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Bpm2010 Final

Bpm2010 Final



Business Performance Measurement - slides MCF lecture at Copenhagen Business School

Business Performance Measurement - slides MCF lecture at Copenhagen Business School



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  • Whenwilltherebe a break
  • Understand Human Behaviour – Alternative models:Maslows etc.Agency cost often arise when there is information assymetryMost agency problems involve balancing stronger incentives to work hard against the higher risk premium required by the agent to compensate for higher risk Engaging in monitoring activities to reduce potential problems increases potential cost. Elements of markets help efficiency – job market etc.
  • Hiearchies – decision management
  • Ask the studens – whatare the advantages?
  • However doesn’t make them irrelevant

Bpm2010 Final Bpm2010 Final Presentation Transcript

  • Balanced Scorecard and it’s relation to organisational design, strategy implementation and criteria for selection of performance measures
    Business performance measurement
  • Before we start…
    Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis
    Organisational Architecture
    Decision making authority, performance evaluation and compensation stucture must be aligned for the three-legged stool not to tilt
    Performance Measurement
    There three general types of measures: Market based, accounting based and the combination of the two – BSC is an example
    Subjectivity in Incentives
    Subjectivity in Incentives refers to how the performance is evaluated but also to the incentive itself. Is used if targets are stretched
    Balanced Scorecard
    BSC takes a balanced approach to value creation, BPM and linkages to strategy by focusing on finance, customers, process and learning
    What gets measured gets done – so think carefully about what you measure and how you measure it
  • Before We Start…
  • Before We Start...
    Anyone brought a laptop for taking notes?
  • and do you have a twitter account?
    Before We Start…
  • .. I need three volunteers?
    Before We Start…
  • Tweet key learnings…
    Before We Start…
  • What we can learn from a financial crisis and Youtube
    Incentives and not measuring what is important can be devastating on world economics
    Before We Start…
  • Tweet key learning….
    Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis #MCF10
    Before We Start…
  • Organisational Architecture
  • Organisational Architecture
    Zimmerman et. al ch. 4
  • To guide internal transactions the three legged stool must balance
    Organisational Architecture
    Zimmerman et. al ch. 4
    In markets this is self-regulating – in companies this is done by expansive administration
  • All organisations must construct
    A system that assigns decision rights
    A system that measures performance
    A system that rewards and punishes performance
  • Decision control
    Decision making authority (hiearchies) – Seperatedesision management and control
    Organisational Architecture
    Zimmerman et al ch. 4
    Decision management
    1. Initiation
    2. Ratification
    Formulating and choosing between decisions
    Approval of selected decision with possible modifications
    3. Implementation
    4. Monitoring
    Executing the selected decisions
    Evaluating the outcome and rewarding decision makers
  • Performance evaluation – Direct attention and give feedback…
    • Necessary in order to provide feedback and to objectively score performance
    • An unbalanced use of objective and subjective measures can lead to over-focus of employees on either the objective or subjetive
    • Greater reliance on incentive compensation requires a higher quality of the measures for evaluation
    Organisational Architecture
  • A balanced mix of objective and subjective measures…
    Objective Measures…
    • Explicit
    • Verifiable measure
    • Quantifiable
    • Examples
    • Sales
    • Production
    Subjective Measures…
    • Implicit
    • Hard-to-measure
    • Qualitative
    • It is used because many jobs have multiple dimensions
    • Examples
    • Team spirit
    Organisational Architecture
    Zimmerman et al. CH. 4
  • Compensation Structure…
    • Must be large enough to make a difference (min. 5% of salary)
    • Must be realistic to obtain and ambitious to ensure performance pressure
    • Employees often need a ”sufficient” base salary – the bonus is uncertain and is not 100% influenced by the individuals actions
    • Often there is lower boundary and upper-bound
    • Must align with strategy
    Organisational Architecture
  • When the legs don’t balance (kassetækning)…
    Organisational Architecture
    Zimmerman et al ch. 4
  • Performance Measurement
  • Criteria for evaluating performance measures
    Performance Mearsurement
    Merchant, 2006
  • Three general measurement alternatives…
    Performance Measurement
    Merchant, 2006
  • Market Based Measures…
    Performance Measurement
    Merchant, 2006
    • Pay managers the same way shareholders are paid
    • Measures are based on changes in Market Value or returns to the shareholders
    • Market measures reflect expectations for future cash flows e.g. Kodak Case
  • Market Based Measures…
    • Strong alignment with shareholders (Congruence)
    • Available on a daily basis (timely)
    • Precise and objective (Accurate)
    • Easy to understand
    • Cost effective
    • Only available for publicly traded companies
    • Limited influence for ordinary employees (controlable)
    • Causility: 98% of stock price changes can in some markets be explained by macroeconomic factors
    • Short term problems with congruence – Risk of management Myopia
    Performance Measurement
    Merchant, 2006
  • Accounting Based Measures…
    Performance Measurement
    Merchant, 2006
    • Residual Measures: Net Income, EBITDA etc.
    • Ratio Measures: Return on Investement (ROI) etc.
    • Are better at explaining value creation over a longer time period (e.g. 10 years)
    • To improve congruence different propriatary models have been developed e.g. EVA
  • Accounting Based Measures…
    • Available Monthly, Quarterly and Yearly (Timely)
    • Measurement system already in place by law (Cost effective)
    • Relatively precise and objective as it is audited (Accurate)
    • Can be tailored to match authority limits of manager (Controllable)
    • Measures often well understood (Understandable)
    • Past performance
    • Transaction oriented
    • Dependant on measuring method(accurate, congruence)
    • Ignore cost of equity capital risk (congruence), risk and capital structure affects the future value
    • Ignores changes in risk, but when the risk of future cashflow is decreased – economic value is created
    • Conservative, disregard hard to value intangible assets (accurate)
    Performance Measurement
    Merchant, 2006
  • Combination of Measures…
    Performance Measurement
    Merchant, 2006
    • No single measure can reflect performance well enough to motivate optimal decision making
    • Balanced Scorecard etc
    • ”KISS” example (Jeff Immelt, GE)
    • 50% bonus dependant on operating cashflows over a three year period
    • 50% of bonus dependant on shareholder return for over three year period meeting or beating S&P500
  • Pro’s and con’s of in the combination of measures…
    • Flexible
    • Canbe future oriented
    • Causuallinkages in the BalancedScorecardsstrategymapprovideguidance. A cause and effectrelationship.(controllable)
    • Potentially it canensurecongruence
    • Difficult to test whethermeasuresreflectchange in valueTheyarebuildonuntestedhypothesesonvaluecreation in the given company
    • Canbeveryexpensive to implement and measure, due to a high no. of complexmeasure points
    • Method for measuringcanaffectresults (customersatisfaction)
    • Valuable information canbe lost in aggregation due to weighing problems
    • Difficult to determinewhat is optimal (S-curve / Net promoter Score)
    Performance Measurement
  • General Advice…
    • It needs to be ambitions (red), pushing people out of their comfort zone
    • Be realistic in order to for people to believe that it is possible to get their bonus
    • In budgetting – people tend to be conservative about own future performance
    Performance Measurement
  • What Gets Measured Gets Done…
    What is important...
    • Is it motivating, attractive, important and inspiring goal?
    • Can the measure reflect a strategic intent?
    • Sears example:
    • Compelling place to work
    • Compelling place to shop
    • Compelling place to invest
    Motivational theory…
    • Motivational theorists such as Locke & Latham found that:
    • Goal specificity
    • Goal difficulty
    • Goal Commitment
    Had an effect on task performance
    Performance Measurement
  • Dilemma in performance measurement…
    Performance Measurement
    Continous Development
  • Performance Measurement
  • Subjectivty in Incentives
  • Subjective in Incentives
    Gibbs et. al, 2004
    Two meanings of subjectivity in incentives…
    1. Meaning: The basis for which the incentive is given is measured subjectively
    Subjectivity in Incentives..
    2. Meaning: The incentive itself is subjective e.g. Promotion, job assignment or threat of termination
  • Subjectivity can arise in several ways…
    • All or part of a bonus is based on subjective judgements about performance
    • The weights on quantitative measures are determined subjectively
    • A subjective performance threshold is used, meaning whether to pay a bonus is determined on measured performance and other factors
    • Subjective bonuses are also refered to as discretionary bonuses
    Subjectivity in Incentives
    Gibbs et al, 2004
  • Subjectivity is used when…
    Subjectivity in Incentives
    Gibbs et al, 2004
    When there has been significant investment in training
    When there are departemental interdependencies
    Subjectivity is used..
    When objective / quantitative bonuses are difficult to achieve and where there is significant consequence of not achieving them
  • The study failed to prove that following was determinants in usage of subjectivity…
    Subjectivity in Incentives
    Gibbs et al, 2004
  • The Effect…
    Subjectivity in Incentives
    Gibbs et al., 2004
  • Balanced Scorecard
  • Traditional financial measures are focused on historic performance and tangible assets
    Balanced Scorecard
  • Strategy understanding and implementation is a challange
    Balanced Scorecard
    Gary Hamel
    Management systems
    Less than 5% of the employees understands the strategy
    In more than 60% of companies the budgets are NOT derived from the strategy
    Less than 25% of managers are rewarded based on the strategy
    More than 85% of managers use LESS than an hour a month to talk about the strategy
  • What is a balanced scorecard…
    Balanced Scorecard
    A tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurement
  • Balanced Scorecard
    Kaplan & Norton, 2001
    Financial Perspective
    If we succeed how will we look to our shareholders
    Learning and Growth
    Customer Perspective
    Vision & Strategy
    To achieve my vision, how must my organisation learn and Improve
    To achieve my vision how must look to my customers
    Process Perspective
    To satisfy my customers at which processes must I excel
  • Balanced Scorecard
  • The 5 Principles of the Balanced Scorecard
    Balanced Scorecard
  • Reflections…
    • Implementing a balanced value creating strategy and aligning organisational activities
    • Provide transparency - ”Seeing” what is going on in the organisation
    • Provide horizontal integration - Numbers initiate debate across functional borders = verbalisation of local knowledge
    • Provide conflict - Surfacing of local knowledge leads to conflict => realignment of organisational power structures
    • Assumes that strategy is planned – lack contingency
    • Assumes that structure follows strategy
    • Top-down communication – interactivity at top-management level
    • These issues are naturally adressed in the continous development of the revision of the Balanced Scorecard – but provides difficulty in making benchmarks
    Balanced Scorecard
  • Causal Linkages and concrete objectives, measures, targets and initiatives
    Balanced Scorecard
    Kaplan & Norton, 2001
  • Summary
  • Performance Measurement
    Evaluation Criteria:
    • Congruence
    • Controllable
    • Timely
    • Accurate
    • Understandable
    • Cost Effective
  • Organisational Architecture
    General Concepts
    • Self-Interest
    • Decision Rights and Systems
    • Knowledge and decision making
    • Markets vs. Firms
    • Influence Cost
    • Cost Effective
  • Subjectivity in measures used to…
    • To counter that quantitative bonuses has incomplete coverage of the work carried out
    • To ensure a long-term focus
    • To counter manipulability of quantitative bonuses
    • To filter out ”noise” from the performance from other departments
    • To recalibrate incentives in situations where ambitious quantitative performance targets are not met
    • Where departments operates in a ”loss” situation
  • Balanced Scorecard
    A tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurement