The process of raising finance is expensive, time consuming and demanding on the company’s resources. Therefore when completed, there is a sense of jubilation as well as relief. However, reality is that once funding is agreed, the ‘real’ challenge begins, the challenge of delivering on the investment potential. So what can the company do to enhance its chances to reach its potential?
One of key tools that should be put in place is a Performance Measurement and Reward system. Such a tool will monitor the progress of the company against its objectives and peers, and motivate staff to collectively deliver the vision, strategy and objectives of the company. The key building blocks are:
- What should be measured?
- What standards are set for these measures?
- What are the rewards for achieving the targets?
1. Measures
An accepted phenomenon is that ‘what gets measured gets managed’ as its focuses the participant’s minds on that being measured. Traditional accounting measures, in the form of management accounts, are very limited in providing a complete measurement tool as:
- The information measures past performance only, i.e. historical information
- It measures only one dimension of the business, the financial dimension
- It ignores important areas such as measuring customer satisfaction and service, the efficiency of internal processes and the competency of staff.
A more useful measurement tool is Kaplan and Norton’s ‘Balanced Scorecard’ which compliments ‘financial measures with operational measures on customer satisfaction, internal processes, and the organisation’s innovation and improvement activities that are the drivers of future financial performance’. The tool has four dimensions namely, Financial, Customer, Internal business and Innovation & Learning perspectives. The Balanced Scorecard not only measures past performance, but also puts on measures that monitor aspects that will effect future return to the company.
2. Financial
The Financial Perspective should include the traditional measure of comparing actual results to budgeted and/or forecast. The company should also focus on the ‘key financial drivers’, drivers that will deliver the preferred financial results of the future. These might, for example, in a technology company include analysis on sale leads and orders, analysis of product mix and their contribution to the company’s bottom line or labour cost as a percentage of sales revenue.
3. Customer
The Customer Perspective needs to focus on the needs of the company’s customers. Measures should be put in place to evaluate customer satisfaction with the company’s products and pre and post sales service. This might include delivery lead times, number of defect products, how long it takes customer service to respond to a customer inquiry or the volume of repeat business, which is the ultimate measure to customer satisfaction. A word of caution, make sure that the item that you are measuring is important to the customer, for example there is no point in measuring if customer service answers the phone within 10 seconds if the customer is not concerned about this.
4. Internal Processes
The Internal Business perspective should focus on the internal items that the company needs to excel at in order to succeed. For example, in a technology company a key item is its ability to recruit and retain software developers, hence a measure may be staff retention measures. Other measures would include production efficiency and production quality measures.
5. Innovation & Learning
The Innovation and Learning perspective focuses on items that will ensure the company can continue to improve and create value. This would include measures on employee competency, training provided for employees and process change and improvements.
6. Standards
Once the company has established what should be measured, it then needs to establish
- Who owns each of these measures and;
- What target should be set for each measure.
The measure owner is the individual or group of individuals who have the greatest influence on that being measured. It is important when setting measures and the targets in particular, the measure owner is involved and ‘buys into’ both the method of measuring and the target being set.
The target needs to be stretching of the owner’s ability but yet achievable and fair. This will ensure that the owner is motivated and focused on the key drivers for the company. It is also important to include some form of benchmarking, comparing performance with both internal peers and external competitors. The external benchmarking will ensure that the company keeps a focus on the market environment outside the company.
The targets set need to be reviewed on a regular basis to ensure that they remain realistic and equitable while bringing the best out of the owner of the measure. Targets would need to be changed if they were not correctly set initially or if there is dramatic change in the environment that the company operates.
7. Rewards
The reward system is used to guide individuals to deliver the standards set out above. The system should be clear, motivate the individuals who are included and the outcome needs to be in the control of the person being held responsible.
The reward system needs to be clearly linked to the measures and targets set out by the company. These links should be clearly understood by all employees. The individuals should know what the company is trying to achieve, what is expected from them and how they contribute to the overall success of the company.
The reward system is intended to be motivating, hence the rewards should encourage the right behavior. They should rewards that the employee is willing to change his behavior to achieve, i.e. be worth the effort.
8. Link To Strategy
The objective of the setting up a Performance Measurement and Reward system is to motivate individuals to deliver on the potential of the company. Therefore the company needs to clearly define its vision, the strategy it has to achieve this vision and the stepping stone objectives in delivering the strategy. The Measurement & Reward system should than be tightly linked to these objectives.
Apart from being a motivation tool, the benefits of a Performance Measurement & Reward system are:
- It ensures that all employees are in pursuit of a common company strategy
- It enables the company to identify where they are on the road to delivering the company’s vision
- It allows employees to see how they contribute to the company’s goals, and
- It enables them to share in the success of the company.
Once put in place, the system can be the difference between the vision becoming reality or just remaining a vision.
Contact: fcoombes@coombesfinance.com
