Session A
Measuring
performance
In many organizations, the only aspect of work that is measured is money — how well is the organization performing against its budgets?
In this session we'll be taking a wider perspective, because budgets are not the only yardstick for measurement, and because first line managers are not the only people with a stake in the way an organization performs. So in this session we'll look at:
a wide range of methods for measuring performance;
how an organization's performance might be judged by the various people who have a stake in it.
Suppose you run a 100-metre race in 15 seconds. How did you perform? There are lots of ways you could describe it (and you might be tempted to use the way that makes you look best when describing it to other people).
1 You could compare this performance to your previous attempts to run 100 metres. Were you faster or slower?
2 You could compare it to a target you have set for yourself, such as 100 metres in 12 seconds.
3 You could compare it to the times of other people in the race, or (if you are very ambitious!) to the world record time for running 100 metres.
All these descriptions are measurements of your performance. So let's have a definition.
Performance measurement considers how well something performs compared with how it performed in the past, or with how it is required to perform in the future, or in comparison with the performance of something else.
In the 100-metre race we said you ‘performed it’ in 15 seconds, and 15 seconds is a sort of performance measurement. If you usually manage to run 100 metres in 13 seconds we might have said that your performance was ‘below average’. If one person beat you in the race we could have said that you came ‘second out of eight runners’.
‘Below average’ and ‘second out of eight’ are both performance measures.
For each of the three measures we used for your 100-metre race, what were you comparing your performance against? Which do you think is the most useful measure?
The first measurement is against the clock: it compares distance travelled with time taken. This is only useful if you happen to know other information, like how long it usually takes people of your age, sex and fitness to run 100 metres. The second is against your own previous performance, and that is useful information for you personally and for people who may compete against you in the near future. The third measurement compares you with other people.
Since I don't know anything else about you, I would say that the third measure is the most useful piece of information you could give me — but I would probably ask you who you were competing against.
The point is, the same performance can be presented in lots of different ways.
Activity 2
Say you had to report your performance in the 100-metre race to your coach, your colleagues at work and your partner. Which measure would you use for each person?
1 Your coach _______________________________________________
2 Your colleagues at work _____________________________________
3 Your partner ______________________________________________
Probably it should be presented in the way that is most helpful to the person who wants the information, but very often information is presented in a way that makes the person presenting it look good.
3.1 Quantitative and qualitative measures
Information is quantitative if it can be expressed in numbers (or ‘quantities’). ‘Five apples’ or ‘2 kg of apples’ or ‘a bag of apples costing £1.50’ are all examples of quantitative information.
Information is qualitative if it is not expressed in numerical terms (for instance ‘below average’), either because it can't be, or because it can't be in a way that has an agreed meaning.
Activity 3
Describe ‘very delicious apples’ as fully as you can.
If you need to describe the quality of something, it's generally more helpful to give as much detail as possible. This at least gives someone a chance to judge the apples in comparison to things they know about.
You may argue that ‘very delicious apples’ could be expressed numerically. You could say ‘apples to which I would give a deliciousness rating of 10 out of 10’. But different people have very different ideas about what they think is a delicious apple. How do you judge?
If you had to choose between the two performance measures for apples below, which would you choose and why?
1 These apples are green, crisp, hard, juicy and sharp on the tongue.
2 I give these apples a deliciousness rating of 5 out of 10, and so do my three colleagues.
I hope you agree that quantitative information (description 2) is the most useful for performance measurement. (This does not mean that qualitative information should never be used, especially if there is a way to express it in a mixture of quantitative (objective) terms and qualitative (subjective) terms.)
If you had bought that bag of apples that rated 5 out of 10, and you wanted to increase your colleagues' apple-eating pleasure, the numbers give you a very clear target to beat: you just have to shop around for apples that rate more highly.
In addition, by saying ‘… and so do my three colleagues’, the second measure is much more convincing than the first, purely personal opinion.
In a supermarket you notice that the label on one of the bottles of organic apple juice you are thinking of buying has ‘Silver Award Winner’ printed on it. Is this an example of performance measurement? If so, why?
Look back at the definition of performance measurement at the beginning of this session if you are not sure.
The award implies that the apple juice performed well enough to come second overall in an organic apple juice competition (presumably judged by experts) in comparison with other juices, so yes it is certainly a performance measure.
Watch out for other examples of attempts to ‘quantify’ qualitative measures. It is a common technique in advertising.
3.2 Comparing numbers: percentages
In this workbook we've already compared actual performance with budgeted performance, by subtracting one number from the other and calling the difference a variance.
There are other ways of looking at numbers in organizations. The most common way in performance measurement is the percentage.
Jumbo Ltd manufactures pet products. It had sales of £23,500 in January, £19,900 in February and £27,400 in March. By how much did sales fall in February and rise in March? Express your answer as a percentage to two decimal places.
In February, sales fell by £(23,500 – 19,900) = £3,600. To express this as a percentage, you divide the difference between the two numbers by the earliest number, and multiply by 100: £(3,600/23,500) × 100% = 15.32%.
In March sales rose (compared with February, the earliest number) by £(27,400 – 19,900) = £7,500, or £7,500/£19,900 × 100% = 37.69%.
Another way of looking at this is simply to divide one number by the other. For instance you could say that February sales are only 84.68% (£19,900/£23,500) of January sales, while March saw sales of 137.69% of February sales. (Remember: it is the thing that the percentage is ‘of’ that represents 100%.)
Here are a few examples of how percentages are used in performance measurement.
Market share
A company may set a target of 25% share of the total market for its product. The marketing department's performance will be measured on the difference between this and the actual market share achieved.
Capacity levels
‘The factory is working at 15% below full capacity’ is an example suggesting that the factory is not producing as much as it could, perhaps because of inefficiencies.
Staff turnover
If a department has staff turnover of 15% over a year, when the average in the organization is only 5%, there may be some problem in the way that department is performing.
3.3 Comparing like with like
Activity 7
We have the following additional information about Jumbo Ltd.
| Sales | 2003 | 2004 |
| January | 23,500 | 34,200 |
| February | 19,900 | 28,900 |
| March | 27,400 | 48,200 |
Can you see a pattern here? Describe them below, as fully as you can. What reasons can you think of for the pattern?
You should be able to see a pattern: sales fall in February and rise in March in both years. There could be a number of reasons for this: perhaps the January figures are boosted by post-Christmas sales, February is about normal and March is the time when the company releases its new Spring range of products.
In a case like this, it is not particularly useful to compare a month with the month before, since we already know roughly how sales will rise and fall between January and March. It is not really fair to compare March sales (the new product range) with February sales (the end of the old product range): we are not comparing like with like.
A better way of measuring would be to compare sales in 2004 with sales in 2003.
| Sales | 2003 | 2004 | Increase |
| January | 23,500 | 34,200 | 45.53% |
| February | 19,900 | 28,900 | 45.23% |
| March | 27,400 | 48,200 | 75.91% |
Here we can see that in both January and February, sales are about 45% higher than they were in the previous year. But in March, sales are 75% higher than last year: the Spring 2004 product range has been much more successful on its launch than the Spring 2003 range was when it was first introduced.
If you get unexpected results you should always check that the principle of comparing like with like is being applied.
Just think of the 100-metre race: if all the other competitors were 30 years older than you, your work colleagues might not be quite so impressed that you came second!
Activity 8
Company A made a profit in the year to 31 December 2003 of £73,900. In the same period, Company B made a profit of £82,500.
What other information would you need to compare the performance of these two companies?
On the face of it, Company B did a bit better than Company A, but we have no idea whether we are comparing like with like.
If Company A's sales were £100,000 and Company B's sales were £500,000, then Company A was actually a lot more successful. We can see this by calculating the profit margin — profit divided by sales — and comparing these.
| Profit (£) | Sales (£) | Profit margin | |
| Company A | 73,900 | 100,000 | 73.9% |
| Company B | 82,500 | 500,000 | 16.5% |
It would also be useful to know what the two companies actually do. Company A might be a firm of solicitors while Company B might make bathroom accessories, in which case there is little point in comparing their performance.
More information about costs would be helpful. Perhaps Company B had unusually large expenses during the year that will not recur in subsequent years.
And it would be helpful to know how much profit the companies made in previous years.
In most business organizations, popular ways of measuring performance are profitability, activity and productivity.
Profitability
Profit is income less costs. All parts of an organization incur costs, and so everyone's performance can be judged in relation to cost. Only some parts of an organization receive income, and their success should be judged in terms of both cost and income.
Activity
All parts of an organization carry out activities. An example of an activity measure is ‘Number of orders received from customers’. This is a measure of the effectiveness of the marketing department. Activities can be measured in terms of physical numbers, monetary value, or time spent.
Productivity
This is the quantity of the product or service produced in relation to the resources put in, for example so many units produced per hour, or per employee, or per tonne of material. These are measures of efficiency.
Activity 9
Circuit Ltd makes circuit boards for the electronics industry. Its production department has two production targets. Identify which is an activity target, and which is a productivity target.
1 At least 15 batches of circuit boards should be produced each week.
Activity target  |
Productivity target |
2 At least 1,000 circuit boards should be produced per hour of production time.
| Activity target |
Productivity target |
Circuit Ltd produces circuit boards in batches, and in one week it can produce at least 15 batches. We don't know how many boards there are in each batch, nor how many resources are used in a week, so Target 1 is an activity target. Target 2 measures both factory time and the number of circuit boards produced, so this is a productivity target.
Financial measures are calculated using figures in the organization's accounting records. Financial measures only tell us something about whether performance is good or bad because they are compared with something else.
Here are some examples of financial performance measures, accompanied by comments that you might typically read in the financial pages of a newspaper (these are derived from the Financial Times).
For each one, try to identify what the performance is being compared with, and what the comparison shows.
Profit: ‘the company made pre-tax profits in 2002 of £1.46 m (2001: £1 m) on sales of £12.7 m (2001: £10.7 m)’.
Sales: ‘the aluminium division had sales which accounted for approximately 10% of the group's total sales’.
Costs: ‘savings from the cost-reduction programme were £30 m a quarter’.
Share price: ‘the group's share price rose 15p to 684p despite the stock market's overall fall’.
You may have expressed your ideas differently but see how they compare with mine.
This year's profits and sales are compared with last year's, and are found to be higher.
Sales for one part of the organization are compared with the total for the group. The comparison shows a certain level of sales, but does not indicate whether this is an improvement or a deterioration.
Costs are compared with a previous period. They are at a lower level, in keeping with a planned reduction.
Share price is higher than before and high relative to the performance of the stock market as a whole.
Here is a list of yard-sticks against which figures in an organization's accounts are usually placed so that they become measures.
Budgeted sales, costs and profits, or standards in a standard costing system.
The trend over time (comparing last year to this year, say).
The results of other departments of the organization.
The results of other organizations, especially competitors.
The market in general.
The economy in general.
The organization's future potential (for example a promising new organization may make large losses in its first few years, but its performance should be judged in terms of how long it will be before it starts to make large profits).
Activity 11
See if you can get hold of a copy of your own organization's latest Annual Report and Accounts and glance through it to see what sort of financial performance measures you can spot.
If you've studied any accounting you'll know that there are several ratios that can be calculated to show how an organization is performing. Examples are the current ratio, profit margin and return on capital employed. Another workbook in this series, Understanding Organizations in their Context, tells you about financial ratios in more detail.
I logged on to the Internet and tapped ‘Annual Report and Accounts’ into a search engine.
The first thing I found was the Annual Report and Accounts of Unilever, which has a liberal sprinkling of financial performance measures just in the first few pages. Examples I found were: ‘Leading brands account for 84% of total sales …’, ‘In Africa, Middle East and Turkey, overall sales were up by 2%, with profits increasing by 13%’ and many others.
Financial measures do not necessarily give the full picture of an organization's performance, and in any case as a first line manager you may not have access to many accounting figures for your section or department.
What measures would you prefer to see for judging your work team's performance? Does the accounting system measure these?
Your team may be best judged by looking at units produced, time taken, product quality, delivery, after-sales service or customer satisfaction, none of which is directly measured by the traditional accounting system.
Unlike traditional variance reports, non-financial indicators are more relevant for non-financial managers, who can understand and therefore use them more effectively.
We can supplement financial measures in each of the following key areas of an organization:
sales-related activities;
materials;
labour.
6.1 Sales-related activities
Traditionally, sales performance is measured in terms of price and volume variances, but other possible measures include revenue targets and target market share. You can analyse these measures in as much detail as you like: by country or by region, by individual products, by salesperson and so on.
Example of a financial measure.
Sales are up by 14%.
Examples of non-financial measures.
Goods returned: total sales
‘0.5% of goods were returned by customers.’
This helps you to monitor customer satisfaction, and is a check on whether quality control procedures are working
Deliveries late: deliveries on schedule
‘12% late deliveries.’
This comparison can be applied both to sales made to customers and to receipts from suppliers, and measures the efficiency of the stores department
Number of people served and speed of service
‘100 people served in one hour.’
In a shop, if it takes too long to reach the checkout point, customers will go elsewhere and future sales will be lost.
Customer profitability analysis
‘An average of £100 profit was made per customer.’
This measure may not be so useful, as profitability can vary widely between different customers. Different customers may be given different levels of discount, delivery costs are higher the further away the customer is, some customers demand more support than others, and so on. Information on this can help you check whether individual customers are actually profitable to sell to, and whether profitability can be improved for any customer by switching effort from one type of activity to another.
Activity 13
A motor insurance company has collected the following data about claims on its insurance policies in the last year.
| Age group | Number of policies | Total premiums (£) | Total claims (£) | Profit or loss (£) |
| 18–25 | 2,700 | 837,000 | 855,000 | |
| 25–35 | 3,400 | 1,003,000 | 520,000 | |
| 35–50 | 5,400 | 1,350,000 | 120,000 | |
| 50–65 | 3,400 | 765,000 | 20,000 | |
| Over 65 | 1,000 | 305,000 | 300,000 |
Which group of customers is the most profitable for the insurance company and which is the least profitable?
Subtract the total claims from the total premiums per group to give you the profit per group. (You can also divide the profit per group by the number of policies to find out the average profit per person.)
| Total premiums (£) |
Total claims (£) |
Profit or loss (£) |
Profit or loss per policy (£) |
|
| 18–25 | 837,000 | 855,000 | −18,000 | −6.67 |
| 25–35 | 1,003,000 | 520,000 | 483,000 | 142.06 |
| 35–50 | 1,350,000 | 120,000 | 1,230,000 | 227.78 |
| 50–65 | 765,000 | 20,000 | 745,000 | 219.18 |
| Over 65 | 305,000 | 300,000 | 5,000 | 5.00 |
The 18 to 25 age group is the only one that is not profitable, and the 35 to 50 age group is most profitable.
You might think that the company should stop selling insurance policies to 18 to 25 year olds – but they will of course get older and become more responsible drivers. The company will want to keep them as customers in the future.
What about the tiny profit made on policies sold to those aged over 65? This is probably a lot of work for little income, and the company might consider either raising the premiums or stop selling insurance to people over 65.
6.2 Materials
Traditional measures for materials are standard costs, and price and usage variances. Again there are many non-financial measures that can be helpful.
General physical quality
This will be important to the final product. Materials may have to have smoothness, or hardness, or pliability, or consistency of colour or taste.
Particular physical quality
The material may need to be perfectly round or weigh a specific amount. Nothing less than 100% performance will do.
You are a first line production manager working in a perfume bottling factory. You are responsible for manufacturing the stoppers for the tops of the bottles, and your colleague is responsible for ensuring that the perfume is not contaminated by other smells as it is bottled.
What non-financial performance measures could you expect to see for each process?
Measures in such cases can be expressed in terms of number of defects: ‘2 out of every 100 stoppers produced had the hole in the wrong position’; ‘6 out of every 10,000 bottles of perfume failed the “sniffer” test’.
The performance of materials suppliers should also be measured: how quickly they deliver materials, whether they are ever late with their deliveries, and how many of the items they deliver are sent back because they are faulty.
6.3 Labour
Labour costs are traditionally measured in terms of rate and volume variances.
Other staff-related measures are possible, such as:
unit sales per salesperson;
time taken to do a task;
hours lost through sickness.
Almost any aspect of an organization can be measured in terms of the different individuals or teams who carry out activities.
Qualitative measures concentrate on things like:
ability to communicate;
relationships with colleagues;
customers’ impressions (‘so and so was extremely helpful/rude’);
levels of skills attained.
Employee-based measures are very important when assessing the performance of the employees' manager, as well as the employee. High profitability or tight cost control should not be accompanied by 100% staff turnover!
Activity 15
John works in the Claims Processing Department of an insurance company with 14 colleagues. They are all paid £18,200 per annum and work a 7-hour day, 5 days a week. The department typically handles 1,500 claims each week of the year.
The department's manager wants to measure the performance of the department. Identify as many useful performance measures as you can think of, explaining what each is intended to measure and how it is calculated.
One morning John spends half an hour on the phone to his sister, who lives in Australia, at the company's expense. The cost of the call proves to be £16. What is the cost of John's half hour of idle time?
Here are some suggestions for measures, with explanations of how they are calculated.
Claims processed per employee per week: 1,500/15 = 100 (activity measure).
Staff cost per claim: (£18,200×15)/(1,500×52)=£3.50 (profitability measure).
Claims processed per department hour: 1,500/(7 × 5) = 42.9 (productivity measure).
Cost of John's half hour of idle time: £16 = £5 = £21 (profitability measure). John earns £10 per hour: £18,200/(7 × 5 × 52) or £5 per half hour.
You may have thought of other measures and probably have slight rounding differences.
6.4 Dangers of non-financial measures
If you have too many measures you will be overloaded with information and may not be able to act on any of it properly.
Non-financial measures might lead managers to pursue detailed goals for their own departments, and lose sight of the goals for the organization as a whole.
Suppose you read in the newspaper that ‘X plc made a profit of £3 m, as opposed to £7 m last year’.
On the face of it, it looks as if X plc has not done very well this year. But you should be well aware by now that it is not fair to pass judgement without comparing X plc's performance with something else.
7.1 The state of the economy
Economic influences should be considered whenever an organization's performance is measured.
What factors in the economy as a whole would you consider if you were assessing the performance of X plc, a retailer?
You may have questioned whether the economy is booming or in recession. Is the government trying to encourage organization growth, control inflation, reduce unemployment, or balance imports and exports?
Economic factors like these will affect interest rates and taxation, foreign exchange rates, the availability of skilled staff, and – crucially for X plc – the willingness of customers to spend money. All these things will have an impact on X plc's performance.
7.2 Competitors
You can compare the performances of different business organizations by calculating the same financial measures for each one, using published accounts, to see whose are better and whose are worse than average.
You can also get information about competitors through:
newspaper and magazine reports and articles;
their promotional material, advertising, website and so on;
market research;
recruiting ex-employees of rival organizations.
Find out the following economic figures. You could look in a broadsheet newspaper such as The Times, or search the Internet (for instance, http://www.statistics.gov.uk/ is a good source).
Rate of inflation ____________ Bank base lending rate ____________
Exchange rates: pound sterling/US dollar ________________ pound sterling/ euro ________________
Rates of corporation tax ________________
We won't give answers, because all these figures are likely to have changed by the time you read this. Hopefully, in the course of your research you will also come across other economic statistics that are relevant to your own organization's industry.
7.3 Benchmarking
Benchmarking analyses the performance of your own organization, or part of it, compared with the performance of another organization or part, which is generally regarded as ‘the best’ at the activity in question.
There are several types of benchmarking.
Competitor benchmarking looks at direct competitors using any available published information, plus information from customer and supplier interviews.
Process benchmarking looks at similar ‘processes’ in different organizations. For example, British Airways learned lessons about how to maintain their aircraft in foreign airports by looking at processes in organizations that maintain photocopiers.
Internal benchmarking looks at different parts of the same organization, such as the security measures taken in different branches of the same shop to see which approach is most effective at preventing shop-lifting.
What do you think are the advantages of benchmarking? Can you see any disadvantages?
Benchmarking is a good way of avoiding complacency, and it can give rise to new ideas. Also, staff are more likely to accept that they are not being asked to perform miracles if they can actually see new methods working in another organization.
But you probably spotted that persuading other organizations to share information may be a problem. Direct competitors won't want to give away their secrets or reveal their weaknesses. Worse, they may provide false information.
And processes can't always be transferred successfully. A way of working that succeeds in one organization may not work at all in another organization, especially if it depends on the talents of particular individuals.
Different people are interested in different aspects of performance, so it is measured in lots of different ways. For every organization there are individuals, groups of people, and other organizations, each of whom has an interest (a ‘stake’) in how the organization performs.
These people are called stakeholders, and there are three main types:
Internal stakeholders: employees, at all levels.
Connected stakeholders: owners; shareholders; members or subscribers of the organization; customers; financiers (banks, venture capitalists and the like); suppliers and partners.
External stakeholders: the general community, local and central government, pressure groups and professional or industry bodies.
Activity 19
Who else might have an interest (or a ‘stake’) in your performance in the 100- metre race?
If I ran in this race I have to admit that my doctor would probably be rather concerned, and would be standing by with a resuscitator! Hopefully you had lots of better ideas.
Other people in your race would be interested, and competitors in other heats.
Your team-mates taking part in other events would want you to win points for the team.
The race officials would be concerned that the race was conducted fairly.
The audience would probably have favourites: they may even have placed bets on how well you will do.
8.1 Internal stakeholders
Everyone who works for the organization, from the most junior new recruit to the senior managers, is an internal stakeholder.
They have a personal stake in the organization's continued existence, because it is a place where they spend a great deal of their time and energy, and it pays their wages or salaries.
Employees also have more specific individual interests and goals. Here are some typical examples:
A secure income, and probably increases in income over time.
Career development.
Human contact and a sense of belonging to a team.
Interesting work that offers opportunities to use and develop skills.
A safe and pleasant working environment.
A sense of doing something worthwhile.
Activity 20
Suppose your organization has announced that it is about to make some staff redundant, and jobs in your department are at risk. How might individuals’ personal objectives affect their performance and so the overall performance of the department?
I would say the answer depends on what each person's main objectives are, whether they like their job, what their other prospects are, and what they stand to gain or lose from being made redundant.
Staff members who don't like their job much may well let their performance drop off. And if they stand to receive a generous enough redundancy package to leave them financially secure until they find another job, they won't make any special effort for the organization.
Staff whose prospects elsewhere are bad, or who are very keen to stay on because of personal objectives will probably perform extra well, to make it clear to managers that they are indispensable.
8.2 Connected stakeholders
Connected stakeholders include the following:
Owners, shareholders, members or subscribers
Their objective is to get a return on the money (or time, if it is a club) they have invested in the organization. If they did not invest their money, the organization would not exist at all, so earning a return is usually a commercial organization's prime objective.
Customers
They want products and services that meet their needs. They are interested in quality, price and dependability of supply. Customers can be very powerful (for instance, Sainsbury's is a much bigger organization than most of the ones it buys from) and have a huge effect on prices and procedures. Individual customers may band together into user groups with a strong interest in performance. Customers of rail and bus services are good examples.
Financiers
They want to know that any loan or overdraft they make, and the interest on it, will be repaid.
Suppliers and partners
They expect to be paid, so they have a stake in the organization's financial stability. They will also be keen to do future business, so it is in their interests that the organization survives and grows.
Activity 21
Suppliers are sometimes regarded as ‘the enemy’. Purchasing departments seek out the lowest-price suppliers and constantly switch supply sources to avoid getting too dependent on any individual supplier. Supplier contracts feature heavy penalty clauses and are drawn up in a spirit of general mistrust of all external providers. Information is deliberately withheld in case the supplier uses it to gain power during price negotiations.
What are the disadvantages of treating suppliers in this way?
If you always pay late, or disrupt suppliers’ plans by placing impossible demands upon them, or switch contracts, eventually no supplier will want to do business with you.
But there is a bigger disadvantage: the supplier's knowledge and skills are not exploited effectively. You buy products and services from suppliers because they are better at providing them than you are. The more they know about your product, your customers’ needs, and your plans for the future, the better able they will be to provide you with the supplies you need.
Forward-thinking organizations recognize this and enter into partnerships with key suppliers. They open up their design departments and share their supply problems, and this helps generate new ideas, solutions, and products.
It may well be in your interest to share information with suppliers. This applies within organizations, too: if your work team is dependent on another to supply materials or information, it is in your interest to collaborate with the other work team as much as possible.
8.3 External stakeholders
External stakeholders are varied and have very varied objectives. Here are some examples.
The general community
This is interested because organizations bring local employment and facilities (shops, restaurants), and national benefits such as exports and know-how. They can also affect the natural environment, for instance by increasing road traffic, polluting water or air, or making excessive noise.
Local and central government
They are interested in tax revenue, compliance with laws that are meant to benefit everyone, such as the Health and Safety at Work Act, and employment prospects.
Pressure groups
They have particular interest in certain aspects of the organization's activities. For example, animal rights activists may object to an organization's methods of testing products.
Professional or industry bodies
They seek to develop ‘best practice’ standards and defend their members’ interests where there is possible conflict with other external stakeholders. They also ensure that members’ activities don't bring the profession or industry into disrepute.
What aspects of your organization's performance would a trade union be interested in?
You may have some ideas that are specific to your organization, but here are some general suggestions.
Rates of pay, and pay rises, relative to other equivalent organizations.
Statistics about recruitment policy, particularly with regard to ethnic and minority groups.
Workers’ rights and working conditions.
Output and productivity information, since this is relevant to job security and the fairness of rates of pay.
8.4 Differing objectives
The objectives of all these different stakeholders can be sharply in conflict.
Company A has made a large profit in the last financial year, and its shareholders and bank are very pleased. Why might the stakeholders below be less satisfied?
Internal stakeholders
Customers
The community
Suppliers
In a situation like this you have to put yourself in the shoes of the other stakeholders. How did the company make its profits?
It might pay very low wages or expect staff to work impossibly long hours.
Corners might have been cut, with an adverse effect on the quality of the product.
No money may have been spent on local community projects.
No money may have been spent developing innovative new products.
I hope you can see that different information is useful depending on what your stake in the organization is and what you want to know about it.
Many organizations have developed performance measurement systems to report on a variety of aspects of performance and reflect the interests of all stakeholders. Let's look at one of the best-known modern approaches, the balanced scorecard.
8.5 The balanced scorecard
This looks at an organization from four different points of view.
| Perspective | Question | Areas of concern and examples of performance targets |
| customer | What do existing and new customers value from us? | Cost, quality, delivery etc. ‘Deliver within two working days’ |
| Internal | What processes must we excel at to achieve our financial and customer objectives? |
Internal ways of doing things and decision making ‘Minimize stock holding costs’ |
| Innovation and learning |
Can we continue to improve and create future value? |
Ability to acquire new skills and develop new products ‘Sales of new products to be 20% of sales of existing ones’ ‘Minimize time to market for new products’ ‘Increase spend on training by 10%’ |
| Financial | How do we create value for our shareholders? | Ability to increase return to shareholders ‘Widen profit margins by 2%’ |
EXTENSION 1
If you want to find out more about implementing this very useful technique, try following the guidance in Balanced Scorecard Step- by-Step: Maximizing Performance and Maintaining Results by P. R. Niven and R. S. Kaplan.
You can see that answers to the questions help identify areas for improvement. Appropriate performance targets (both financial and non-financial) can then be set.
For instance if the answer to the question ‘What do customers value?’ is ‘fast delivery’, then specific targets can be set (‘Deliver within two working days’). Internal processes that aim to ensure delivery in two days can be set up, and performance can be monitored to see whether the target is being met.
A ‘process’ is simply a way of doing something. If you run out of a certain raw material, for example, there will be a ‘process’ for getting new supplies, such as: ‘Write out a stock requisition, get it authorized by the project manager, send it to the purchasing department, identify the best supplier, place an order, take delivery and check for quality, accept delivery into stores’. The target might be to maintain a minimum level of stock and to avoid going out of stock of any item.
The scorecard is balanced because managers are expected to take account of all four perspectives when they look at performance. This should prevent improvements being made in one area at the expense of others.
Activity 24
A company develops a new car with indicators that get louder as the car goes faster, so that they are not accidentally left flashing when driving at high speed on a motorway. The company has the processes and technology to make such a device at a reasonable cost.
Use the balanced scorecard to see whether this is a good idea.
| Perspective | Question | Evaluation |
| Customer | What do existing and new customers value from us? |
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| Internal | What processes must we excel at to achieve our financial and customer objectives? |
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| Innovation and learning |
Can we continue to improve and create future value? |
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| Financial | How do we create value for our shareholders? |
At first this sounds like a good innovation in response to a specific customer need. Certainly the evaluation of the internal, innovation/learning and financial perspectives would be positive.
But if you think about it a little more deeply, it may be that the customer perspective is wrong – that what the customer really wants is a better soundproofed car with a quieter engine, not an even noisier car!
This is an example of focusing too much on innovation without thinking through what the customer really values.
Activity 25
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This activity may provide the basis of appropriate evidence for your S/NVQ portfolio. If you are intending to take this course of action it might be better to write your answers on separate sheets of paper. |
Draw up a balanced scorecard for your part of your organization, and aim to include at least three performance measures under each heading.
You will need to begin by identifying the stakeholders in your part of the organization and determining what their interests are. Remember that other departments are ‘customers’ of your department, and your department has its own internal suppliers.
The financial perspective can include budget targets if this is most appropriate.
Looking at the completed scorecard, what ideas for improvements does it suggest?
1 Here is some performance information for two factories owned by the same organization. They both make Product X. The figures show the numbers of units of Product X produced by each factory. Your task is to produce a numerical comparison of the performance of the two factories, and comment on what you find.
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Factory A | 31,200 | 31,000 | 34,300 | 29,800 |
| Factory B | 18,500 | 19,300 | 16,200 | 31,700 |
2 What measures could you devise to assess staff morale amongst your work team? Try to think of three. Remember that quantitative measures are more useful than qualitative measures.
3 Fill in the missing words in the following sentences.
Benchmarking is a good way of avoiding _______________ and it may give rise to _______________ _______________.
The main interest of shareholders is to get a _______________ on their _______________, so _______________ is usually thought of as a commercial organization's prime objective.
The balanced scorecard looks at an organization from four different points of view.
a
b
c
d
Answers to these questions can be found on pages 116–17.
Performance measurement looks at how well something performs compared with how it performed in the past, or how it is required to perform in the future, or how something else performs.
Quantitative information is most useful because it gives you a clear target to beat.
It is important to make sure that you are comparing like with like.
An organization's performance is judged on profitability, productivity and activity.
Financial performance indicators compare performance against budget, the trend over time, other organizations, the economy in general and future potential.
Non-financial measures look at specific aspects, such as the number of people served or the time taken to do something.
External comparisons can be made against the general economy and competitors, and by benchmarking against competitors, other processes or other internal departments.
Stakeholders are internal (employees), connected (owners, customers, financiers, suppliers), and external (community, government, pressure groups, professional bodies). Their objectives may be in conflict.
The balanced scorecard is a performance measurement framework that takes account of the interests of all stakeholders.