performance measurement and costing system in new vietnamese companies

The objectives of the project were to understand impact of performance measurement and costing system in new Vietnamese companies which show the importance of performance measurement and

PERFORMANCE MEASUREMENT AND COSTING SYSTEM

IN NEW VIETNAMESE COMPANIES

BY PHAM THI THU HANG

DECLERATION

I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at HELP University College or other institutions The word count is 12,778 words

PHAM THI THU HANG

Date:

ACKNOWLEDGEMENT

This graduation thesis is the result of twelve weeks of research and writing during the autumn of 2011 It has been an interesting and learning experience In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process

First and foremost, special mentions and grate thanks must go to Mrs Nguyen Van Anh , my supervisor at International School, Vietnam National University, Hanoi With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis I could not have been able to complete this thesis without his positive suggestions and guidance

Secondly, I want to thank all the managers and staffs of Hungyen Garment Join stock Company, for their cooperation that helped and inspired me in writing

Thirdly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis

My appreciation is to my family and my friends for their supports and encouragements

Gratefulness is to the readers also, whose feedback will help much in improving the thesis

Hanoi, October 2011

PERFORMANCE MEASUREMENT AND COSTING SYSTEM

IN NEW VIETNAMESE COMPANIES

BY PHAM THI THU HANG OCTOBER 2011 Supervisor: Mrs Nguyen Van Anh

ABSTRACT

The graduation projects the results of research performance measurement and costing system in new Vietnamese companies The objectives of the project were to understand impact of performance measurement and costing system in new Vietnamese companies which show the importance of performance measurement and costing system Benefits of performance measurement and costing system will be required to improve the competitiveness of new enterprises in the 21st century A performance based costing system was discussed, highlighting its capability to measure performance in such areas as knowledge management and information systems, as well as performance across functions and organizations The steps for setting up that Performance Based Costing system were described Finally, a framework describing the relationship among Performance Based Costing system components was presented in the hope that it would provoke more thought on and development of the concept

In this thesis, the researcher uses case study of Hungyen Garment Join stock Company because this Branch may be given more accurate information and able to take the right actions

TABLE CONTENT

DECLERATION ii

ACKNOWLEDGEMENT iii

PERFORMANCE MEASUREMENT AND COSTING SYSTEM iv

IN NEW VIETNAMESE COMPANIES iv

LIST OF FIGURES AND IMAGES vii

LIST OF ABBREVIATION viii

CHAPTER 1 - INTRODUCTION 1

1.1 Introduction 1

1.2 Problem statement 3

1.3 The objective of research 3

1.4 The structure of paper 5

2.1 Costing systems 6

2.1.1 The overview of costing system 6

2.1.2 The importance of costing systems 7

2.1.3 The type of costing systems 9

2.1.4 Design of a Performance Based Costing (PBC) system 13

2.2 A framework for measuring performance in new enterprise 17

2.2.1 Type of performance measurement 17

2.2.2 The importance of measurement performance 20

2.2.3 Issues with business performance measurement (BPM) 20

2.2.4 The framework for performance measurement in new company 24

2.3 Conceptual framework 26

2.3.1 Performance Reference Model (PRM) 26

2.3.2 Contingency theory 28

CHAPTER 3 - RESEARCH METHODOLOGY 31

3.1 Research objective 31

3.2 Research design 31

3.2.1 Research approach 31

3.2.2 Data collection 32

CHAPTER 4 - DATA ANALYZE 34

4.1 Case study of a textile company 34

4.1.1 The introduction of Hungyen Garment Join stock Company 34

4.1.2 The producing 35

4.1.3 Market share 36

4.2 The costing system and performance measurement of the Hungyen Join stock Company 36

4.2.1 The differences of costing systems 37

4.2.2 The set up of an accounting system of Hungyen Join stock company 38

4.3 The designing performance measurement system in Hungyen Join stock company 40

CHAPTER 5: CONCLUSION 44

5.1 Summary 44

5.2 The implementation 46

5.2.1 Accounting system 46

5.2.2 Costing system 47

5.2.3 Performance measurement 49

REFERENCE: 52

LIST OF FIGURES AND IMAGES

LIST OF ABBREVIATION

GAAP Generally Accepted Accounting Principles

CHAPTER 1 - INTRODUCTION

1.1 Introduction

In the 21st century, firms need not just operate in different countries; they must develop global strategies to coordinate Their operations at all phases of the value-adding chain (D‘Amours et al., 1999) Coordination of the supply chain has become strategically important as new forms of organization, such as virtual enterprises, global manufacturing and logistics networks, and other company-to-company alliances, evolve The Japanese are often praised for the way they use information sharing to improve supply chain competitiveness Information exchange has become a key component in their manufacturing strategies (Dyer and Ouchi, 1993) Companies in all sectors are examining ways to reduce costs, shorten product development times and manage risks The transactions between companies in supply chains are characterized

by adding value up through the chain and incurring costs (and consequent payments) down the chain Supply chain management aims to reduce costs, risks and lead times associated with these transactions, thus releasing value

There is limited research on supply chain management in the low-volume Engineer to Order (ETO) sector This is in stark contrast to the extensive literature on high-volume sectors, particularly the automotive sector (Hicks et al., 2000) Performance measurement is critical to the success of any ―for-profit‖ organization because it creates understanding, molds behavior, and improves competitiveness World-class firms recognize the central role measurement plays in their success and are often compulsive about their performance measurement efforts (Fawcett and Cooper, 1998)

Activity Based Costing (ABC) is a product costing technique that has gained attention Turney,(1996) defined ABC as a method of measuring the cost and performance of

activities and cost objects It assigns costs to activities based on their consumption of resources and then allocates costs to cost objects based on their required activities The focus of ABC is on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects ABC helps identify problems and opportunities and formulate solutions to problems or ways to take advantage of opportunities It does so by providing financial and non-financial information about activities and cost objects Numerous articles address the design and implementation of ABC systems (Shank and Govindarajan, 1993; Alan, 1995; David and Robert, 1995; Booth, 1996) According to Innes and Mitchell (1990), ABC provides process control information A measure of the volume of each activity (cost driver) is used to generate a cost rate for estimating production cost, and as a performance measure for the activity concerned In practice, most applications of ABC make arbitrary allocations of common costs The search for the activities which connect costs to products and processes, and for the cost drivers which proxy for them, involves compromise between accuracy and manageability The result is that some indirect costs are excluded from the cost-pools associated with a practical set of cost drivers (Armstrong, 2002)

Strategic performance measurement defines the focus and scope of management accounting Specifically the requirement is that management accounting practice recognize and reflect choices made in organizations for management accounting to be relevant (Atkinson, 1998) For the purpose of strategic performance measurement, the organization‘s objective can be entirely financial, social, or a mix of both financial and social objectives It is widely believed that the large-scale use of EDI leads to improvements in the communication infrastructure between organizations, and that this,

in turn, strengthens the economy of a nation and possibly a group of nations It is also

widely recognized that EDI enables organizations to redesign their processes significantly, because of its main capabilities: high speed, reliability and ease of data capture (Sheombar and Wagenaar, 1991) Hoogeweegen et al (1998) describe a comprehensive approach for evaluating the value of various courses of action involved

in implementing EDI The first relies on ABC and quantifies the costs and benefits that are to be expected from the information processing when EDI is being used The second uses discrete-event computer simulation to quantify the costs and benefits to be expected in the physical logistic processes

1.2 Problem statement

This paper describes a framework for measuring costs and performance in new forms of business organization that are evolving to meet the competitive challenges of the 21st century Therefore, the research questions will be as the following:

1 What are the advantages and disadvantages of performance measurement and costing system?

2 How to estimate the most suitable performance measurement and costing system in new Vietnamese companies?

3 What is the threat for a new enterprise in implementation performance measurement and costing system?

4 What are the solutions for the above problems?

1.3 The objective of research

This paper highlights the importance of costing system and performance measurement in the current manufacturing and market environment Giving the guidance for the new companies which are confused the suitable system for their operation

Costing is basically the ascertainment of cost whether for a specified thing or activity To ascertain cost, we need to apply accounting and costing principles, methods and techniques In view of the complexity of businesses and increasing changes in industry, trade and commerce, costing is becoming very important It assist management to make decision for example make or buy, whether to accept a special order and others, it assist management in planning and control, costing assists management to appreciate scarce resources in the increasingly complex business operations, understanding costing assist

in cost awareness, cost control / management, is vital to an organization‘s survival re: using marginal cost in competitive tendering and others

Improvement in individual, group, or organizational performance cannot occur unless there is some way of getting performance feedback Feedback is having the outcomes of work communicated to the employee, work group, or company For an individual employee, performance measures create a link between their own behavior and the organization's goals For the organization or its work unit's performance measurement is the link between decisions and organizational goals It has been said that before you can improve something, you have to be able to measure it, which implies that what you want

to improve can somehow be quantified Additionally, it has also been said that improvement in performance can result just from measuring it Whether or not this is true, measurement is the first step in improvement But while measuring is the process of quantification, its effect is to stimulate positive action Managers should be aware that almost all measures have negative consequences if they are used incorrectly or in the wrong situation Managers have to study the environmental conditions and analyze these potential negative consequences before adopting performance measures

1.4 The structure of paper

This research is divided to five chapters, each chapter has own responsibility

Chapter one briefly will talk about the aim of this paper Chapter two will about the general view of costing systems and performance measurement and their importance in

a new company, chapter two will also orient for the research by theories and models Chapter three will give the answer of how the data can be collected and analyzed The result of the above data, information will be conducted in chapter four, it also supported

by the case study, and the last chapter will summarized the main ideas of the research and the recommendations are possible for the implementing costing system and performance measurement in Vietnam – a developing country

CHAPTER 2 - LITERATURE REVIEW

2.1 Costing systems

2.1.1 The overview of costing system

Costing systems are components of a broader accounting system used by a given company or organization The main function of the costing system is to keep a focused eye on expenditures made by the company While the data that is collected and generated by the costing system is also integrated into the overall accounting system, the costing approach allows for easy extraction of the data for reports to upper management

The information that typically is gathered by a costing system allows owners and managers to quickly identify the current status of two key factors that are relevant to the success of the company Operational costs are often the foundation of the data collected

by a costing system Here, management is able to get a snapshot of all expenditures that are directly connected with the general operation of the organization, especially in terms

of production costs

A second important bloc of information that is retrieved with the use of a costing system

is performance cost Here, management is able to view any and all expenditures that are related to helping the companies remain profitable, less the direct cost of operations Expenses associated with marketing, public relations, and sales efforts are examples of the type of expenditures that are captured in the performance cost module

A costing system is not intended to replace an accounting system Instead, the systems actually work within the broad framework of general accounting systems to extract specific data for quick and easy analysis By making use of a costing system, it is possible to quickly identify expenditures that were intended to benefit the company, but

are failing to do so in a significant way This makes it possible for owners and managers

to make the necessary adjustments to the company‘s working strategy and thus exercise

a more responsible use of available resources

From this perspective, it can be said that regular use of a costing system can help to minimize waste and also make it possible to direct available resources in more productive directions rather than continuing to spend money on items that are accomplishing little or nothing for the company

2.1.2 The importance of costing systems

Managers rely on cost accounting to provide an idea of the actual expenses of processes, departments, operations or product which is the foundation of their budget, allowing them

to analyze fluctuation and the way funds are used socially for profit It is used in management accounting, where managers justify the ability to cut expenses for a company

in order to increase that company‘s profit As a tool for internal use, versus a tool for external users like financial accounting, cost accounting does not need to follow the GAAP standards (Generally Accepted Accounting Principles) because its use is more pragmatic

It creates a financial value out of the production of a product, measuring currency that is nominal into units that are measured by convention By taking recorded historic costs a bit further, it allocates a company‘s fixed costs over a specific time period to what items are actually produced during that period of time, creating a total cost of product production Products that were not sold during that period of time produced a "full cost" of those products, recording them in a complex inventory system that uses accounting methods of its own that are in compliance with the GAAP standards Managers are then able to focus

on each period's results as it relates to the "standard cost" of any product

Any distortions in expenses that were caused by calculating what the overhead of a product

is versus what a unit cost is for companies that specialize in only one specific product are very minor in industries that mass produce that product with a low fixed one Understanding why it varies compared to what was actually planned helps a manager to save company money by taking actions that are appropriate to correct that variation in the future Variance analysis is a very important part of cost accounting because it breaks down each variance into many different components of standard and actual one Some of these components are material expenses variation, volume variation and labor expenses variation

It is a very important part of the management accounting process In order for managers to determine the best methods to increase a company's profitability, as well as saving company money in the future, cost accounting is a necessary system in the management of

a company's budget, providing important data to analyze fluctuation in company production expense

Executive level pay is based upon company performance If the performance of a company

is not reported in a proper manner, executives make money that far exceeds what the business is capable of and creates a false picture of a company's performance This false reporting causes the stock market to balloon by rewarding stock to companies who do not deserve it, and these methods have a bad effect on our economy Business accounting that honors the GAAP creates a transparent persona, an air of trust and respect, from the users

of their financial statements

2.1.3 The type of costing systems

When considering a costing system which be the most suitable system for providing management information to the directors of a manufacturing company, it is necessary to bear in mind the purpose for which it is being set up

a Process costing

Process costing may apply in an industry where all units produced are identical and cannot be separately identified The production activity is likely to consist of continuous, repetitive processes that may go through a number of different stages, for example the processes in the sugar manufacturing industry that produce molasses and refined sugar at different stages In the case of process costing, the costs relating to each separate part of the process are computed and the output of each stage is transferred at cost to become the input of the following stage The input materials of some of the stages in the process could be acquired from outside, as well as being produced in-house, and these outside materials would form part of the cost for the next stage It should be emphasizes that the type of costs used in costing each stage of the process will be depend on what technique of costing is used For example where marginal costing is used only the variable costs will be used while if absorption costing is used the fixed overhead costs will be included in costing the product at each stage of process The direct material and labor costs will be collected in the various departments, each of which is responsible for a particular process Other direct expenses are allocated to the specific processes to which they related The production overhead costs will be allocated to the product in a reasonable manner

b Job Costing

Job costing is used where each job is different and performed to the customer‘s specifications; examples being the construction industry or the motion picture industry,

or in services such as auditing where each job has its own particular characteristics and procedures agreed with the client Here, the direct labor and materials costs relating to a particular job are identified, with a relevant portion of overheads, and these costs are used in the costing of that particular job

In examining what are the different costing systems based on the same principle as job costing, systems such as batch costing and contract costing could also be considered When these costing systems are used, the costs relating to a particular batch or a particular contract are identified and used in costing that batch or contract

c Marginal Costing (or Direct Costing)

When reviewing different costing systems, marginal (or direct) costing shouldn't be ruled out When output is at any given level, it is normally possible to increase the level

of output without increasing all costs proportionally, because a certain proportion of the costs will remain fixed at the same level even if the output increases Therefore, only the variable costs will increase with an increased level of output, and it is only this increase in variable costs that needs to be taken into account by management, when taking decisions as to how to increase the level of output The increase in these variable costs per unit of output is referred to as the marginal cost, and is an important item of information for management in calculating what effect an increase in the level of output

of goods or services will have on the level of profit Costing that is based on variable costs per unit, without taking fixed costs into account at that stage, is known as marginal costing Marginal costing is a tool for management decision-making, as it shows the effect on contribution and therefore on profit of increasing sales by one further unit Decisions on expanding or discontinuing product lines may be taken by analyzing the contribution to profit of each product or service and deciding which product lines should be expanded and which should be discontinued

The main disadvantage of marginal costing is that the distinctions between fixed and variable overheads are not as clear-cut in reality as they are in theory The price, fixed cost and variable cost can all vary frequently within an accounting period, and stepped costs are very common in reality, becoming relevant at various levels of output It is therefore difficult to be certain of the marginal cost or the contribution made by an additional unit of output at a particular moment in time

As absorption costing depends on setting allocation criteria in advance, the costs will never be absorbed exactly as there will always be differences between budget forecasts

of sales and costs and the actual results The costs will therefore be under or over absorbed in any particular accounting period Where the output is varying a lot from year to year, absorption costing will be less useful because of these differences between forecast and actual performance

Absorption costing also has the disadvantage that the cost of the inventory at the end of the accounting period contains overhead expenses, resulting in a carry forward of these expenses to the following period Accounting principles would require such overheads

to be written off to profit and loss account in the period in which they are incurred

Where the closing inventory is higher than opening inventory, the profit will be higher under absorption costing as these overheads are being carried forward in the inventory figure on the balance sheet

e Activity Based Costing (ABC)

When using different costing systems, you shouldn't rule out ABC, if absorption costing isn't for you ABC also attempts to allocate to the products and services, all the costs incurred in producing them, including the overhead costs However ABC aims to overcome some of the problems encountered by absorption costing, in terms of allocating overhead costs to products and services This method of costing therefore first identifies the activities that are being carried out in the organization, and allocates the costs to these activities By then measuring the contribution of each of the activities

to the products and services of the enterprise, it is possible to allocate the costs relating

to each activity among the products or services which that activity is involved in producing The intended result is that the costs are assigned to products on a rational basis, and the profitability of each product or service can be more accurately determined than, for example, by absorption costing which may use general allocation keys

Setting up an ABC system therefore requires observation and measurement of the various activities, of people or machines involved in putting together the end products

of the enterprise This detailed measurement results in accurate allocation of costs among activities and rational assignment of activities to the end products Inefficiencies

in procedures may be highlighted by this system and the real profitability of each product or service can be ascertained, leading to informed management decisions on expansion or discontinuance of product lines or services A science of activity based management has arisen to take decisions based on the information provided by ABC

systems and implement the changes indicated by the information supplied by the costing system

A disadvantage of using a different costing system such as ABC is that it can be expensive to implement, requiring detailed observation and measurement of activities and analysis of how these activities relate to particular products and services Management may devote too many resources to establishing the system, and produce detailed information much of which is not needed in operating the costing system Software systems required to implement ABC can also be expensive

2.1.4 Design of a Performance Based Costing (PBC) system

PBC is designed to provide decision-makers at all levels in the security cooperation community with sufficient cost and programmatic information to manage their organizations Additionally, PBC will help managers better understand macro-level aspects

of the security cooperation business, such as the costs structure underlying the Foreign Military Sales (FMS) administrative rate, the Foreign Military Financing (FMF) administrative budget and the appropriate level of the annual FMS administrative ceiling The need to better understand the costs of conducting the security cooperation operations has been a major concern for a long time Specific objectives of the PBC effort include, but are not limited to the following:

 To be able to calculate total costs and cost by core function(s) for each country program, as well as other cost objects;

 To compare costs for similar processes across the military departments, training commands and military headquarters;

 To calculate cost for each core function to compare the PBB foreign military sales administrative budget and the foreign military financing administrative budget to actual costs;

 To highlight costs in total and by program for all non the foreign military financing functions;

 To provide cost data to each the military department for the purposes of allocating the the foreign military sale

 Administrative budget and the the foreign military financing administrative budget PBC will provide the optimum method for gathering and understanding these costs It will assign resource costs to activities based on the use of resources, and assigns activity costs

to products based on the use of activities

A PBC system focuses on performance (in terms of financial and non-financial) rather than activities themselves, which avoids distorted product cost information produced by the application of traditional costing systems in the virtual enterprise/supply chain environment PBC provides more accurate cost information The basic principle of PBC is

to identify the business areas that add value to an organization and to calculate direct materials, direct labor, overhead, etc., for the purpose of accurately estimating product cost The product cost depends on the value added and costs incurred in those areas The steps required to design a PBC system are explained

- Step 1: Develop objectives for the performance based costing system, a PBC system may

be desirable for a number of reasons A company must carefully define the purpose of the system in terms of system objectives Basic objectives of a PBC system include the following: (a) encourage proactive rather than reactive responses to markets, customers, and partners, (b) promote agility, and (c) create wealth (maximize profits).Other objectives

would of course be necessary and would reflect organizational needs as well as the business environment

- Step 2: Develop PBC team: The second step in designing a PBC system is to develop a team, which should include members from several disciplines and perhaps from different organizations in a virtual organization or supply chain environment Team size depends on the organization‘s size, urgency of completion of projects and the availability of staff The team members should have the full support of top management, which is only possible if top management is convinced that a new cost system is better than the old system, they should be dedicated to the success of the system, and they should have the required knowledge and experience to make a significant contribution to system success

- Step 3: Address issues of organization: A PBC system affects many aspects of an organization and its partners The potential impact of the new system, especially in terms

of its effect on people and organizational relationships, should be considered Many of these organizational impacts of a PBC system are not directly quantifiable, but to ignore them for that reason would be to ignore some of the most important issues, costs, and benefits (Lyne and Friedman, 1996) The particular nature and circumstances of an organization are highly pertinent to an assessment of how suitable would be the adoption

of the PBC methodology

- Step 4: Identification of value-adding areas and critical success factors: The Value Creation Area (VCA) is where a set of processes or procedures add value to products and services (value from standpoint of customers) and hence to an organization They are aggregations of tasks (whether performed by people or machines) to satisfy the needs of customers (whether they are internal or external) (Miller, 1992) The identification of the critical success factors (CSFs) for a PBC system is a basic step because it sets the structure and scope of the system CSF identification forces the accountant to determine what is

actually happening in the relevant areas of a business and ensure that the costing system is built on reality (Innes et al., 1994) It is to be noted that an ―Area‖ can be defined as a set

of activities that occur to create value to customers‖

- Step 5: Identification of CSF drivers in areas: A CSF driver is a factor that has a direct influence on cost and performance pertaining to the CSF or VCA It provides the best explanation of why costs in a CSF cost pool change over time (Kennedy, 1996) A CSF/VCA driver can be defined as any factor that causes a change in the cost of a VCA The primary cost drivers are the link between resources and activities They relate cost from the general ledger to the activities (Berliner and Brimson, 1988) The accuracy of a product cost depends on CSF drivers The cost of each area is an aggregation of the costs

of primary drivers, and ―product cost‖ is an aggregation of the costs of areas These CSF drivers actually indicate how many specific resources an area consumes Different types of resources are required to perform in each area; therefore, every area should be analyzed in detail to create a list of all the primary CSF drivers The estimation of cost for each driver should be very accurate

- Step 6: Critical success factors cost pools: A CSF cost pool is the total cost associated with a particular CSF Each type of CSF has drivers that become cost elements in a CSF pool If all the costs of a CSF are identified by cost drivers, then the costs can be directly charged to the CSF cost pool If some resources are shared by several CSFs, then some measure of apportionment will be necessary The basis of apportionment should reflect as closely as possible the extent to which each activity consumes the shared resource The best estimation of the apportionment rate does not adversely affect the accuracy (Keegan and Eiler, 1994)

- Step 7: Secondary cost drivers: A secondary cost driver is a measure of the frequency and intensity of demands placed on activities by a cost object (Miller, 1996) It is used for

assigning the cost of a CSF to a cost object A cost driver is a variable used as the denominator in rates used to apply CSF costs to product or cost objects (Innes et al., 1994)

- Step 8: Cost object: A cost object can be any customer, product, service, contract, project

or other work unit for which a separate cost measurement is desired The cost object resides at the bottom of the cost assignment view of the PBC system Most companies have two hierarchies of cost objects, one for products and another for customers (Turney, 1996) The ideal cost object is ‗products‘ that are sold to customers Linking the cost of a CSF/ VCA directly to areas and activities that affect the cost of products is the basis for a product cost under a PBC system To operate effectively selected cost drivers should be clearly identified with specific products (Innes et al., 1994)

- Step 9: Implementation the costing of a product with a PBC system should be compared with that of the traditional costing systems (one already in use).There is a risk of increasing the cost of a product due to an increase in the cost of measurement If the system is very detailed, then the accuracy of the system will increase, but at the same, the time measurement cost will increase The cost of implementing and maintaining a complex system can become excessive If the product cost is higher using this new system than with the traditional costing systems (due to measurement cost and complexity of system), then PBC system should be reexamined, starting with identification of value creating areas A simple solution for reducing system cost is a reduction in area details, but this reduction should be made carefully as it will affect the accuracy of product cost

2.2 A framework for measuring performance in new enterprise

2.2.1 Type of performance measurement

Performance measures can be grouped into two basic types: those that relate to results (outputs or outcomes such as competitiveness or financial performance) and those that

focus on the determinants of the results (inputs such as quality, flexibility, resource utilization, and innovation) This suggests that performance measurement frameworks can

be built around the concepts of results and determinants

Measures of performance of a business usually embrace five fundamental, but interlinking areas:

 Money, usually measured as profit

 Output/input relationships or productivity

 Customer emphasis such as quality

 Innovation and adaptation to change

 Human resources

Within the operations area, standard individual performance measures could be productivity measures, quality measures, inventory measures, lead-time measures, preventive maintenance, performance to schedule, and utilization Specific measures could include

 Cost of quality: measured as budgeted versus actual

 Variances: measured as standard absorbed cost versus actual expenses

 Period expenses: measured as budgeted versus actual expenses

 Safety: measured on some common scale such as number of hours without an accident

 Profit contribution: measured in dollars or some common scale

 Inventory turnover: measured as actual versus budgeted turnover

While financial measures of performance are often used to gauge organizational performance, some firms have experienced negative consequences from relying solely on these measures Traditional financial measures are better at measuring the consequences of yesterday's actions than at projecting tomorrow's performance Therefore, it is better that

managers not rely on one set of measures to provide a clear performance target Many firms still rely on measures of cost and efficiency, when at times such indicators as time, quality, and service would be more appropriate measures To be effective, performance yardsticks should continuously evolve in order to properly assess performance and focus resources on continuous improvement and motivating personnel In order to incorporate various types of performance measures some firm's develop performance measurement frameworks These frameworks appear in the literature and vary from Kaplan and Norton's balanced scorecard to Fitzgerald's framework of results and determinants

Kaplan and Norton's balanced scorecard approach operates from the perspective that more than financial data is needed to measure performance and that non - financial data should

be included to adequately assess performance They suggest that any performance measurement framework should allow managers to ask the following questions:

 How do we look to our shareholders? (financial perspective)

 What must we excel at? (internal business perspective)

 How do our customers see us? (customer perspective)

 How can we continue to improve and create value? (innovation and learning perspective)

However, the balanced scorecard is flawed as it does not allow for one of the most important questions of all: What are our competitors doing? (The competitor perspective) Keegan proposed a similar, but lesser known, performance measurement framework titled the "performance matrix." The performance matrix is more flexible, as it is able to integrate different dimensions of performance, and employs generic terms such as internal, external, cost, and non - cost

2.2.2 The importance of measurement performance

Business performance measurement has a variety of uses Bititci, Carrie and Turner (2002) list the following reasons companies‘ measure business performance:

· To monitor and control

· To drive improvement

· To maximize the effectiveness of the improvement effort

· To achieve alignment with organizational goals and objectives

· To reward and to discipline

Simmons (2000) looks at business performance measurement as a tool to balance five major tensions within a firm:

1 Balancing profit, growth and control

2 Balancing short term results against long-term capabilities and growth opportunities

3 Balancing performance expectations of different constituencies

4 Balancing opportunities and attention

5 Balancing the motives of human behavior

Looking at the firm as a complex organism seeking to survive or thrive in its competitive environment, PM systems serve as a key contributor to the perceptual and coordination/control capabilities of the firm Firms use BPM systems to help monitor and control specific activities; to predict future internal and external states; to monitor state and behavior relative to its goals; to make decisions within needed time frames; and to alter the firm‘s overall orientation and/or behavior

2.2.3 Issues with business performance measurement (BPM)

Commentary on PM can be placed along a continuum ranging from views supporting conventional approaches based on a rational view of decision-making at one end to

unconventional approaches that derive from a view based on ambiguity, irrationality or bounded-rationality In addition, commentaries cover a wide range of topics from data integration and quality, best practices to cognitive psychology that address multiple levels

of analysis – including the individual, the workgroup and team, the firm and cultures

Diversity

Perhaps the first and most important issue with Business Performance Measurement (BPM) is its diversity Neely (2002) cites 12 million web sites dedicated to performance measurement, up from 200,000 in 1997, a significant rise in the number of conferences world-wide on the subject and wide-spread adoption of the BSC in large organizations He also cites tremendous diversity in the academic field as well, with experts in accounting, economics, human resource management, marketing, operations management, psychology and sociology all exploring the subject independent of each other In 1998 at a multi-disciplinary conference on performance measurement in the U.K., the 94 papers presented cited 1,245 books and articles, of which less than 10% were cited more than once and only 0.3% were cited more than five times More importantly, Neely argues that there is little agreement on what are the most important themes and theories in performance measurement

problem as well Performance measurement efforts may have more success in measuring activities and outputs, versus outcomes Outcomes require stakeholder or customer perceptions of timeliness, quality and usefulness of services, which involve data not widely gathered (Berman, 2002)

Data quality

BPM systems typically draw their data from data warehouses that in turn draw their data from source enterprise systems and numerous ancillary software and data sources throughout an enterprise Bad data quality is affecting the usefulness for data warehouses

in general The Data Warehousing Institute (TDWI) reports in its study of 647 companies

on data quality reports that 40% of the companies surveyed have suffered losses, problems

or costs due to poor data quality (Eckerson, 2002) Sources of data quality are: lack of validation routines in data entry systems or in system loading; mismatched syntax (first name, last name versus last name, first name), data formats (6-byte versus 4-byte data fields) and code structures (male/female versus m/f); unexpected changes in source systems; the number and complexity of system integration interfaces; poor system design; data conversion errors (Eckerson, 2002)

Strategy and measurement

BPM systems come in two distinct flavors: strategic and operational The balanced scorecard is an example of a strategic BPM system Operational BPM systems help managers with specific operational process control issues that may or may not be directly related to the strategy Numerous researchers have discussed the link between strategy, measurement and success

Measurement plays a crucial role in translating business strategy into results (Lingle & Schiemann, 1996) In the area of executive management, only 6 in 10 executives place confidence in the data presented to them Factors that prevent successful measurement

include fuzzy objectives (more precise objectives needed), unjustified trust in informal feedback systems, and existing entrenched measurement systems Those that measure gain agreement on the strategy, clarity of communication, focus and alignment and organizational culture advantages (Lingle & Schiemann, 1996) The survey included 203 executives, 72 percent top executives 50% of the respondents were from companies with more than 500 employees

Not all measures are good ones to include in a strategic measurement system Strategy and performance measurements need to be intertwined, and as such are likely to be unique for each company Companies should measure how parts of their value chain actually fit together for an overarching advantage instead of relying on process-by-process metrics (Porter, 2002)

Three forces are at work in shaping BPM: increased demands from capital markets for forecasting accuracy; shorter product cycles, quicker market shifts and expanding partnerships; and the growing sophistication and availability of information technology, including ERP software, and improved database and analytic capabilities (Krell, 2002) Despite the widespread understanding of the link between strategy, measurement and success and the need for some balance between internal/external, leading/lagging indicators, internal, lagging metrics dominate performance measurement, rather than external and leading indicators (Krell, 2002)

Successful violations of accepted BPM principals

The widely accepted model of PM adheres to three basic principles: performance should

be clearly defined; performance should be accurately measured; rewards should be contingent upon measured performance (Austin & Gittell, 2002) However, continued acceptance on these three principles may be misplaced Austin and Gittell document cases where firms deliberately violated one or more of these three principles but still exhibited