance picture.
Continued marketing in the future is likely but probably at a reduce cost.

This is an indicator that the businesses financial performance is better than the loss suggests.
The loss includes the launch marketing cost. This cost needs to be adjusted to get a
meaningful performance assessment.

This organisation lost money but as part of the figures over £100,000 of “launch
marketing” was incurred. A good performance assessment would allow for costs which
are one off items in its commentary.

Other costs
Another cost that appears under control in that it seems to have simply varied with volume.

Again, because there is little to say avoid the padding trap and said little. Focus,
focus, focus.

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However, what does the non financial data tell us? From what has been said already we would
expect to get more of an indication of the future direction of the business. Again each area is
considered and then the learning points discussed in a handwriting font

Website hits
This is a very impressive start. The internet revolutionises the way new businesses enter a
market. Nonetheless growth in hits is 25% between the two quarters and this is impressive. If
this continued over a year the final quarter hits would be over 1.6m hits.

Note again the use of experience and judgement. If you think it is impressive that a
new business gains so much interest in its products in the first two quarters then say
so. You must draw on your experience in a commentary and not be afraid to state your
opinion.
The angle taken here is a little different than for the financial assessment. The
“future” performance is now being talked about. Non-financial indicators of
performance very often give us clues as to the likely direction that the business will
take. Website hits are no guarantee of actual sales. However, they do represent an
interest in the company by potential customers and if other elements of good
performance are present (accessible ordering system, quality products for example)
then sales may follow.

Number of orders placed


Freg’s order conversion rates are 4% and 4.5% in quarter 1 and 2 respectively. Both these
figures appear to be ahead of the industry average and hence can be described as good. Freg
appears competitive

Industry averages are very useful when one considers performance. They enable an
assessment of relative performance against competitors. Without this angle an
assessment can only focus on the trend of results. Performing trend analysis alone is
dangerous. An organisation might be growing (and therefore be congratulated for
good performance) but doing so at a much slower rate than the market. You must take
an external view of performance.
We can use the number of orders placed to calculate the average price achieved for the orders:

Quarter 1

£504,000
= £15.20 per order
33,157

Quarter 2

£816,000
= £17.50 per order
46, 628

This suggests that the fall in gross profit has little to do with the sales price. The problem of the
falling gross profit must lie elsewhere. Perhaps the mix of products is changing with customers
choosing the products they liked best in their first few orders.

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Mathematical calculations are useful in performance management. The calculation of


an average, a growth rate or as in this case a price can add value to the assessment.
You may not be told which calculation might be useful so again experience is needed.
These calculations do not have to be complicated. Using complicated calculations such
as standard deviations or a covariance is often possible but if your reader does not
understand the measures there is little point in their calculation. Keep it simple is good
advice. The marketing spend per customer or per website hit are both straightforward
and useful calculations that could have been done.
Again the calculation itself is just the start of an assessment of performance. An
interpretation would then be needed.

The marketing spend per website hit is:


Quarter 1: £72,000 / 828,947 = £0.0868
Quarter 2: £48,960 / 1,036,191 = £0.0473

A good assessment of performance would now state an opinion on this. This seems
cheap. Direct mail would cost a lot more than £0.09 per unit sent and its response rate
would be unlikely (according to research) to be more than 2%. The direction of the unit
cost is also worthy of comment. It seems as if the business is generating sales
regardless of the marketing spend. Word of mouth, newspaper reports or repeat
purchases may be a cause of this. A qualitative comment would be sensible here too!
“This is encouraging!”

Late delivery
Freg is selling food and customers will require reliable delivery systems. The increase in late
delivery is worrying for Freg as this could easily lose customers. Businesses can the victim of
their own success in that rapid expansion over stretches resources and reliability or quality
suffers.

Disappointed customers may not return a second time.

The danger signals for the future should be clear here. Non-financial measures tend to
reveal the future perhaps better than a crystal ball. Your assessment should be prepared
to take this angle and hypothesise as to what might happen if what you see at the
moment continues.

Sales returns
Returns are clearly common in this industry. The customers may be unhappy with the quality
or the goods might have been damaged in transit. The concern here is that the business’s
return rate has jumped up in quarter 2 and is now well above the average for the industry. In
other words performance is worsening and below that of the competitors.

If the business is under pressure on delivery (as shown by the lateness of delivery) it could be
that errors are being made. If wrong or damaged goods are sent out then they will be returned
by disappointed customers.

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This is clearly concerning and an investigation is needed.

Note the “worsening” and poor “competitiveness” angles taken here. Both are valid. A
performance assessment can talk about trend and about relative success if the data is
available.

System down time


If customers cannot access the site then orders cannot be placed. This is financially disastrous.

Downtime could be caused by insufficient investment at the development stage (we are told
that the server was developed by an inexperienced developer) or when the site is under
pressure due to the growth in volumes of sales and hits.

The down time percentage has risen alarmingly and this is concerning. Ideally we would need
figures for the average percentage down time achieved by comparable systems to be able to
comment further.

A discussion with the website developers may well be warranted along with an inspection of
the developer’s contract.

If you are guessing as to possible cause and can think of more than one plausible
possibility then be prepared to state the most likely reason for a measures result.
Note also the suggestion that the website developers may be responsible. Good business
advice can come from a performance assessment don’t be afraid to give it!

Summary
Although the business has lost over £225,964 in the first two quarters of its life, this is not as
bad as it looks. The reasons for this view are:

• New businesses rarely breakeven within six months of launch

• The losses are after charging launch marketing and website development costs, these
costs will not be incurred at such a high rate in the future
The threat to the future surrounds the fall in gross profit percentage which should be
investigated and the possible drop in quality.

The business is moving in the right direction and without website development and launch
marketing they made a profit of £56,564 in quarter 1 and £90,432 in quarter 2.

Performance assessment often starts with the detail, looking at individual costs and
revenue for example. However, an overall view can sometimes be useful (as here). You
should be able to draw conclusions and look at the situation at the top level. This is the
sort of summary that members of a board would find very useful. Recognise that the
profit and loss account of a business does always reflect its true performance.

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Workings
1. Gross profit

Quarter 1: Quarter 2:
262,080 407,184
= 52% = 52%
504,000 816,000
2. Website conversion rates

Quarter 1: Quarter 2:
33,157 46,628
= 4% = 52%
828,947 1,036,191

3. Website hits growth

Between quarter 1 and quarter 2 the growth in website hits has been:

1,936,191
= 1.25 = 25%
828,947

4. Sales growth between quarter 1 and quarter 2 has been

816,000
= 1.62 = 62%
504,000

5. Profits before website costs are

Q1 Q2 Total
Losses shown -159,436 -66,528
Website costs 144,000 108,000
Revised result -15,436 41,472 26,036

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The academic world’s contribution to non-financial performance assessment


In the above example of performance assessment experience has been used to select a series of
techniques and calculations. However, the academic world is full of help in this regard. The list of
financial and non-financial assessment based potential calculations is endless. A student can
concentrate on a few key calculations since a few will often be enough.

The mistake that many performance managers make is to bombard their reader with as many
calculations as possible and in an exam this is disastrous. Your entire allocated time can be taken up
with calculations which will earn you a maximum of 10% of the marks available for a question. A
performance assessment is 90% words and so the marks will be allocated accordingly.

That having been said you do need to be able to do these calculations and be able to select which
ones you need in any given situation.

Financial performance assessment calculations


Much depends on what you are trying to assess. Profitability, liquidity or gearing are all possibilities.

Profitability
Gross profit (%) = gross profit/sales x 100

Net profit (%) = net profit/sales x 100

Costs can be measured as the % increase from one year to the next or can be measured as the % of
sales that is represents thus: cost/sales x 100

If a balance sheet is provided or available then other calculations are possible:

Asset turnover can be measured as sales / capital employed – this measure attempts to show how
hard the assets are working for the owner. If the assets are working hard, then a high amounts of
sales will be generated for every £ of assets held.

ROCE % (return on capital employed) is measured as the net profit / capital employed x 100. This
attempts to show how well the assets are generating profit.

Liquidity
Liquidity concerns that amount of readily available cash a business has and thus indicates its ability
to pay its debts.

The most commonly used ratio is the current ratio. This is measured as current assets/current
liabilities and ideally would exceed 1. A “liquid” business has enough current assets to settle its
current liabilities.

Since inventory can sometimes be slow moving (and hence not very liquid) a quick ratio can be used
removing inventories from the current assets figure above.

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Gearing
Debt is a common enough form of finance for businesses, it has tax advantages over equity (the
interest attracts tax relief ) and the interest rate is often lower than the cost of other forms of long
term borrowing. However, too much debt renders a business risky. High levels of interest payments
can damage dividend prospects and involve the banks (or other financial institutions) having an
active interest in the business. Gearing can be measured as:

Gearing (%) = debt / (debt + equity) x 100

Comparator
With all these ratios you need a comparator. Previous year figures will give the performance
manager the opportunity to talk about trends. If other businesses data is available or industry
averages then the conversation can turn to matters of competitiveness and acceptability (of debt
levels for example).

It is important that the performance manager recognises which comparator they have and makes
comments as appropriate. For example if all you have is previous year figures then comments of
“improvement” or “worsening” are fine but “good” is more doubtful. If a gross profit has increased to
40% from 37% you still cannot say the 40% is good. If competitors earn a gross profit of 48% then
you can say that we are improving but still have a long way to go!

Generally speaking, despite the difficulties in using external comparators (lack of consistency in
calculation being the main problem) some external focus is important. No business operates in a
vacuum.

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Non financial performance assessment


There are no rules here. Every organisation selects its own measures which it wishes to focus on and
no two organisations measures will be the same. Exciting eh! In the business world this means a
committee which will sit down (probably) and discuss what they consider to be important. In an
exam, life is simpler. Whilst sat down (definitely) you will have to apply a given model or set of
measures to a question. Prior preparation is centred on becoming used to the models that exist (and
that are in your particular syllabus) and familiar to some of the more common measures that are
used.

Briefly considered here are two of the more popular models, but remember you need to apply
yourself in an exam so rote learning of these models will not be enough.

The Balanced Scorecard – Kaplan and Norton


This is perhaps one of the best known models, it suggests that managers should agree targets in four
broad areas (they called them “perspectives” to be flash). The areas were:

Financial perspective: Every business cannot ignore the financial figures


(despite the importance of non-financial measures).
Banks and shareholders in particular will be
concerned about the current position of the
business and without their support there is no future!
Any of the financial measures noted above could be
used here.

Customer perspective: An external view, a view focussed on the customer is


vital for the go ahead business. “Go-ahead” - an
American sounding expression for which there is an
apology! A business must know how its customers
feel about the products and services provided. To do
that the business must measure the customers’
degree of satisfaction in some way.
Measures could include:

• % on time delivery

• % repurchase rate by returning customers

• customer satisfaction rating


(a score out of 10 – see below)

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Internal business perspective: An internal view. An organisation must operate


efficiently delivering customer needs whilst
controlling its costs and resources. All resources and
internal processes could be covered: with targets
being set for assets usage, supply chain
management and customer service systems.
Measures could include:

• manufacturing build times

• cost per unit

• machine breakdown rate


(perhaps measured by breakdown hours per
thousand hours)

The innovation and learning perspective: This concerns the intangible assets that a business
has, primarily its people (human capital) and its
knowledge (information capital).
Measures could include:

• employee lateness or absence rate

• employee turnover

• time to develop products to market

Fitzgerald and Moon’s Building Block model


This is a model probably best suited for service based businesses but could probably be adapted for
others fairly easily.

They proposed that underpinning the actual targets (they grouped these in to 6 dimensions – see
later) were principles surrounding standards and rewards.

Standards
They suggested that employees should participate in the setting of targets since this would
encourage ownership of the target and a commitment to it. They said that the target should provide
stretch making it achievable but only with effort and that all targets should be seen to be fair by all
concerned. To achieve fairness adjustments might have to be made to (say) allow for cheaper
overseas rents not available in all the countries an organisation operates. In this way all divisions
could be compared fairly.

Rewards
The motivation and willingness of an employee to work hard cannot be assumed. Many employers
think that rewarding staff using purely a flat rate (for time) is enough. They think that the employee is
already being paid and should therefore give their all for the business without the need for further
incentive. There are doubts as to the wisdom of this. A lower basic pay with a variable bonus element
would seem sensible.

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Fitzgerald and Moon suggested that any reward system should be easily understood, concern
conditions that are controllable by the employee and motivate them to strive for more.

In whichever model you decide is most appropriate the precise individual targets would have
to be agreed by each business but they should be:

Specific vague targets can often be misinterpreted. If you tell an


employee to “do better” or “improve” you might be asking
for miracles. Most employees want better guidance. Agree
a specific improvement plan and review progress regularly.

Measurable performance managers have to put a number on all


targets which can be difficult but rarely impossible. I am
happy but how happy? Am I happier now than last month?
Tricky questions. But if I tell you that my happy score was 8
last month and 9 this month then I can convey some
understanding to you about how I feel.

The medical profession employ this technique in triage.


“How do you rate your pain on a scale of 1 -10?” patients
get asked when presenting themselves at a hospital. This
should enable the triage nurse to prioritise cases. There are
clearly honesty issues here with patients feigning near
death pain levels to be seen sooner, however that is a
problem of the vested interest involved not the scoring
principle.

Achievable (with a little effort.) This chapter is not specifically dealing with motivation
theories and ideas. However, it is worth noting that setting
targets that stretch individuals is usually the best way to
maximise output from them

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Relevant targets need to be focussed on what is important and be


relevant to the individual and the organisation as a whole.
In other words a little thought needs to go in to which
targets to set. Single targets rarely work since (sadly)
employee bias can creep in. For example if a car wash
business set a target solely on the speed of hand wash
they could easily end up with lots of partially washed cars
(and complaining customers). The car washers (probably
called automobile hygiene technicians in the bizarre world
we live in) need targets concerning a (small) range of areas.
Wash speed, wash quality and customer handling for
example. Abuse of the performance management system
becomes much more difficult in this way.

Time based a target needs a time focus. It is easy to say “one day I will
be a millionaire”. It is quite another to commit to being rich
before you are 30 years old. The time based element will
almost certainly galvanise more action.

SMART based targets work but fall down in even one area and the objectives may not be met.

Dimensions
Fitzgerald and Moon proposed six dimensions or areas that service organisations should set targets.
Although again as each business is different some organisations would concentrate on which areas
they felt were important to them.

Financial performance: Most of the nonfinancial performance models recognise


that businesses cannot entirely focus on the future and so
suggest measuring short term financial performance in
some way. This is a sound idea. It no good being
“promising” in the way a footballer might be if in the
present the player breaks a leg and can play no more. In a
business context a business that goes bankrupt today can
hardly do well tomorrow.

Competitive performance: No organisation operates in a vacuum and competitors will


almost always be present. Therefore setting targets on
market share and sales growth is sensible.

Flexibility: An organisation needs to flexible in the way it deals with its


customers. The more it is able to say “yes” to a customer
request the more customers it will have. This means having
a sensible range of products or flexibility in relation to
added extras (in cars for example). In a restaurant context,
flexibility in booking numbers, times of booking and the
range of items on the menu would all be possible
measures to use.

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GEOFF CORDWELL
UNDERSTANDING PERFORMANCE MANAGEMENT

! A word of warning here! To be a Jack of all trades


(and hence flexible) can mean you are a master of
none (and hence not seen as an expert and “good
quality”). Balance is needed. If you say yes to
everything suggested by a customer you could lose
focus and the control of your business.
Flexibility can also be referred to in relation to an internal
process perspective. It is not so good saying yes to every
customer in a restaurant if that means the chef and his staff
cannot cope with the demand. Staffing levels, overtime
worked and the mix of permanent and temporary staff
could all be measured.

Quality of service: An organisation has to decide what quality means for it.
Continuing the restaurant theme from above, a restaurant’s
quality might be based around targets for food taste,
service levels and waiting times for example.

Resource utilisation: Organisations that have assets often feel they ought to use
them. Sales per £ of assets value is commonly used but
non-financial measures can also be used. A private hospital
might have invested large sums of money into buying a
MRI scanner (an expensive piece of machinery that uses
magnets to produce a picture of the inside of a body). How
well it uses this asset is important so it could measure the
hours per week it is operational for example.

Other organisations may measure how much they are


spending on R&D or the time taken between an idea being
floated and a product delivered to market.

Innovation: An organisation can sometimes thrive on the quality of its


new ideas. Targets can be set for the number of new ideas
it generates (process targets) and the successfulness of the
new ideas (sales from new products).

Targets – central points!


• Too many targets can confuse people.

• Single targets can easily be abused (if you ask an employee to wash cars quickly then he may do
that but if this is his only target then what about quality of work and customer service? You may
end up with a lot of poorly washed cars).

• Be clear on what you consider to be important and focus most of the effort there. A restaurant
may be happy to keep customers waiting a little, sacrificing throughput in return for quality food
cooked from fresh. This should be reflected in its targets and in this case its prices as quality will
often have to come at a price.

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GEOFF CORDWELL
UNDERSTANDING PERFORMANCE MANAGEMENT

• Decide in haste repent at your leisure. Whilst it can be argued that an action focus is good for
business setting the wrong targets can take a business in the wrong direction and financial
disaster can follow. A car salesman might be targeted solely on number of sales made. However
he can achieve this by reducing prices (and hence profits). Careful consideration is needed and
regular review sensible. A business should not expect to get it right first time every time but
carless errors are avoidable with a little thought.
A performance manager cannot ignore the current financial position of a business. The shareholders
and other stakeholders have to be kept satisfied. However good performance management builds
for the future and non-financial measures can move the business forward.

If we consider Freg R’us again for a moment: the financial results are very promising and the owners
are likely to be pleased with the progress made. However, there are some concerns being revealed
by the non-financials. If the sales returns continue at such a high level the costs of these will rise as
will the activity involved in remedy. The future may not, therefore be as bright as the owners
currently anticipate.

Conclusions
The management of performance is not easy and many businesses struggle with it. However,
following the many simple ideas above a business can set up balanced performance measures that
will deliver better prospects and hence profit.

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