Performance measurement


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Performance measurement

  1. 1. Session 4B: Performance Measurement Model Design Dr Frank Selto CURISES Cost and Managerial Accounting
  2. 2. Overview <ul><li>Sources of Market Value </li></ul><ul><li>Types of Financial Performance Measurement </li></ul><ul><li>Managing Intangible Assets </li></ul><ul><li>Overview of Balanced Scorecard </li></ul><ul><ul><li>New Term, Old Concept </li></ul></ul>
  3. 3. Intangible Assets: Mkt to Book Why are these ratios not equal to 1.00? What do these ratios say about intangible assets? 10 Aug 09   Microsoft Hewlett Packard   Symbol MSFT HPQ Market value per share $ 23.35 $ 43.50 Book value per share $ 4.41 $ 17.02 MV/BV 5.29 2.56
  4. 4. Growing Importance of Intangible Assets The Source of Value Has Shifted From Tangible to Intangible Assets Intangible Assets Tangible Assets 1982 1992 1 2000 2 percentage of market value related to… <ul><li>1. Brookings Institute </li></ul><ul><li>Baruch Lev analysis of S&P500 companies </li></ul><ul><li>Adapted from a slide by The Balanced Scorecard Collaborative, Inc © 2000 </li></ul><ul><li>3. SWAG by Selto </li></ul>38% 62% 62% 85% 38% 15% 30% 70% 2009 3 MV/BV 1.6 2.6 6.7 3.3
  5. 5. Contributions to Market Value Market Value Financial Capital Intellectual Capital Focus of Traditional Accounting Systems Social Capital Focus of Most New Performance Models Focus of Ethical Investors and Some Performance Models
  6. 6. Contributions to Market Value Market Value Financial Capital Intellectual Capital Human Capital Structural Capital Customer Capital Organizational Capital Social Capital
  7. 7. Contributions to Market Value Market Value Financial Capital Intellectual Capital Social Capital Environmental Capital Community Capital Prevention Remediation Employees Neighbors
  8. 8. Example: CMP Media Company founded by Leeds family <ul><li>From website: “CMP Media's success has been built on a set of principles that has served its employees, customers, readers and suppliers well for more than 30 years.” </li></ul><ul><li>Be a great company to do business with for customers and suppliers. </li></ul><ul><li>Be an excellent company to work for – able to hire, motivate and develop outstanding, diverse people who work together harmoniously toward a common objective. </li></ul><ul><li>Provide only superior products and services. </li></ul><ul><li>Contribute actively to a better social and physical environment. </li></ul><ul><li>Be profitable to provide the resources for future growth, quality and financial stability. </li></ul>
  9. 9. Leeds’ Approach at CMP Media <ul><li>No formal overall measurement program for social responsibility performance </li></ul><ul><li>All board level strategic discussions included human resource and employee involvement programs </li></ul><ul><li>Discussed and approved the proposed donations of the CMP Community Action Fund </li></ul><ul><li>Top executives had major options grants that accelerated if certain diversity goals were met </li></ul><ul><li>Results included: </li></ul><ul><ul><li>Top rating as one of the best companies to work for </li></ul></ul><ul><ul><li>Low employee turnover </li></ul></ul><ul><ul><li>High productivity and innovation </li></ul></ul><ul><ul><li>Superior profitability and market value </li></ul></ul>
  10. 10. Financial Success Depends on Intangible Assets <ul><li>Most Common Intangible Assets Include </li></ul><ul><ul><li>Knowledge, Skills, Training, Motivation </li></ul></ul><ul><ul><li>Knowledge-Based Processes </li></ul></ul><ul><ul><li>Customer Knowledge and Relations </li></ul></ul><ul><ul><li>Environmental and Social Relations </li></ul></ul><ul><li>Where Do These Show Up in Financial Reports? </li></ul><ul><ul><li>Goodwill </li></ul></ul><ul><ul><li>Financial Statements Poorly Equipped to Manage Intangible Assets </li></ul></ul><ul><ul><li>May Show up in Mgt Letter, Footnotes and Proxy Statements </li></ul></ul>
  11. 11. Managing Intangible Assets <ul><li>Cannot use most traditional financial management tools </li></ul><ul><ul><li>Using ROI, EVA, Cost variances, etc., too late to affect current financial performance </li></ul></ul><ul><ul><li>These are OUTCOMES that occur after good or bad management has happened </li></ul></ul><ul><li>Many companies have set of Key Performance Indicators (KPI) </li></ul><ul><li>Need valid set of Leading KPIs of financial performance </li></ul><ul><ul><li>Performance Measurement Models (PMMs) </li></ul></ul>
  12. 12. Many Competing Performance Measurement Models (PMM) <ul><li>“ Balanced Scorecard” </li></ul><ul><li>“ Value-Based Management” </li></ul><ul><li>“ Value Creation Model” </li></ul><ul><li>“ Shareholder Value” </li></ul><ul><li>“ Economic Value Added” </li></ul><ul><li>All major consulting firms have own versions </li></ul><ul><li>PMMs being widely adopted by many firms world-wide </li></ul><ul><li>PMMs commonly model leading and lagging indicators of performance </li></ul>
  13. 13. An Actual PMM
  14. 14. Popular PMM: Balanced Scorecard <ul><li>Linking leading activities and indicators = Balanced Scorecard </li></ul><ul><li>Communication Device and so-called “ Causal” Model </li></ul><ul><li>Good Communication Device = </li></ul><ul><ul><li>Accurate, Clear, Credible, Interactive </li></ul></ul><ul><li>Causal Model = </li></ul><ul><ul><li>Reflection of Cause-and-Effect relations among key performance indicators (KPI) </li></ul></ul><ul><ul><li>No reliable evidence for this yet </li></ul></ul>
  15. 15. Generic Balanced Scorecard
  16. 16. Measures of Performance <ul><li>Must use “Proxy” measures </li></ul><ul><li>Improvements in valid proxies signal improvements in the “True” measures </li></ul><ul><li>Organizational capability examples: </li></ul><ul><ul><li>Training Hours Offered and Completed </li></ul></ul><ul><ul><li>Employee Education Levels </li></ul></ul><ul><ul><li>Employee Morale and Satisfaction </li></ul></ul><ul><ul><li>Employee Turnover </li></ul></ul><ul><li>Do these measure organizational capability? </li></ul>
  17. 17. What do We Know About Measures Actually Used? <ul><li>Linked to incentives </li></ul><ul><li>Affected by actions </li></ul><ul><li>Measurable </li></ul><ul><ul><li>Accurate and timely </li></ul></ul><ul><ul><li>Economical </li></ul></ul><ul><ul><li>Limited in number </li></ul></ul><ul><li>Auditable </li></ul><ul><li>Achieve intended effects </li></ul><ul><li>Belief in entire performance “story” </li></ul>
  18. 18. Linked Measures of Performance <ul><li>Explain these relations: </li></ul><ul><li>Is this causality or finality? </li></ul>
  19. 19. Combine Leading KPIs to Cover Strategic Decision Making <ul><li>BSC tells story of business success </li></ul><ul><ul><li>“ Value Propositions” </li></ul></ul><ul><ul><li>Reflected in Kaplan’s “Strategy Map” </li></ul></ul><ul><li>Gaps in measurement coverage lead to gaps in management decision making </li></ul><ul><ul><li>This is the BSC story anyway </li></ul></ul><ul><li>This is not a causal story, however </li></ul>
  20. 20. Sample Strategy Map
  21. 21. Duke Children’s Hospital Balanced Scorecard Research, Education & Teaching <ul><li>Admissions </li></ul><ul><li>Discharge </li></ul>Internal Processes Mission To provide patients, families and primary care physicians with the best, most compassionate care possible and to excel at communications Wait Time Quality Productivity <ul><li>Readmission Rate </li></ul><ul><li>Infection Rates </li></ul><ul><li>Blood Culture Contamination Rate </li></ul><ul><li>Use of Clinical Pathways (Top 10) </li></ul><ul><li>Length of Stay </li></ul><ul><li>Daily Staffing vs. Occupancy </li></ul><ul><li>Communication </li></ul><ul><li>Staff retention </li></ul><ul><li>Staff approval ratings </li></ul><ul><li>Productivity through work redesign </li></ul><ul><li>Strategic Database </li></ul><ul><ul><li>Availability </li></ul></ul><ul><ul><li>Use </li></ul></ul><ul><li>% Satisfied </li></ul><ul><li>% Would Recommend </li></ul><ul><li>% Parents Could Articulate Care Plan </li></ul><ul><li>Discharge Timeliness </li></ul>Customer Patient Primary Care Physician <ul><li>% Satisfied with Communication </li></ul><ul><li>% Parents Could Identify DCH Physician </li></ul><ul><li>Cost per Case </li></ul><ul><li>Match flexible budget </li></ul>Financial <ul><li>Revenue from Neonatal Care </li></ul><ul><li>Operating Margin </li></ul>© 2000. The Balanced Scorecard Collaborative, Inc. Robert Kaplan and David Norton. All rights reserved
  22. 22. How to Evaluate BSC Effectiveness? <ul><li>Internal validity </li></ul><ul><ul><li>Cause and effect relations </li></ul></ul><ul><ul><li>Logic of accounting relations </li></ul></ul><ul><ul><li>Credible story </li></ul></ul><ul><li>External validity </li></ul><ul><ul><li>Financial verification of finality relations </li></ul></ul><ul><ul><li>Acceptance and belief in the “story of success” </li></ul></ul>
  23. 23. BSC Opportunities & Questions