Chapter 12: Current developments in performance management
Chapter learning objectives
Upon completion of this chapter you will be able to:
- discuss, evaluate and apply environmental management accounting using for example lifecycle costing, input/output analysis and activity-based costing
- discuss the use of benchmarking in public sector performance (league tables) in public sector performance and its effects on operational and strategic management and behaviour
- discuss the issues surrounding the use of targets in public sector organisations
- discuss contemporary issues in performance management
- discuss how changing organisation's structure, culture and strategy will influence the adoption of new performance measurement methods and techniques.
1 Exam focus
Student Accountant articles: visit the ACCA website, www.accaglobal.com, to review the following articles on the topics in this chapter:
- Environmental management accounting - July 2010
- Environmental management accounting - July 2004
The area of performance management is constantly evolving. Thetechniques and systems used today are very different from those of 50years ago and there are current issues and pressures which are likely tolead to further developments:
- changes in technology may have significant impact on measuring performance
- a recognition that there is a broader picture than just financial performance
- issues relating to governance.
New performance measurement methods and techniques have beendeveloped as a result of a change in an organisation's structure,culture and strategy.
Contemporary issues in perf. management
Changes in technology
Improvements in technology have a significant impact on performance management.
- It is possible to measure more and more different indicators of performance â€“ the challenge now is to ensure that the aspects being measured and managed are the right ones.
- Improved technology also means that it is possible to produce information much more quickly and in real time.
- Information is now made directly available to managers on their desks at the touch of a button. The production of performance reports is no longer the responsibility of a small number of specialists â€“ rather their role is to design the overall system to ensure that it provides the information required by managers.
- The availability of more data does not automatically mean that there is more useful information â€“ it is still important to ensure that the data is interpreted to ensure that it is useful.
- Performance management is about more than the information produced â€“ however much information is provided, what is important is how it is used and how the organisation acts in response to it.
Broadening performance management
There is a growing recognition that the performance of organisations depends on more than purely financial performance.
- There has been significant growth in the use of non-financial measures of performance.
- Techniques have been developed to enable measurement of performance in a number of different dimensions, and this trend looks set to continue. Examples are the balanced scorecard and the performance prism.
- Historically the focus of performance management has been on outputs of the organisation's activities. Organisations are now beginning to focus on outcomes, or achievements, and then using output measures to achieve those outcomes.
- There is a recognition that everyone in the organisation needs to be involved in performance management.
- There is also a need to extend involvement outside the organisation to the entire supply chain, as organisations recognise that others have an influence on their performance.
Over recent years, the issue of corporate governance has become amajor area for concern in many countries. Organisations are now underincreased pressure to demonstrate that they are effectively managed.This has led to:
- pressure to demonstrate improvements in performance
- more demands for accountability from external agencies
- legislation and regulation relating to performance reporting
- companies looking for ways to measure and report on improvements in governance.
3 Environmental management accounting
Organisations are becoming increasingly aware of the environmental implications of their actions.
Test your understanding 1
Discuss the potential benefits to a company ofreducing the negative environmental impact of its operations, productsor services.
Illustration 1 - Environmental management at BP
BP plc's previous Annual Review describes a number of activitiesaimed at reducing the environmental impact of the company's operations:
- improving the integrity of its equipment and pipelines to reduce the spillage of oil
- reducing the emissions of greenhouse gases, which is measured and reported within the Annual Review
- introducing environmental requirements for new projects
- supporting the use of market mechanisms to bring about emission reductions across industry
- launching a new business providing energy from alternative sources
- investing in research into biofuels
- developing and marketing fuel which produces lower emissions compared with standard fuels.
3.2 Drawbacks of traditional management accounting
Management accounts provide us with an analysis of the performanceof the business. However, traditional accounting systems are unable todeal adequately with environmental costs. As a result, managers areunaware of these costs and have no information with which to manage orreduce them.
Illustration 2 - Reputational costs
In April 2010 a blast at the Deepwater Horizon rig in the Gulf ofMexico killed eleven people and caused one of the worst oil spills inhistory. The US presidential commission concluded that the oil spill wasan avoidable disaster caused by a series of failures and blunders madeby BP, its partners and the government departments assigned to regulatethem. It also warned that such a disaster was likely to recur because ofcomplacency in the industry.
For BP, the company at the heart of the disaster, the effects havehad a deep and widespread impact. The company has become synonymous witheverything that is dangerous about oil exploration causing massivereputational damage.
3.3 Using environmental management accounting to address these problems
To ensure that environmental costs are fully considered and toimprove the environmental performance of an organisation, a newtechnique called environmental management accounting (EMA) has beenintroduced. EMA:
- identifies and estimates the costs of environment-related activities and seeks to control these costs
- identifies and separately monitors the usage and cost of resources such as water, electricity and fuel and enables these costs to be reduced
- ensures environmental considerations form a part of capital investment decisions
- assesses the likelihood and impact of environmental risks
- includes environment-related indicators as part of routine performance monitoring
- benchmarks activities against environmental best practice.
In summary, the focus of EMA is not all on financial costs but italso considers the environmental cost or benefit of any decisions made.
3.4 EMA techniques
Four key techniques exist. The techniques can assist anorganisation in improving its performance. They are not mutuallyexclusive.
Activity-based costing (ABC)
ABC distinguishes between:
- environment-related costs which can be attributed directly to a cost centre, e.g. a waste filtration plant, and
- environment-driven costs which are generally hidden in overheads.
The environment-driven costs are removed from general overheads andtraced to products or services. This means that cost drivers aredetermined for these costs and products are charged for the use of theseenvironmental costs based on the amount of cost drivers that theycontribute to the activity. This should give a good attribution ofenvironmental costs to individual products and should result in bettercontrol of costs.
Advantages and disadvantages of ABC
This technique compares the physical quantities input into aprocess and compares this with the output quantities. The physicalquantities can be translated into monetary terms.
Illustration 3 - Input/output analysis
A reduction in waste could help to eliminate the loss.
Flow cost accounting
This is associated with input/output analysis since it looks at thephysical quantities of material involved in different processes. Theaim is to reduce the quantities of material and hence the cost.
Lifecycle costing considers the costs and revenues of a productover its whole life rather than one accounting period. Therefore, thefull environmental cost of producing a product will be taken intoaccount. In order to reduce lifecycle costs an organisation may adopt aTQM approach.
It is arguable that TQM and environmental management areinextricably linked insofar as good environmental management isincreasingly recognised as an essential component of TQM. Suchorganisations pursue objectives that may include zero complaints, zerospills, zero pollution, zero waste and zero accidents. Informationsystems need to be able to support such environmental objectives via theprovision of feedback â€“ on the success or otherwise â€“ of theorganisational efforts in achieving such objectives.
NB: The benefit of each of the techniques must be weighed against the cost of providing the additional information.
Illustration 4 - Cost reduction at McCain Foods
One example of energy saving is McCain Foods, which buys an eighthof the UK's potatoes to make chips. It has cut its Peterborough plant'sCO2 footprint by two-thirds, says corporate affairs director BillBartlett. It invested Â£10m in three 3MW turbines to meet 60 per cent ofits annual electricity demand. McCain spent another Â£4.5m on a lagoonto catch the methane from fermenting waste water and particulates, whichgenerates another 10 per cent of the site's electricity usage. It alsowants to refine its used cooking oil, either for its own vehicles fleetor for selling on.
McCain want to become more competitive and more efficient.
4 The use of league tables (benchmarking) in the public sector
A league table is a chart or list which compares one organisation with another by ranking them in order of ability or achievement.
Benchmarking will be used to rank the organisations in the league table.
League tables have become a popular performance management tool inthe public sector in recent years, for example in hospitals and schools.
Illustration 5 - The use of league tables in schools
In January 2010 the secondary schools league tables showed thatLondon is the highest performing region in England at GCSE level with54% of pupils achieving the benchmark at GCSE of five A* to C gradesincluding English and mathematics. This is a striking turnaround in justover a decade. In 1997 only 29.9% of London pupils reached this level.
Advantages of league tables
- Implementation stimulates competition and the adoption of best practice. As a result, the quality of the service should improve.
- Monitors and ensures accountability of the providers.
- Performance is transparent.
- League tables should be readily available and can be used by consumers to make choices.
Test your understanding 2
Discuss the disadvantages of using league tables in the public sector.
Test your understanding 3
A government has decided to improve school performance by the use of league tables with schools assessed on the following:
- percentage pass rates in examinations
It has been proposed that funding be linked to these measures.
Suggest some potentially negative outcomes of this system.
5 The use of targets in public sector organisations
'A performance targetrepresents the level of performance that the organisation aims toachieve for a particular activity. Such targets should be consistentwith the SMART criteria' (Government and Audit Commission).
The results from the benchmarking process (discussed above) can beused to set attainment targets for public sector organisations such asschools, hospitals and the police force.
These should act as an invaluable tool for improvement. However,there are a number of issues associated with the use of targets.
- Central control - most targets are set centrally by government. It may be more appropriate for targets to be drawn up locally by professionals who are aware of the challenges faced in different parts of the country.
- Difficulty level - targets that are too difficult tend to debilitate rather than motivate and those that are too easy lead to complacency.
- All or nothing - not meeting the target can be seen as a sign of failure. However, if an aspirational target is set it may not be met but may still result in improvements and act as a motivator.
- Too many targets - there is a tendency to set too many targets to try to measure every aspect of service delivery. However, a manager responsible for service delivery will be unable to concentrate on more than a handful of targets at any one time.
- Targets not always appropriate - it is not always appropriate to set targets, e.g. if the activity is not within the control of the person responsible for meeting the target.
- Cost - the cost of setting the target may outweigh the benefit.
- Lack of ownership of targets - each target should have a named person who is accountable for the performance and achievement of the objective.
- Gaming - there may be a tendency for people to 'play the system' rather than using the targets as a tool for improvement, i.e. people want to look good rather than be good.
- Conflict - conflict between targets may occur, e.g. a reduction in the number of children on the Child Protection Register may coincide with an increase in child abuse cases.
Test your understanding answers
Test your understanding 1
The benefits are as follows:
- An environmental approach ensures the organisation meets with legal and regulatory standards.
- Increased sales as a result of meeting with customers' needs.
- Helps to maintain a positive public image.
- Manages risk, e.g. of an environmental disaster.
- Can reduce costs, e.g. through improved use of fuel and water.
Test your understanding 2
- Encourages providers to focus on performance measures rather than the quality of the service.
- Costly and time consuming.
- May encourage creative reporting.
- The value of any performance indicator depends on the quality of any data in the calculation. The data management systems in the public sector do not always provide quality data.
- Many of the outcomes valued by society are not measurable but many of the performance indicators have been selected on the basis of what is practical rather than what is meaningful.
- Differences between public sector organisations may make comparisons meaningless, e.g. a school in a deprived area will be at a natural disadvantage. This may result in employees being held responsible for things over which they have no control.
- A poor ranking may have a negative impact on public trust and employee morale.
- A poor ranking may lead to a worsening of future performance, e.g. gifted children are no longer sent to a poorly performing school and this results in an even lower ranking in future years.
Test your understanding 3
- Children with special needs/disability will find it harder to gain school places as they may be perceived as having less chance of passing examinations reducing school performance and funding. (The irony here is that schools which are willing to accept children with disabilities often need more funding, not less.)
- Truants are likely to be expelled at the school's first realistic opportunity. This may result in the school performing better but only transfers the 'problem' somewhere else.
- Schools may focus on examination performance to the detriment of other educational goals, e.g. art, sports.
- Schools facing difficulties will receive less funding to help overcome those problems.
- There will be increased competitiveness and decreased collaboration between schools.
Created at 5/24/2012 4:32 PM by System Account
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Last modified at 5/25/2012 12:55 PM by System Account
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