Tag Archive | Performance Management

The ‘forgotten’ part of performance management

I recently read an article in The Economist online http://bit.ly/aiSE5K about assessing the performance of fund managers. I found the article quite interesting, as we all know how people in the financial sector have been (and still are) rewarded based on their performance. And, what bank or fund has really performed in recent times?

The article mentions an idea called the ‘inertia benchmark’ – this the performance which would have been achieved if a fund manager did absolutely nothing. This measure could then be compared with the actual performance of the fund to assess if the actions of a fund manager actually yielded better results. This idea made me think do business owners and managers ‘forget’ the meaning of improved performance? As accountants we can create plans, monitor actions and report on performance against plans. And we know too how important it is to use the right performance indicators. In larger companies and many SMEs, reward systems are often linked performance ( banks and funds are a good example), and performance is often measured in terms of profit – again something accountants are good at measuring. So understanding, or more precisely, defining, the meaning of performance can have a big effect on rewards and the information needed to assess it. I wonder how many managers ask themselves what would have happened if the course of action taken was actually to do nothing. Yes, this would be tricky and identifying an inertia benchmark would be considerably more difficult than with a fund. But it might be good to consider such ideas when performance and reward systems are closely linked.

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No Accounting for startups?

While having  a regular look on inc.com, I found this interesting blog post from Steve Blank’s blog. He writes that financial statements are not the best thing to use to monitor a start-up business. Sometimes banks or venture capitalists insist on things like regular income statements and balance sheets. While I don’t think it’s right to say “no accounting”, there is a point in the pieces in that a start-up might be much better served concentrating on more important performance indicators. Have a read and see for yourself.

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How do you measure your business performance? Ideas for small businesses

Measuring performance of any kind means a target, plan or standard must be in place to measure against. Any business, large or small needs some kind of a plan. In the accounting world plans equals budgets – yes those annoying things!  A budget is plan expressed in money terms. Usually budgets for incomes and expenditures are set for a year and each month the business performance is measured against the budget. This is common practice in many businesses but how useful the comparison of results versus budget is depends on how good the budget was in the first place. Should a business complement measuring against budgets with other types of performance indicators? Yes is the answer. Larger businesses use many indicators of performance other than comparing to budgets or profits. For example, a key performance indicator for an airline is”bums on seats”. This is something that can be measured by flight, day etc and related to the costs of running the airline. Could a small business do something similar? Sure it can. Here’s an example for a business I know, Priority Engineering (www.priorityengineering.ie), who automate entrances gates for residential and business customers. This business both offers both installation and maintenance services. As a small business, the owner does not have time to do detailed plans and compare these to actual performance. But, he does know the costs of running the business. So he equates these costs to a number or service calls or installations needed per week. This is much easier to track and relates the work done to performance in terms of covering costs. So what performance indicator would you use for your business?

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How Deere & Co manage business performance

According to a recent piece in Time magazine ( Deere’s Harvest Mar 22nd, 2010), Deere & Co – the US agricultural and construction equipment manufacturer- reported strong earnings and profits in 2009, despite a continuing global recession. The good results are due in part to increased sales in developing economies (crops have to be grown for an increasing population to eat) and tight cost control coupled with lean manufacturing at Deere.
In fact, in recent years Deere has seen continued strong results and its share price has increased five-fold. While some increased sales and tight cost control contribute to these results, a novel performance measurement systems introduced by former CEO Bob Lane may also help explain things. Lane introduced a system whereby by a 1% per month “charge” was taken into account before any profit could be reported by managers. In simpler terms, a 12% per annum profit was viewed as breakeven by Lane and Deere managers. Although not reported, I’m sure Deere managers strove to exceed this – maybe to be rewarded with a bonus payment?. Nonetheless, this is a really useful idea. You would look at it another way in that 12% of the target “profit” could be lost before a real accountning loss happens. Either way, this approach might be useful to your business, large or small.
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