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Tag Archive | Performance Management

Money in football

A short post today. I am not a big football fan, but when you think of the amounts of money top football clubs earn and spend, it’s big business. The Economist published a great infographic and few months ago which show the revenues if the top European teams. Very interesting – you can see it here

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Kindle Fire breaks even – but profits elsewhere

Image representing iPad as depicted in CrunchBase

Image via CrunchBase

I have written a few posts before on breakeven, but here is a great example of how businesses are prepared to accept not making money on some products, for the sake of others. In October 2012, Amazon launched its Kindle Fire tablet and its Paperwhite e-reader in the UK and other European countries. The Kindle Fire retails at about £150, which is probably less than half the price of an iPad and about £100 cheaper than an iPad mini. In an interview with the BBC , Amazon’s boss Jeff Bezos said the company sells its hardware at cost i.e. they breakeven. This may explain the cheaper price of the Kindle Fire compared to the iPad. However Amazon earn profits on Kindle book sales, Kindle book rentals and its Prime service. In contrast,  Apple have noted they breakeven on services such as iTunes and make profits on their hardware,

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.

Balanced scorecards – an airport example

Photo from thisislondon.co.uk

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.

Balanced scorecards – a bit of humour

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

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.

The balanced scorecard – making it public??

 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.

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

Operating leverage explained

Operating leverage refers to relative amount of costs that are fixed and variable in the cost structure of a business. Some companies will have relatively high fixed costs compared to variable costs and are said to have a high operating leverage. For example, pharmaceutical companies incur up to $1billon to develop new drugs over a 10 to15 period[1], whereas the manufacture cost pennies – just think of the price of a pack of paracetemol in your local pharmacy. Low operating leverage means variable costs are a relatively high proportion of total costs. Retailers like Tesco or Sainsbury have relatively low fixed costs and relatively high variable costs – the variable cost of each item sold (e.g. the purchase price) is likely to be much higher than the associated fixed cost for that item. The degree of operating leverage of a company can be used to assess its risk profile. Companies with high operating leverage are more vulnerable to decreasing sales e.g. sharp economic and business cycle swings. Companies with a high level of costs tied up in machinery, plants and equipment cannot easily cut costs to adjust to a change in demand. So, if there is a downturn in the economy revenues and profits can plummet. On the other hand, companies with lower operating leverage can adapt their cost structure more rapidly as it has more variable costs.


[1] http://www.washingtontimes.com/news/2009/mar/13/blocking-drug-development/ accessed  Dec 4th, 2009

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.

Problems at Honda?

Following the earth quake and tsunami in Japan earlier this year, car manufacturers faced many problems. One I have wrote about previously, namely the fact that supplies of components dried-up after the disaster due to the close-knit just-in-time management systems used. The Economist provided another example from Honda recently. Honda launched their new Civic model in April/May this year. The problem of course was whether or not the company could actually deliver enough cars to meet demand, due to production disruption and supplier problems. Other car manufacturers, particularly US ones, would of course benefit.  However, for Honda the short term seems still slightly troublesome

Problems at Honda?

Following the earth quake and tsunami in Japan earlier this year, car manufacturers faced many problems. One I have wrote about previously, namely the fact that supplies of components dried-up after the disaster due to the close-knit just-in-time management systems used. The Economist provided another example from Honda recently. Honda launched their new Civic model in April/May this year. The problem of course was whether or not the company could actually deliver enough cars to meet demand, due to production disruption and supplier problems. Other car manufacturers, particularly US ones, would of course benefit. However, for Honda the short term seems still slightly troublesome

Management control in NGO’s

Non-governmental organisations (NGO) are increasingly being held to account for their performance and uses of funding. Indeed, the funding they obtain is more likely to be based on having sufficient competencies to use the funds in the best possible way.  Sounds like a business doesn’t it? But NGO’s are not businesses you might say, and they usually have a non-profit (and often very worthy) objective.

However, NGO’s are increasingly becoming like businesses. For example, the Charities Act (2009) in Ireland requires all charities to be formally registered and (in most cases) submit annual audited financial reports to a Registrar. From a management accounting view, NGO’s can of course adopt budgetary control and other performance measures as normally used in a business. A recent report from CIMA suggests “evidence shows that developing formal management controls can help NGOs to develop networks with government departments, funding agencies, other service providers and clients”. It goes on to say that management accounting can contribute in several ways to the success of an NGO:

  • Planning and control when formulating proposals for funding, often involving networks of partner agencies.
  • Clarifying within the NGO the importance of including economic efficiency as an organisational value alongside traditional welfare values.
  • Linking non-financial operational performance to financial concerns.
Making the link between such management accounting concepts and the underlying purpose of an NGO may not be that easy. While overall the CIMA research report suggests NGO’s can benefit from business like management control systems, it does mention that controls that are too formal or too financial may affect what the authors term “bonding capital”. This refers to the close interpersonal relationships of NGO members based on shared beliefs. If these shared beliefs are called into question by over formalised management controls, this could be to the detriment of the NGO.

Preventive maintenance – a good investment?

This article on The Economist website brought me back to my days working as a management accountant in manufacturing firms.  Maintaining manufacturing and process equipment was always a delicate balance.  Spares and maintenance staff pay was quite a substantial cost in one plant I worked in over the years.  This plant, like others, tried its best to engage in preventive maintenance programs.  This usually implied using a mixture of following guidelines from equipment manufacturers and the experience of the maintenance staff. But, as I am sure you can imagine,  preventative maintenance comes at a cost too. The arguments would always be “should we wait until it breaks,  or fix it before it breaks”. Of course, letting a piece of equipment go unmaintained can create serious problems. A business needs to avoid its main manufacturing process being down – losses of revenue per day (or even per hour) rack up very quickly. So from an accounting and profit view, a balance needs to be achieved between the right level of preventive maintenance and the cost of same.

Of course modern technology can help. When I left my last manufacturing role back in 2004, process equipment could be remotely diagnosed and repaired by engineers. I always remember being amazed in or around 2001 when a production manager told me how the main machine at our plant had PLC’s (programmable logic circuits) with an IP address – the same as any PC or internet device. This meant the engineers from the equipment manufacturer could simply connect over the internet. At the time I was thinking, wouldn’t it be great if fault information could be sent out instead, or even better, that fault signs might be noted in advance.

So, reading the above mentioned piece from The Economist brought me back to those great days when I as an accountant was constantly amazed by how advanced machinery had become. But now it seems a “virtual engineer” may be on hand to predict if electrical equipment is showing early signs of failure (read the piece for more detail).  No detail is given on the cost of such devices, but it would seem to be a great cost-saving idea. It could mean that preventive maintenance costs are incurred less frequently as equipment may be perfectly fine beyond it’s normal maintenance  period

Investors call for clearer business reporting

CIMA commented recently (see here) on an IFAC report which suggests that financial reports have become too complex with the result that the underlying financial performance of a business is hidden. Add to this the increasingly complex nature of businesses and you get some idea if the problems in compiling clear concise and meaningful reports.  The IFAC report quotes Tanya Branwhite, executive director of strategy research at Macquarie Securities in Australia: ‘If financial accounts are not prepared with the users in mind, then we risk a whole area of unaudited “shadow reporting” being provided directly to investors that doesn’t go through the rigorous financial accounting process,’ she warns.

I remember from my early accounting lectures that a ‘knowledgeable’ investor in seen as the defining user of accounting reports. If you are prepared to stick your money where your mouth is, you’ll want to know all the detail. But the problem is that financial statements just can’t provide this, or as the IFAC report highlights, are too complex. According to the IFAC report,  business reporting suffers from a number of significant issues at present: information overload, fair value accounting, operational performance, convergence of accounting standards, real time reporting, management commentary and sustainability reporting. The big questions is how can financial reporting help solve these? One simple answer suggested is that investors might become more actively involved in the standard setting process (i.e. IFRS) and discussions about the presentation and content of financial reports.

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