Bpm2010 Final

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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

    1. 1. Balanced Scorecard and it’s relation to organisational design, strategy implementation and criteria for selection of performance measures<br />Business performance measurement<br />
    2. 2. Before we start…<br />Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis <br />3<br />Organisational Architecture<br />Decision making authority, performance evaluation and compensation stucture must be aligned for the three-legged stool not to tilt<br />10<br />Performance Measurement<br />There three general types of measures: Market based, accounting based and the combination of the two – BSC is an example<br />19<br />Subjectivity in Incentives<br />Subjectivity in Incentives refers to how the performance is evaluated but also to the incentive itself. Is used if targets are stretched<br />30<br />Balanced Scorecard<br />BSC takes a balanced approach to value creation, BPM and linkages to strategy by focusing on finance, customers, process and learning<br />36<br />Summary<br />What gets measured gets done – so think carefully about what you measure and how you measure it<br />44<br />
    3. 3. Before We Start…<br />
    4. 4. Before We Start...<br />Anyone brought a laptop for taking notes?<br />
    5. 5. and do you have a twitter account?<br />Before We Start…<br />
    6. 6. .. I need three volunteers?<br />Before We Start…<br />
    7. 7. Tweet key learnings… <br />Before We Start…<br />MCF10<br />Control10<br />Password:<br />
    8. 8. What we can learn from a financial crisis and Youtube<br />Incentives and not measuring what is important can be devastating on world economics<br />Before We Start…<br />http://www.youtube.com/watch?v=UC31Oudc5Bg<br />
    9. 9. Tweet key learning….<br />Lacking congruence (alignment of interest) in incentive systems btw leader and shareholder can lead to financial crisis #MCF10<br />Before We Start…<br />@MCF10<br />
    10. 10. Organisational Architecture<br />
    11. 11. Organisational Architecture<br />Zimmerman et. al ch. 4<br />
    12. 12. To guide internal transactions the three legged stool must balance<br />Organisational Architecture<br />Zimmerman et. al ch. 4<br />In markets this is self-regulating – in companies this is done by expansive administration<br />
    13. 13. All organisations must construct<br />A system that assigns decision rights<br />A system that measures performance<br />A system that rewards and punishes performance<br />
    14. 14. Decision control<br />Decision making authority (hiearchies) – Seperatedesision management and control<br />Organisational Architecture<br />Zimmerman et al ch. 4<br />Agent<br />Principal<br />Decision management<br />1. Initiation<br />2. Ratification<br />Formulating and choosing between decisions<br />Approval of selected decision with possible modifications<br />3. Implementation<br />4. Monitoring<br />Executing the selected decisions<br />Evaluating the outcome and rewarding decision makers<br />
    15. 15. Performance evaluation – Direct attention and give feedback…<br /><ul><li>Necessary in order to provide feedback and to objectively score performance
    16. 16. An unbalanced use of objective and subjective measures can lead to over-focus of employees on either the objective or subjetive
    17. 17. Greater reliance on incentive compensation requires a higher quality of the measures for evaluation</li></ul>Organisational Architecture<br />
    18. 18. A balanced mix of objective and subjective measures…<br />Objective Measures…<br /><ul><li> Explicit
    19. 19. Verifiable measure
    20. 20. Quantifiable
    21. 21. Examples
    22. 22. Sales
    23. 23. Production</li></ul>Subjective Measures…<br /><ul><li>Implicit
    24. 24. Hard-to-measure
    25. 25. Qualitative
    26. 26. It is used because many jobs have multiple dimensions
    27. 27. Examples
    28. 28. Team spirit</li></ul>Organisational Architecture<br />Zimmerman et al. CH. 4<br />
    29. 29. Compensation Structure…<br /><ul><li>Must be large enough to make a difference (min. 5% of salary)
    30. 30. Must be realistic to obtain and ambitious to ensure performance pressure
    31. 31. Employees often need a ”sufficient” base salary – the bonus is uncertain and is not 100% influenced by the individuals actions
    32. 32. Often there is lower boundary and upper-bound
    33. 33. Must align with strategy</li></ul>Organisational Architecture<br />
    34. 34.
    35. 35. When the legs don’t balance (kassetækning)…<br />Organisational Architecture<br />Zimmerman et al ch. 4<br />
    36. 36. Performance Measurement<br />
    37. 37. Criteria for evaluating performance measures<br />Performance Mearsurement<br />Merchant, 2006<br />
    38. 38. Three general measurement alternatives…<br />Performance Measurement<br />Merchant, 2006<br />
    39. 39. Market Based Measures…<br />Performance Measurement<br />Merchant, 2006<br /><ul><li>Pay managers the same way shareholders are paid
    40. 40. Measures are based on changes in Market Value or returns to the shareholders
    41. 41. Market measures reflect expectations for future cash flows e.g. Kodak Case</li></li></ul><li>Market Based Measures…<br />Pro’s<br /><ul><li>Strong alignment with shareholders (Congruence)
    42. 42. Available on a daily basis (timely)
    43. 43. Precise and objective (Accurate)
    44. 44. Easy to understand
    45. 45. Cost effective</li></ul>Con’s<br /><ul><li>Only available for publicly traded companies
    46. 46. Limited influence for ordinary employees (controlable)
    47. 47. Causility: 98% of stock price changes can in some markets be explained by macroeconomic factors
    48. 48. Short term problems with congruence – Risk of management Myopia</li></ul>Performance Measurement<br />Merchant, 2006<br />
    49. 49. Accounting Based Measures…<br />Performance Measurement<br />Merchant, 2006<br /><ul><li>Residual Measures: Net Income, EBITDA etc.
    50. 50. Ratio Measures: Return on Investement (ROI) etc.
    51. 51. Are better at explaining value creation over a longer time period (e.g. 10 years)
    52. 52. To improve congruence different propriatary models have been developed e.g. EVA</li></li></ul><li>Accounting Based Measures…<br />Pro’s<br /><ul><li>Available Monthly, Quarterly and Yearly (Timely)
    53. 53. Measurement system already in place by law (Cost effective)
    54. 54. Relatively precise and objective as it is audited (Accurate)
    55. 55. Can be tailored to match authority limits of manager (Controllable)
    56. 56. Measures often well understood (Understandable)</li></ul>Con’s<br /><ul><li>Past performance
    57. 57. Transaction oriented
    58. 58. Dependant on measuring method(accurate, congruence)
    59. 59. Ignore cost of equity capital risk (congruence), risk and capital structure affects the future value
    60. 60. Ignores changes in risk, but when the risk of future cashflow is decreased – economic value is created
    61. 61. Conservative, disregard hard to value intangible assets (accurate)</li></ul>Performance Measurement<br />Merchant, 2006<br />
    62. 62. Combination of Measures…<br />Performance Measurement<br />Merchant, 2006<br /><ul><li>No single measure can reflect performance well enough to motivate optimal decision making
    63. 63. Balanced Scorecard etc
    64. 64. ”KISS” example (Jeff Immelt, GE)
    65. 65. 50% bonus dependant on operating cashflows over a three year period
    66. 66. 50% of bonus dependant on shareholder return for over three year period meeting or beating S&P500</li></li></ul><li>Pro’s and con’s of in the combination of measures…<br />Pro’s<br /><ul><li>Flexible
    67. 67. Canbe future oriented
    68. 68. Causuallinkages in the BalancedScorecardsstrategymapprovideguidance. A cause and effectrelationship.(controllable)
    69. 69. Potentially it canensurecongruence</li></ul>Con’s<br /><ul><li>Difficult to test whethermeasuresreflectchange in valueTheyarebuildonuntestedhypothesesonvaluecreation in the given company
    70. 70. Canbeveryexpensive to implement and measure, due to a high no. of complexmeasure points
    71. 71. Method for measuringcanaffectresults (customersatisfaction)
    72. 72. Valuable information canbe lost in aggregation due to weighing problems
    73. 73. Difficult to determinewhat is optimal (S-curve / Net promoter Score)</li></ul>Performance Measurement<br />
    74. 74. General Advice…<br /><ul><li>It needs to be ambitions (red), pushing people out of their comfort zone
    75. 75. Be realistic in order to for people to believe that it is possible to get their bonus
    76. 76. In budgetting – people tend to be conservative about own future performance</li></ul>Performance Measurement<br />
    77. 77. What Gets Measured Gets Done…<br />What is important...<br /><ul><li>Is it motivating, attractive, important and inspiring goal?
    78. 78. Can the measure reflect a strategic intent?
    79. 79. Sears example:
    80. 80. Compelling place to work
    81. 81. Compelling place to shop
    82. 82. Compelling place to invest</li></ul>Motivational theory…<br /><ul><li>Motivational theorists such as Locke & Latham found that:
    83. 83. Goal specificity
    84. 84. Goal difficulty
    85. 85. Goal Commitment</li></ul>Had an effect on task performance<br />Performance Measurement<br />
    86. 86. Dilemma in performance measurement…<br />Performance Measurement<br />Benchmarking<br />Continous Development<br />
    87. 87. Performance Measurement<br />
    88. 88. Subjectivty in Incentives<br />
    89. 89. Subjective in Incentives<br />Gibbs et. al, 2004<br />Two meanings of subjectivity in incentives…<br />1. Meaning: The basis for which the incentive is given is measured subjectively<br />Subjectivity in Incentives..<br />2. Meaning: The incentive itself is subjective e.g. Promotion, job assignment or threat of termination<br />
    90. 90. Subjectivity can arise in several ways…<br /><ul><li>All or part of a bonus is based on subjective judgements about performance
    91. 91. The weights on quantitative measures are determined subjectively
    92. 92. A subjective performance threshold is used, meaning whether to pay a bonus is determined on measured performance and other factors
    93. 93. Subjective bonuses are also refered to as discretionary bonuses</li></ul>Subjectivity in Incentives<br />Gibbs et al, 2004<br />
    94. 94. Subjectivity is used when…<br />Subjectivity in Incentives<br />Gibbs et al, 2004<br />When there has been significant investment in training<br />When there are departemental interdependencies<br />Subjectivity is used..<br />When objective / quantitative bonuses are difficult to achieve and where there is significant consequence of not achieving them<br />
    95. 95. The study failed to prove that following was determinants in usage of subjectivity…<br />Subjectivity in Incentives<br />Gibbs et al, 2004<br />
    96. 96. The Effect…<br />Subjectivity in Incentives<br />Gibbs et al., 2004<br />
    97. 97. Balanced Scorecard<br />
    98. 98. Traditional financial measures are focused on historic performance and tangible assets<br />Balanced Scorecard<br />
    99. 99. Strategy understanding and implementation is a challange<br />Balanced Scorecard<br />Gary Hamel<br />Vision<br />Management systems<br />Less than 5% of the employees understands the strategy<br />In more than 60% of companies the budgets are NOT derived from the strategy<br />Compensation<br />Leadership<br />Less than 25% of managers are rewarded based on the strategy<br />More than 85% of managers use LESS than an hour a month to talk about the strategy<br />
    100. 100. What is a balanced scorecard…<br />Balanced Scorecard<br />A tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurement<br />
    101. 101. Balanced Scorecard<br />Kaplan & Norton, 2001<br />Financial Perspective<br />If we succeed how will we look to our shareholders<br />Learning and Growth<br />Customer Perspective<br />Vision & Strategy<br />To achieve my vision, how must my organisation learn and Improve<br />To achieve my vision how must look to my customers<br />Process Perspective<br />To satisfy my customers at which processes must I excel<br />
    102. 102. Balanced Scorecard<br />
    103. 103. The 5 Principles of the Balanced Scorecard<br />Balanced Scorecard<br />
    104. 104. Reflections…<br />Effects<br /><ul><li>Implementing a balanced value creating strategy and aligning organisational activities
    105. 105. Provide transparency - ”Seeing” what is going on in the organisation
    106. 106. Provide horizontal integration - Numbers initiate debate across functional borders = verbalisation of local knowledge
    107. 107. Provide conflict - Surfacing of local knowledge leads to conflict => realignment of organisational power structures</li></ul>Problems<br /><ul><li>Assumes that strategy is planned – lack contingency
    108. 108. Assumes that structure follows strategy
    109. 109. Top-down communication – interactivity at top-management level
    110. 110. These issues are naturally adressed in the continous development of the revision of the Balanced Scorecard – but provides difficulty in making benchmarks</li></ul>Balanced Scorecard<br />
    111. 111. Causal Linkages and concrete objectives, measures, targets and initiatives<br />Balanced Scorecard<br />Kaplan & Norton, 2001<br />
    112. 112. Summary<br />
    113. 113. Performance Measurement<br />Evaluation Criteria:<br /><ul><li>Congruence
    114. 114. Controllable
    115. 115. Timely
    116. 116. Accurate
    117. 117. Understandable
    118. 118. Cost Effective</li></ul>Summary<br />
    119. 119. Organisational Architecture<br />General Concepts<br /><ul><li> Self-Interest
    120. 120. Decision Rights and Systems
    121. 121. Knowledge and decision making
    122. 122. Markets vs. Firms
    123. 123. Influence Cost
    124. 124. Cost Effective</li></ul>Summary<br />
    125. 125. Subjectivity in measures used to…<br /><ul><li>To counter that quantitative bonuses has incomplete coverage of the work carried out
    126. 126. To ensure a long-term focus
    127. 127. To counter manipulability of quantitative bonuses
    128. 128. To filter out ”noise” from the performance from other departments
    129. 129. To recalibrate incentives in situations where ambitious quantitative performance targets are not met
    130. 130. Where departments operates in a ”loss” situation</li></ul>Summary<br />
    131. 131. Balanced Scorecard<br />A tool to balance value-creating activities towards shareholder value, as well as ensure strategy implementation and performance measurement<br />Summary<br />
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