Operational drivers and performance measures

Accounting Ahead | Original study resource | accountingahead.com.au

Operational drivers and performance

measures

MODULE 3 | 3.4.1 | STUDENT COMPANION

Operational drivers (revenue, costs and growth) sit beneath the organisation's objectives. A good

measure helps develop and implement strategy, supports decisions, motivates people and signals to

stakeholders. Every result must be judged against a benchmark: a number on its own means very little.

What is the organisation for?

Shareholder view

Organisations exist for their shareholders (Friedman,

1970)

Shareholders provide the risk capital

Judge performance mainly by financial results and

shareholder returns

Often called value-based management

Stakeholder view

Organisations serve many groups with different

interests

Some value can't be measured in dollars

Hard questions: which measures, how to balance

them, what if they conflict?

Example: a charity reducing youth homelessness

Most companies still focus on shareholder returns, but other stakeholders carry growing weight

Nine tests of a good performance measure

Validity

Does it capture what we care about?

Reliability

Same result whoever measures it?

Clarity

Easy to understand?

Low cost

Benefits exceed the cost?

Timeliness

Early enough to act on?

Accessibility

Available to those who need it?

Controllability

Can those judged influence it?

Resists gaming

Hard to manipulate?

Relevance

Consistent with the strategy?

People focus on what they're measured on, so choose measures carefully

GLOBAL STRATEGY AND LEADERSHIP | M3 | 3.4.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Case note: Sears auto centres, 1992

In June 1992, after an undercover investigation, California's consumer affairs regulator accused Sears' auto

centres of selling customers repairs they did not need. Sears had paid its service advisers commissions and set

them sales quotas. Chairman Edward Brennan admitted the goal-setting process had 'created an environment

where mistakes did occur'; within weeks Sears scrapped the commissions and quotas, and it settled that

September. The measures rewarded selling, not fixing.

Sources: Time, June and September 1992; UPI, June 1992; Ordóñez et al., 'Goals Gone Wild', 2009.

Types of measures: one process, many measures (recruitment,

imagined)

Other types include analytical, organisation-specific, and environmental and social sustainability measures.

Type What it measures Recruitment example

Input Time, money and resources consumed Recruiters' hours

Activity How often something happens Interviews held

Output What is produced People hired

Efficiency Outputs compared with inputs Cost per hire

Effectiveness Whether outputs meet standards Share of hires still employed after a year

Impact Contribution to the mission Productivity the new hires add

Judging a trend against benchmarks

80%

85%

90%

95%

100%

Year 1 Year 2 Year 3 Year 4 Year 5

Northgate Industry average Best practice

Improving about 1.25 points a year, but still below average and well short of best practice

Catch-up arithmetic: at about 1.25 points a year (86% to 91% over four years), Northgate needs (97 - 91) /

1.25 = about 4.8 more years to reach today's best practice, which will keep moving.

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Accounting Ahead | Original study resource | accountingahead.com.au

Three kinds of benchmarking

Kind Compares Example

Internal Units within the organisation Branch A's processing time against Branch B's

Competitive The organisation with its direct rivals Our delivery times against our main

competitor's

Functional A process with whoever does it best, in any

industry

A hospital handover against a racing pit crew

Case note: Great Ormond Street Hospital and Ferrari

Doctors at London's Great Ormond Street Hospital, concerned about errors when children were handed over

from the operating theatre to intensive care, visited the Ferrari Formula One team to learn how its pit crew

managed fast, high-pressure handovers with clear roles, set sequences and a single leader, and also consulted

airline pilots. They redesigned their own handover. A 2007 study of 50 handovers found that average technical

errors fell from 5.4 to 3.2 per handover, and missed items of information from 2.1 to 1.1.

Source: K. Catchpole et al., 'Patient handover from surgery to intensive care: using Formula 1 pit-stop and aviation models to improve

safety and quality', Paediatric Anaesthesia, 2007.

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 3 | 3.4.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Test a proposed measure

Imagine a wealth advisory firm that wants to grow long-term client relationships. It proposes to judge each

adviser by the number of client meetings held per week.

Test Does the measure pass? Why?

Validity

Reliability

Clarity

Low cost

Timeliness

Accessibility

Controllability

Resistance to gaming

Relevance

Question 2 - Classify the measures

Measure for an imagined regional hospital Type of measure

(a) Nursing hours per patient day

(b) Number of operations performed

(c) Cost per operation

(d) Share of patients readmitted within 28 days

(e) Fall in heart disease deaths in the region

(f) Number of outpatient appointments held

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Judge the result

Imagine an insurer whose customer satisfaction has risen from 78% to 84% over three years. Its internal target

is 85%, the industry average is 86% and the best performer achieves 93%. Judge its performance, using both

the trend and the benchmarks, and say what you would recommend.

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | 3.4.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Client meetings per week

Test Assessment

Validity Weak: meetings don't show relationship quality or client outcomes

Reliability Fair, if meetings are logged consistently

Clarity, low cost, timeliness,

accessibility, controllability

Pass: clear, cheap to collect from calendars, available weekly, easy to share and

within advisers' control

Resistance to gaming Poor: advisers could hold short, pointless meetings

Relevance Weak link to long-term relationships

Better: combine client retention, client satisfaction, growth in funds under advice and complaint rates, with

meetings tracked only as a supporting activity measure.

Question 2 - Hospital measures

Measure Type

(a) Nursing hours per patient day Input (or an efficiency ratio of input to activity)

(b) Operations performed Output

(c) Cost per operation Efficiency

(d) Readmissions within 28 days Effectiveness (quality of outcome)

(e) Fewer heart disease deaths Impact

(f) Outpatient appointments held Activity (or output)

Question 3 - Insurer's customer satisfaction

Trend: improving, about 2 points a year. Benchmarks: just below its own target (85%), below the industry

average (86%) and well short of best practice (93%). It is improving but still a relative weakness.

Recommendation: find out what drives the best performer's satisfaction (functional or competitive

benchmarking), target the main causes of dissatisfaction, and set a stretch target that closes the gap to the

industry average within a year, then moves towards best practice.

GLOBAL STRATEGY AND LEADERSHIP | M3 | 3.4.1 | WORKED ANSWERS

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