The morning seemed really peaceful and simple till I was intercom to meet my senior at the upper office's conference room. I was really taken aback after that morning. This is my first job as an auditor after graduating from a degree in accounting.
I had alot to learn, and many important procedures I'm still unaware of. Hence I often was reprimanded of not performing these procedures. This morning I was reprimanded of not performing one of the needed procedure which I'm not aware of. That senior of mine was so angry that she threw the papers right in front of me, which also hit my face by accident. I was too taken aback that I started tearing.
When another senior saw me in tears, he asked what has happened and learn about the situation. He asked if anyone witnessed that incident, and apparently we were in closed doors so no one could be my witness. However, he went up to approach her and have a talk with her.
She apologised to him, where he accepted her apology on my behalf. She admitted that she was hot-tempered and apologised for that. He gave her warning that there should be no "throwing" of things at the staff again, as the matter could be taken up to legal action when reported. She understood the consequences. After the talk her tone was slightly better. However, we would still have to monitor her behavior, as the current solution might only be temporal, because she isn't really able to handle her emotions.
Friday, December 4, 2009
Sunday, September 13, 2009
Spoilt Brat @ 7-Eleven
I decided to try out the goodwill of 7-Eleven, who provides bill payment facility for Singtel, etc. As I saw that the queue isn't too long and there weren't many customers, I stepped into the mini mart to pay my bills. However, there came a few more customers joining me in the queue. As the staff processed my bill payment as fast as he could, I realised a spoilt brat chattering behind my back.
She commented audibly: "Can't she do this elsewhere?", and her friend replied, "She's just paying her bills (what's the matter?)". Throughout the entire bill payment process, she kept hissing and making fussing noises such as "tsk", "sighss..", "haiz...", etc. This is really strange. The staff didn't take more than one minute to process my bills. He was pretty efficient. What was strange was that teenage herself. I seems to me that her patience probably hasn't reached puberty; and hence she had to use her courage in the wrong manner, so as to make others "look bad" for taking up her time?
Well, most of the time when someone has the intention to make you look bad, they are usually the ones looking really bad at the end of the day. Because it shows how impatient, etc that person is. It just makes one's inner unresolved issues more recognized, isn't it? You can do some observations and you'll realised I'm right. =)
She commented audibly: "Can't she do this elsewhere?", and her friend replied, "She's just paying her bills (what's the matter?)". Throughout the entire bill payment process, she kept hissing and making fussing noises such as "tsk", "sighss..", "haiz...", etc. This is really strange. The staff didn't take more than one minute to process my bills. He was pretty efficient. What was strange was that teenage herself. I seems to me that her patience probably hasn't reached puberty; and hence she had to use her courage in the wrong manner, so as to make others "look bad" for taking up her time?
Well, most of the time when someone has the intention to make you look bad, they are usually the ones looking really bad at the end of the day. Because it shows how impatient, etc that person is. It just makes one's inner unresolved issues more recognized, isn't it? You can do some observations and you'll realised I'm right. =)
Tuesday, February 17, 2009
Issues discovered in the evaluation of performance evaluation and balanced scorecard scheme
(A)Importance of Non-Financial performance methods (NFPM)
It has been rather challenging for companies to choose a reliable performance measure these days. Performance measurement systems play a key role in developing strategy, evaluating the achievement of organizational objectives and compensating managers. However the traditional financially oriented systems do not work adequately. A recent survey of U.S. financial services companies found most were not satisfied with their measurement systems. They believed there was too much emphasis on financial measures such as earnings and accounting returns and little emphasis on drivers of value such as customer and employee satisfaction, innovation and quality.
In response, companies now stress the importance of non-financial performance measurement systems. A third of financial services companies, for example, made a major change in their performance measurement system during the past two years and 39% plan a major change within two years. Furthermore, the inadequacies in financial performance measures have led to innovations ranging from non-financial indicators of "intangible assets" and "intellectual capital" to "balanced scorecards" of integrated financial and non-financial measures.
For certain aspects of Cadco’s work as well, it would be very difficult to measure an appropriate objective in financial terms. It is therefore important that some non-financial performance measures are used. If a financial measure that does not fully reflect the nature of the objective is used to assess performance, then there will be a clear incentive for behavior that leads to the target measure, but no necessarily the actual objective. For an instance, if the objective was to improve the quality of the product or service, and the measure used for this was to spend x% of costs on quality assurance, this measure could easily be met without actually improving quality, because more spending does not necessarily bring about better quality. In other words, meeting the budgeted expenditure is not always the best strategy or the best achievement.
The other reason why it is more important to have non-financial performance measures is because the employees or the staff works with physical measures, instead of financial measures. Hence the relevant measure here should be in terms of quantity of units produced, processed or sold, quality of work performed, timeliness of the work performed (number of units produced per hour), cost-effectiveness on which the employee has some degree of control over costs, absenteeism or tardiness, creativity, adherence to policy, gossip and other personal habits, personal appearance or grooming, manager appraisal, self-appraisal, peer appraisal, team appraisal, assessment center, etc.
There is also evidence that non-financial performance measures are often easier to understand and relate to. The technical jargons from financial basis of measurements (budgets, forecasts, profit and loss, balance sheets) might not be understood by employees without accounting or finance background at non-finance departments or those without relevant education in accounting and finance.
Moreover, many of the financial measures originated from physical measures. Therefore, it is more economical to use the physical measure. There should be a system use at each of the lower levels of the organization, with the lowest levels using physical units of measure that are specific. Integration of measures in this form is difficult and very few companies have been able to design such a comprehensive measurement system.
Although there are many advantages to non-financial performance measures, they also have their disadvantages. It has five primary limitations.
Time and cost has been a problem for some companies. They have found the costs of a system that tracks a large number of financial and non-financial measures can be greater than its benefits. Development can consume considerable time and expense, not least of which is selling the system to skeptical employees who have learned to operate under existing rules. A greater number of diverse performance measures frequently requires significant investment in information systems to draw information from multiple and often incompatible databases.
Evaluating performance using multiple measures that can conflict in the short term can also be time-consuming. One bank that adopted a performance evaluation system using multiple accounting and non-financial measures saw the time required for area directors to evaluate branch managers increase from less than one day per quarter to six days.
Bureaucracies can cause the measurement process to degenerate into mechanistic exercises that add little to reaching strategic goals. For example, shortly after becoming the first US Company to win Japan's prestigious Deming Prize for quality improvement, Florida Power and Light found that employees believed the company's quality improvement process placed too much emphasis on reporting, presenting and discussing a myriad of quality indicators. They felt this deprived them of time that could be better spent serving customers. The company responded by eliminating most quality reviews, reducing the number of indicators tracked and minimizing reports and meetings.
The second drawback is that, non-financial data are measured in many ways; hence there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways. Many companies attempt to overcome this by rating each performance measure in terms of its strategic importance and then evaluating overall performance based on a weighted average of the measures. Others assign arbitrary weightings to the various goals. One major car manufacturer, for example, structures executive bonuses so: 40% based on warranty repairs per 100 vehicles sold; 20% on customer satisfaction surveys; 20% on market share; and 20% on accounting performance, pre-tax earnings. However, like all subjective assessments, these methods can lead to considerable error.
Lack of causal links is a third issue. Many companies adopt non-financial measures without articulating the relations between the measures or verifying that they have a bearing on accounting and stock price performance. Unknown or unverified causal links create two problems when evaluating performance: incorrect measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes. Xerox, for example, spent millions of dollars on customer surveys, under the assumption that improvements in satisfaction translated into better financial performance. Later analysis found no such association. As a result, Xerox shifted to a customer loyalty measure that was found to be a leading indicator of financial performance.
The lack of an explicit casual model of the relations between measures also contributes to difficulties in evaluating their relative importance. Without knowing the size and timing of associations among measures, companies find it difficult to make decisions or measure success based on them.
Fourth on the list of problems with non-financial measures is lack of statistical reliability. It’s whether a measure actually represents what it purports to represent, rather than random "measurement error". Many non-financial data such as satisfaction measures are based on surveys with few respondents and few questions. These measures generally exhibit poor statistical reliability, reducing their ability to discriminate superior performance or predict future financial results.
Finally, although financial measures are unlikely to capture fully the many dimensions of organizational performance, implementing an evaluation system with too many measures can lead to "measurement disintegration". This occurs when an overabundance of measures dilutes the effect of the measurement process. Managers chase a variety of measures simultaneously, while achieving little gain in the main drivers of success.
Once managers have determined that the expected benefits from non-financial data outweigh the costs, three steps can be used to select and implement appropriate measures.
The non-financial measures are increasingly important in decision-making and performance evaluation. However, companies should not simply copy measures used by others. In choosing the measures must be linked to factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. In addition, companies should remember that performance measurement choice is a dynamic process. There are measures that may be appropriate today, but the system needs to be continually reassessed as strategies and competitive environments evolve.
(B) Main Features of the Balanced Scorecard
The balanced scorecard is a management tool designed to articulate, execute and monitor strategy using mix of financial and non-financial measures. It should help an organisation to align and focus all its resources on its strategy. The underlying principles of the balanced scorecard states that there should be a balance between external measures relating to shareholders and customers and internal measures relating to critical business processes such as innovation, learning and growth. It is necessary to define what is important for the particular business. This is why organisation may have very different scorecards.
The balanced scorecard translates vision and strategy into four perspectives. They are financial, customers, internal business perspective and learning and growth.
The financial perspective is in how we look to our shareholders. This perspective is composed of measures such as cash flow, sales and income growth and profits and return on capital employed (ROCE) or return on net assets (RONA). It can also include comparative measures such as net margin versus the rest of the industry. The types of measures used will depend on the strategy being pursued. For example, if trying to increase shareholder value there are generally two generic strategies, revenue growth and productivity strategy. Each of these strategies will be pursued in a different manner and will require tailored measures. A productivity strategy being driven by improved cost structure, for example, will want to achieve lower cost per unit.
The customer perspective is in how customers see us. This perspective comprises measures such as goals for new products, on-time delivery and defect and failure levels. It is in this perspective that a company’s customer value proposition should be evident, for example are you pursuing a strategy based on operational excellence, customer intimacy or product leadership. Again, the measures used in this perspective will depend on the strategy being pursued. For example, a company pursuing a customer intimacy strategy will focus on particular differentiators to fulfilling this strategy such as high-level service from employees and rewarding customer loyalty. From the measures, it should be possible to identify the strategy being pursued.
The internal business perspective is in what we must excel. This perspective relates to internal business processes such as productivity, cycle, time, quality, and cost measures. Strategy should determine the measurement emphasis for internal business processes so that measures will relate to the value proposition a company is trying to support. Typical measures in different groupings will vary. If it is not an organization’s aim to pursue a strategy based on product leadership for example, measures to do with the innovation process which will play a supportive rather than primary role, should only focus on the basic requirements for the organization.
The learning and growth perspective is in how we can continue to improve and create value. To achieve the vision of the company, how will we sustain our ability to change and improve? Measures in this perspective will relate to facilitating a motivated and trained workforce. Measures would typically fall into three areas. They are strategic competencies, strategic technologies and a climate for action. For example, the personal growth through employee feedback and alignment to higher level strategic objectives.
One of the main reasons why the balanced scorecard approach is increasingly popular is that it can be really beneficial as it has a range of measures to help the staff understand how they can contribute to the strategic success of the organization. It also provides executives a framework that is effective in translating the company’s vision and strategy into a set of performance measures. Short term benefits could be gained, however at the expense of long term profitability.
The starting point is to understand a company's value drivers or success drivers, which are the factors that create stakeholder value. Once known, these factors determine which measures contribute to long-term success and so how to translate corporate objectives into measures that guide managers' actions.
While this seems intuitive, experience indicates that companies do a poor job determining and articulating these drivers. Managers tend to use one of three methods to identify value drivers, the most common being intuition. However, executives' rankings of value drivers may not reflect their true importance. For example, many executives rate environmental performance and quality as relatively unimportant drivers of long-term financial performance. In contrast, statistical analyses indicate these dimensions are strongly associated with a company's market value.
However, there are many implementation problems to this balanced scorecard framework. An ambiguous corporate or business strategy is one of them. The purpose of the balanced scorecard is to implement an organization’s strategy and the only way this can be achieve is if the strategy is explicit and made to form the basis of the scorecard. Ambiguity at this level will mean that the senior executive management team will struggle to translate the business strategy into specific and tangible strategy objectives. Broad consensus at top management level is also crucial followed by acceptance that the scorecard is to serve as the organizing framework for a wide range of team based management processes.
Next, performance measures are not aligned to strategy. It is not uncommon for mangers to drown their organisations with many different performance measures without assessing whether they measure performance against the strategic objectives and the critical success factors of the business. In the case of Cadco, which always look into new businesses and clients, should move the performance measures into that direction. A good balanced scorecard should have a mix of outcome measures and performance drivers that are specifically derived form the organization’s strategy. Normally, it is suggested that there are 4-5 measures for each perspective.
The balanced scorecard approach is not accepted within the organization because managers do not accept the change in approach. This is usually because they were not given a change to influence it. Ultimately the scorecard changes peoples’ behavior. People are required to make it work and users and the needs of departments need to be taken into account if the scorecard’s introduction is to be successful. Developing strategy with scorecard should occur through management dialogue to define the strategy using the strategy maps and templates as a framework for discussions. Some organisations have adopted a family of scorecards where there is a high level group scorecard supported by scorecards for individual business units and in some cases for individual members of staff.
Hence the balanced scorecard could be subjective. Especially when Cadco is an engineering design company, where it needs to comply to various procedural rules.
(C) Key measures for each of the main aspects of a balanced scorecard for Cadco
Customer Perspective
There can be four relevant key measures in this aspect. Firstly, it’s the percentage of repeat orders from customers. This would be used to measure the trend and possible benchmark against competitors. Next, it could be the customer satisfaction index. This would measure whether Cadco’s product is doing well in terms of meeting the customer’s needs. The next key measure could be the market share of the company’s product. This measures whether Cadco’s engineering designs are well-known and well-liked over the local markets and international markets. Next, it could be the customer profitability. This measures the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. The other key measures could be the customer retention and acquisition. Customer Retention is the activity that the selling organization undertakes to reduce customer account defections. The success of this activity is when the customer account places an additional order before a 12-month period has expired. Note that ideally these orders will need to contribute similar financial amounts to the previous 12 months.
Internal Business Perspective
The key measures include innovation, operations and post-sales service, and the percentage of work completed on time and within the budget. Innovation refers to the market idenification, research and development and design of the product. Operations shows how the product is built and delivered. Post-sales services would show how the customers receives the product, and it also determines the amount of subsequent repeat sales. The clusters for the internal process perspective are operations management (by improving asset utilization, supply chain management, etc), customer management (by expanding and deepening relations), innovation (by new products and services) and regulatory & social (by establishing good relations with the external stakeholders).
Innovation and Learning Perspective
The key measures are in the areas of people, systems and technology. In terms of technology, it can be measured in view of the percentage of designers in Cadco who uses the latest version of design software to produce their products. It can also be measured by determining the life cycle of each product designed. How long does it last? The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise.
Financial Perspective
The key measures in this perspective includes the shareholder value, revenue growth and mix, cost reduction or productivity improvement and asset utilisation and investment strategy. One way of doing so it to calculate the growth in operating cash flow. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc. Finally, the harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. Some of the most common financial measures that are incorporated in the financial perspective are EVA, revenue growth, costs, profit margins, cash flow, net operating income etc.
Reference:
1. “The balanced scorecard-An Overview” by CIMA, technical briefing.
2. “Non-financial Performance Measures: What Works and What Doesn't” Published: December 06, 2000 in Knowledge@Wharton. http://knowledge.wharton.upenn.edu/article.cfm?articleid=279
3. http://en.wikipedia.org/wiki/Balanced_scorecard
It has been rather challenging for companies to choose a reliable performance measure these days. Performance measurement systems play a key role in developing strategy, evaluating the achievement of organizational objectives and compensating managers. However the traditional financially oriented systems do not work adequately. A recent survey of U.S. financial services companies found most were not satisfied with their measurement systems. They believed there was too much emphasis on financial measures such as earnings and accounting returns and little emphasis on drivers of value such as customer and employee satisfaction, innovation and quality.
In response, companies now stress the importance of non-financial performance measurement systems. A third of financial services companies, for example, made a major change in their performance measurement system during the past two years and 39% plan a major change within two years. Furthermore, the inadequacies in financial performance measures have led to innovations ranging from non-financial indicators of "intangible assets" and "intellectual capital" to "balanced scorecards" of integrated financial and non-financial measures.
For certain aspects of Cadco’s work as well, it would be very difficult to measure an appropriate objective in financial terms. It is therefore important that some non-financial performance measures are used. If a financial measure that does not fully reflect the nature of the objective is used to assess performance, then there will be a clear incentive for behavior that leads to the target measure, but no necessarily the actual objective. For an instance, if the objective was to improve the quality of the product or service, and the measure used for this was to spend x% of costs on quality assurance, this measure could easily be met without actually improving quality, because more spending does not necessarily bring about better quality. In other words, meeting the budgeted expenditure is not always the best strategy or the best achievement.
The other reason why it is more important to have non-financial performance measures is because the employees or the staff works with physical measures, instead of financial measures. Hence the relevant measure here should be in terms of quantity of units produced, processed or sold, quality of work performed, timeliness of the work performed (number of units produced per hour), cost-effectiveness on which the employee has some degree of control over costs, absenteeism or tardiness, creativity, adherence to policy, gossip and other personal habits, personal appearance or grooming, manager appraisal, self-appraisal, peer appraisal, team appraisal, assessment center, etc.
There is also evidence that non-financial performance measures are often easier to understand and relate to. The technical jargons from financial basis of measurements (budgets, forecasts, profit and loss, balance sheets) might not be understood by employees without accounting or finance background at non-finance departments or those without relevant education in accounting and finance.
Moreover, many of the financial measures originated from physical measures. Therefore, it is more economical to use the physical measure. There should be a system use at each of the lower levels of the organization, with the lowest levels using physical units of measure that are specific. Integration of measures in this form is difficult and very few companies have been able to design such a comprehensive measurement system.
Although there are many advantages to non-financial performance measures, they also have their disadvantages. It has five primary limitations.
Time and cost has been a problem for some companies. They have found the costs of a system that tracks a large number of financial and non-financial measures can be greater than its benefits. Development can consume considerable time and expense, not least of which is selling the system to skeptical employees who have learned to operate under existing rules. A greater number of diverse performance measures frequently requires significant investment in information systems to draw information from multiple and often incompatible databases.
Evaluating performance using multiple measures that can conflict in the short term can also be time-consuming. One bank that adopted a performance evaluation system using multiple accounting and non-financial measures saw the time required for area directors to evaluate branch managers increase from less than one day per quarter to six days.
Bureaucracies can cause the measurement process to degenerate into mechanistic exercises that add little to reaching strategic goals. For example, shortly after becoming the first US Company to win Japan's prestigious Deming Prize for quality improvement, Florida Power and Light found that employees believed the company's quality improvement process placed too much emphasis on reporting, presenting and discussing a myriad of quality indicators. They felt this deprived them of time that could be better spent serving customers. The company responded by eliminating most quality reviews, reducing the number of indicators tracked and minimizing reports and meetings.
The second drawback is that, non-financial data are measured in many ways; hence there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways. Many companies attempt to overcome this by rating each performance measure in terms of its strategic importance and then evaluating overall performance based on a weighted average of the measures. Others assign arbitrary weightings to the various goals. One major car manufacturer, for example, structures executive bonuses so: 40% based on warranty repairs per 100 vehicles sold; 20% on customer satisfaction surveys; 20% on market share; and 20% on accounting performance, pre-tax earnings. However, like all subjective assessments, these methods can lead to considerable error.
Lack of causal links is a third issue. Many companies adopt non-financial measures without articulating the relations between the measures or verifying that they have a bearing on accounting and stock price performance. Unknown or unverified causal links create two problems when evaluating performance: incorrect measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes. Xerox, for example, spent millions of dollars on customer surveys, under the assumption that improvements in satisfaction translated into better financial performance. Later analysis found no such association. As a result, Xerox shifted to a customer loyalty measure that was found to be a leading indicator of financial performance.
The lack of an explicit casual model of the relations between measures also contributes to difficulties in evaluating their relative importance. Without knowing the size and timing of associations among measures, companies find it difficult to make decisions or measure success based on them.
Fourth on the list of problems with non-financial measures is lack of statistical reliability. It’s whether a measure actually represents what it purports to represent, rather than random "measurement error". Many non-financial data such as satisfaction measures are based on surveys with few respondents and few questions. These measures generally exhibit poor statistical reliability, reducing their ability to discriminate superior performance or predict future financial results.
Finally, although financial measures are unlikely to capture fully the many dimensions of organizational performance, implementing an evaluation system with too many measures can lead to "measurement disintegration". This occurs when an overabundance of measures dilutes the effect of the measurement process. Managers chase a variety of measures simultaneously, while achieving little gain in the main drivers of success.
Once managers have determined that the expected benefits from non-financial data outweigh the costs, three steps can be used to select and implement appropriate measures.
The non-financial measures are increasingly important in decision-making and performance evaluation. However, companies should not simply copy measures used by others. In choosing the measures must be linked to factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. In addition, companies should remember that performance measurement choice is a dynamic process. There are measures that may be appropriate today, but the system needs to be continually reassessed as strategies and competitive environments evolve.
(B) Main Features of the Balanced Scorecard
The balanced scorecard is a management tool designed to articulate, execute and monitor strategy using mix of financial and non-financial measures. It should help an organisation to align and focus all its resources on its strategy. The underlying principles of the balanced scorecard states that there should be a balance between external measures relating to shareholders and customers and internal measures relating to critical business processes such as innovation, learning and growth. It is necessary to define what is important for the particular business. This is why organisation may have very different scorecards.
The balanced scorecard translates vision and strategy into four perspectives. They are financial, customers, internal business perspective and learning and growth.
The financial perspective is in how we look to our shareholders. This perspective is composed of measures such as cash flow, sales and income growth and profits and return on capital employed (ROCE) or return on net assets (RONA). It can also include comparative measures such as net margin versus the rest of the industry. The types of measures used will depend on the strategy being pursued. For example, if trying to increase shareholder value there are generally two generic strategies, revenue growth and productivity strategy. Each of these strategies will be pursued in a different manner and will require tailored measures. A productivity strategy being driven by improved cost structure, for example, will want to achieve lower cost per unit.
The customer perspective is in how customers see us. This perspective comprises measures such as goals for new products, on-time delivery and defect and failure levels. It is in this perspective that a company’s customer value proposition should be evident, for example are you pursuing a strategy based on operational excellence, customer intimacy or product leadership. Again, the measures used in this perspective will depend on the strategy being pursued. For example, a company pursuing a customer intimacy strategy will focus on particular differentiators to fulfilling this strategy such as high-level service from employees and rewarding customer loyalty. From the measures, it should be possible to identify the strategy being pursued.
The internal business perspective is in what we must excel. This perspective relates to internal business processes such as productivity, cycle, time, quality, and cost measures. Strategy should determine the measurement emphasis for internal business processes so that measures will relate to the value proposition a company is trying to support. Typical measures in different groupings will vary. If it is not an organization’s aim to pursue a strategy based on product leadership for example, measures to do with the innovation process which will play a supportive rather than primary role, should only focus on the basic requirements for the organization.
The learning and growth perspective is in how we can continue to improve and create value. To achieve the vision of the company, how will we sustain our ability to change and improve? Measures in this perspective will relate to facilitating a motivated and trained workforce. Measures would typically fall into three areas. They are strategic competencies, strategic technologies and a climate for action. For example, the personal growth through employee feedback and alignment to higher level strategic objectives.
One of the main reasons why the balanced scorecard approach is increasingly popular is that it can be really beneficial as it has a range of measures to help the staff understand how they can contribute to the strategic success of the organization. It also provides executives a framework that is effective in translating the company’s vision and strategy into a set of performance measures. Short term benefits could be gained, however at the expense of long term profitability.
The starting point is to understand a company's value drivers or success drivers, which are the factors that create stakeholder value. Once known, these factors determine which measures contribute to long-term success and so how to translate corporate objectives into measures that guide managers' actions.
While this seems intuitive, experience indicates that companies do a poor job determining and articulating these drivers. Managers tend to use one of three methods to identify value drivers, the most common being intuition. However, executives' rankings of value drivers may not reflect their true importance. For example, many executives rate environmental performance and quality as relatively unimportant drivers of long-term financial performance. In contrast, statistical analyses indicate these dimensions are strongly associated with a company's market value.
However, there are many implementation problems to this balanced scorecard framework. An ambiguous corporate or business strategy is one of them. The purpose of the balanced scorecard is to implement an organization’s strategy and the only way this can be achieve is if the strategy is explicit and made to form the basis of the scorecard. Ambiguity at this level will mean that the senior executive management team will struggle to translate the business strategy into specific and tangible strategy objectives. Broad consensus at top management level is also crucial followed by acceptance that the scorecard is to serve as the organizing framework for a wide range of team based management processes.
Next, performance measures are not aligned to strategy. It is not uncommon for mangers to drown their organisations with many different performance measures without assessing whether they measure performance against the strategic objectives and the critical success factors of the business. In the case of Cadco, which always look into new businesses and clients, should move the performance measures into that direction. A good balanced scorecard should have a mix of outcome measures and performance drivers that are specifically derived form the organization’s strategy. Normally, it is suggested that there are 4-5 measures for each perspective.
The balanced scorecard approach is not accepted within the organization because managers do not accept the change in approach. This is usually because they were not given a change to influence it. Ultimately the scorecard changes peoples’ behavior. People are required to make it work and users and the needs of departments need to be taken into account if the scorecard’s introduction is to be successful. Developing strategy with scorecard should occur through management dialogue to define the strategy using the strategy maps and templates as a framework for discussions. Some organisations have adopted a family of scorecards where there is a high level group scorecard supported by scorecards for individual business units and in some cases for individual members of staff.
Hence the balanced scorecard could be subjective. Especially when Cadco is an engineering design company, where it needs to comply to various procedural rules.
(C) Key measures for each of the main aspects of a balanced scorecard for Cadco
Customer Perspective
There can be four relevant key measures in this aspect. Firstly, it’s the percentage of repeat orders from customers. This would be used to measure the trend and possible benchmark against competitors. Next, it could be the customer satisfaction index. This would measure whether Cadco’s product is doing well in terms of meeting the customer’s needs. The next key measure could be the market share of the company’s product. This measures whether Cadco’s engineering designs are well-known and well-liked over the local markets and international markets. Next, it could be the customer profitability. This measures the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. The other key measures could be the customer retention and acquisition. Customer Retention is the activity that the selling organization undertakes to reduce customer account defections. The success of this activity is when the customer account places an additional order before a 12-month period has expired. Note that ideally these orders will need to contribute similar financial amounts to the previous 12 months.
Internal Business Perspective
The key measures include innovation, operations and post-sales service, and the percentage of work completed on time and within the budget. Innovation refers to the market idenification, research and development and design of the product. Operations shows how the product is built and delivered. Post-sales services would show how the customers receives the product, and it also determines the amount of subsequent repeat sales. The clusters for the internal process perspective are operations management (by improving asset utilization, supply chain management, etc), customer management (by expanding and deepening relations), innovation (by new products and services) and regulatory & social (by establishing good relations with the external stakeholders).
Innovation and Learning Perspective
The key measures are in the areas of people, systems and technology. In terms of technology, it can be measured in view of the percentage of designers in Cadco who uses the latest version of design software to produce their products. It can also be measured by determining the life cycle of each product designed. How long does it last? The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise.
Financial Perspective
The key measures in this perspective includes the shareholder value, revenue growth and mix, cost reduction or productivity improvement and asset utilisation and investment strategy. One way of doing so it to calculate the growth in operating cash flow. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc. Finally, the harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. Some of the most common financial measures that are incorporated in the financial perspective are EVA, revenue growth, costs, profit margins, cash flow, net operating income etc.
Reference:
1. “The balanced scorecard-An Overview” by CIMA, technical briefing.
2. “Non-financial Performance Measures: What Works and What Doesn't” Published: December 06, 2000 in Knowledge@Wharton. http://knowledge.wharton.upenn.edu/article.cfm?articleid=279
3. http://en.wikipedia.org/wiki/Balanced_scorecard
Wednesday, February 11, 2009
Workers Laid-Off, Retrenchment Another Big Thing
Is there an alternative to handle the economic crisis instead of relying solely on Retrenchment and laying off of employees and workers?
Many listed companies from all over the countries have been laying off their employees and workers over the past six months, after the major economic crisis has announced of itself. Many employees from SMEs to the Big Listed Companies have experienced retrenchments as their firms decides to downsize their various departments, merge two or more departments into one, or even to make do without one or two departments.
However, other than the common retrenchment exercise, is there any other approach to the matter?
There are many small ways that create a dynamic impact on the firms in cost-cutting strategy. One evening, I happen to meet up with my ex-colleagues from my internship company for dinner, and we were chatting on this very topic over coffee. I asked them how has the company handled the economic crisis when none of the common strategies of pay-cut, retrenchment, laying off workers have taken place.
She mentioned that the company has reduced each employee's amount of annual leaves. A worker's average pay a day is estimated to be around $56. If one day leave is removed from this employee, the company would not be paying $56 for a non-working day and a no-productivity day. By cutting 2 days from the annual leave, it would be $112 that would be saved. The entire company on the average should contain around 250 employees. Ceteris paribus, assuming all workers have the same pay of $56 per day, the company could have saved $28000 in a year. On the flip side, with a reduction in annual leaves, it also bring about higher productivity, because the workers would be present and would also be contributing to more than what he/she has been.
The other mentioned strategy was the removal of meal coupon priviledges. The company now employ bulk catering services which operates on the just-in-time approach. This catering services allows employees to order meals on the very day for those who desires the services, and hence prevents losses on those who are absent or decides to eat out. Meal coupons amount to $1.50 per day, which means the company could have spent to $360 per year for each worker. On the estimate of 250 workers in the company, it would have spent close to $90000 on employees meal coupons benefits, which now could be saved when the scheme has been removed. Catering services are drawn from the employees on wages, which has no further incremental cost on the company.
Thereby, the company managed to tide over the economic crisis in the meanwhile with their ability to identify the major causes for cost. Hence, the major cost driver for the overheads of employee benefits would be reduced in great amounts.
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