Performance Management

Question 1

Performance measures are particular values or characteristics used to measure/examine a result or performance criteria. It may be expressed in a qualitative or quantitative way which helps institution to understand, manage and improve what they do. Performance measures inform the institution:

* how well it is doing

* if it is meeting its goals

* if its customers are satisfied

* if its processes are in statistical control

In the early 1990's, Dr. Robert Kaplan (Harvard Business School) and Dr. David Norton, developed a new system for performance measurement, called the balanced scorecard. The balanced scorecard is a management system (not only a measurement system) that enables institutions to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. The balanced scorecard suggests that institution or organization should be viewed from four perspectives including both financial and non-financial measure:

1) Financial perspective.

This perspective evaluates the profitability of the institution's strategy. It focuses on profit targets, cost avoidance, and cost-efficiency (i.e. the ability to deliver maximum value to the customer). It involves:

 Operating Income :

Operating income can be used to gauge the general health of the core institution.

 Return on Investment :

ROI is a backward-looking metric that yields no insights into how to improve the institution's results in the future. ROI has been used primarily for self-justification.

 Net Earnings :

Net Earning shows what the company has earned (or lost) in a given period of time.

 Earnings per share (EPS) :

EPS is a measure which fundamentally shows how well the shareholder is doing.

 Cash flow :

Cash flow is a measure of a company's worth and its ability to pay dividends.

 Economic Value-Added (EVA) :

EVA is a method to calculate the true economic profit of an institution. EVA gives managers a clearer idea of whether they are creating or destroying shareholder wealth.

 Residual Income :

Residual income is the true profit or the amount by which earnings exceed or fall short of the minimum rate of return that shareholders could get by investing in comparable securities.

2) Customer perspective

This perspective identifies the targeted market segments and measures the company's success in the segments. The customer perspective typically includes several core or generic objectives and measures relating to:

 Market share :

It is a measure of market share which indicates whether the strategy adopted is achieving the expected results in the targeted market segment

 Customer retention and loyalty :

It is a method of maintaining or increasing market share in targeted customer segment by ensuring that existing customers are retained in those segments.

 New customer acquisition :

It can be measured by either the number of new customers or the total sales to new customers in the desired market segment.

 Customer satisfaction :

A measurement or indicator of the degree to which customers or users of the institution's products or services are pleased with those products or services, typically measured by an attitude questionnaire.

 Customer profitability :

Customer profitability measures provide a valuable signal that satisfaction, retention, and growth in customer relationships are desirable only if these relationships contribute to higher, not lower, profits.

These are leading indicators of whether customers are not satisfied, or if they will eventually find institutions that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.

3) Internal business perspective

This perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth. Metrics based on this perspective allow the managers to know how well their institution is running, and whether its products and services conform to customer requirements. There are three main internal business perspectives:

 Innovation process:

The objective of this process is to increase the number of new products or services, decrease the time to develop the new products or services and identify new markets and customers.

 Operations process

The objectives for the operations process include decreasing process time, increasing process efficiency, increasing process quality and decreasing process cost.

 Post sale services process

This category of internal business perspective includes warranty and repair activities, treatment of defects and returns and the process and the administration of customer payment.

4) Learning and Growth perspective

Learning and growth metrics address the question of how the institution must learn, improve, and innovate in order to meet its objectives. This perspective stresses the importance of investing for future in areas other than investing in assets and new product research and development.

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