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20 years of balanced scorecards

The balanced scorecard was 20 years old in 2012. Here is link to a video from CGMA where the original scorecard creators, Kaplan and Norton, reflect on the last two decades.

 

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A brief (but incomplete) overview of current attempts to account for sustainability : guest post 2 by Dr Stephen Jollands

World map of countries by ecological footprint

World map of countries by ecological footprint (Photo credit: Wikipedia)

Guest post #2 by Dr Stephen Jollands

In the previous post I defined sustainability as humanity not over-consuming the resources available to them and thereby irreversibly depleting the levels of natural capital while at the same time ensuring an equitable and fair distribution, both within the current generation as well as across all future generations, of the resources available. The aim of this post is to review some of the tools that claim to account for sustainability and question how well they stack up against this definition.

The obvious place to start is with the very tool we utilised to help explain sustainability, the ecological footprint. This calculates the biologically productive surface area required to sustain the thing of interest; whether that is the Earth, a specific country, an organisation, or even a specific project. Thus this tool is a very effective indicator of resource throughput. Despite being a very effective tool and adhering to a strong conception of sustainability it also has inherent weaknesses. Primarily amongst these is that it gives no indication over the health of the specific part of the ecosphere that the resources are being drawn from or the waste assimilated to. Therefore, it would appear that its effectiveness would be improved if set within a system of supporting sustainability focused management controls. We shall now turn to examining a few of these potential candidates.

The most obvious to examine next is the various types of external reporting that organisations do under the label of sustainability. There have been many differing frameworks developed in this respect including The Prince’s Accounting for Sustainability Project, the GRI and Integrated Reporting. These provide useful tools for businesses to organise their communications with their shareholders in regards to their social and environmental impacts. But this is also the source of critique for them as well. That is we have to question how far beyond public relations these reports go. The proponents of the various framework argue that the use of their frameworks provide stakeholders with an in depth analysis of the social and environmental impacts of an organisation. However, we need to question whether any rationale executive would allow the more controversial elements of their operations to be released in a public environment. When we reflect on the various accounting standards inability to provide clarity over economic affairs, as is evidenced by continual scandals, it is hardly surprising that these frameworks will probably fare no better. Further, none of these frameworks requires the organisation to report on the scale or scope of resources drawn from the ecosphere or waste assimilated back into it (i.e. an ecological footprint), which, as was explained last week, is at the heart of the issue of sustainability. This is not surprising as the accounting entity convention sets precise limits as to what is accounted for. For this very reason many commentators have expressed the view that the focus of the going concern concept should be elements of the ecosphere; such as rivers and forests; rather than the economic entity. If this was the case then economic organisations would be required to account for how they have helped maintained these ecosphere going concerns and in doing so been allowed to generate a profit.

The final example, although there is so many others we could review, which I will cover will be attempts to provide a cost to the social and environmental impacts of an organisation. The reason for selecting this as the final example is that Puma generated a large amount of publicity recently through publishing their first Environmental Profit and Loss account. Puma reports that their environmental impact for the key areas of greenhouse gas emissions, water use, land use, air pollution and waste, generated through their operations and supply chain is valued at €145 million in 2010. In the same year Puma reported that their Net Earnings were €202.2 million. This raises the question as to whether, given their Net Earnings were greater than their environmental impacts, they are therefore a truly sustainable organisation? The possibility of one of the world’s most notable examples of a consumerism driven, profit increasing through growth in sales organisations being sustainable seems to fly in the face of the evidence provided by the ecological footprint of our current over consumption of natural capital. This contradiction could be better explored had Puma provided more in depth details surrounding their calculations. However, given the involvement of consultants in this calculation, these details are unlikely to be ever released. The final question to ask is what concrete actions will this calculation result in?

In closing this quick overview, I would also question why Puma chose to put itself in a position for stakeholders to believe that it was the first organisation to provide an environmental profit and loss account when so many other notable and more transparent examples and experiments have occurred before? Or indeed we could question why Puma did not utilise one of these other tools given they are existing technologies and these tools have a close relationship with strong conceptions of sustainability? One notable example is full cost accounting (FCA). FCA as a concept integrates all potential costs and benefits, including those that relate to social and environmental, that organisations would normally consider as externalities, into the economic calculations they perform. The aim, therefore, is to ensure that a full set of broad considerations are taken into account during the decision making process. Of course here the emphasis is on decision making rather than releasing information publically and hence when this tool is used it generally does not make levels of publicity anywhere near those generated by Puma. Related to this is the sustainability assessment model (SAM), which is a tool developed in order to assist with the implementation of FCA. It is interesting that a colleague of mine focused his PhD research on assisting two local government bodies in implementing the use of SAM. While one of these were genuinely amazed at the extent of their impact and proceeded to take action accordingly, the other asked my colleague to leave when the SAM failed to deliver the “right” answer. That is when it provided visibility over the high levels of un-sustainability this plainly was unsettling to the managers involved. It is often understood by researchers in the area of accounting for sustainability that if the results do not make you feel incredibly uncomfortable you’re plainly not doing it right. Thus it is with interest that I introduce the last tool, the sustainable cost calculation (SCC). SCC is a way to measures how much it would cost an organisation to ensure that its operations left Earth at least no worse off at the end of the accounting period. The idea here is precisely to utilise the language of accounting to provide visibility over the true impacts of an organisation on natural capital and thereby the gapping chasm between our current operations and those that would be sustainable. It is interesting that the experiments with this tool have, beyond showing the un-sustainability of the organisations involved, highlighted how difficult it is to perform these calculations given the complexities and our relative dearth of knowledge as to how our ecosphere works.

The point I am trying to highlight in this post is that it is hard to be anything but cynical of many of the current attempts to account for sustainability as they do not link to the underlying issues and appear to be nothing more than attempts to generate publicity for the organisations involved.

These issues, covered in these two posts, around accounting and sustainability is the focus of my research and teaching efforts:

http://business-school.exeter.ac.uk/about/whoswho/index.php?web_id=Stephen_Jollands&tab=profile

I would therefore encourage anyone interested in furthering their knowledge in the area of sustainability and business to consider undertaking the innovative One Planet MBA, which I teach the accounting module in:

http://business-school.exeter.ac.uk/mba/

A graphical look at business performance – Apple Retail stores

I have written quite a few posts on performance management of firms and how management accountants can use both financial and non-financial performance measures. One thing I have not thus far mentioned is the actual presentation of such information. I am not one of those people who uses the bells and whistles and products like Powerpoint, but I do appreciate that information presenting in a short, concise format. One way to do present information in a clear way is to use a graphical format. So, here I give a great example which a kind reader of my blog referred me to.

We all know how successful Apple Inc are. Now you can look into their annual reports and analysts presentations to get a view of how much money they make. But wouldn’t you love to know what Apple’s managers get to see on a regular basis in terms of the company performance. That is, what kind of performance measurements might they use  and report on internally. Below you’ll see a great infographic on the performance of Apple’s retail stores. The data shown is self-explanatory, so I will not detail it here.  When I first saw this graphic, I thought wow, wouldn’t this be a great internal performance measurement tool. Of course, we don’t know if Apple actually prepare something like this infographic, but it is certainly quite effective at getting the message across.

The importance of integrating cost and risk into decision making

English: The 2012 Summer Olympics Olympic Stad...

Olympic Stadium at Stratford, London (Photo credit: Wikipedia)

It’s always great to find and example of where some simple planning and management accounting type work would have done quite a bit for a particular company or decision.

During the summer just past, a great example came to life. The London 2012 Olympics have come and gone, but I’m sure you can imagine such an event needed a lot on planning. Mostly, the games went fine. However, a few weeks before the games kicked off, a story broke about how G4S would not be able to deliver the number of security personnel they were contracted to provide. You can read more on the BBC website here, but in a nutshell G4S racked up losses of £30-50m. Why? Well it seems to boil down to not been able to recruit enough new staff and train them within the timeframe, and thus G4S have to cover the cost of army personnel provided instead.  According to the BBC, the value of the contract was £280m and one would think there should be scope for profit in this. I wonder did anyone ever ask this key question: What if we cannot recruit enough staff? If this question was asked, then the next question might be: how much will it cost us if we cannot provide enough staff. These two relatively simple questions might have forced managers at G4S to think about the risk of this happening and the costs. This does not mean they would have not faced the problems and costs they did, but at least they may have been more prepared to deal with the problem as it happened – or better still planned better from the start.

Strategic scorecard – a useful tool from CIMA

A short post today – holiday season.

You may know about tools like the Balanced Scorecard which are used by many organisations to monitor performance from financial and non-financial aspects. Here is another type of scorecard, developed by CIMA, which may be quite useful to managers and boards of directors when trying to formulate a strategy. The tool prompts managers to consider the business model of the organisation and reflect in the external environment, risks/opportunities, implementation and options available. Have a read of a document prepared by CIMA/CGMA by clicking this link .CGMA Strategic scorecard_T1 FINAL . This document explains the scorecard quite well.

What is big data? And what does it mean for management accountants?

Image Copyright The Economist

You may have heard the term “big data“, or perhaps not. Here, I’ll try to explain it and pause for a moment to consider what it means for management accounting.

The fact that many businesses capture vast amounts if data is not brand new (see this article from The Economist in 2010), but the focus of collecting and analysing what marketing people call big data is now beginning to come firmly under the radar of management accountants too. Before looking briefly at what big data means, we need to define. First, back to basics. Data is simply facts, numbers, statistics etc. For example, 175,80,40 are just numbers. They are in fact my approximate height, weight and age. This is information, as you now know some facts about something i.e. me. The problem with big data is getting the information value from it.

Here is where a management accountant can help – assuming of course (s)he has some technical proficiency. Here is an extract from an item on CNET back in May of this year (bold is added by me):

Put simply, the analysis that big science brings to the table makes big data relevant. I envision big science combining with big data to create big opportunities in three significant ways: real-time relevant content, data visualization, and predictive analytics.


When I read the above, I immediately thought isn’t this what management accountants have been doing for years now?  If you remember the basis definition of what management accounting is, you’ll remember it is about providing decision-relevant information to managers. This includes real-time data, forecasts and predictions and is often aggregated (or visualised). Personally, I believe management accountants, IT people  and marketeers (who might be responsible for collecting all this big data) can all work together to make big data work as information. In particular, management accountants are well placed to assist as they know what information drives a business.

Using rail freight to reduce CO2 emissions

A year or two ago I set a hypothetical assignment for some of my students on a comparison of CO2 emissions on road freight versus rail freight. I based on the assumption that a CO2 charge would have to be paid by firms, and they could in fact save money by using rail freight. Of course the problem with rail freight is that is does not go door-to-door, but it might still be an option for transporting between cities or depots – depending on volume.  At the time when I set the assignment, I did not find many examples (at least in the UK/Ireland), but I came across a Tesco press release in November last. According to the release, Tesco are expanding their use of rail services, which will mean 24,000 tons less CO2 and 72,000 less road journeys. Yes, this is a great thing for the environment, but the management accountant in me really wants to know the cost  savings generated by this.

Giving finance feedback to businesses – making it relevant

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:

  1. Think strategically – in essence, the key metrics will the ones which support strategy. This may be cost, revenues or a non-financial measure
  2. Focus on accountability – limit the feedback to factors which are controllable by managers/business units
  3. Be clear – keep it very simple, use  only a few key metrics
  4. No surprises – keep the information useful, less detailed and relevant to the manager/business unit
  5. Be clear – explain figures to non-finance people, highlight how finance can help managers
  6. 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”
  7. Two-way process – finance can also be the receiver of information. Reports/metrics can be challenged by operational managers
  8. Persevere – it may take some time for finance’s metric to be accepted by some managers/business units. But persevere

Football and banker’s pay – there is a link?

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.

New report on distribution of profits

20110503-135530.jpg The Guardian (May 1, 2011) reported on a new proposal put forward by the High Pay Commission recently. The proposal is a very simple addition to the annual financial statements. One though which is certainty aimed at stakeholders in the broadest sense, not just investors. The proposal comes about as a result of the many high salaries and bonuses of many banking and other executives which continued to be paid despite huge losses. The idea is simple. A company will have to report on how it has distributed its profit over each of the past three years. The distribution of profits as reinvestment, dividends or pay/bonuses is to be disclosed. Some of this is already in financial statements, but the latter certainty is not easy to decipher. A simple statement like that proposed would be really useful in my view, even helping people form a view on the longer term sustainability of the business. We’ll have to wait and see if this proposal becomes a reality.

Performance related pay – some food for thought BA v Banks

Image from slate.com

We’ve all heard the rumpus about bankers getting bonuses while the bank is still loss making. I can’t say I agree at all, as I can’t see a reason why someone should be substantially rewarded when losses are being made. While reading the news recently (April 1, 2011), I noted that British Airways CEO Willie Walsh, did not take a bonus for two years while the company was loss-making (see here). Contrast that to Royal Bank of Scotland. According to the Guardian, bonuses totalling £950m are to be paid out despite £1.1 billion in losses. Or out another way, the loss would be £150m if no bonuses were paid out.  I am not getting into the personalities or the companies, but surely what the likes of BA have done is both logical and financially sound.

Opportunity costs of losing employees

If you have studied business or economics, you’ll know what an opportunity cost is. Just in case, an opportunity cost is the cost forgone by choosing one course of action over another. I often ask my students ” what is the opportunity cost of who sitting here listening to me? Can you put a money value on it?” Usually one or two of them realise that they could be out working, so they answer with the minimum wage rate, which is a reasonable answer.

Two things prompted me to write this post. First, someone I know was made redundant as a systems trainer a few years ago, due to the role being outsourced. Now, after much failures by the outsourcing company, that same person is back in the company as a contractor earning a tidy daily fee. Why? Well, the outsourcing/redundancy meant a huge body of knowledge was lost from the company, which to cut it short resulted in poor systems training. I wonder how much this mistake actually cost the company?  WI had this thought in the back of my mind when I read a post on Marc Lepere’s Blog on the CIMAGlobal website.  Marc talks about the opportunity costs of employees. It’s not something I have ever thought about, but I think he is right on the button. Marc’s company have devised too useful concepts called Cost of Replacing Talent® (CORT) and Cost of Loosing Talent®. Taking both together, you can imagine a substantial cost of losing valuable staff.  In my example, the cost of loosing talent included a massive knowledge loss, which is a cost that might be hard to put a monetary value on but is a cost.  Within the CORT is an estimate of the opportunity cost of replacing staff, which is something like the time in weeks it take the new staff to become effective.  This could be up to 30 weeks for senior managers, according to the post.  So be careful when putting too much pressure on your staff; losing the good ones costs more than you might think.

Use of learning curves in real-life

If you studied management accounting in the past, do you remember this formula:

Y=tXl

Y= average hours to produce product, t= time to produce first unit, X= cumulative units produced and l= rate of learning.

Of course, you don’t remember this – it’s the formula for a learning curve. A what? A learning curve, which is the relationship between the time taken to complete a task as an employee learns how to do the task. Management accountants learn this formula as it can be used to predict how costs might behave when production tasks are changed or new tasks introduced. I have to say I have never had to use a learning curve in my time in industry, and forgot the formula until I had to teach it to students again in recent years.

A CIMA research report recently shed some light on the use of learning curves. According to the research, about 6% of respondents to a survey actually used learning curves in some way, but a vast majority of management accountants considered the technique appropriate for the organisation they worked in. What’s interesting is that the main reason for not using learning curves is a lack of knowledge on the part on management accountants. I suppose this does not surprise me as if you don’t use any particular accounting technique, you’ll quickly forget it. Which is exactly what I done! Until now that is. The research report does not give detailed findings on the specific uses of the learning curve, but top of the list of uses in planning/budgeting and costing of products/services.

Risk management and management accountants

The idea of accountants taking risks tends to go against the stereotype image that accountants get – you know, grey suit, drives a Volvo and so on.  Businesses take risks everyday, based on information available and sometimes on experience or gut instinct. Management accountants provide a lot of the information needed by managers to make decisions on a daily basis. One wonders though what happened to assessing risk in banks in recent times. I am reading a book called Downfall by Joseph Stiglitz at the moment and he sure has a lot to say about the lack of risk assessment by US (and European) banks on recent years. In one passage he talks about how banks assumed the risk of other banks failing, or of a property-crash were seen as minimal. But look what happened.

I read a piece back in January in CIMA’s Insight on risk management and management accountants. The key message from this article was that management accountants need to get the message across about risk. They are after all providers of information for decision making, and are training in risk management.  As noted in the piece, defining exactly what risk is is not that simple. It seems risk managers may not have been overly involved in decision-making at high levels in recent times. The author suggests that risk managers and managements accountants work closely together to get the message across about risk. I couldn’t agree more. Management accountants may have shook off the dull, boring stereotype and are now often part of the management team and/or board. Thus, as the article suggests, risk managers might piggy-back on the organisational knowledge of management accountants and get active in the areas where risky decisions are being discussed or taken – i.e. at board level.

The key points on Key Performance Indicators

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

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