Help Clients Take Measure

CPAs can use performance measurement to become more complete business advisers.
BY EDWARD GREGORY AND ROSLYN MYERS

EXECUTIVE SUMMARY
PERFORMANCE MEASUREMENT (PM) IDENTIFIES, monitors and improves those business activities that affect a company’s profitability. The method uses both leading (future) and lagging (past) indicators to assess how well a business is meeting its targets in the present.

THE SEVEN ESSENTIAL STEPS FOR A PM system are: Prepare a strategic plan, identify the CSFs, determine the CSF measures, establish measurement standards, collect data and monitor results, make necessary operating revisions and reward success.

WHEN EMPLOYEES WORK WITH MANAGEMENT to pick critical success factors, all groups better understand how goals are met. Performance measures allow employees to see clearly what management cares about and the results it wants.

CSF MEASURES SHOULD BE IN terms of volume, time and/or quality. They should be capable of being assessed weekly or even daily. Choose measurement standards that are realistic to keep the PM process healthy.

A CPA WHO NOTES AND COMPARES weekly production figures with an industry benchmark during an audit or other engagement has spotted an opportunity to offer PM. Companies employ performance measures to manage risk as well as internal operations.

CPA EXPERTISE INCLUDES PM SKILL SETS —the know-how to measure an entity’s performance and design systems that reliably capture and report that information. As more companies find value in using PM systems, CPAs will be well positioned to assist in their design and implementation.

EDWARD GREGORY, CPA, MBA, is the Performance View team leader for initiatives that relate to performance measurement. Mr. Gregory is an employee of the AICPA and his views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation. ROSLYN MYERS is a New York-based business writer. Her e-mail address is rozmyers2@yahoo.com .

PAs and financial managers face a greater burden than ever to evaluate business performance accurately and in real time. Instead of using end-of-period reports to see how a company is doing—an inherently slow process—CPAs can help clients and employers monitor ongoing productivity and financial strength by using performance measurement (PM) to track key activities, make decisions faster and attain goals in a more controlled and targeted manner. It’s a system many companies are turning to, and some CPAs see such engagements as a natural extension of the work they already do for their clients. Here’s how it works.

IT'S NOT A CRYSTAL BALL BUT…

The goal of PM is to identify, monitor and improve business activities that have a direct impact on a company’s profitability. The method uses both leading (future) and lagging (past) indicators to assess how well a business is meeting production and profit targets. Depending on the type of business, relevant “critical success factors” (CSFs; “key performance indicators” is an equivalent term) might include customer satisfaction, employee turnover, quality, time to market and/or other operational efficiencies. They indicate what’s likely to happen to a company—both good and bad—in current and future periods.

Motivational Metrics

When a wholesale distributor of electrical supplies started to measure how many items customers picked per hour, the rate quickly went to 17 from 8. Today, the company’s objective is to achieve 20 picks per hour.

Source: Don Aux Associates, www.donaux.com .

The previous-period results CPAs traditionally look at (net income, earnings per share and revenue per employee, for example) are essential data, but they provide little insight about what’s down the road. “If a company’s net income increased from $10 million to $15 million last year, does that help me as an investor, or as a banker looking to approve a loan, feel comfortable that similar increases will occur next year?” asks Erik Skie, CPA, a principal at Larson Allen Weishair & Co. LLP. “Not necessarily.” However, if investors or bankers learn the company not only increased its net income but also improved employee morale and decreased its employee turnover rate (or customer surveys revealed an increasingly satisfied clientele), they can better gauge its investment potential. In this case, well-trained and retained employees and satisfied customers suggest the organization is likely to continue its success.

SEVEN STEPS

“There are seven essential steps for implementing a performance measurement system,” says William O’Brien, CPA, a California-based financial management consultant. A CPA performing a PM engagement must help the client

Prepare a strategic plan. Despite a client’s temptation to skip this step, “if there’s no strategic guidance in place, the CSF identification process might result in measures that don’t fit a business’s long-term goals,” says O’Brien. At a minimum, he recommends beginning with a set of strategic objectives such as “to reduce administration expenses by 10% over 12 months” or “to increase market share by 5%” in that time frame. (For more information on strategic planning, see “ Strategic Planners Lead the Pack ,” JofA, Dec.01, page 26.)

Identify the CSFs. A CPA or financial manager should help a company choose the most important one for each objective. A CSF is something that has to be done now in order to achieve a goal. A CSF for a goal to increase market share is product awareness, for example.

Determine the CSF measures. The measures should be in terms of volume, time and/or quality. They should be capable of being assessed weekly “or even daily,” says O’Brien. For example, where “product awareness” is the CSF, an appropriate measure is the number of contact points with customers, such as meetings or ads.

Establish measurement standards. Use industry or internal-performance benchmarks. “For example, advertising experts could provide the number of daily ads needed to achieve a particular market-share increase,” O’Brien says. (The process will collapse if the standards are unrealistic.)

Collect data and monitor results. At this point in the process, CPAs and financial managers look at results on a weekly or semimonthly basis. Data should be reviewed in the same time frame in which it’s collected to keep the business informed about whether it’s staying on track.

Make necessary operating revisions. “Think of this step as making a midcourse correction in a cross-country race,” says O’Brien. For example, compare the “customer contact” data with the standard. If needed, use the data to make operating revisions—such as running more ads—that align with the goal before end-of-period financial results are locked in.

Reward success. Rewarding staff for achievement makes the process more than finance busywork. Use an incentive compensation plan to reward workers who successfully meet targets.

IT REQUIRES TAILORING

CPAs can work with a company to develop business objectives, CSFs and the measures to monitor them, but there’s no template that fits everyone. To get the right measures, a company needs input from all levels of its business, and a cross-functional team meeting is useful for gathering that information. A CPA who understands both the process and the business can facilitate such a fact-finding meeting, eliciting participants’ opinions and experience and laying the groundwork for an entity’s PM program. The AICPA offers detailed PM consulting instruction with Performance View (see “ Taking Measures to Grow ,”at the end of this article).

John Lally, CPA, of Rosenfield, Holland, Raymon & Pielech, a New Bedford, Massachusetts, accounting and consulting firm, performs PM engagements. To help a business client select the measures that are most useful for it, he gets input from a cross-section of staff. He “assembles a team with people from the finance, operations, marketing and shipping departments as well as the company’s president,” Lally says. “When employees work with management in the selection process, it allows all groups to understand why certain issues are important and how goals are met.”

Performance measures allow employees to see clearly what management cares about and the results it wants. A sign commonly found in factories that states the number of days since an employee was hurt in an accident is a simple example of a performance measure. It shows employees that workplace safety is important to management and it instills a climate of carefulness, which is always cost-effective.

CASE STUDY
Follow the Fleet

When a CPA firm spotted high maintenance charges at a limousine and transportation company with a 200-vehicle fleet, it advised the business to take a closer look at what was going on. As a result, the company decided to monitor and manage the way it handled vehicle maintenance. Management put into place a performance measurement system.

Although the original focus was maintenance, the company learned a lot about the behavior of its drivers by monitoring each vehicle’s gas mileage. Over time management could see a correlation between poor gas mileage, specific drivers and their propensity for accidents and tickets. It also found the drivers who had the most tickets and accidents had the most customer complaints.

At the inception of the program the company was paying more than $125,000 per month for vehicle insurance, so reducing the number of accidents and tickets became an important goal. The company established a bonus pool. Eligibility for the pool was limited to drivers who showed up for work on time, dressed appropriately and had no tickets, accidents or complaints for the quarter. At the end of each quarter, eligible drivers received a share of the bonus pool, the amount of which was roughly equal to the increase in maintenance costs and insurance premiums the company had been averaging every quarter during the previous two years. The owner’s premise was simple: “Keep costs and rates down, and I’ll pay you what I would have paid out otherwise.”

There was an immediate shift in the attitude of his better drivers when they realized their bonus was being affected by the poor performance of a few. Peer pressure to do the right thing on the job and to fire drivers who did not measure up to the standards developed. Everyone understood and had a stake in conscientious driver performance, and the owner’s insurance rates and maintenance costs stabilized.

Each CSF and its measure influence implementation (see “Follow the Fleet, above). If workers see managers focus on how much is produced per hour, they speed up; but if managers focus on product quality, employees slow down to concentrate on a more careful process. If managers focus on a measure that incorporates both speed and quality—such as products shipped on time and percentage of returns—workers are likely to take both into consideration.

USEFUL IN MANY CONTEXTS

PM systems refine the goal-setting process for different layers of a business, taking into account interdependent factors such as the production process, office culture, and staff and executive accountability. Companies often employ performance measures to manage risk as well as internal operations. Examples:

Transparency in financial reporting. Some companies voluntarily report performance measures in accordance with FASB guidelines such as those in Improving Business Reporting: Insights into Enhancing Voluntary Disclosures (January 2001). That report looked at voluntary disclosure of nonrequired business information in eight industries. It encouraged disclosure of “critical success factors and the trends surrounding those factors” and “the metrics used by companies to manage their operations and drive their business.” A 2001 FASB follow-up report, Business and Financial Reporting, Challenges from the New Economy (May 2001), suggested that the business-reporting model could be improved to better serve investor interests. (For more information see “ Quality Financial Reporting ,” JofA , Apr.02, page 70.)

At his swearing in SEC Chairman Harvey Pitt commented that he wants to encourage companies to issue current numbers and frequent updates on how businesses are performing—in other words, PM reporting. In addition, the SEC assembled a committee to “consider what types of information might assist investors in better understanding the critical success factors or drivers of value for a business,” and that SEC task force has been considering new policy about valuing intangibles and reporting performance measures.

Health and safety accountability. The European Council of the European Union adopted the Eco-Management and Auditing Scheme (EMAS) in 1993, whose purpose is to “promote continuous environmental performance improvements of industrial activities by committing sites to evaluate and improve their own environmental performance.” Companies are required to issue a public report on their environmental issues, subject to verification by independent authorities (who may or may not be public accountants), indicating both past goals and whether they were met and goals for the coming years. Dow Chemical and the Royal Dutch/Shell Group use PM reports to gauge improvement in areas related to health, safety and environmental issues under this system.

PRACTITIONERS ARE HALFWAY HOME

Already familiar with the aims and bottom lines of the entities they serve, CPAs are in a favorable position to offer PM consulting, Lally says. “We point out items—such as weekly production goals—that may become issues in the future. This allows potential problems to be addressed before they get out of hand,” he says. He notes that adding “performance measures to our audit engagements” has brought in about $25,000 in additional business for the firm.

In one case, when a rival pitched PM services to one of Lally’s manufacturing clients, it instead turned to his firm, whose audit of the business already had highlighted important measures. “We started with one measure—inventory days—as a test case. We added more measures and changes to the production schedule as the company identified other critical factors,” says Lally.

Less than a year into the process, he sees improvement in the client’s business: “The employees are more focused and have a better understanding of how interdepartmental activities affect financial results.” Lally explains: “The client engaged us to train its employees about financial statements so they’d understand how the company was performing. We presented three prior years’ statements and analyzed the data to show how performance measures affect production. It helped to show them the connection between CSFs and cash flow.”

PM Engagement Resources

The AICPA Web site offers comprehensive information, www.aicpa.org/performanceview .

Practice guides

CPA Performance View Services: A Practitioner’s Guide to Providing Performance Measurement Engagements
An easy-to-use handbook that gives step-by-step guidance for a PM engagement, cpa2biz.com .

CPA Performance View Services: A Financial Manager’s Guide to Leading Performance Measurement Initiatives
PM guidance for financial managers, cpa2biz.com .

Software

CPA Views
A progressive, easy-to-use software tool developed by Performance Soft for the CPA market, www.performancesoft.com .

CPA expertise includes three skill sets necessary for developing and applying PM programs: determining how to measure an entity’s performance, designing systems to capture information and reporting on that performance. As more companies use performance measurement systems, someone within the company—or advising it—will be needed to assist in their design and implementation. “Selling PM services has largely consisted of sharing ratio analysis with clients and letting them see where production improvements can benefit them,” Lally says. That, at least, bodes well for CPAs.

CASE STUDY
Taking Measures to Grow: Performance View

Two years ago, Caroline Boudreaux, CPA, of Boudreaux, Henderson & Co., LLP—a two-partner, seven-person firm in New Iberia, Louisiana—decided to shift most of her firm’s practice from traditional “compliance” services such as accounting and taxes to “reliance” type services encompassing a range of consulting niches. Accordingly, Boudreaux’s firm has a new mission: “Our goal is to position ourselves as the ‘go-to’ firm for as many of our client’s needs as possible. We actively seek ways in which we can solve problems for clients. I no longer sell services; I facilitate solutions.”

Her decision to add performance measurement (PM) consulting crystallized when Boudreaux attended the 2000 AICPA Practitioners’ Symposium and heard a presentation on the CPA Performance View PLUS seminar, which is an intensive three-day program jointly sponsored by the AICPA and Mentor Plus. It trains practitioners in the technical aspects of performance measurement, which provides feedback about key activities that are critical to a company and serves as a predictor of outcomes.

The course handbook gave Boudreaux technical instruction on performance measurement consulting and step-by-step protocols to follow for delivering PM engagements. The course kit includes Power Point presentations, Excel worksheets and CD-ROMs. “I am constantly going back to my tool kit to refresh my memory of what’s in it, when to use it and to practice,” says Boudreaux.

“Practitioners leave the training with the knowledge, system and tools they need to launch a PM consulting division,” says Edi Osborne, CEO of Mentor Plus, a Pleasanton, California, consultancy that specializes in accounting firms and small businesses.

Boudreaux, who had wanted “a practical PM system that would work quickly” for her firm, says the program gave her a turnkey consulting operation. It “prepares you to identify what key activities to measure and when and how to do it,” says Boudreaux. The value to clients is that it’s “a tool for drilling down to the root of problems and changing actions to prevent those problems from recurring,” she says.

Because the system enabled her to “hit the ground running,” the firm’s annual consulting revenues have doubled since rolling out PM in January 2001. So far, the firm markets the service using a Power Point presentation that also was part of the Performance View training.

Boudreaux says, “The program teaches us to follow five ground rules to assure a successful engagement”:

Performance measures should be linked to the overall goals and strategy of the company.

Everyone from top management to frontline personnel must be involved in developing and gathering the performance measures.

Employees must understand the “why” of the measures before being held accountable about them.

Employees should be held accountable only to measures they have control over. Responsibility without authority leads to cultural chaos.

Employees must have a positive incentive to support the gathering, monitoring and improving of the measures.

When negotiating a PM engagement, Boudreaux asks for a 12-month commitment. The first six months usually are devoted to developing a workable system for the business, followed by six months of monitoring. She sets a fixed fee, payable monthly, according to what she sees as the engagement’s value to the client. “It takes about a year to see results, and I want my clients to see the process through to the end. If clients are not satisfied, I’ll refund their money,” Boudreaux says.

The steps involved include combining the company’s established goals with growth objectives, charting the tasks the company must do to accomplish them and determining key performance indicators (KPIs). Monitoring KPIs is at the heart of the feedback system, and these measures keep owners informed about their company’s performance in real time. The up-to-the-minute picture enables a company to improve work outcomes on a weekly, daily or even hourly basis.

Keeping staff members informed about their performance and its effect on the company’s profitability is a vital step when developing incentive programs for teamwide process improvement. She uses monthly meetings that include as many of her clients’ staff members as possible. Employees who get quota-specific feedback about their performance often improve in the areas measured. “The more people you can get involved, the better,” she says.

According to Boudreaux, one of the by-products is team building. “During the engagements, I bring employees together to share their perspectives, but owners also need to understand their employees and communicate better with them.”

When employees are financially literate and understand the relationship between financial measurements and KPIs, they “realize that a company’s profitability is critically dependent on their own work and how they work together,” she says. The company uses KPI data to develop a “report and reward” system. Rewards can range from performance-based bonuses or commissions to dinner out for an employee and his or her spouse or guest.

Once a system to measure, report and reward the activities critical to the company’s success is in place, the practitioner should meet at regular intervals with management to review and advise on ways to improve the critical numbers or to change or refine the measures, she says.

Performance measurement engagements have led to other types of consulting for Boudreaux, including financial literacy training, group facilitation and team building and small business strategic planning. Despite having had to limit the number of PM engagements the firm takes on—“One client had to wait several months before I could begin,” she says—she will continue to market PM consulting services. She’s eased her workload by delegating documentation, session-preparation and data-input tasks to a non-CPA staff member.

Boudreaux takes advantage of the free follow-up monthly conference calls that are part of the CPA Performance View PLUS training. “These phone sessions are an opportunity to discuss what’s working and not working.” She also stays connected with other CPAs involved in PM consulting by attending the meetings of the Mentor Plus Consultants Accounting Roundtable (CART). Boudreaux says the meetings are empowering and have bolstered her commitment to the PM consulting niche. “We are each assigned an individual mentor. The group also shares resources they may have developed individually.”

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