4.

Performance
Measurement System
MODULE 4: PERFORMANCE MEASUREMENT AND
EVALUATION

• Responsibility Accounting,
• Linking Critical Success Factors (CSFs) to Key Performance Indicators (KPIs) and Corporate
Strategy.
• Performance Measurement Models – Balanced Scorecard, The Performance Pyramid,
• The Performance Prism and The Building Block Model.
Responsibility Accounting
Responsibility accounting
• Responsibility accounting is a system of accounting that segregat
es
revenues and costs into areas of personal responsibility to monitor
and assess the performance of individual parts of an organization.
The focus is on accountability, ensuring that managers and employee
s are responsible for the financial outcomes related to their specific
areas.
• Responsibility accounting is a type of management accounting in
which a company's management, budgeting, and internal accounting
are all held accountable.
• The fundamental goal of this accounting is to assist all of a
company's planning, costing, and responsibility centers.
Responsibility accounting – Key
elements
1.Responsibility Centers: These are segments or departments withi
n
an organization, such as cost centers, profit centers, and investment
centers, each managed by individuals who are accountable for the
results.
2.Performance Reports: Regular reports are prepared to evaluate th
e
performance of each responsibility center, comparing actual results t
o budgets and standards.
3.Control and Accountability: Helps in controlling costs and revenu
es
by assigning specific responsibilities to managers, who are then held
accountable for their performance.
Key elements ..
• Inputs and Outputs or Costs and Revenues
• Planned and Actual Information / Budgeting
• Identification of Responsibility Centers
• Relationship between Organizational Structure and Responsibility
Accounting System
• Assigning costs to individuals and limiting their efforts to controllable costs
• Transfer pricing policy
• Performance Reporting
• Participative Management
 Determination of contribution
of a Division
- Efficiency & Effectiveness
Objectives
of
Responsibil Evaluation of Quality of
performance
ity
Accounting
Motivation consistent with
Organizational Goals
• Benefits:
• Enhanced Control: Improves control over organizational a
ctivities by closely monitoring performance.
• Motivation: Encourages managers to perform better by ho
lding them accountable for their respective areas.
• Informed Decision Making-
Provides detailed financial information for each responsibilit
y center, aiding in better decision-making.
Approaches to Responsibility
Accounting
• Activity Based Responsibility Accounting
• Functional Based Responsibility Accounting
• Strategy based Responsibility Accounting
• Financial Perspective
• Customer perspective
• Process perspective
• Infrastructure (learning and growth) perspective
Linking CSFs to KPIs
• The key is alignment and ensuring everything serves the overall corporate strategy:
1.Identify Corporate Strategy: Define the overall vision and strategy of your organi
zation. This often includes long-term goals and core values.
2.Define Critical Success Factors (CSFs): Determine the essential areas where per
formance is key to achieving the corporate strategy. These could be market positioni
ng, product innovation, customer satisfaction, etc.
3.Determine Key Performance Indicators (KPIs): Identify specific, measurable m
etrics that reflect the performance in each CSF. If customer satisfaction is a CSF, a K
PI might be Net Promoter Score.
4.Link CSFs to KPIs: Ensure each KPI directly supports a CSF. This ensures your metr
ics are relevant and impactful.
5.Communicate and Monitor: Make sure everyone in the organization understands
the
CSFs and KPIs and their link to the corporate strategy. Regularly review and adjust a
s needed.
Identify Corporate Strategy
• Identifying your corporate strategy is all about understanding the big picture and
the
unique position of your organization in the market. Here’s a roadmap to help you
get there:
1.Understand the Vision and Mission: Start with the organization's vision and
mission
statements. These provide a clear understanding of what the organization aspire
s to be and its core purpose.
2.Analyze the Market: Conduct a market analysis to understand industry trends,
customer needs, and competitor strategies. This will help you identify opportuniti
es and threats.
3.Evaluate Strengths and Weaknesses: Conduct a SWOT analysis (Strengths,
Weaknesses, Opportunities, Threats) to understand the internal and external fact
ors affecting the organization.
4.Understand Long Term Goals: Based on the insights from the SWOT analysis,
identify long-term goals that align with the vision and mission.
Identify Corporate Strategy
5. Identify Strategic Initiatives:
• Identify key initiatives and projects that will help achieve the long -
term goals. These should be specific, actionable, and measurable.
6. Annual Reports and SEC Filings:
• These documents contain detailed information about the company's performance, future
plans, and strategic initiatives. Look for sections discussing long-term goals, growth
strategies, and risk factors.
7. Press Releases and News Articles:
• Keep an eye on news releases and articles about the company. They often highlight
strategic decisions, mergers and acquisitions, and new product launches.
8. Investor Presentations and Analyst Reports:
• These materials often provide insights into the company's strategic priorities and future
outlook.
9. Direct Communication with the Company:
• Engage with the company's investor relations team or executives through investor calls,
conferences, or direct communication.
Identifying Corporate Strategy
• Using Financial Statements as Clues:
• While financial statements don't directly reveal a company's corporate strategy,
they can provide indirect insights:
• Capital Allocation:
• Analyze how the company allocates capital across different business units or
projects. This can indicate strategic priorities.
• Acquisitions and Divestments:
• These actions can signal a shift in strategy, such as entering new markets or
exiting non-core businesses.
• Research and Development (R&D) Expenses:
• High R&D spending may suggest a focus on innovation and product development.
• Leverage and Capital Structure:
• Changes in leverage or capital structure can indicate strategic shifts, such as
acquisitions or expansion plans.
Point to remember
• Financial statements are just one piece of the puzzle.
• Corporate strategy is often a complex and evolving process.
• Understanding the following is crucial:
• the company's industry,
• competitive landscape, and
• regulatory environment
Importance of Corporate Strategy
• Focus
• Measurable Progress
• Long-Term success
• Channelizes distribution of scarce resources
• Shares corporate vision to employees and motivates them
• Empowers management to tackle unseen market contingencies
• Effectiveness of implementation can be seen through success of
strategy
• Prepares company to handle unforeseen external emergencies
Limitations of Corporate Strategy
• Complex Process
• Requires High Expenditure
• Uncertain estimates
• Difficulty in achieving desired results
• Useful only for long-range problems
Strateg
y Map
CSFs (Critical Success Factors)
1.Clarify Business Objectives: What are the key goals of your business?
Profitability, market share, customer satisfaction?
2.Analyze Industry Standards: Look at industry benchmarks and best pract
ices. What are the common success factors in your industry?
3.Identify Key Areas of Activity: Pinpoint the activities crucial for meeting
your business objectives. It might be product development, customer servic
e, or operational efficiency.
4.Gather Insights from Stakeholders: Engage with internal and external

stakeholders to understand their perspectives on what’s critical for success.

5.Evaluate and Prioritize: Finally, evaluate the identified factors and prioriti
ze them based on their impact on achieving the business objectives.
CSFs are the backbone of your strategy,
What are KPIs (Key Performance
Indicators)
• KPIs facilitate an organization in defining and measuring its progress
towards the achievement of pre-determined goals.
• The characteristic features of KPIs are as follows:
• Non-financial measures
• KPIs are measured frequently
• Monitored by top management
• KPIs are understood by staff
• KPIs have a Significant effect on the organization
KPIs (Key Performance Indicators)
• Key Performance Indicators (KPIs) are crucial for measuring your
organization's success. Here's a step-by-step guide on how to identify
and implement effective KPIs:
• 1. Align with Strategic Goals:
• Identify Objectives: Clearly define your organization's overarching goals.
• Break Down Goals: Divide these goals into smaller, measurable objectives.
• Link KPIs to Objectives: Ensure each KPI directly contributes to a specific
objective.
KPIs
• 2. Choose Relevant Metrics:
• Consider Your Industry:
• Research industry-standard KPIs to benchmark your performance.
• Focus on Key Areas: Identify the critical areas of your business (e.g., sales, marketing,
operations, finance).
• Balance Leading and Lagging Indicators:
• Leading Indicators: Predict future performance (e.g., customer satisfaction, employee morale).
• Lagging Indicators: Measure past performance (e.g., revenue, profit margin).

• 3. Make KPIs SMART:

• Specific: Clearly defined and easy to understand.
• Measurable: Quantifiable with specific metrics.
• Achievable: Realistic and attainable. Relevant: Aligned with organizational goals. Time-bound: Set
clear deadlines for measurement and improvement.
KPIs
4. Establish a Data Collection System:
•Identify Data Sources: Determine where to collect data (e.g., CRM, ERP, analytics tools).
•Set Up Data Collection Processes: Automate data collection whenever possible.
•Ensure Data Quality: Implement data cleaning and validation procedures.
5. Monitor and Analyze KPIs Regularly:
•Track Performance: Use dashboards or reports to visualize KPI data.
•Analyze Trends: Identify patterns and anomalies in the data.
•Identify Areas for Improvement: Pinpoint opportunities to optimize performance.
6. Set Realistic Targets:
Consider Past Performance: Use historical data to set baseline targets.
•Account for External Factors: Factor in market trends, economic conditions, and other
external influences.
•Challenge Yourself: Set ambitious but attainable targets to drive continuous improvement.
Importance of KPIs
• Improves productivity
• Improves sales
• Better evaluation of performance
• Easy to understand
• Indicates Common Goals
• Improves Organizational Performance
• Incentives for personal performance
Performance Measurement
• Purpose
• To support decisions
• To observe impact on strategic plans
• Performance assessment
• Diagnosis
• Management of a consistent enhancement process
• Motivation
• Comparison
• Record Development
Performance Measurement
• Importance
• Provides path of performance
• Provides milestones
• Provides avenues for learning
• Identifies Accountability
• Identifies Criticality
• Provides structure to the work
• Helps in organization
• Provides for objectivity, precision and accuracy
Balanced scorecard
• A balanced scorecard (BSC) is a strategic management
tool that helps organizations track and improve their
performance. It's a structured report that helps monitor
how well an organization is executing its activities and
the results of those actions.
• The BSC is based on the idea of balancing leading and
lagging indicators, which represent the drivers and
outcomes of an organization's goals. It can help
organizations:
• Describe their strategy,
• Measure their strategy,
• Track actions to improve results,
• Identify and improve internal business functions, and
• Improve external outcomes.
Balanced Scorecard
• The BSC typically includes four perspectives:
• Financial perspective: Measures like sales revenue,
operating expenses, and net income
• Customer perspective: Measures like quality, delivery
speed, and customer service
• Internal business process perspective: Measures related
to operations, customer management, innovation, and more
• Learning and growth perspective: Measures related to
human capital, information capital, and organizational capital
Objectives of Balanced Scorecard
• Strategic Communication and Clarification
• Communicating Organizational Objectives
• Detecting and Aligning Strategic Objectives
• Aligning Unit and Individual Goals
• For Having perioding Performance Reviews
Balanced Score Card
Perspectives Criteria

Financial Cashflow
Return on Equity
Return on assets
Customer Valuation of ability to determine needs of the customers
Effectiveness of Customer Service practices
Proportion of repeat business and
Quality of communication with customers
Internal Asset Utilization improvements
Business Advancement of employee self-confidence
Processes Variations in turnover rates
Learning and Developments in the ability to innovate
Growth Number of new products compared to competittors and
Ris in employee skills
Importance of Balanced Scorecard
• Consensus at the Strategy Execution level
• Communicates strategy to the organization
• Translates Strategy into meaningful goals
• Employees identify themselves with goals
• Personal targets linked to strategy
Limitations of Balanced Scorecard
• Does not provide recommendations
• Resistance from Employees
• Not fully efficient
• Takes time
• Can show low profit
The performance pyramid
Performance Prism
Performance Prism
Buildin
g Block
Model