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. |