Measuring SBUs Performance

Recent years have seen heightened concern and focus on measuring and managing organisational performance. Performance management methodologies such as strategy maps, demand forecasting, customer profitability analysis, product profitability analysis, activity-based costing, value based management, balanced scorecards, performance prism, dynamic pricing and driver-based resource capacity planning have proved to be great assets for improving business performance. At the same time, as the global modern economy has evolved, businesses are now being challenged to adapt to new operational models.

Competition in the marketplace has intensified further increasing the need for businesses to respond promptly to customer needs, improve quality and cut costs. As a result, most companies have eliminated management layers and devolved authority and decision-making down through the organisation. Through decentralisation and empowerment, there is conventional thinking that managers and their subordinates will think and act like owners, be willing to take calculated risks and become accountable for their performance. However, the reality is often very different. The results are, more often than not, disappointing.

One of the problems that most companies encounter when they migrate from a centralised to a decentralised organisational model is setting up targets and designing reward systems for the newly formed strategic business units. As the managers of these business units get involved in strategic decision-making, they face the challenge of achieving great results and avoid experiencing a backlash from senior executives. In the end, they are more likely to negotiate manageable targets that appear outwardly tough but are inwardly comfortable. In the long-term, this approach doesn’t help at all to improve organisational performance.

To really benefit from decentralisation and empowerment, you should re-examine how you set targets, measure performance, and design your reward systems. Below are issues that you should consider in order to make measuring performance in this new business model successful:

• Top management commitment: Most change projects start from the top of the organisation and are then cascaded down. Senior executive’s involvement is key to securing buy in because of their power and influence. Management should be able to clearly communicate the reasons and benefits of measuring and improving performance. They should also be able identify and analyse any training and educational needs and address the issues accordingly. Better trained employees often lead to more satisfied and loyal customers and ultimately improved cash flows and shareholder value.

• Definition of your targets: Targets should not only be financial but also strategic. They should be underpinned by clear action plans that cascade down the organisation and promote both ownership and commitment. Most organisations are still glued to the notion of focusing on actual versus budget numbers. In order to get a broader view of business performance, your reports should take a modern balanced scorecard approach that tracks progress in various areas of the business. They should be relative to other strategic business units and external factors.

Furthermore, are your targets demanding or not and how are they linked with the reward systems? Are you sending out a message that promotes winners and punishes losers? Are employees getting all the support they need to improve performance? By using performance management tools such as scorecards to set targets, you will avoid the mistake of focusing on numerical variances that tell nothing about what to do differently in the future. Instead, scorecards help you set targets that will result in real action plans that spell out changes to processes, timescales and responsibilities for implementing them.

• Reward Processes: Compensation systems should be based on company-wide results. This means looking beyond the share price only and monitor performance in other parts of the business and against external competition. Share prices can easily be manipulated and do not tell the whole story of the business. Lessons can be learned from the collapse of Enron, the former US giant oil company and Lehman Brothers, the former Wall Street titan. During their operational time, both companies were great at hitting their numbers, but were poor at walking the talk of their core values. Their emphasis on numbers over company-wide results resulted in managers and employees getting rewarded for failure.

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