PARK ADVISORY LLP
These presentations provide management professionals with overviews of the importance of financial management by examining, among other things, the classification and management of costs, the identification and management of risk in the context of creating value, determination of a viable capital structure, evaluating operational and capital expenditure opportunities, and reporting on overall performance.
Organisational performance should never be evaluated in isolation. A number of predetermined performance targets enable the effectiveness of activities to be evaluated. Various measurement criteria may be adopted but the important performance indicators are those that identify the degree of achievement of our strategic objectives. This means that we must have suitable measures in place, which must reflect the core values of our organisation. More importantly, the monitoring and reporting mechanisms we use should be designed to focus people's behaviour on the journey toward achieving our objectives. How is it best to achieve this?
The common sense of direction fosters the necessary team effort required to produce the best possible outcomes. Of course, this is just looking internally at our performance. We have to remember there are outsiders who are equally interested in how our organisation is performing. The information we provide to outsiders is pretty much defined by a universal understanding of what is considered important. A regulatory framework is evolving to guide and control the content of publicly available financial information so that there is clear and consistent communication between an organisation and its stakeholders. How the recipient uses that information is up to them but they would normally be making economic decisions regarding their relationship with our organisation.
Simply looking at the figures provided in the financial statements will not help. We need to look behind the numbers to better appreciate the setting that produced these results. Most organisations provide descriptive elements in their reports, such as the directors' report, and reading these helps to put the performance into perspective. Using this contextual information and a more detailed analysis of the financial information we have a clearer picture of the past performance, financial strength, and future prospects of an organisation. In brief, that is what we do for outsiders. Let’s now consider the more important aspect of our internal reporting.
Our performance measurement system is what tells us whether we are on the way to reaching our strategic objectives. These will change from time to time to reflect changes in the world in which we operate. This means that our performance measurement system should be in a state of constant review that will probably result in frequent changes to ensure it remains aligned with our strategic objectives. Failure to do this will cause employees to continue to reflect on things that are now less important while not focusing on what is newly important. Since, as a general rule, we only comprehend what we measure, our organisation's inertia will keep it moving in the same direction it had been going should we fail to change measurements.
Evaluating our performance involves the use of either objective or subjective performance measures, or combinations of both. Objective criteria include explicit, verifiable measures such as sales, profit or value-added per employee. Subjective criteria focus on multiple hard-to-measure factors. For example, subjective performance measures of a manager include a variety of factors such as improving team spirit, getting along with peers, and meeting targets and schedules. Most organisations will use a mix of objective and subjective performance measures to ensure that team does not focus entirely on the objective criteria to the detriment of their other responsibilities.
Performance measurement systems generally use both financial and non-financial measures of performance. In the past we have tended to focus our assessment of performance on tactical operations. Where we are faced with a constantly changing landscape, our ability to link operations with strategy and then assess whether we are getting it right has been coming up short. Numerous performance measures dilute our attention from the things that matter. It’s essential that we identify several key indicators that will articulate what it is that we need to get better at if we are going to reach our destination. Importantly, some things have a greater effect than others and so we must explicitly specify the relative weights for each indicator when they are used to assess performance. As you can see, it is important that performance measurement reflects our strategic direction and that the reporting of performance properly compares actual achievement with the intention of our strategy.
Creating, understanding, impacting, managing, serving, manipulating and exploiting markets are the common denominators of organisational strategy, which is nothing without implementation. There are two key elements in the drive for profitability. One is the ability to maximize revenues and the other is to reduce or contain costs. In relation to the first, an absolutely crucial feature of our success is the ability to position our products, or services, within the market place in a way that generates an acceptable and sustainable profit margin. This calls for full recognition of the impact on, and relationship between, the prices that our customers are prepared to tolerate and the level of appropriate functionality that is being provided in meeting their needs. The relationship between pricing and functionality is crucial. Furthermore, it impacts on the likelihood of being able to maintain high levels of profitability, the probability of competitive attack from other organisations and the linkage with necessary operational improvement strategies to reduce or contain costs, such as target costing.
A well designed performance reporting system focuses on results and measures these results against objectives and targets that have already been established. How well these results measure up is a key element in evaluating our chances of reaching our destination. What is more, it will have everyone pulling in the same direction, since we are all working toward the same objectives. Unfortunately, when it comes to our organisation, a good reporting system will not turn a poor performer into a good performer. However, it may turn a good performer into an even better performer because the information provided encourages people to strive for the best. So, do we have a good performance reporting system?
To answer this a number of questions need to be asked. First, are the reports being read and acted upon? Reports distributed without any feedback are an indication that the system is not highly effective. Indeed, they may not contain information that is relevant at the time. Second, do the reports provide sufficient information for us to take corrective action where necessary without delay? Internally the main purpose of performance reporting is not to tell us where we have been but, more importantly, where we are going. If this kind of information can't be gathered from the reports, then they are simply not doing their job. Third, are we receiving the information we need in a timely fashion? Knowing we have problems days, or sometimes weeks, after it first becomes apparent simply isn't good enough. We are well endowed with technology these days to ensure our performance reporting is on-line and real-time. What is more, a good performance reporting system must have credibility, which it gains by being accurate, fair, and clear.
As always there are other things that we can think about. Perhaps the most effective way of presenting performance information is through exception reporting. Exception reporting works on the premise that we are usually flooded with too much information and have difficulty extracting the important things from the dross. By highlighting information that is out of the ordinary, and not reporting on those items that are within established parameters, we can concentrate on what is important.
Even if we limit the amount of information that is distributed throughout our organisation to that which is necessary for managing our strategy, there will still be plenty to digest. Not everybody needs to know everything and so individuals should only receive information on which they can take action. This means that reports for information only should be eliminated wherever possible in the interest of reducing the information glut. For example, status reports that are created during a crisis should be eliminated once the crisis has passed.
The most important factor in designing performance reporting is to know your audience and to present them with the information they need and want so that they are able to manage effectively. More often than not readers of reports prefer to see summaries and conclusions with detail only being provided when an item moves outside of its established parameters. What is more, there is no point in giving an individual information about something over which they exert no influence.
As I’m sure you can see, reporting for management is a complex and often thankless task. Each manager requires something different but this should be expected in the diverse ecosystem that is our organisation. There are lots of things that we must consider when developing a performance reporting system but most of all it should emphasize our organisation's strategy and the key initiatives chosen to achieve it. Choosing the most appropriate performance measures, like measuring those things that individuals can influence, will help everyone see more clearly how the work they do contributes to our results. Traditional reporting and performance measurement systems are becoming less fashionable as they rarely approach this vital activity in a strategic, forward thinking way. Strategy mapping and scorecarding appear to be the way of the future.
Performance management, through the use of a well-designed performance measurement system, creates a shared vision that will allow us to effectively manage our strategic objectives in a way that maximizes value to all stakeholders. We need to project just one version of the truth because a single version will allow us to optimize organisational efficiency, support continuous improvement, and maximize the value of our human and capital resources.