I have written before on balanced scorecards at London’s Heathrow Airport. London Gatwick too has a balance scorecard which has similar performance measures (e.g. security wait time, seat availability, flights on time etc.).
I noticed the monthly performance report at Gatwick was displayed publicly again, on the walk-way to the departure gates – better than a corridor to the gents for sure as at Heathrow. Both the Heathrow and Gatwick scorecards are linked to a scheme operated by the UK Civil Aviation Authority (CAA), and the main objective of these scheme is to reward for meeting targets that improve customer service. If targets are achieved then, extra public funding can be paid to the airport, whereas failure to meet targets results in payments by the airport.
The performance measures in both these scorecards are no doubt related to a strategic objective something like “to improve and maintain customer service” – which I imagine would be quite an important objective to any airport. It seems the targets too are reviewed on a regular basis by the CAA, which means customer performance improvement is at least possible. Have a look at the scorecard web page to see more.
As you many know, many scorecard type systems used to report on business performance often use some form of traffic-light system to display whether or not targets have been met (see one of my previous posts). While looking for examples of scorecards, I came across a German blog post, which equated the use of scorecards to Formula 1 (F1) flags – well taking the mick a bit really on the use of ideas such as traffic light type reporting. You can see the original post here, but below is a brief translation. It’s a bit funny, the idea being that the management accountant can be signalled by the security guard on whether or not to drive past the main gate.
Green – all is clear. Drive to the bank and plan to take over the competition.
Blue – a competitor is about to outperform us. The security guard has the phone number of a recruitment agency.
Yellow – not sure if there is real danger. The management accountant has not yet received a recent consultants report. Meet colleagues in the car park first.
Red – the business has been taken over or merged. The accounting department has been centralised. Go home
Red/Yellow stripes – danger of slippage. The board has discovered a good Business Intelligence software suite. Time for a training course
If you have studied management accounting, you’ll have heard the term balanced scorecard. A scorecard is a report of key performance indicators – both financial and non-financial – of an organisation. Many organisations not only use some form of scorecard, but also publish it on their websites or display it in a public place within the organisation.
Take for example London’s Heathrow airport. As you can see on the graphic here, they produce a monthly report (see here) which looks at many areas of performance for each terminal. Like many firms, they use a colour-coded system, where red usually means a target has not been achieved – for example, seat availability seems to be an issue in Terminal 3 on the example here.
This scorecard is a great example – if you click the link above you’ll see it has much more than I show here. I have only one negative thing to say about it – and this falls from a recent trip through Terminal 1. I discovered this wonderful colourful (and positive) scorecard on my way to the gents – on the corridor into the toilets to be specific. Surely there’s a better place to display results? Or maybe it does not matter as only us management accountants take any notice of such things.
In my former life as a management accountant in industry, I worked in a number of projects which automated either production itself, production planning, or both. A term I was use to at that time was Manufacturing Execution System or MES. So what is an MES and why should management accountants know about them? Well, an advertisement in the November 2011 edition of Financial Management (CIMA’s monthly magazine) prompted me to write about it. AN MES is a system which basically communicates from sales through to the actual making of a product or a the start of a process. An MES may include a sales order module, which would gather customer orders and pass these on to planning modules or directly to process equipment. Typically, an MES will improve a production process as production is scheduled more efficiently and can be monitored for back-logs and jams. Also, an MES will also typically integrate with an ERP system, which means that a businesses systems are fully integrated. According to the advert in the CIMA magazine, Carlsberg (yes the brewer) improved performance in several areas once it used an MES; sales increased bu 1.5%, gross margins up 1.2%, downtime decreased from 28% to 13%, material loss decreased by 1%. All of these translate into increased profitability, which of course is of interest to managers and management accountants. I would argue that understanding how an MES works in a business is a vital piece of kit for any management accountant, particularly if such performance improvements can be made. If you are interested in reading some more, here are two websites I am familiar with which offer MES systems; Kiwiplan and ATS.
In the May 2011 edition of Financial Management (CIMA’s monthly journal), Richard Young writes a very nice summary of how managements accountants can provide good and relevant financial information and feedback to business units. I’ll summarise the main points below:
- Think strategically – in essence, the key metrics will the ones which support strategy. This may be cost, revenues or a non-financial measure
- Focus on accountability – limit the feedback to factors which are controllable by managers/business units
- Be clear – keep it very simple, use only a few key metrics
- No surprises – keep the information useful, less detailed and relevant to the manager/business unit
- Be clear – explain figures to non-finance people, highlight how finance can help managers
- The big picture – target feedback so that no managers/units get enveloped in too much information. They need to able to see the “big picture”
- Two-way process – finance can also be the receiver of information. Reports/metrics can be challenged by operational managers
- Persevere – it may take some time for finance’s metric to be accepted by some managers/business units. But persevere
Okay, so I have no much interest in football, but this recent piece in The Economist makes for great reading if you’re into the footie – or like me trying to paint peformance management issues in a lighter way! You can read the articles for yourself, but the basic theme is that while both banks and football clubs pay high salaries to retain/attract the best talent, the question is does this make economic sense. Arguably, the more successful banks and football clubs get to keep more of their revenues as they make more money by having the best traders/players. So it seems to make sense that pay and performance are linked in banks and football clubs. However, if bankers/players pay is capped, they can move elsewhere, which may have an effect on the performance of the bank/club they leave. So, according to the article, unless a cartel scenario exists in banks it is unlikely that any cap on pay will be useful in an economic sense. It may be what politicians want, but it’s unlikely to make economic sense.
In management accounting, we often talk about Key Performance Indicators (or KPI). These are measures of business performance which catch the essence of how a business is doing. Choosing the right KPI is not an easy task, even for a business with accountants on the payroll. This leaves it tough on smaller businesses, who probably have little expertise in this area. Having said that, there are a number of key things you might focus on as a small business.
The first is cash, without it you are snookered. Accountants often refer to liquidity issues, meaning a business cannot generate enough cash. Liquidity issues lead to solvency problems, meaning you can’t pay debts as they fall due. Traditionally, accountants will tell you need the ratio of cash and receivables to payables to be about 1:1. To make this sort of metric even easier, why not think about it like this:
Cash in the bank/Monthly cash requirements = number of months until cash runs out.
You could easily work this measure out at any time and try to collect debts from customers before you run out of cash. If you have a bank overdraft which is within its limit, you could quickly alter the above to figure out how long until you hit the overdraft limit.
A second key metric is your cost structure. You could regularly compare you costs as a portion of sales revenue. Keeping a tab on this might help prevent cost overruns over a period of time. So if you see sales drop off, are costs remaining the same?
Finally, think beyond the traditional financial measures. Try to think of what it is that keeps your business ticking over. The key metric(s) here will vary by business but you should consider things like:
- number of new sales enquiries
- number of customer complaints
- how efficient is your production and/or purchasing
- what’s your market share.
- sales revenue by customer/product or segment
Robin Tidd wrote a very concise article in Accountancy Plus recently (see the December 2010 issue here) on the subject of key performance indicators (KPI) in a business. According to Tidd, while around 90% of Fortune 500 companies utilise tools like the Balanced Scorecard to report on KPI, 70% are not happy with their reports. Tidd, rightly points out that this is not a problem with the tools used – such as a Balanced Scorecard – but more likely the application of the tools. He makes a few key points which I summarise below.
1. Don’t mix up KPI with key reporting indicators.
The best example of this is profit, which is a result or outcome.
Of course these results are essential, but tell nothing about what
caused the result. For example, have profits increased due to
improved productivity or customer satisfaction.
2. Use maps of your organisations processes to help find the best KPI.
3. Be careful to look at all processes and not just departmental ones. This avoids choosing KPI which may be sub-optimal.
4. Compare KPI on a regular basis, keeping the reporting interval short. This allows for faster corrective action.
5. Use the KPI on the front-line on a regular and routine basis. This fosters continuous improvement in all processes.
You can read the full article here http://is.gd/jLEn2
I watched a Channel 4 documentary (Dispatches) last month (June 7th) about the somewhat lacking work done by some child social workers in the UK. While they may be over-stretched and burdened with bureaucracy, the have a job to do which can seriously effect peoples lives – so was quite annoyed when I watched what an undercover social worker found (have a quick look here http://www.channel4.com/programmes/dispatches/articles/undercover-social-worker-exclusive-video-clips). But that’s not what this blog is about, so sorry for the little rant. One thing struck me though as a management accountant while watching this. One senior social workers mentioned how their performance is rated. Using performance metrics is common in business and all kinds of organisation, but the right metric must be used. For example, profit is one metric, but this does not tell us much about how the company treats its workers or the environment for example. And on a day-to-day basis, business might used metrics like units sold e.g. bums on seats for airlines. In the documentary, the senior social worker mentioned that performance was measured by the number of cases closed by each social worker. The more closed, the better they were deemed to perform. Then, she mentioned how silly this was, as there was no measure of quality – how well the case was dealt with, or how the outcomes matched what children needed. If I remember her quote correctly, she said “you could write ‘cream buns, cream buns, cream buns’ in the middle of a care report and nobody would even look at it. They (local councils or health officials I presume) are only interested in the number of cases dealt with”. Yes, this might be a bit of an extreme example, but it really does show the importance of linking a performance metric to the desired outcomes of any organisation. So, spend a little time getting it right!