Per Measurment

8
PERFORMANCE
MEASUREMENT AND
EVALUATION
LEARNING OUTCOMES
After studying this chapter, you will be able to:

❑ Explain the role of performance measurement and control systems in value
creation, strategy implementation, and monitoring performance to improve
strategies
❑ Discuss, traditional and non-traditional approaches to performance
measurement
❑ Calculate and interpret non-financial performance indicators and suggest
methods to improve the performance indicated
❑ Compute and evaluate performance measures relevant in a divisionalised
organisation structure including return on investment, residual income and
economic value added
❑ Explain the causes and problems created by short-termism and financial
manipulation of results and suggest methods to encourage a long- term
view
❑ Analyze and evaluate performance and suggest ways for improving
financial and non-financial performance
© The Institute of Chartered Accountants of India

8.2 STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION
CHAPTER OVERVIEW
RESPONSIBILITY ACCOUNTING
Responsibility accounting is the collection, summarization, and reporting of financial information
where individual manager is held accountable for certain costs, revenue, or assets of the firm. The
information is about the decision centers throughout the organization. It can also be call ed
profitability accounting or activity accounting.
Responsibility accounting is apt where top management has delegated authority to make
decisions. The idea behind responsibility accounting is that each manager’s performance should
be judged by how well he or she manages those items under his or her control.
Performance measurement is directly linked to the organisational structure of a business.

PERFORMANCE MEASUREMENT AND EVALUATION 8.3
Test Your Understanding

X and Y limited are engaged in the manufacturing of bearing balls. The organisation structure of
both firms is different from each other. In X limited decision making power is centralized with top
management only, whereas in Y limited power is decentralised.
Identify which among the X and Y limited, will be benefited most from the implementation of
responsibility accounting and segment reporting?
Hint
The key to effective decision making in a decentralised organisation is responsibility accounting,
means holding manager responsible for only those things that are under their control. Y will be
more benefited from the implementation of responsibility accounting and segment reporting.
Organisational Structure
Organisational structure outlines the roles of individuals in the organisation and decide the way in
which authority and responsibility is allocated among them and how they are coordinating with
each other to attain organisational objectives.
Note- If clear lines of responsibility cannot be determined, it is nearly impossible that responsibility
accounting can be implemented effectively.
Performance measurement is also directly linked to the organisational structure of a business.
Organisational
Structures
Entrepreneurial Functional Divisional Matrix
Each type of organisational structure has its own set of pros and cons, apart from specific
implications on performance measurement and appraisal.
Entrepreneurial Organisational Structure
Since the entrepreneur (owner) is often expected to have specialized knowledge of produ ct (be it
good or service), hence in an entrepreneurial structure; the management & control revolves
around such owner only. In absence of professional management, such an entrepreneur owner act
in a dual capacity; both as owner and manager. This structure prevails in service entities or in the
businesses which are in their early days.
Functional Organizational Structure
A functional organizational structure forms when a business departmentalizes, according to the
business functions such as production & operations, marketing, and finance. Low cost and
standardization of process are among advantages, but the conflict of int erest among the functional
manager is a major shortcoming.
This organizational structure is appropriate for small and medium-sized businesses which are
working in a relatively stable environment and operates in a few products and locations.
In functional organizational structure pricing, product mix and output decisions will be made by

central management, consequently the functional managers in a centralized organization will have
far less independence than divisional managers.
Note – IC, CC and RC are abbreviations of Investment, Cost, and Revenue Centre respectively.
Divisional Organizational Structure
An organization with a divisional organizational structure has various divisions operating
autonomously (may term as strategic business unit (SBU), only if capable to operate
independently) as a business under a broad corporate framework according to geographical areas,
markets, or products and services.
Note- In divisional structure too, some functional departments are working horizontally throughout
the organisation (known as centralized/corporate function or shared/support services) for example
Accounts and HR & Payroll etc. (not shown below)
Generally, this type of organizational structure leads to a decentralization of the decision -making
process. Using this structure, division heads are free to set selling prices, choose which market to
sell in, make product mix and output decisions, and select suppliers; he nce autonomy is high.
This type of organisation structure is fit for growing companies which are diversifying, because it’s
easy to bolt on another division.
Note – IC and CC are abbreviations of Investment and Cost Centre respectively.

Matrix Organizational Structure

In a matrix structure, cross-functional teams are formed to reap the benefits of decentralisation,
speedy decisions and early resolution of prospective disputes or issues, because representatives
of different functions are part of team. Cross-functional team contain staff from different functions
and who are responsible to achieve a specific target unitedly.
The shaded staff required to report twice, once to their functional lead and another to project
lead/manager. Conflict of interest is expected, but availability of cross-functional skills is a key
advantage.
Responsibility Centres and Its Performance
According to Deakin and Maher ‘a responsibility centre is a specific unit of an organisation
assigned to a manager who is held responsible for its operation and resources’.
To enhance the application of responsibility accounting in decision making, it is essential for an
organisation to attach a level of responsibility (decentralised power/s) to different
divisions/departments and designate as either of cost, profit, revenue or investment centre.
Cost or Expense Centres
Cost or Expense Centres are responsibility centres where
the manager ‘has control over the costs’ (other than
those of capital nature) owning to function, for which he/
she is responsible. For example, the paint department in
an automobile firm. Performance report of cost centre is
focused on budgeted and actual costs (cost in term of
quantity of input resource (may be money, material, man-
hours) to appraise the performance. Cost variances are
relevant measures.
Note- Cost centre can use both cost control (cost containment – Standard costing and budgetary
control) and cost reduction (cost management – such as Target Costing, Kaizen) tools and
techniques.

Revenue Centres
Revenue Centres are the responsibility centres where
the manager has ‘control over the generation of
revenue from operation’ with no responsibility for
costs. To illustrate, booking counter of any Airline
Company is revenue centre.
The key measures used to appraise performance are
sales variances.
Profit Centres
Profit Centres are the responsibility centres where the
manager of such a centre or division has ‘control on
both revenue and costs’ (other than those, which are
of capital nature) earned out of and incurred on assets
assigned to the division respectively. To illustrate, the
facility of canteen can be considered as the profit centre.
Thus, performance is measured in terms of the
difference between the revenues and costs.
Note - Internal transfer pricing policy has a significant effect on the performance of profit centre.
Divisional transfer pricing is discussed in detail in the next chapter.
Investment Centres
Investment Centres are the responsibility centres where the manager has responsibility for not just
the revenues and costs relating to the centre, but also the assets that cause these costs and
generate these revenues and the investment decisions relating to disposal and acquisit ion of
assets.
The performance of an investment centre can be measured by appraising profit/return in relation to
investment base of centre, ROI, RI, and EVA are some prominent financial performance measures.
Investment centre can be referred to as strategic business units (SBUs). Mind it each division is
not SBU. For being SBU capabilities to work independently and in isolation are essential.
Practical Insight
SBUs
ITC Limited is a diversified group dealing in 13 business ranging from FMCG (Comprises 7 business
- Cigarettes & Cigars, Foods, Personal Care, Education & Stationery, Lifestyle Retailing, Safety
Matches, and Agarbattis & Dhoop), Hotels, Paperboards & Specialty Papers, Packaging, Agri-
Business, Information Technology, and ITC Brand world. ITC has 11 divisions but has only four
designated SBUs, these are Personal Care Products, Education and Stationery Products, Packaging
& Printing, and Matches & Agarbattis.
(Source - https://www.itcportal.com/)

Concept Insight
Classification of Responsibility Centre
It noteworthy that the formation of separate divisions shall lead to the delegation of authority,
but the degrees of such delegation will not always same. It is further important to note that
classification of a responsibility centre into cost, revenue, profit and investment will be based
upon the delegated responsibility (& authority). Certain function- based responsibility centre will
never change its nature, but others can; means a responsibility centre may be capable to
change its nature (due change in organisation structure and delegated responsibility and
authority). For example, a faculty department is the university is cost centre, but if it starts
conducting MDP (management development programme) and undertake research and
consultancy projects may become a profit centre.
Example
A transport department of a five-star luxury hotel has a total of 5 cars in the operation to pick and
drop its guest. The budgeted cost is `2,62,500 out of which `75,000 is fixed in nature for 25,000
kms. of run in a quarter. Fixed cost is committed in nature and unavoidable to the whole extent.
During the quarter immediately closed, kms. covered by car was 23,600 and cost incurred was
`2,54,750. The car can be hired from outside at `12 per km.
Performance report of the transport department as Cost Centre, responsible to operate five cars→
Particulars `
Variable cost (working note) (`7.5 × 23,600 kms.) 1,77,000
Add: Fixed cost 75,000
Cost allowed to be incurred (for 23,600 kms.) 2,52,000
Cost actually incurred (to run 23,600 kms.) 2,54,750
Cost Variance 2,750 (adverse)
Working Note – Budgeted variable cost per km.
Particulars `
Budgeted cost 2,62,500
Less: Fixed cost 75,000
Budgeted variable cost 1,87,500
Budgeted variable cost per km. (`1,87,500/25,000 kms.) 7.5
Performance report of the transport department as a Profit Centre at an output level of 23,600 Kms→
Particulars `
Cost of hiring (`12 × 23,600 kms.) 2,83,200
Cost actually incurred (to run 23,600 kms.) 2,54,750
Profit Variance 28,450 (favorable)

Example
“Z” manages a staff of over 75 persons and a budget of close to a million HKD per year. He is
responsible for maintenance of all buildings and equipment at a large educational institute.
However, any rebuilding, renovation, or modernization plan is budgeted and administered
separately. “Z”’s responsibilities comprise negotiating with contractors, selection and evaluation
of staffs, choosing the types of landscaping, and so on. “Z”’s services, however, are not billed
out to the user departments within the institute. The performance of “Z” should be evaluated
based on a cost centre. Though “Z” delivers a suitable service, there is no direct influence on
revenue. Further, “Z” does not affect prices or determine the level of output. “Z”’s task is to
maintain the buildings to particular quality level within allowed costs. This is a main essence of a
cost center. In addition, the institute should use a combination of financial and non -financial
performance measures to evaluate “Z”’s performance. Focusing on financial measures alone is
not worthwhile as “Z” can always defer maintenance to achieve budgeted targets. However, firm
is required to make sure that the budget is not over-spent by a lot. Non-financial measures such
as time to respond to complaints and feedback score on maintenance appear useful way to
make sure that “Z” is providing the desired service quality.
PERFORMANCE MANAGEMENT SYSTEM

Performance management shall be considered as an essential aspect of management accounting.
Performance management may be seen as four-stage solution to take any organisation towards
sustainability.
Firstly determine the organisational structure and also ensure that the
structure must be appropriate and best fit
Evaluate the degree of delegation of control and also identify the

responsibilty centres
Establish the performacne measures (both financial and non-financial)

and target for each measure
Review the performance (with help of KPI Dashboard) and take corrective
actions (if required)
Aspects related to the first two phases are already covered in the previous heading, now it’s turn to
study the performance measure (both financial and non-financial), based upon which performance
can be measured.

DIVISIONAL PERFORMANCE MEASURES

Performance management system plays a key role in deploy
strategy, but it has a prerequisite and that is; measure the
existing performance. As already mentioned in the first
section of this chapter that performance measurement is
directly linked to the organisational structure. If organisation
is divisionalised then performance also needs to be
measured at the division level for each division. It is
obvious, that to measure the performance of division certain
performance measures or indicators need to be established.
It is important here to note that if any organisation opt for divisional structure, then there are
verities of issues, which need to be addressed while establishing performance measures to
determine performance. These issues are such as inter-dependence of divisions, goal congruence,
allocation of costs of shared services or head office, and internal transfer pricing poli cy and etc.
These factors affect the divisional performance substantially. Divisional transfer pricing and
Allocation of shared cost using ABC/ABM are discussed in detail in chapters 9 and 10 respectively.
The rest will be discussed in this chapter at an appropriate place.
A good performance measure should–
▪ Provide the reasonable incentive to the divisional manager to make decisions which are in
the best interests of the overall company (goal congruence).
▪ Only include factors for which the divisional manager can be held accountable.
▪ Recognise the long-term objectives as well as the short-term objectives of the organisation.
Performance Measures (or indicators)
Financial Measures Non Financial Measures & tools are
Return on Investment (ROI) Balanced Scorecard
Residual Income (RI) The Performance Pyramid
Economic Value Added (EVA) Building Block Model
The Performance Prism
Triple Bottom Line (TBL)
Note- Tools mentioned under the Non-financial measures category also include financial indicators
or prospective to a certain extent (as part of the wider picture).

Concept Insight
Measure vs. Indicator
Despite the fact word measure and indicator are used interchangeably, but both are not the
same and it’s important to consider the difference between indicator and measure before
moving ahead.
The comparative conclusions need to be drawn from the indicator as they only indicate (as
signal or pointer or index) but don’t actually measure. Whereas measure is meant to quantify.
To illustrate, degree Celsius is a measure of temperature, which becomes an indicator of
whether (is it hot or cold). Similarly, the percentage rate (of return) is the measure, which
indicates business profitability.

Is considering pure financial performance measures/ indicators sufficient or not?
Hint
Since financial performance measures such as ROI or EVA are profit-oriented and can inspire
managers to become short-term oriented, but the strategy needs to be sustainable apart from
being just profitable; hence in order to overcome the inadequacy and unjustifiable nature of
financial performance indicators, non-financial performance indicators need also to be applied.
Non-Financial Performance Indicators are sustainable action-based indicators. For example,
employee training will increase the profit & let them feel empowered, putting effort in research
and development will result in a high brand image & high intellectual property right.
Pros and Cons of the use of Performance Measures

David Otley, Jane Broadbent, and Anthony Berry suggest the pros and cons of the use of
performance measures the benefits are–
▪ Develops agreed measures of activity.
▪ Define and clarifies the objectives of the organization.
▪ Helps in the setting targets for managers.
▪ Greater understanding of the process.
▪ Facilitate comparison between divisions.
▪ Promotes accountability to stakeholders.
Poorly designed performance management system (where performance measures are not
appropriately chosen and applied) may result in wrong signaling. Wrong signals may lead to
inappropriate action and decisions; hence it is important to identify and overcome the problems
associated with the use of performance measures.

The major problems are–

Tunnel Vision
In literal means tunnel vision is the retention of only central vision wherein peripheral vision is lost.
In similar way business managers may have central focus on few performance measures or area
which will results in loss of observation on other important areas for which either performance
indicators not clearly defined or not part of performance management system.
Sub-optimization
Sub-optimisation occurs when business managers pursue their individual objectives at the
expense of overall objective of organisation. Hence sub-optimisation leads to focus on few and
narrow objectives only.
Myopia
Myopia is the tendency wherein the focus is on short-term measures, which neglecting the long-
term measures; hence the long-term performance of organisation. Business managers are largely
concerned (while making business decision) with the performance of business over that period
only, for which they are expected to have an association with the organisation, hence their
decisions are not always sustainable in nature.
Ossification
Ossification is a kind of paralysis which is resultant from unwillingness of business managers to
change the performance measures which are currently in practice, despite these measures
become outdated. Ossification is simply ignoring the dynamics of business environment.
Irrelevance
Irrelevance can said to be in existence when business managers trying to attain the desired
indicators but relaying upon the irrelevant measures to said indicators.
Gaming
Gaming is basically a deliberate attempt to distort the measures to be in an advantageous position.
It includes the altering of variable to influence the measured performance.
Misrepresentation
Misrepresentation involves the use of creative reporting to depict that performance is acceptab le,
whereas in actual it is not. It is different from gaming because it is related to communicating the
incorrect performance rather distorting the measures/indicators.
Misinterpretation
Misinterpretation is the failure to assign the appropriate and deserving interpretation either with the
intention to deceive or due to inability to decode the complexity involved in information and
environment in which such information needs to be interpreted.

FINANCIAL PERFORMANCE MEASURES

In order to be a sustainable business, the essentials are profitability, survival, and growth. Since
the financial performance measures/indicators, can be considered as best indicators of profitability
and easy indicators of growth and survival (solvency and liquidity); hence must be part of
performance measurement metrics. These are–
Return on Investment (ROI)
DuPont, an American company during the 1920s become the first to recognise the need to
consider the level of investment along with the income generated through such investment, while
appraising the performance of the investment centre. Since then many orga nizations instead of
focusing purely on the absolute size of a division’s profits, have started focus on the ROI of a
division.
“ROI expresses divisional profit as a percentage of the assets employed in the division. Assets
employed can be defined as total divisional assets, assets controllable by the divisional manager
or net assets.”
ROI is a common measure and thus is ideal for comparison across corporate divisions for
companies of similar size and in similar sectors. But has limitation too, It may poss ible that
divisional ROI can be increased by those actions that will reduce the overall ROI of the company
and conversely the actions that decrease the divisional ROI may make the company as a whole
better off.
In other words, evaluating divisional managers on the basis of ROI may not encourage goal
congruence. (it’s already mentioned in the beginning of topic ‘Divisional Performance Measures’
that certain issues will arise due to establishing measures at a divisional level which need to be
addressed and goal congruence is one among these)
Example
Division α Division β
Available Investment Project ₹20 lacs ₹20 lacs
Controllable Contribution ₹2.0 lacs ₹1.4 lacs
Return on the Proposed Project 10% 7%
Presently the ROI of Divisions 13% 5%
Overall Cost of Capital is 8%
The manager of division α would be unwilling to invest the additional ₹20 lacs because the return
on the proposed project is 10% and this would decrease the present ROI of 13%.
On the other hand, the manager of division β would wish to invest the ₹20 lacs because the return
on the proposed project of 7% is in excess of the present ROI of 5%, and it would increase the
division's ROI.

The managers of both divisions would make decisions that would not be in the best interests of the
company. The company should accept only those projects where the ROI > Cost of Capital (8%),
but the manager of division α would reject a possible return of 10%, and the manager of division β
would accept a possible return of 7%.
This is a situation of sub-optimisation. ROI can therefore lead to a lack of goal congruence.
Note- No doubt ROI is easy to calculate as all the requisite information is readily available (if
accounts are prepared at divisional level) but research shows poor correlation between ROI and
shareholder’s wealth and can be distorted by accounting policies.
Residual Income (RI)
To overcome some of the dysfunctional consequences of ROI (lack of goal congruence), the
residual income approach can be used for the purpose of evaluating the performance of divisional
managers.
“Residual income is excess of controllable profit over a predetermined organisation -wide minimum
hurdle rate (cost of capital charge) on the investment controllable by the divisional manager. So
higher the residual income means better the performance.”
For evaluating the economic performance of the division residual income can be defined as
divisional profit contribution less a cost of capital charge on the total investment in assets
employed by the division.
If residual income is used to measure the managerial performance of investment centres, there is
a greater probability that managers will be encouraged, when acting in their own best interests,
also to act in the best interests of the company.
Returning to our previous example in respect of the investment decision for divisions α and β, the
residual income calculations are as shown further;
Division α (in ₹ lacs) Division β (in ₹ lacs)
Proposed Investment ₹20.00 ₹20.00
Controllable Contribution ₹2.00 ₹1.40
Cost of Capital (8%) ₹1.60 ₹1.60
Residual Income ₹0.40 – ₹0.20
This calculation indicates that the residual income of division α will increase and that of division β
will decrease if both managers accept the project. Therefore, the manager of division α would
invest, whereas the manager of division β would not. These actions are in the best interests of the
company as a whole.
Being an absolute measure, the residual income is not capable to be used as a tool for making the
comparison between the divisional performances of different sizes. It is obvious, that a large
division is more likely to earn a larger residual income than a small division. (See the next
example)
To overcome this deficiency, targeted or budgeted levels of residual income should be set for each
division that is consistent with asset size and the market conditions of the divisions.


Differentiate ROI and RI?
Hint
▪ In the case of ROI division managers are computing and comparing the return of proposed
investment with the existing rate of return of respective division, whereas in the case of RI the
minimum rate of return (cost of capital) is used to compute residual income.
▪ ROI is a relative measure, whereas RI is an absolute measure.
▪ In case of ROI, the decision was taken based upon a comparison between two (existing and
proposed) earning rates, whereas in the case of RI contribution (earning) is compared with cost.
Hence, it may possible ROI and RI may give contradictory results (see the next example).
Example
The following data pertain to two divisions. W 1 and W 2, of a large Shipping Company.
W1 (₹) W2 (₹)
Profit 1,20,00,000 31,20,000
Investment 9,60,00,000 1,56,00,000
Cost of Capital at 10%
Note - This example shows that RI is subject to a size effect, but ROI is not. The larger size for the W1
Division (which is more than 6 times that of the W 2 Division) overcomes its lower profitability, as
measured by ROI. Thus, RI is not a good way to compare divisions that differ greatly in size.
Workings
W1 W2 Remark
ROI 12.50% 20.00% W2 division has the
(₹1,20,00,000 / ₹9,60,00,000) (₹31,20,000 / ₹1,56,00,000) higher ROI.
RI ₹24,00,000 ₹15,60,000 W1 division has the
(₹1,20,00,000 – 0.1 × ₹9,60,00,000) (₹31,20,000 – 0.1 × ₹1,56,00,000) higher RI.
It can be clearly seen W 2 which outperform the W 1 in measure of ROI, has the disadvantage of
size effect which is a shortcoming of RI.
Illustration 1
LNG Limited has three divisions. Its desired rate of return is 14%.
The operating assets and income for each division are as follows:
Divisions Operating Assets ( ₹ ) Operating Income ( ₹ )
L 19,20,000 3,45,600
N 10,50,000 1,73,250
G 12,30,000 1,67,280
Total 42,00,000 6,86,130
LNG Limited has ₹ 8,00,000 of additional cash to invest in one of its divisions.

The divisional managers have identified investment opportunities that are expected to yield the
following ROIs–
Divisions Expected ROIs for additional investment
L 16%
N 12%
G 15%
Required
(i) CALCULATE ROIs at present for each division and STATE which division manager is
currently providing the highest ROI.
(ii) Based on ROI, IDENTIFY the division manager who would be the most eager to accept the
additional investment funds.
(iii) Based on ROI, IDENTIFY the division manager who would be least eager to accept the
additional investment funds.
(iv) STATE the division that offers the best investment opportunity for LNG limited.
(v) DISCUSS the conflict between requirements (ii) and (iv) above.
(vi) ADVISE how the residual income performance measure could be used to motivate the
managers to act in the best interest of the company.
Solution
(i) Present ROI of each division
Operating Operating
Divisions ROI
Assets (₹) Income (₹)
L 19,20,000 3,45,600 18%
N 10,50,000 1,73,250 16.5%
G 12,30,000 1,67,280 13.6%
The division manager of L division is currently providing the highest ROI of 18% among the
three divisions.
(ii) The manager of division G would be most eager to accept the additional fund of ₹ 8,00,000
because of ROI of the proposed investment is more than the present ROI of 13.6% and the
acceptance of the proposal would increase the division’s ROI.
(iii) The managers of division L and N, both would be reluctant to invest the additional fund of ₹
8,00,000. Because the return on the proposed project is 16% for L and 12% for N against
their existing ROI of 18% and 16.5% respectively.
However, the manager of division N would be least likely to accept the additional investment
because the proposed ROI of the project is 4.5% less than present ROI.
(iv) Division L offers the best investment opportunity of 16% for LNG limited.
(v) Lack of goal congruence between divisions and organisation as a whole is the reason. The
divisional managers are forced to choose between the best interests of their division
(because their individual performance is linked to division performance) and the best
interests of the company as a whole.

In requirement (ii) decision of mangers of division G is in the best interest of the division but
at the expense of their company, resulting sub optimisation; whereas in requirement (iv)
decision is taken from the perspective of LNG limited as a whole.
(vi) To avoid sub optimisation, the divisional performance can be measured using Residual
Income (RI). Since under RI divisional managers don’t reject the proposed projects with lower
returns than existing rate of return of division, hence in the interest of organisation as a whole
division is ready to accept the investment projects with the returns equal to or greater than
the predetermined required rate of return (i.e. 14%). RI being absolute measures have
shortcoming too that performance of divisions with different sizes can’t be compared.
Economic Value Added (EVA)
Joel Stern and Bennett Stewart the founders of New-York based consulting firm ‘Stern Stewart &
Company’ during the 1990s promoted the EVA. EVA is a performance measurement system that
aims to overcome the limitations of other divisional performance measures which are based upon
accounting profit. The major shortcomings of relying upon accounting profit include –
▪ Profit ignores the cost of equity capital. Companies only generate wealth when they generate
a return in excess of the return required by providers of capital – both equity and debt. In
financial statements, the calculation of profit does take into account the cost of debt finance,
but ignores the cost of equity finance.
▪ Profits calculated in accordance with accounting standards do not truly reflect the wealth that
has been created, and are subject to manipulation by accountants.
An alternate to accounting profit is economic profit and EVA is a measure of economic profit.
Calculation of EVA
Economic Value Added is a measure of economic profit. Economic Value Added is calculated as
the difference between the Net Operating Profit After Tax (NOPAT) and the Op portunity Cost of
Invested Capital. This opportunity cost is determined by multiplying the Weighted Average Cost of
Debt and Equity Capital (WACC) and the amount of Capital Employed.
EVA = NOPAT – WACC × Capital
Where- NOPAT means net operating profit after tax. This profit figure shows profits before taking
out the cost of interest.
Two approaches to adjusting for interest are taken.
▪ Start with operating profit, then deduct the adjusted tax charge. The tax charge should be
adjusted because it includes the tax benefit of interest. Since interest is a tax-deductible item,
having interest in the income statement means that the tax charge is lower. Since we are
taking the cost of interest out of the income statement, it is also necessary to remove the tax
benefit of it from the tax charge. To do this, multiply the interest by the tax rate, and add this
to the tax charge, or
▪ Start with profit after tax, and add back the net cost of interest. This is the interest charge
multiplied by (1 – rate of corporate tax).

Example
The following information is available for the division X of Xu ltd:
Net operating profit before interest and taxes 7,500
Depreciation expenses 2,500
Change in net working capital 1,250
Capital expenditure 1,000
Invested capital 12,500
WACC 8%
Tax Rate 30%
EVA can be calculated as NOPAT minus the capital charge on invested capital. In this case,
NOPAT is equal to net operating profit before interest and taxes `7,500 minus taxes `2,250
(`7,500 × 30%), which is equal to `5,250. EVA is then equal to `4,250 (`5,250 – `12,500 × 8%).
Limitations of EVA
EVA too has certain limitations, important among them are–
▪ EVA is also, an absolute measure hence not free from shortcomings like comparison
between performances of enterprises of different size is not possible, and
▪ Largely based upon historical data.

May you enlist the instance when will EVA increase?
Hint
EVA will increase if any of the following initiative either individually or in any combination
applied by the organisation –
▪ Operating profits can be made to grow without employing more capital, i.e. greater
efficiency.
▪ Additional capital’s invested in projects that return more than the cost of obtaining new
capital, i.e. profitable growth.
▪ Churn out capital from those investment/ projects which yield at a rate less than cost of
capital, i.e. liquidate unproductive capital.
Illustration 2
XYZ Ltd. provides you with the following financial information as at 31st March 20 20.
(` in lakhs)
Share Capital 981.46
Reserves and Surplus 1,313.62
Long Term Debt 144.44
Trade Payables 20.38

Additional information provided is as follows:

(i) Profit before interest and tax is ` 2,202.84 lakhs
(ii) Interest paid is ` 13.48 lakhs.
(iii) Tax rate is 30%
(iv) Cost of equity = 12.42% and cost of debt = 6.53%
Required
CALCULATE Economic Value Added of XYZ Ltd.
Solution
EVA = NOPAT – WACC × Capital Employed
Capital Employed
= `981.46 L + `1313.62 L + `144.44 L
= `2,439.52 L
WACC =  981.46 + 1,313.62   12.42% +  144.44   6.53%
 2,439.52   2,439.52 
= 12.07%
NOPAT = [PBIT- Interest - Tax] + Interest (net of tax)
` in lakhs
PBIT 2,202.84
Less: Interest (13.48)
PBT 2,189.36
Less: Tax @ 30% (656.81)
PAT 1,532.55
Add: Interest (net of tax) [13.48 × (1 - 0.30)] 9.44
NOPAT 1,541.99
EVA = NOPAT – WACC × Capital Employed
= `1,541.99 L– 12.07% × `2,439.52 L = `1,247.54 L
Practical Insight
EVA Practices
HUL computes EVA and report the same in the annual report. HUL considered 7.02% as pre-tax
rate of the cost of debt and 9.11% as the cost of equity to compute WACC for the year 2019-20.
Cost of equity has been computed using Capital Asset Pricing Model (SML) pronounced by
William Sharpe in 1963 considering risk-free return equivalent to yield on long term Government
Bonds (taken at 6.14% for 2019-20), market risk premium (taken at 4.47%), and beta variant for
the company (taken at 0.664).
(Source – HUL Annual Report 2019-20)

NON - FINANCIAL PERFORMANCE MEASURES

As mentioned earlier in this chapter financial measures possesses the significant amount of
shortcomings such as short-term orientation, historical in nature, internally focused only (not
comprises entire picture), and window dressing, which make them unfit for an effective
performance management system, especially in isolation. Since profitability is important vis -à-vis
stability, hence a balance need to be maintained between both the financia l as well as non-
financial measures (so that financial performance can be measured, but in the context of long -term
viability).
Tools like balanced scorecard, performance pyramid, building block model, and performance prism
is capable to serve the purpose because these encompass non-financial performance measures
apart from financial performance measures.
Test your Understanding

What are the difficulties and shortcoming of using and interpreting qualitative information (non –
financial performance measures/ indicators)?
Hints
▪ Quantitative information is capable to influence the decision.
▪ Traditionally information system recognized quantitative data more quickly and easily.
▪ It is difficult to assign meaning and take interpretation out of qualitative data because
subjectivity is involved.
▪ Difficult to compare as measures are not readily available.
▪ Qualitative information may be incomplete and dynamic of qualitative information is high.
▪ The cost of collection and sorting may be very high.
Case Scenario
Lite automobile limited (LAL) is one of leading automobile assembly part manufactures of the
country. In order to manage the performance of LAL, the CMD in latest board meeting shown
his willingness to apply non-financial performance indicators (NFPI) in addition to financial
performance indicators.
CEO conducts meeting thereafter with functional heads. Some of the functional heads are
concerned with the scope of the NFPI as part of performance management system. During the
meeting Chief HR Lead of company raise his concern over the utility of NFPI to monitor and
control the human resource. Chief Operating Officer also raise his concern on the manner how
NFPI can ensure quality in the products and services. Chief Public Relation Officer also
concerned how NFPI will improve the brand equity.

Required
Office of CEO hired you as management consultant, for designing and effective implementation
of performance management system which also consider NFPI. CEO asked you to briefly
EXPLAIN the scope of non-financial performance indicators in regard to only 3 functions whose
functional heads raised the concern.
Solution
The performances management system, which also consider non-financial performance
indicators in addition to financial performance indicators; capable to ensure sustainable
performance in all functional areas; hence its scope is organisation wide. In regard to three
functional areas specifically mentioned in the case scope shall be–
Scope of NFPI
Management of Human Product and Service Brand Awareness &

Resources Quality Company Profile
Monitor & Control staff in Qualitative Product and In term of;

term of; service; Value of brand with
Staff Turnover that can beat rival's high loyalty
Absente Rate product Preceived Quality
Result of Job & R&D image
Satisfaction Survey Full-fill need of customer Brand awareness
Human resources
It is the people who actually create the organisation through processes, hence human resources
are a significant element of any organisation. If they performance well, the entire organisation
automatically performs well; hence measures such as staff turnover, absenteeism, job
satisfaction, and offer letter accepted shall be part of.
Quality of product and service
What make any business distinct from others, it is largely the value which it’s products or
services capable to create for the consumers; quality is important determinant of value. Hence ,
the following performance measures (owning to quality) can be part of performance metrics -
▪ How much value the product is creating currently?
▪ Where do product offer in comparison that of competitor?
▪ Is product capable to generate further superior performance and scope of innovation?
Brand equity
Non-financial performance measures consider the brand equity (value of the brand) as one of
the significant performance measures. Brand value is largely based upon factors like customer’s
awareness & loyalty which includes consumer behaviour also perceived quality, stakeholders’
expectation and organisation ability to meet them, and factors like patents and trademarks etc.

Balanced Scorecard
In today’s business environment information becomes a vital element and to gain competitive
advantage over the peers, it cannot be denied. In this era of information age competition, a
company cannot survive just by injecting huge capital investment in new technology for physical
assets only or by excellent management of financial assets and liabilities. In this information age
both manufacturing and service organisation needs new capabilities for competitive success.
Merely investing in and managing physical, tangible assets is not enough but an organisation must
be able to mobilise and exploit its intangible or invisible assets which in turn becomes a decisive
factor.
Intangible assets enable an organisation to:
▪ Maintain and further development in customer relationships to retain loyalty of existing
customers and to serve new market/ customer segments effectively and efficiently.
▪ Introduce products and services as per the desire of targeted customer and market
segments.
▪ Produce customised high-quality products and services economically with short gestation
periods.
▪ Mobilise employee skills and motivation for better and consistent deliberation in process
capabilities, quality, and response times.
▪ Deploy information technology, data bases and effective management information systems.
The balanced scorecard is a method which displays organisation’s performance into four
dimensions namely financial, customer, internal and innovation. The four dimensions acknowledge
the interest of shareholders, customers and employees taking into account of both long-term and
short-term goals.
Kaplan and Norton classified performance measures into four business ‘perspectives’:
Financial Perspective: “How Do We Look to Shareholders?”
In this step manager of a division or a unit, links its business objectives to the corporate strategy of
the company as a whole. Financial performance measures indicate whether the company’s
strategy implementation and execution are contributing to its revenue and earnings. To identify key
performance measures in this perspective, managers, during strategic planning ask “How do we
look to shareholders?”
Corporate strategy and strategic initiatives are examined from the financial perspective to see
feasibility of these initiatives of being met. The financial objectives chosen at the onset of the
balanced scorecard implementation should serve two purposes:
▪ To provide definite performance that was expected at the time of strategies selection.
▪ To provide a focus for objectives and appropriate measures in each of the other three
perspectives.

Customer Perspective: “How Do Customer View Us?”

In this stage, companies identify customers and market segments in which they compete and also
the means by which they provide value to these customers and markets. Managers identify the
lead indicators which make a particular business unit or product different from that of others. Lead
indicator may vary from customer to customer or market segment. If for example, a customer
values on-time delivery then on-time delivery becomes a lead indicator. Examples of lead
indicators may include any number of customer considerations, including:
▪ On-time delivery
▪ On-site service
▪ After sales support
▪ Defects per order
▪ Cost of the product
▪ Free shipments etc.
By delivering quality as per the customer demand and need, business units can improve outcome
measures such as customer satisfaction, retention, acquisition and loyalty.
Internal Business Perspective: “At What Must We Excel?”
In this stage companies identify processes and activities which are necessary to achieve the
objectives as identified at financial perspectives and customer perspective stage. These objectives
may be achieved by reassessing the value chain and making necessary changes to the existing
operating activities. If maintaining net earnings is the financial objective of a company and after
sales service can increase customer retention, then internal business perspective needs to
improve after sales services to satisfy customer requirements to maintain net earnings. This
objective may be achieved by providing for example toll free customer help lines, setting up
service centres in all major cities.
Learning and Growth Perspective: “How Do We Continue to Improve and Create Value?”
In the learning and growth perspective, Companies determine the activities and infrastructure that
the company must build to create long term growth, which are necessary to achieve the objectives
set in the previous three perspectives. Organisational learning and growth comes from t hree
principle sources:
▪ People i.e. employee capabilities
▪ Systems i.e. information system capabilities and
▪ Organisational procedures i.e. motivation, empowerment and alignment.
Since, the balanced scorecard is intended to improve long-term performance, managers may
invest in resources needed in the short-run but this should not affect business unit’s performance.
The ultimate result of using the Balanced Scorecard approach should be an improved long term
financial performance. Since the scorecard gives equal importance to the relevant non –financial
measures, it should discourage the short termism that leads to cuts in spending on new product
development, human resource development etc. which are ultimately detrimental for the future
prospects of the company.

Concept Insight
Responsibility to devise and implement a Balanced Scorecard
The responsibility to devise and implement a Balanced Scorecard should be that of the
managers working with the business. Since every company is different, it shall need to work out
for itself the various financial and non – financial measures, which need to be focused upon for
its own development. Since the Balanced Scorecard is recommended as a management tool
used both for internal and external reporting purposes, it is again the manager’s responsibility to
decide as to what information needs to be disclosed and how any problems of confidentiality
can best be overcome.
Why Balanced Scorecard fails to provide for the desired results?

The following are some reasons why Balanced Scorecards sometimes fail to provide for the
desired results–
▪ Managers mistakenly think that since they already use non – financial measures, they
already have a Balanced Scorecard.
▪ Senior executives misguidedly delegate the responsibility of the Scorecard implementation to
middle level managers.
▪ Company’s try to copy measures and strategies used by the best companies rather than
developing their own measures suited for the environment under which they function.
▪ There are times when Balanced Scorecards are thought to be meant for reporting purposes
only. This notion does not allow a Business to use the Scorecard to manage Business in a
new and more effective way.
Note- It may be noted that the above-mentioned difficulties refer to the internal use of the
Scorecard, unless it is used internally successfully, it should not be used as a basis for external
reporting.
Concept Insight
Implementing Balanced Scorecard
Balanced scorecard deals with prospects like internal process, learning and innovations, which
are highly people-oriented, hence change in human behaviour may be sought, so managing the
human behaviour to launch the change is important (Key → link the rewards to scorecard
measures).

The following figure summarises the ideas of a Balanced Scorecard:
Source: Robert S Kaplan and David P Norton, The Balanced Scorecard: Translating Strategy into Action
Example
Perspective Strategic Objective Measure
Financial ▪ Improve ROI ▪ % increase in ROI
▪ Increase Sales ▪ % increase in sales
Customer ▪ Improve brand recognition ▪ % of target audience who recognize
Perspective ▪ Customer retention brand
▪ %of suggestions/ complaints responded
▪ % increase in repeat customers/
Number of repeat customers
Internal ▪ Improve in product quality ▪ % reduction in defect rate
Perspective ▪ Improve on time delivery to ▪ % of orders on time
customers ▪ % increase in MCE
▪ Reduction in time spent in non-
value added activities
Learning & ▪ Expansion of eco-friendly product line ▪ No. of eco-friendly products developed
Innovation ▪ Introduction of limited edition items ▪ No of limited editions introduced

Illustration 3
Standard Telecom Ltd. is a leading cellular service provider having a global presence. It aims to be
the most innovative and trusted telecom company in the world. To achieve this aim, it is constantly
working on its overall functioning. It is trying to adopt the best managements practices in the world.
Following are some information related to the company’s performance for a particular period:
Particulars Current Base Target
Year Year
Operating Ratio 60% 54% Reduce it to 50%
Average Revenue per user ` 225 ` 210 Increase it to ` 250
Unresolved Consumer Complaints 27,500 25,000 Reduce it by 20%
Customer Relationship Centres 280 200 Take the total to 250
Employee Coverage under Training Programme 10% 8% At least 15%
Required
ANALYSE the performance of the company using Balance Scorecard approach.
Solution
The balanced scorecard is a method which displays organisation’s performance into four
dimensions namely financial, customer, internal and innovation. The four dimensions acknowledge
the interest of shareholders, customers and employees taking into account of both long -term and
short-term goals. The detailed analysis of performance of the company using Balanced Scorecard
approach as follows:
(i) Financial Perspective: Operating ratio and average revenue will be covered in this prospective.
Company is unable to achieve its target of reducing the operating ratio to 50% instead it has
increased to 60%. The company is required to take appropriate steps to control and manage
its operating expenses.
The average revenue per user has increased from `210 to `225 but remains short of
targeted `250. This is also one of the reasons for the swelled operating ratio. The company
can boost up its average revenue per user by providing more paid value-added services
because the increasing price is not a fine choice considering the cut-throat competition in the
telecom sector.
(ii) Customer Perspective: Service complaints will be covered under this perspective.
The company had set a target of reducing unresolved complaints by 20% instead unresolved
complaints have risen by 10% [(27,500-25,000)/ (25,000) × 100]. It shows dissatisfaction is
increasing among the consumers which would adversely impact the consumer’s general
perception about the company and the company may lose its consumers in long run.
(iii) Internal Business Perspective: Establishing customer relationship centres will be covered
under this perspective.
The company has established 80 relationship centres in the current period exceeding its
target of 50 (250-200) to cater to the needs of existing consumers as well as soliciting new
consumers. This shows the seriousness of the company towards consumer satisfaction and
would help them in the long run.

(iv) Learning and Growth Perspective: Employee training program is covered under this
perspective.
The company had set a target to cover at least 15% employee under its training program but
covered only 10%. This could hurt the capabilities of the employees which are needed for
long term growth of the organisation necessary to achieve the objectives set in the previous
three perspectives. People or the human resource of the company is one of the three
principal sources where organisational learning and growth come.
Practical Insight
Qantas Airways Limited
For 2018/19, the Board considered the following key measures of financial, safety, customer and operational performance
and the associated targets to be key indicators of performance and drivers of shareholder value. The performance
outcomes for these measures are reflected in the CEO’s and Executive Management’s remuneration outcomes. The table
below summarises performance versus target against each scorecard category under the 2018/19 STIP.
Scorecard Measures Scorecard Actual Comment
Category/ Weighting Outcome
Strategic ‘Target’
Objective (Range of
Outcomes)
The Underlying PBT result of $1,302 million
for 2018/19 exceeded the profit threshold, but
Group Underlying Profit 50%
was less than the target set by the Board.
Profitability Before Tax (PBT) (0–100%)
This resulted in a partial contribution to the
STIP Scorecard under this measure.
The Qantas Group overall did not achieve its
Workplace Safety stretch targets for the year.
Within the Group, a number of reporting
entities achieved their targets and/or
delivered strong year-on-year improvements.
Workplace Safety
For example: Regional Airlines; the Australian
measures
Airports and Freight departments of Qantas
Airlines; and Jetstar Airways regarding lost
work-day case rates. Overall, there was a nil
contribution under the Workplace Safety
Workplace and measure.
15%
Operational Operational Safety performance continued to
(0-22.5%)
Safety remain strong. The Group maintains a
positive reporting culture. Technical Dispatch
Reliability across the Group remained strong
and there were no on-going or unresolved
Board’s
adverse flight data trends across any Group
assessment of
airline for key operational performance
Operational Safety
indicators. Therefore, there was an above
target contribution under the Operational
Safety measure. Overall, there was a partial
contribution to the STIP Scorecard under the
Workplace and Operational Safety measure.

Target or threshold NPS performance was

achieved or exceeded by Qantas
International, Qantas Domestic, QantasLink,
Qantas Frequent Flyer and Jetstar Australia
Net Promoter
Domestic. However, Jetstar Australia Long
Score (NPS) 15%
Customer Haul’s NPS performance was below
(0-22.5%)
threshold. Qantas Domestic/Qantas Link on-
Punctuality time performance was below threshold.
Overall, there was a partial contribution to the
STIP Scorecard under the Customer
measure.
Executive Management’s continued focus on
maximising our leading domestic position
through the dual brand strategy has enabled a
Combined Qantas
strong margin advantage over our
Domestic and
competitors. The combined Qantas Domestic
Australian Jetstar Domestic
and Jetstar Domestic Profit Margin outcome
Domestic Profit Margin: 10%
was above the threshold but below target and
Market EBIT per ASK (0-15%)
therefore a partial contribution to the STIP
Position
Scorecard resulted. Qantas Domestic and
Domestic network Jetstar maintained the Group’s network
advantage advantage in the Australian domestic market
with a target contribution to the STIP
Scorecard under this measure.
Executive Management’s continued focus on
Transformation transformation delivered $452 million of
benefits benefits during 2018/19, exceeding the $400
million target. Jetstar Japan exceeded its
Underlying EBIT target, delivering a record
Transformation Jetstar Japan 10%
AUD profit share. Qantas Loyalty achieved its
and Growth Underlying EBIT (0–15%)
Underlying EBIT target, delivering an 8.4 per
cent profit growth relative to prior year.
Qantas Loyalty Overall, there was an above target
Underlying EBIT contribution to the STIP Scorecard under this
measure.
2018/19 STIP Scorecard Outcome 100% 81%
(0–175%)
Key:
Above target achievement against targets Partial achievement against targets
Full achievement against targets No achievements against targets
Note- Short- Term Incentive Plan (or STIP). The STIP is an annual incentive opportunity where an Executive may
receive an award that is a combination of a cash bonus and an award of restricted shares if the plan’s performance
conditions are achieved.
(Source: Qantas Airways ‘Annual Report’ 2019)

Performance Pyramid
K. F. Cross and R. L. Lynch, in the year 1989 publish an article ‘The SMART way to define and
sustain success.’ In this article they suggest Strategic Measurement Analysis and Reporting
Technique (SMART) which is popularly known as performance pyramids due to 4 level hierarchy
applied in the framework.
The attractiveness of this framework is that it integrates the business’ strategic objective with
operational performance dimensions, consider the internal efficiency vis -à-vis external
effectiveness. Performance pyramid contains the hierarchy of financial and non-financial
performance measures divided in following four levels–
Through corporate vision, organisation defines how the long-term success & competitive
L- 1
advantage will be attained.
In order to achieve corporate vision, the initial focus is on the attainment of CSFs related
L-2
to market and finance at SBU or division level.
Market and financial strategies become a guiding force to achieve a strategic objective,
L-3
which includes Customer Satisfaction, Increased Flexibility and High Productivity.
Operational performance dimensions such as Quality, Delivery, Cycle Time and Waste
L- 4
etc. will be used as status check to strategic objective designated at level 3.
Caution – Performance prism concentrate only two categories of stakeholders, i.e. shareholder &
customer.


Identify the flows defined in the pyramid and quote the nature of external and internal forces.
Hint
▪ The flow of ‘Objectives’ are from top to bottom, whereas the flow of ‘Measures’ are from bottom
to the top.
▪ The left-hand side of the pyramid contains external forces which are ‘non-financial’. Whereas
the right-hand side of the pyramid contains internal efficiency which is predominantly ‘financial’
in nature.
Illustration 4
You are a paid assistant working in SBC LLP – an accounts consultancy firm. You have received
the following email from one of SBC’s senior partner:
To: DG
From: SB
Date: 22/06/20XX
Subject: PEL meeting this afternoon
As you are probably aware, we are meeting with the managers of PEL later this afternoon to
discuss several key issues, and I need you to do some research for me. I need a report that covers
the following:
Analysis of the new proposal for the period 2020 to 2022 based on
- external effectiveness and
- internal efficiency
To help you with this, I’ve attached a copy of our forecast of PEL’s financial and non-financial data
for the period 2020 to 2022. Please read it carefully and email me back as soon as possible so I
have time to prepare before the meeting.
Thanks
SB
------------------------Attachment-----------------------------
Background to PEL
Precision Engineering Ltd (PEL) specialises in engineering design and manufacture in the
automotive and motorsport industry. PEL’s design team has many years’ experience in the design
and development of engine components for the market and high-performance engines. PEL has
identified a number of key competitors and intends to emphasis on close co -operation with its
customers in providing products to meet their specific engineering design and quality
requirements. Efforts will be made to improve the effectiveness of all aspects of the cycle, from
product design to after-sales service to customers. This will require data from a number of
departments in the achievement of the specific goals of the new proposal. Efforts will be made to
improve productivity in conjunction with increased flexibility of methods.
Forecast of PEL’s Financial and Non-Financial Data

Particulars 2020 2021 2022

Total Market Size ( ₹ lacs) 110 115 120
PEL Sales ( ₹ lacs) 18 21 23
PEL Total Costs ( ₹ lacs) 14.10 12.72 12.55
Production Achieving Design Quality Standards 95.5% 98.0% 98.5%
Returns from Customers (% of Deliveries) 2.0% 1.0% 0.5%
Cost of After-Sales Service ( ₹ lacs) 1.3 1.1 1.0
Sales Meeting Planned Delivery Dates 85% 90% 95%
Average Cycle Time (Customer Enquiry to Delivery) (weeks) 5.0 4.5 4.0
Components Scrapped in Production (%) 6.5% 4.0% 1.5%
Idle Machine Capacity (%) 9% 5% 1%
Required
Draft the email as requested by the partner.
Solution
To: SB
From: DG
Date: 22/06/20XX
Subject: Re: PEL Meeting this afternoon
Please find below my analysis of the points you wished me to examine for PEL. Please let me
know if you wish to discuss any of these points in more detail.
Kind regards
DG
------------------------Analysis-----------------------------
External Effectiveness- The marketing success of the proposal is associated with the
achievement of customer satisfaction. The success will need an efficient business operating
system for all aspects of the cycle from product design to after-sales service to customers.
Customer satisfaction is linked with improved quality and delivery.
Quantitative measures of these factors are as follows:
▪ Quality is expected to improve. The percentage of production achieving design quality
standards is expected to increase from 95.5% to 98.5% between 2020 and 2022. In the same
period, returns from customers for replacement or rectification should drop from 2% to 0.5%
and the cost of after-sales service should drop from ₹1.3 lacs to ₹1.0 lacs.
▪ Delivery efficiency improvement that is expected may be measured in terms of the rise in the
percentage of goods achieving the planned delivery date. This percentage rises from 85% in
2020 to 95% in 2022.

Internal Efficiency- The financial success of the proposal is linked to the achievement of high
productivity. This should be helped through reduced cycle time and decreased levels of waste.
Quantitative measures of these factors are as follows:
▪ The average total cycle time from customer enquiry to delivery should drop from 5 weeks in
2020 to 4 weeks in 2022.
▪ Waste in the form of idle machine capacity is expected to drop from 9% to 1% between 2020
and 2022. Also, component production scrap is expected to drop from 6.5% in 2020 to 1.5%
in 2022.
The Building Block Model
Fitzgerald and Moon proposed a Building Block Model which suggests the solution of performance
measurement problems in service industries. But it can be applied to other manufacturing and
retail businesses to evaluate business performance. It is based on the three building blocks of
dimensions, standards, and rewards.
Dimensions- Dimensions are the goals for the business, i.e. the CSFs and suitable measures
must be developed to measure each performance dimension. They are further divided into two
sub-categories.

Determinants-These are performance areas which influence the results. These are.
▪ Quality- It is the ability to deliver goods and service with consistency. Quality should be
judged from eyes of the customers. Quality is the level of benefits customers expects from
the product. Quality should be enough for a product price paid.
▪ Flexibility- It is the responsiveness to change in the factor influencing the business
performance. Ex, ability to cope with sudden increase in sales demand.
▪ Innovation- Ability of the business to devise new products and new ways of doing things. Like
packaging of products with environment friendly (recyclable) material.
▪ Resource Utilization- It is the ability to use resources to achieve business objectives.
Business assets should be used for the proper purpose and in most efficient way. Ex, using
delivery vans to its maximum capacity only by carrying authorized goods.
Results- It reflects the success or failure of determinants identified above.
▪ Financial Performance- Financial performance gives an indication of overall business at a
glance in monetary terms. These can be used to identify areas of strengths and weaknesses.
It may also highlight other areas previous identified which may be critical to business
success.
▪ Competitive Performance- How they stand in comparison to its competitors? How are
the different from their competitors? Ex, offering of products of higher quality than
competitors and products having distinct features than rival products.
The Results and Determinants Framework
Dimensions of Performance Types of Measures
Quality of Service ▪ Reliability
▪ Responsiveness
▪ Aesthetics/appearance Communication
▪ Cleanliness/tidiness
▪ Comfort
▪ Friendliness
▪ Courtesy
▪ Competence
Determinants
▪ Access
▪ Availability
▪ Security
▪ Communication
Flexibility ▪ Volume Flexibility
▪ Delivery Speed Flexibility
▪ Specification Flexibility
Resource ▪ Productivity
utilization ▪ Efficiency
Innovation ▪ Performance of the Innovation Process
▪ Performance of Individual Innovations

Competitiveness ▪ Relative Market Share and Position

▪ Sales Growth
▪ Measures of the Customer Base
Results
Financial Performance ▪ Profitability

▪ Liquidity
▪ Capital Structure
▪ Market Ratios
(Source: Fitzgerald, 1991)
Standards- These are the measures used, i.e. the KPIs, should have the following characteristics:
Equity- Performance measures should be equally challenging for all parts of the business.
Relaxation given to one part of the business leads to perception of unfair treatment which hinders
productivity.
Ownership- Performance measure should be acceptable to everyone. Employees should be got
involved in the identification of measures rather than being imposed on them. Ownership means
here is responsibility for the results.
Achievable- Performance measure should be realistic. Ex, using actual results for the competitors
to set as target. Employee will not be motivated to achieve targets if consider them impossible.
Rewards- To ensure that employees are motivated to meet standards, the standards need to be
clear and linked to controllable factors. Reward schemes should possess the following
characteristics:
Motivation- Rewards scheme should be set in manner which motivates employees to achieve the
business goals. If sales growth is desired than bonus can be linked to performance measures, like
increase in number of units sold than previous year.
Clear- Rewards scheme should be clearly communicated to employees in advance. What kind of
performance will be rewarded and how their performance will be measured?
Controllability- Employees should only be rewarded or penalized of the result over which they
some control or influence.
Practical Insight
Building Block Model Practices
Variants of the building block model are currently used in Australia in the regulation of electricity
transmission and distribution, gas transmission and distribution, railways, postal services, urban
water and sewerage services, irrigation infrastructure, and port access.

Performance Prism
Performance Prism creators Andy Neely and Chris Adams mentioned that the better -known
Balanced Scorecard framework only focuses on two sets of stakeholders: shareholders and
customers. The Performance Prism is an approach to performance management which aims to
effectively meet the needs and requirements of all stakeholders. This is in contrast with
the performance pyramid which tends to concentrate on customers and shareholders and is also in
contrast with value based management, which prioritizes the needs of shareholders.
▪ It takes stakeholder requirements as the start point for the development of performance
measures rather than the strategy of the organisation.
▪ It recognises the need to work with stakeholders to ensure that their needs are met.
There are five ‘interrelated facets’ to the Performance Prism which lead to key questions for
strategy formulation and measurement design:
Stakeholders Satisfaction: The organization needs to focus on who are the stakeholders? What
are the needs and wants of the stakeholders.
Strategies: What are the strategies required by the organization to fulfill the wants and needs of
the stakeholders?
Processes: What are the necessary processes required for satisfying the above strategies?
Capabilities: What capabilities does the organization needs for operating and enhancing the
process?
Stakeholders Contributions: It further takes into account what contribution does the management
needs from its stakeholders?
Comprehensiveness of Performance Prism
(Source: Neely, 2002)
The Performance Prism allows organisations to develop strategies, business processes and
measures geared to the specific needs of all important stakeholder groups. By taking a broad
stakeholder perspective that includes regulators and business communities, the PP enables an
organisation to more directly address the risks and opportunities in its business environment.
Using the PP to develop measures for each relevant stakeholder facil itates the communication and
implementation of strategy.


British business author John Brett Elkington in year 1994 coined the term TBL. But the origin of
concept actually lies in Brundtland report by World Commission on Environment and Development,
(now known as Brundtland Commission) published in year 1987, in which Sustainable
Development is explained as is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
It is also important here to note that United Nations Conference on Environment and Development
taken place in year 1992, gave stress on sustainable development.
As mentioned earlier in this chapter that every business needs to be sustainable rather only
profitable. But question which come to mind is → when a business said to be sustainable? →
Obviously, answer is when management make sustainable business decisions. Hence real
question is → When a business decision said to be sustainable? How to measure performance of
business decision in term of sustainability?
Answer lies in TBL i.e. Triple Bottom Line.
To measure performance of business decision in
economic terms we consider only one bottom line i.e.
profit, but to consider sustainability of business
decision there are three bottom lines i.e. People,
Planet and Profit (also known as dimensions of TBL).
TBL truly extends the scope of traditional accountancy, to transform it into modern day
sustainability reporting (which is beyond financial reporting because it considers social and
environmental performance too). Some organisations even have separate business sustainability
reporting system and they apply the standard of sustainability reporting pronounced by Global
Reporting Initiative, Which is the independent, international organization that helps businesses
and other organizations take responsibility for their impacts, by providing them with the global
common framework (standards) to report those impacts.
Dimension (sets) of TBL
▪ Planet, the environmental bottom line measures
the impact on resources, such as air, water,
ground and emissions to determine the
environment impact and ecological footprints.
▪ People, the social equity bottom line relates to
corporate governance, motivation, incentives,
health and safety, human capital development,
human rights and ethical behaviour.
▪ Profit, the economic bottom line refers to
measures maintaining or improving the company’s
success in term of adding value to shareholders.

A sustainable decision is one which acceptable from the aspect of each bottom line as shown in
the table below-
Planet People Profit Performance of Sub-set
Acceptable Acceptable Not acceptable Bearable
Not acceptable Acceptable Acceptable Equitable
Acceptable Not acceptable Acceptable Viable
Acceptable Acceptable Acceptable Sustainable
TBL believes in a stakeholder approach rather shareholder approach. TBL implies that businesses
must consider the full cost, hence become a substitute to full cost accounting with even wider
perspective.
TBL can be used to encourage each division and manager within the organisation to act in a
responsible manner from holistic perspective.

Can you identify the businesses falling in each sub-set – Bearable, Equitable and Viable?
Hint
A business dealing in a plastic bag (mind it, use of less than 35-micron plastic bag are
prohibited now) may be equitable business but not sustainable because of harm to the
environment. One can take the example of cracker manufacturing business as well.
Similarly, Tabaco business is viable only business but not sustainable.
Example
S Ltd. has recently undertaken following initiatives towards sustainability, they can be reported
under relevant dimension–
Activity Bottom Line
Reduced the amount of plastic usage in peanut butter jars. Planet
Constructed solar powered warehouse. Planet
Provided financial support to the hospital run by the local authority in the People
vicinity of the factory.
Started childcare unit for the benefit of women employees as well as for the People
neighboring community.
Generated profit for the company’s shareholders. Profit
The triple bottom line recognise that a company's performance should not only be viewed in terms
of its ability to generate economic profits for its owners, but also by its impact on people and the
planet for its long term economic and social viability.


Can you tell the Pros of tools detailed above starting from balanced scorecard to TBL?
Hint
The tools explained above are capable to overcome the shortcomings of financial performance
measures but don’t ignore the financial aspect of the business. Indeed, they maintain a balance
between financial and non-financial aspects to ensure the success of the corporate strategy.
The benefits include–
▪ Balance between financial and non-financial performance measures.
▪ Regardless ease or difficulty to measure, include all significant factors.
▪ Capable to coordinate external as well as internal measures.
▪ Linked the measures with corporate strategy.
▪ Linked the motivation with performance.
The above hint is based upon research work from David Otley (2005) who observed a common
thread between results and determinants framework by Fitzgerald (1991), the balanced
scorecard by Kaplan and Norton (1992) and Neely’s performance prism.
CSF & KPI AS DRIVERS OF STRATEGIC OBJECTIVES

As mentioned earlier in this chapter, that third phase of performance management includes the
establishment of the performance measures (both financial and non-financial) and target for each
measure, hence mere selecting the measures will not solve the purpose; the scope of measure are
also of utmost importance.
The performance measures shall target/encompasses the areas (process or part of the process);
which are vital for the attainment of strategic objectives is essential. These areas are known as
Critical Success Factors (CSFs). Even it is advisable for organisations to start establishing
measures related to these areas and keep them in central focus thereafter too.
The fourth and last phase of performance management includes the review the performance (with
help of KPI Dashboard) and take corrective actions (if required), hence mere identification of CSFs
and establishing the targets will not enough. An effective review system must be i n order which
comprises Key Performance Indicators (KPIs) on a single and handy dashboard to indicate the
performance in real-time basis.
Note- It is quite a clear from the above discussion that CSFs and KPI are not one and the same
thing but related to each other. The CSFs are the areas that are critical for the attainment of
corporate objectives, whereas KPIs are signals of performance in such areas.
For example, for an IT Department, a Critical Success Factor could be restoring normal service
and in order to achieve that, a logical KPI would be the Average Turnaround Time, with a target of
4 hours. The Average Turnaround Time and its target of 4 hours is the KPI that represents ‘how’
the IT department achieved its Critical Success Factor.

CSFs are a true source of Competitive Advantage

If any organisation able to use its core competencies to exploit the CSFs, it will surely have an edge
over rivals, which will position the organisation in a better strategic position; leads to competitive
advantages. John F Rockart in his paper ‘Chief executives define their own data needs’ in March
1979 issue of Harvard Business Review highlighted how the attainment of the corporate objective is
supported by CSFs irrespective of nature of organisation (be it for profit or not for profit) . In the same
piece of his work, Rockart also highlighted the four prime sources of CSFs:
▪ Structure of particular Industry
▪ Competitive Strategy, industry position, and geographical location
▪ Environmental Factors
▪ Temporary Influences
Apart from four aspects highlighted by Rockart, another important point is the functional area of
manager who is identifying the CSFs, because a priority of purchase manager can’t be the same as
of a personal manager. To overcome this, CSFs need to be identified; organisation -wide.
Relation between CSFs, KPIs, and Corporate Objectives
Ideally, each CSF should have a KPI associated with it. A single CSF can also have more than one
KPI if required. The KPI targets are more formally called thresholds, and the thresholds must be
ascertained with a great deal of industry analysis, as well as internal analysis. KPIs shall be SMART
(specific, measurable, attainable, relevant, and time-bound).
Effective performance management system warrants that,
- KPIs must be selected and designed in such a manner that if meets the threshold then deliver
the CSFs and
- the CSFs, in turn, must be designed and constructed in a way that ensures that the company’s
strategic vision is delivered if the CSFs are met.
Concept Insight
SMART Objective
Even objectives of organisation also need to be
SMART. George T. Doran first use this term in the
November 1981 issue of Management Review, but
the attribute of MBO (management by objective by
Peter F Drucker) inspire the origin of SMART.
Specific→ should be clearly defined;
Measurable→ have means to quantify;
Achievable→ can be achieved i.e. should be
realistic; Relevant→ relevant to the organization’s
strategic goals; Time Constrained→ have a
designated start and end dates.
The terms– goals or objectives are often used interchangeably, although one key difference is
that it should always be possible to quantify an objective. Goal conversely, can be not be
quantified and are therefore open ended.

BENCHMARKING SCHEMES
Benchmarking evolved over a period of time. It can be even traced way back to 1912 when curious
Henry Ford during a tour of a Chicago learn something (importing idea from other industry) from
slaughterhouse which helped Ford Highland Park Plant be the world’s first producer of magnetos.
Later during the 1960s when japan post the second world-war rising back, benchmarking was in
application for being the best of best in various forms.
But during later 1970s and early 1980s (the especially year 1982, when David T Kearn s took over
as CEO at Xerox), it formally came into limelight when Xerox (then Rank Xerox) applied the
benchmarking with intent to attain ‘leadership through quality’ (to protect their market share) and
to overcome a situation wherein their products had defects at a rate of 30,000 parts per million
(caused loss of market share from 86% to 17% in a decades’ time). By 1983 they benchmarked
around 230 processes which brings down defects to 150 parts per million.
The success of benchmarking at Xerox motivated many companies (even market leaders) to adopt
the technique of benchmarking for improvement. By the end of first half of the decades of the 90s,
hundreds of companies across the world implemented benchmarking these included leading
companies like ford, AT&T, IBM, GE, Motorola and Citicorp.
The ‘International Benchmarking Clearinghouse’ was promoted by Xerox along with market leaders
such ford, AT&T, Motorola, and IBM to profess about benchmarking and guide the companies
across the globe who are curious to benchmarking.
Meaning, Nature, and Scope
“Benchmarking is systematic and continuous performance improvement technique, wherein it
important to identify and adopt the best practices in the application; either inside or outside the
organisation; but on a constant basis.”
Mind it benchmarking deals with best practice, not the best performance, because performance
maybe once in a while but best practices are relatively durable. Here it is also important to
acknowledge that the business environment is highly dynamic hence the benchmarks (the
yardstick of standard) are dynamic too. The one which is the best today, may not be the best
tomorrow; hence it is a continuing process, not a one-time exercise.
Note- It’s truly a never-ending process, this can be sensed from a statement made in the year
1999 (almost after 2 decades, when Xerox started benchmarking) by Warren Jeffries who was then
customer services benchmarking manager at Xerox "Benchmarking at Xerox is still very much a
matter of competitive advantage. It is used to keep Xerox’s edge razor-sharp, to discover where
something is being done with less time, lower cost, fewer resources and better technology”.
The focus of benchmarking exercise is on the identification of the scope of improvement and
implementation of the same. The scope of improvement may be significant or merge (minor or
narrow), hence depending upon scope the benchmarking can be seen either as independent
exercise (but in reference to other aspects of organisations) or as component of a wider
improvement process such as business process reengineering or quality impro vement program or
to shift the culture of a company to be more customer-oriented and results-focused.

Benchmarking can deliver significant performance improvements based on efficiency, cost

savings, and new revenues. Benchmarking projects typically target cycle times, productivity,
customer service, quality, and production costs.
Types of Benchmarking
Since each organisation is unique in its own way hence not looking for the same type of
improvement, if their prospect of using a benchmarking tool is unique then way and form will also
be unique. This makes benchmarking versatile. Some organisations benchmark the process, but
few other benchmark strategies. Some benchmark from rivals, whereas few others from non -
competitive but functional leaders. Some are doing it internally (among divisions), but few others
prefer the external organisation to benchmark. Each type of benchmarking has its own benefits
and shortcomings and therefore best-fit type needs to be identified. The major types of
benchmarking and classification thereof are as follows–
I- Based upon content and scope of benchmarking
Process Functional Performance Strategic Product

Benchmarking Benchmarking Benchmarking Benchmarking Benchmarking
Process Benchmarking
It involves the comparison of an organisation critical business processes and operations against
best practice organisation that performs similar work or deliver similar services. For example, how
do best-practice organisations process customers’ orders? By comparing with and understanding
how top or better performers complete a process, you can find ways to make your own processes
more efficient, optimal, faster, and more effective.
Functional Benchmarking
This type of benchmarking is used when organisations look to benchmark with partners drawn
from different business sectors or areas of activity to find ways of improving similar functions or
work processes. This sort of benchmarking can lead to innovation and dramatic improvements.
Performance Benchmarking
Performance Benchmarking involves collecting information on how well you’re doing in terms of
outcomes (performance measures) and comparing these outcomes internally or externally. This
can also refer to functional performance benchmarking, such as benchmarking the performance of
the HR or the marketing functions.
Strategic Benchmarking
Strategic benchmarking involves a systematic process through which a company seeks to improve
their overall performance by examining the long-term strategies against the best-practice
companies. It involves comparing high-level aspects such as developing new products and
services, core competencies and innovation strategies, etc.
Product Benchmarking
Product benchmarking is more or less reverse engineering. In this organization buys its rival’s
products and dismantle these to find out about component used in product, features, and
performances; in comparison to its own product.

II- Based upon role of benchmarking partner
Competitive Collaborative
Competitive Benchmarking
It involves the comparison of competitors’ products, processes, and business results with their
own. Benchmarking partners are drawn from the same sector. The purpose is to gain superiority
over other. However, to protect confidentiality it is common for the companies to undertake this
type of benchmarking through trade associations or third parties.
Collaborative Benchmarking
Collaborative Benchmarking is the comparison with benchmarking partner with intent of developing
a learning atmosphere and sharing of knowledge.
III- Based upon boundry
Geographical boundry (location Organisation's business boundry

of Benchmarking partner)
Global Benchmarking Internal Benchmarking External Benchmarking
Inter Group
Inter Industry
Global Benchmarking
It is a benchmarking through which distinction in cross border culture, business processes, and
trade practices are bridged to improve. The concept of the global village and the advancement of
information technology enhance the importance and use of this type of benchmarking.
Internal Benchmarking
It involves seeking benchmarking partners from within the same organisation. The main
advantages of internal benchmarking are that access to sensitive data and information is easier;
standardised data is often readily available; usually, less time and resources are needed. There
may be fewer barriers to implementation as practices may be relatively easy to transfer across the
same organisation. However, real innovation may be lacking and the best in class performance is
more likely to be found through external benchmarking.
External Benchmarking
It involves seeking the help from outside organisations that are known to be best in class. External
benchmarking provides opportunities for learning from those who are at the leading edge, although
it must be remembered that not every best practice solution can be transferred to others. In
addition, this type of benchmarking may take up more time and resources to ensure the
comparability of data and information, the credibility of the findings, and the development of sound
recommendations. The external benchmarking can be categorised into–

▪ Intra-Group Benchmarking: In intra-group benchmarking the groups of companies in the

same industry agree that similar units within the cooperating companies will pool data on
their process. The processes are benchmarked against each other at or operational level.
‘Improvement task forces’ are established to identify and transfer best practices to all
members of the group.
▪ Inter-Industry Benchmarking: In inter-industry benchmarking a non-competing business
with a similar process is identified and asked to participate in a benchmarking exercise. For
example, a publisher of schoolbook may approach a publisher of university-level books to
establish a benchmarking relationship. Although the two publishers are not in direct
competition there are obviously many similarities in their business with respect to sources of
supply, distribution channels. Each will be able to benefit from the experience of others and
establish ‘best practices’ in their common business processes.
Benchmarking Process
Considering the benchmarking process followed at Xerox, the Robert C Camp, who is author of
Book ‘Benchmarking: The Search for Industry Best Practices that Lead to Supe rior Performance’ in
1989 developed a five-phase (comprising of 12 steps in totality) approach to benchmarking.

Let’s understand each phase and what it comprises –

Planning Phase– This is the first phase and includes the decisions on;
1. What to benchmark– Business is set of processes and processes are sequence of activities.
Wherein some of processes and activities are more critical (or CSFs) than others. Hence, it’s
always advisable to benchmark such critical processes and activities (or CSFs) on priority
basis. A phased implementation may apt rather than targeting all CSFs in one go.
Practical Insight
Xerox targeted the defects, design and labour cost, customer satisfaction, time to process
the order and raise invoices etc.
2. From whom to benchmark– Basically, this step talk about the identification of benchmarking
partners (against whom benchmarking will be performed).
Practical Insight
Xerox considered American Express (for billing and collection), Cummins Engines and
Ford (for factory floor layout), Florida Power and Light (for quality improvement), Honda
(for supplier development), Toyota (for quality management), Hewlett-Packard (for
research and product development), Saturn (a division of General Motors) and Fuji Xerox
(for manufacturing operations) and Du-Pont (for manufacturing safety).
3. How to collect data and actual collection– The success of the benchmarking process lies in
this step. Data can be collected from International Benchmarking Clearing-house (some
countries have nation-wide clearing houses too). Data collection starts with the mapping of
the process to be benchmarked so that a metric can be prepared in which data of
benchmarking partner collected through contract partners can be recorded for analysis.
Analysis Phase– This phase includes;
4. Gap analysis to assess the own current performance against the performance by
benchmarking partner and to quantify the gap along with reasons for the same. This gap can
be termed as the current competitive gap.
5. Identify realistic opportunities. Undisputedly each gap in performance is the possible source
of improvement, but the cost benefit analysis shall be carried out to identify those gaps which
can be overcome (or filled) with the cost which will be less than the expected benefit. This is
most critical step in the entire process after data collection.
In this manner gap which can be overcome and reason for same is known to organisation
hence a projection of future performance levels can be prepared.

Integration Phase– Change always cause some sort of resistance, degree of which may be very;
hence the best way to overcome the resistance is ‘involve every one and communicate every one’
(especially to those who are expected to be impacted). This phase includes;
6. Communication of projected future performance level (as determined in previous stage) to all
concerned, who are impacted by changes in order to overcome the gaps (the realistic
opportunities identified in step 5) to gain their acceptance.
7. Establish a new function targets (objective and goals) according to project future
performance level accepted in step 6.
Action Phase– This phase includes;
8. Prepare and implement action plans to overcome the gaps (means attaining the revised
function targets) so that projected future performance level can be actually reached.
9. Assess the progress against the action plan applied. Periodical monitoring is a must so that
the action plan can be reviewed and revisited where required.
10. Introduce revisions to recalibrate the action plan and benchmark – The deviations identified
in step 9 need to be responded with the revision and rectification in the plan.
Maturity Phase– This is the final phase and it includes integration too;
11. Determine the success of the action plan at closure in terms of whether superior
performances are attained or not.
12. Ensure integration of benchmarked process into organization’s process. That’s too an
integral practice.
Pre-requisites for Successful Benchmarking
Irrespective of the type and scope of benchmarking, it will be important to ensure that there shall be;
▪ Commitment from management with the requisite support;
▪ Clarity of objective at the outset and current performance of organisation;
▪ Appropriate scope of the work, that’s too at par to objectives, resources, time availability, and
the experience of those involved;
▪ Correct selection of benchmarking partner and contract partner
▪ Sufficient resources are available to complete projects within the required time scale;
▪ Requisite skills and competencies among the members of the team responsible for
benchmarking
▪ Effective communication to ensure all set of relevant stakeholders must be informed at all
stage regarding the reasons for benchmarking and relation between cause and effect.
Caution Factors about Benchmarking
▪ Benchmarking is a time-consuming exercise. It has a significant requirement for staff time
and company resources.
▪ Benchmarking implementation requires the direct involvement of the senior manager, which
makes the entire exercise costly as well.

▪ Benchmarking required certain skills-set and competencies in organisation and especially in

members of the designated team responsible for benchmarking, hence training is highly
required for these staff/employees which causes both time and money resources.
▪ Reliability of data fetched through contract partners are always in question unless the source
is international/nation benchmarking clearing-house or it is a case of internal benchmarking.
▪ As mentioned earlier every change cause resistance from some set of stakeholder (degree
and sort maybe different). Benchmarking is also not an exception. It is likely that there is
resistance from employees.
▪ While adapting best practice, benchmarking allows for tailor-made according to the
company’s needs and culture. This simply causes benchmarking to fail, beca use in this way
what is adapted may not be best practice or best in class.
▪ Companies may waste time in benchmarking non-critical functions.
Practical Insight
Benchmarking at Xerox (earlier Rank Xerox)
The benchmarking (competitive benchmarking followed by functional benchmarking) at Xerox’s
drives numerous benefits, which overhaul the processes at Xerox and help them to emerge as a
quality leader with customer satisfaction level of more than 90%; from a level where their
products had over 30,000 defective parts per million (about 30 times more than its competitors).
By 1983 Xerox had benchmarked more than 230 process performance areas in their operation.
Xerox won all the three prestigious quality awards → The Deming Award (Japan) in 1980, the
Malcolm Bald-ridge National Quality Award in 1989, and The European Quality Award in 1992.
Xerox business services, the company's document outsourcing division also won the Bald-ridge
award in the service category in 1997.
Xerox witness both the qualitative and quantitative benefits, which includes–
▪ Highly satisfied customers for its copier/duplicator and printing systems increased by 38%
and 39% respectively.
▪ Customer complaints to the president's office declined by more than 60%.
▪ Customer satisfaction with Xerox’s sales processes improved by 40%, service processes by
18%, and administrative processes by 21%.
▪ Overall customer satisfaction was rated at more than 90% in 1991.
▪ Service response time reduced by 27%.
▪ Inspection of incoming components reduced to below 5%.
▪ Defects in incoming parts reduced to 150ppm from 30,000ppm.
▪ Inventory costs reduced by two-thirds.
▪ Marketing productivity increased by one-third. Distribution productivity increased by 8-10 %.
▪ Increased product reliability on account of a 40% reduction in unscheduled maintenance.
▪ Errors in billing reduced from 8.3 % to 3.5% percent.
▪ Country units improved sales from 152% to 328%.

PERFORMANCE MEASUREMENT IN THE NOT FOR PROFIT SECTOR

It is important to understand the nature of not-for-profit organisation in order to appreciate the
dynamics of performance evaluation in such organisations.
Key Characteristics
▪ These are established for purpose of charitable, welfare, social, environmental, and mutual
co-operations and perform non-economic activities largely as a principle operation.
▪ These organisations also required the amount of funds to arrange a set of resources
necessary for the attainment of the above-stated purposes. Hence, they maintain the corpus,
funded with contributions from either members or external contributors (depending upon
purpose and form of not for profit organisation).
▪ Since getting funds from members and/or contributors rather than shareholders, hence
wealth creation for shareholders is not among the objectives. It is important here to note
fiduciary (of trust) relation towards contributors (to ensure application of fund for stated
purpose) is still exist.
▪ Since the purpose of existence and operation is not to earn the profit, hence not expected/
allowed to distribute the surplus among the stakeholders (as like distribution of the dividend
among shareholders). The surplus will become part of the corpus.

Performance Measurement
Despite the fact that the not-for-profit organisation need not to earn a profit, but it doesn’t free
them from fiduciary responsibility towards the contributor of funds. They are responsible to provide
reasonable assurance to the contributor of fund that the fund is applied for the advancement of the
stated purpose, and up to which scale such purpose is attained.
So, in order to establish a measurable link between resources spent and purpose attained the
performance of not-for-profit organisation (and the decision taken thereat) need to be measured.
The next question which comes to mind is that ‘what performance measures need to be used?

What kind of performance measures not-for-profit organisation needs to employ?
Hint
It is equally important to include both financial and non-financial measures.
These organisations also required the necessary amount of fund to arrange required resources
to attain stated purposes. Hence, they maintained corpus, to which either members or external
contributors (depending upon purpose and form of not-for-profit organisation).
Despite being not-for-profit organisations, in order to ensure that the funds are deployed to
attain the intended objectives; the financial measures are equally importa nt as non-financial
measures to measure their performance.
Challenges for Measuring Performance and Way-Out

The performance measurement in not-for-profit organisations is subject to certain challenges. The
key challenges are–
Difficult to quantify the cost and benefits
It is difficult to quantify the benefit derived from the activities of these organisations in the scale of
money, especially due to the nature and timing of benefits. Nature of benefit can be behavioral,
which can only measure in term of utility or satisfaction initially; then can be quantified after a lot of
efforts. For example, if a not-for-profit organisation is formed for providing free education to poor
students, then the benefits derived by the students cannot be easily quantified and benefits are
futuristic too (that too for a longer period till the life of such pupil). There is also a time gap
between the cost incurred and benefit accrued, which makes trade-off difficult and complex.
Similarly, all the costs can’t be measured in monetary terms. Additional and auxiliary costs in form
of externalities can be there, which is difficult to quantify due to involved complexities. For
example, if some affordable housing scheme is approved, the cost will not only be limited to
construction; it also involves provisioning of road, causing pollution in that area (due to vehicle
running on such roads by potential residents), and social aspects due to parking issues. This is
merely one aspect; hence auxiliary costs are not easy to quantify.

Way-out → Despite it is difficult still, an attempt shall be made to trade-off costs and benefits
based upon opportunity value and cost. Relative value can be used to assign value to cost
incurred and benefits earned.
Note- Mind it, the reliability of such values may not be there, due to variation in time and level of
relative transactions. Hence, it is difficult to evaluate the performance of not-for-profit
organisations; just using financial measures.
Performance and Commitment of State (or Governments of State)
Not-for-profit organisation are largely engaged in functions which are of high public importance
and value, such as food security, education, and health. But same are primary responsibility of the
state (or governments of state) hence some of the state’s bodies are also working in a not-for-
profit set-up which usually has a deficit budget. State which normally has access to large available
fund and workforce, if performing well through its own bodies and agency; then mere a little bit left
to do for other not-for-profit organisations which are NGOs. Secondly state itself is the funding
source of both categories of not-for-profit organisations (full for their own bodies and to some
extent for NGOs through its welfare schemes). Hence after considering both these factors it can be
concluded that performance of not-for-profit organisations largely depends upon performance and
the commitment of state.
Since its external factor beyond control hence no specific way-out apart from predicting or
forecasting with acute accuracy as much as possible.
Multiple Objectives
A single not-for profit organisation may have diverse stakeholders to deal with, and each section of
society or group of stakeholders has its own need. This will cause multiple objectives to be achieved by
such not-for-profit organisation and there may be exiting or potential conflict among them.
Way-out → Prioritisation among these objectives
Note- Mind it, prioritisation shall be based upon importance (utility) and urgency (time).
Measuring the Utility of Funds
Not-for-profit organisations don’t earn to spend, they just budget to spend. In some cases, it may
possibly spend more than required because they have the availability of fund for disposal or in
process of implementing some welfare scheme pronounced by the government, but in some other
situations they may even not able to fulfill the targets (objectives) due scarcity of fund; hence the
utility of fund for the not-for-profit organisation is not same always. Spending excessively without
purpose may not create utility. Hence not-for-profit organisation finds it difficult to measure the
utility of funds expended.
Way-out → Value for Money framework shall be used to measure the utility of funds spent.

Models for Measuring the Performance

Value for Money (VFM) Framework
VFM framework can be used for measurement of performance in the not-for-profit sector, because
Not-for-profit organisations are expected to provide the best possible value from available money
(usually limited). VFM framework ensures–
Effectiveness (spend wisely) (an output
measure, the goal approach) → whether the
organisation has achieved its desired mission
and objectives?
Efficiency (spend well) (a link between input
and output factor, as process approach) →
Whether the resources and funds available to
the organisation has been utilised efficiently i.e.
maximum output has been obtained with
minimum input?
Economy (spend less) (as an input measure,
the resource approach) → Whether the
appropriate quantity and quality of inputs is
available at the lowest cost?
Note – Now two another Es have added i.e. Equity (spend fairly) and Ethics (spend properly). It is
worth to note that five elements (to ensure value for money framework works properly) need to
take care of are Input, Process, Output, Outcome, and Impact.
Example
Let’s consider a case of a school that provides free education to children who come from BPL
(below the property line) families. The school also provides free lunch to the students to
encourage daily attendance.
A measure of effectiveness is whether the school has been able to provide quality education to
the desired number of students. The performance of the school can be measured using the
metrics of the number of students dropping out of school year-on-year. Another measure of
performance could be the number of students who have successfully completely the 12th exams
and joined college. It is important to note that the measures might not be wholly within the control
of the school. A student might drop out even after the best efforts by the school. This makes the
performance measurement a challenging task.
A measure of efficiency could be the number of students trained per hour spent by teachers or
the students to teacher ratio. In the case of schooling, a low student to teacher ratio is preferred.
A measure of an economy would be the amount spent on maintaining the school premises, the
amount spent on remuneration to teachers, etc. The amount spent can be compared to the
budgeted expenditure or sanction amount.
If performance is measured based on the cost incurred, the school might as well decide to cut
necessary expenditure to meet the expenditure budget. For example, the school might not spend
an adequate amount to upkeep the library or computer equipment. This can be detrimental in th e
longer run. Hence, it is important to balance financial measures with non -financial measures.


Can you identify any two financial objectives of not-for-profit organisation?
Hint
▪ These organisations also required the necessary amount of fund, hence required to
consider and maximise the net cash income (flow).
▪ Budget is an important tool to quantify and it is equally important to keep spending within budget.
Adapted Balanced Scorecard by Kaplan
Robert S Kaplan (one of the co-founder of Balanced Scorecards) wrote an article in the year 2001
‘Strategic Performance Measurement and Management in Nonprofit Organizations’ with a theme of
adaption of balanced scorecard by nonprofit organisation with several examples of actual
implementation. In this article, considering the increasing need of measuring and managing
organizational performance in case of not-for-profit organisation Kaplan suggest ‘Adapted
Balanced Scorecard’ for measuring performance at NGOs.
The four perspectives suggested by adapted balanced scorecard are exactly the same as
suggested in Balanced Scorecard earlier by Kaplan along with Norton.
Then what make Adapted Balanced Scorecard different from Balanced Scorecard → it is the
assumption of the framework the premises of each prospective. The main assumption is that
mission statement is central point to attain rather profit.
Prospective Focus
Customer Perspective Satisfaction of beneficiary, Market Growth, and Other
stakeholder’s interest
Financial Perspective Fund raising, Funds growth, and Funds distribution
Internal Processes Internal efficiency, Volunteer development, Information
Perspective communication, and Quality
Innovation and Learning The capability of organisation to adjust to the changing
Perspective environment and Innovative changes
Note- It is important to note that the positioning of financial perspective and customer perspective
is switched. This is due to the fact that achieving financial success is not the primary objective for
these organisations. Instead, nonprofit organisations should be primarily concerned with how
efficiently and effectively they meet the needs of their beneficiaries and contributories/ members.
Other Performance Measures
▪ The quality of services provided by the organisations.
▪ The attainment of objective and mission.
▪ The ability to raise funds to meet the objectives efficiently.
▪ Transparent and periodical reports to the stakeholders.
▪ The long- term impact (benefits) of the activities of the not-for-profit organisations.

Performance Measurement Process

The performance measurement process typically starts with identification of the overriding
objectives and mission of the not-for-profit organisation. This includes evaluating the mission,
vision and strategy on a continuous basis. This stage typically defines the problem being solved
and the stakeholder which would be addressed by the organisation. The various objectives/mission
of the organisation are broken down and mapped with key strategies: Stakeholder (Customer),
Financial, Internal Process and Learning & Growth. In other words, the objectives are mapped with
various perspectives of the balanced scorecard. The performance measures/ key performance
indicators of each of the perspectives is defined. The actual outcome is measured and evaluated
against the performance measures defined. Any changes which are required to the performance
measures are carried out after analysis of the outcome on a periodic basis.
PERFORMANCE REPORTS
Responsibility Accounting is implemented by issuing performance reports at frequent intervals that
inform responsibility centre managers of the deviations from budgets for which they are
accountable and required to take action. Performance reports are useful for not only comparing
budgeted results to actual results, but for also showing managers the effects of activity changes
and how well these changes are controlled by management.
Note that the reports start from the bottom and move upward with each mana ger receiving
information on the operations of the unit for which he is directly responsible and summary
information on performance of other lower level managers under their direct or indirect control.
No matter how much authority and autonomy are given to responsibility managers, performance
reports are needed to evaluate the performance of the managers at all operating levels of the
organization. At bottom levels, it helps in determining what all corrective measures are required in
their segments. At top management level, these reports keep them top managers informed on the
performance of all segments.
The responsibility accounting performance report collects all of the responsibility accounting
budgets made for each department and summaries them in one large report.
Since many organisation are adopting integrated reporting, and performance is one of area which
is covered by integrated report. Hence, integrated reporting can be used for purpose of
application of responsibility accounting. It is important here to note that integrated report is a
concise communication about how an organization's strategy, governance, performance and
prospects lead to the creation of value over the short, medium and long term.
Concept Insight
Value Creation
Value creation is not an independent activity within the organization’s sole control. Value is created
using capital. In integrated reporting, capital is not limited to just financial capital. There are six
different categories: financial, manufactured, human, natural, intellectual, social & relationship
capitals. A combined effect of these capital is what results in value creation for the company.

Example
If any engineering department introduced automation (invested in new technology) then
performance report considers its effect and shows the implications, such as reduction shall be in
variable cost on account of reduction in men-hours. The budgeted reports would show a low
expected level of these variable costs. Upper management could then check the variances
between the actual and budgeted costs. If upper level management sees a manager’s efficiency
and profitability decrease compared with the budgeted numbers, management can talk with the
department manager and try to correct the unfavorable variances.
SUMMARY
▪ Responsibility Accounting is the collection, summarization, and reporting of financial
information where individual managers are held accountable for certain costs, revenue or
assets of the firm.
▪ An organisation structure outlines the roles of individuals in the organisation and decide the
way in which authority and responsibility is allocated among them and how they are
coordinating with each other to attain organisational objectives.
▪ Pure financial performance measures are Return on Investment, Residual Income, Residual
Income and Economic Value Added.
▪ Integration of Financial and Non- Financial Measures –
o Balanced Scorecard – Balanced Score Card is a set of financial and non-financial
measures relating to a company’s critical success factors. It is an approach which provides
information to management to assist in strategic policy formulation and achievement.
Major Components of Balanced scorecard – Customer Perspective i.e. how do customers
see us, Internal Perspective i.e. what must we excel at, Innovation and Learning
Perspective i.e. can we continue to improve and create value, Financial Perspective i.e.
how do we look to our shareholders.
Process of Creating a Balanced Scorecard – Identify Vision i.e. where an organisation is
going, Identify Strategies i.e. how an organisation is planning to go there, Identify CSFs
and Perspectives i.e. what we have to do well in each perspective, Identify Measures which
will ensure that everything is going in the expected way, Evaluate i.e. ensuring what we are
measuring is right, Create Action Plan, Follow up and Manage i.e. what should be the
structure of the reports and who should have the authority to look at it.
o Performance Pyramid – The Performance Pyramid is also known as Strategic
Measurement and Reporting Technique. They view businesses as performance pyramids.
The attractiveness of this framework is that it links the business strategy with day -to-day
operations.
o Building Block Model – Fitzgerald and Moon have developed an approach to performance
measurement in business services that is based on the three building blocks of
dimensions, standards and rewards.

o Performance Prism – The Performance Prism is an approach to performance management

which aims to effectively meet the needs and requirements of all stakeholders. This is in
contrast with the performance pyramid which tends to concentrate on customers and
shareholders and is also in contrast with value- based management, which prioritizes the
needs of shareholders.
Steps of Performance Prism – Focus on who are the stakeholders and what are the needs
and wants of the stakeholders, plan the strategies required to fulfill the wants and needs of
the stakeholders, identify the processes required for satisfying the above strategies,
identify the capabilities for operating and enhancing the process and take into account
what contribution does the management needs from its stakeholders.
▪ Triple Bottom Line (TBL) – TBL expands traditional accountancy reporting systems, looking at
social and environmental performance, rather than simply financial performance.
▪ Disadvantages to Non-financial Performance Measures – Multiple measures create conflict in
the short term can also be time consuming, unlike accounting measures, non-financial data
are measured in many ways, there is no common denominator.
▪ Linking CSFs to KPIs and Corporate Strategy –
o Each critical success factor should have a KPI associated with it. A single Critical Factor
can also have more than one KPI, if need be. The objectives, CSFs, and KPIs together
represent a chain of links that together deliver a company’s strategic goal, by breaking
down that strategic vision into a set of quantifiable targets.
▪ Benchmarking Schemes – Benchmarking is a technique for continuous improvement in
performance. It involves comparing a firm’s products, services or activities against other best
performing organisations, either internal or external to the firm. The objective is to find out how
the product, service or activity can be improved and ensure that the improvements are
implemented.
o Pre-requisites for Successful Benchmarking – Senior management support, clearly defined
objectives, appropriate scope of work, availability of sufficient resources, clarity of
organisation picture among the benchmarking teams, right skills and competencies of the
benchmarking team, reasons for benchmarking are informed to all the stakeholders.
o Difficulties in implementation of Benchmarking – Time Consuming, delegation of authority
not possible, and resistance from employees, costly, non-identification of necessary
improvements may result in wastage of time and resources.
▪ Performance Measurement in NFPs–
o Value for money is interpreted as providing an economic, efficient and effective se rvice
(3Es).
o Multiple and diverse objectives – NFP organisations are unlikely to have an objective of
maximisation of shareholder wealth. Instead they are seeking to satisfy the needs of their
members or sections of society, which they have been set up to benefit.
▪ The performance report responsibility accounting collects all of the responsibility accounting
budgets made for each department and summaries them in one large report.

TEST YOUR KNOWLEDGE

Return on Investment (ROI)
1. “Y” Limited has three autonomous divisions. The divisions are evaluated on the basis of ROI,
with yearend bonuses given to divisional managers who have the highest ROI. Operating
results of Division II for the last year are given below:
`
Sales 2,10,00,000
Less: Variable Expenses 1,26,00,000
Contribution margin 84,00,000
Less: Fixed Expenses 67,20,000
Net Operating Income 16,80,000
Divisional Operating Assets 52,50,000
The company's overall ROI for the last year was 18% (considering all divisions). Division II
has an opportunity to add a new product line that would require an investment of `30,00,000.
Other details of the new product line are as follows:
`
Sales ` 90,00,000 per annum
Variable Expenses 65% of sales
Fixed Expenses ` 25,20,000 per annum
Life cycle of the product line 5 years
Required
(i) CALCULATE last year's ROI of Division II.
(ii) DISCUSS whether the manager of Division II would accept or reject the new product
line, if he takes his decision based solely on divisional ROI.
(iii) ADVISE how residual income approach can be used as an alternative financial measure
for evaluation of managerial performance in the best interest of the company.
2. BYD Alloy Ltd. first opened its door in 1991 for business and now it is a major supplier of
metals supporting over a dozen different industries and employs experts to support each
industry. These include Wood & Panel Products Manufacturing, Hearth Produ cts, Site
Furnishings, Commercial and Residential Construction etc. It has grown through devotion to
its customers, dedication to customer service and commitment to quality products. The
company has two divisions: Division ‘Y’ and Division ‘D’. Each division work as an investment
centre separately. Salary of each divisional manager is `7,20,000 per annum with the
addition of an annual performance related bonus based on divisional return on investment
(ROI). A minimum ROI of 12% p.a. is expected to be achieved by each divisional manager. If

a manager only achieves the 12% target, he will not be rewarded a bonus. However, for
every whole 1% point above 12% which the division achieves for the year, a bonus equal to
3% of annual salary will be paid subject to a maximum bonus of 20% of annual salary. The
figures belonging to the year ended 31 March 2021 are given below:
Division ‘Y’ (‘000) Division ‘D’ (‘000)
Revenue 29,000 17,400
Profit 5,290 3,940
Less: Head Office Cost (2,530) (1,368)
Net Profit 2,760 2,572
Non- Current Assets 19,520 29,960
Cash, Inventory, and Trade Receivable 4,960 6,520
Trade Payable 5,920 2,800
Manager Responsible HAI FAI
During the financial year 2020-21, FAI manager of Division ‘D’ invested `13.6 million in new
equipment including an advanced cutting machine, which will increase productivity by 10%
per annum. HAI, manager of Division ‘Y’, has made no investment during the year, even its
computer system needs updation. Division ‘Y’’s manager has already delayed payments of its
suppliers due to limited cash & bank balance although the cash balance at Division ‘Y’ is still
better than that of Division ‘D’.
Required
(i) For each division, COMPUTE, ROI for the year ending 31 March 2021. JUSTIFY the
figures used in your calculation.
(ii) COMPUTE bonus of each manager for the year ended 31 March 2021.
(iii) DISCUSS whether ROI provides justifiable basis for computing the bonuses of
managers and the problems arising from its use at BYD for the year ended 31 March
2021.
Economic Value Added (EVA)
3. X Greetings is a Korean company based in Seoul committed to supplying the highest quality
stationery, greeting cards, gifts, and children’s products, which are sourced from all over the
world. Company also distributes Sunday Paper – Korean made eco-friendly stationery
designed and manufactured in Seoul. X’s home currency is the KRW. It is also listed on the
KRX for last 20 years and its current share price is KRW 23.25.
You are a Management Accountant of the X Greetings and directors have asked you to study
X on value-based management which is a different approach to the performance
management. The directors have heard about this method considering it a way of focusing on
shareholder’s interests and in the present economic scenario, they think it to be useful for the
growth of X.

Conventionally earnings per share (EPS) and share price were being used to assess
performance. The proposed changes are important and the directors require you to have the
implications of the new analysis and also want to convince the major investors for the future
benefits.
Financial data for X Greetings
Particular 2020-21 2019-20
KRW in million KRW in million
Profit after interest and tax 55.55 65.38
Interest 15.60 8.00
Opening capital employed 273.58 198.40
Closing capital employed 329.13 273.58
Debt to Equity Debt to Equity
Capital structure 40:60 40:60
% %
Costs of capital
Equity 14.20 11.50
Debt (pre-tax rate) 8.00 6.00
Tax rate 30 30
Stock market information:
Average number of shares in issue 3.2 million 3.2 million
Stock market all-share index 1,985 2,561
Retailing sector index 1,155 1,408
X Greetings (share price) KRW 22.50 KRW 24.40
Required
ASSESS the performance of X Greetings using Economic Value Added and ANALYSE the
result relative to those of earnings per share (EPS) and share price. Assumptions, if any,
should be clearly stated.
4. Water Utilities Services (WUS) is established with an aim for supply and distribution of w ater
in Mumbai as well as supply of water to the various local authorities for distribution to villages
and other small cities adjacent to Mumbai. This involved planning, operating, treating,
maintaining, and distributing water resources in the country’s urban centres and other areas
mandated by Maharashtra Government. Its mission is “To provide sustainable water in a cost
effective and environmentally friendly manner to the economy”.

The government ensures that WUS does not take advantage of its monopoly position in the
regional area by increasing prices. The government controls majority of services through its
water regulatory body which determines an acceptable margin level (ROCE) and ensures that
the pricing of WUS within these areas does not break this level. The remaining work i.e. a
water bottle operation (WBO) is not regulated by government and WUS charges a market
rate for water supply in bottle. The regulator compute return on capital employed (ROCE) of
WUS based on its own valuation of the capital assets which are used in operation and the
profit from those services.
Acceptable level of ROCE set by the regulator is 7.00%. If WUS breach this level, then the
company would be penalized. WUS board is trying to improve the performance for the benefit
of the shareholders. In order to communicate the objective of maximizing shareholders’
wealth, the directors have decided to consider economic value added (EVA) as the key
performance indicator.
Compute EVA of WUS based on the following information for the year ending 31 March 2021:
Particulars Water Distribution Water Bottle Total
Operation (WDO) Operation (WBO)
` in Crore ` in Crore ` in Crore
Revenue 555.00 186.00 741.00
Less: Operating Cost 460.00 119.00 579.00
Operating Profit 95.00 67.00 162.00
Less: Finance Charges 46.00
Profit Before Tax 116.00
Less: Tax at 30% 34.80
Profit After Tax 81.20
Capital Employed 2020-21 2019-20
` in Crore ` in Crore
Audited Accounts 1,616.20 1,495.00
Determined by the Regulator (for WDO Only) 1,558.00 1,422.00
Notes
1. Operating Costs includes:
Particular 2020-21 2019-20
` in Crore ` in Crore
Depreciation 118 114
Provision for doubtful debts 4 1
Research and Development 24 –
Other non-cash items 14 12

2. Economic depreciation is `166 Crore in 2020-21. In FY 2019-20, economic and

accounting depreciation were assumed to be the same.
3. Current year tax paid is `18 Crore and deferred tax provisions of `16.80 Crore has
been adjusted. There was no deferred tax balance before 2020-21. The provision for
doubtful debts was `9 Crore in the 2020-21 balance sheet.
4. Research and development has been non-capitalized. It belongs to a new project that
will be developed over five years and is expected to be of long-term benefit to the
company. 2020-21 is the first year of this project.
5. Cost of Capital
Equity 14%
Debt (Pre-Tax) 6%
6. Gearing of WUS
Equity 45%
Debt 55%
Required
(i) EVALUATE the financial performance of WUS using EVA.
(ii) ASSESS whether WUS comply with its acceptable ROCE level
(iii) Advise on how to improve profitability.
5. Beta Control (BC) is a global leader in manufacturing of commercial building control syste ms
with over 250 distributors and many thousands of installations in more than 50 countries.
Control systems involve air conditioning systems, facility management, energy and water
management, access control and security controls etc. At BC, manufacturing is done at a
number of factory sites where some products are easy and largely produced and have a long
life while other products are intricated and have a short life due to changing technologies.
BC’s mission statement is ‘to keep you ahead through control systems that improve
productivity and save energy’.
A Newly appointed chief executive officer (CEO) is anxious about declining share price of BC
in the last two years. She identified that the business has grown through acquisition and
senior management have focused on making corporate deals but not on making control
systems. She announced that the BC’s focus must be on optimization and upgradation of its
value generation rather than just getting bigger through acquisitions.
Assuming yourself as a performance management expert of BC, the CEO has asked you to
aid her in her improvement programme. Firstly, she wants your views on the use of EVA as
the key performance metric at BC. You are given the current EVA computation (Annexure1)
but there is some suspicion about whether the assistant who has done this work is sufficiently
well trained about this method. So, she requires you to examine his accuracy and the
assumptions forming part of the calculation.

Required
Write a report to the chief executive officer to EVALUATE the usefulness of EVA as
performance measure and accuracy of the calculation done by assistant apart the
assumptions taken if any.
--------------------------------------------------------------------------------------------------------------------------
Annexure 1
NOPAT
Particulars Year ended 31st March 2021
` in Lacs (L) Notes
Operating Profit 1,102.80
Add:
Non-Cash Expenses 30.20
Marketing Expenditure Capitalised 46.20 7
Less:
Tax 269.60 9
Lost Tax Relief on Interest 48.96
Net Operating Profit After Tax (NOPAT) 860.64
Capital Employed
Particulars Year ended 31st March 2021
` in Lacs (L) Notes
From the Statement of Financial Position 4,802.00 10
Add:
Marketing Expenditure Capitalized 46.20 7
Adjusted Capital Employed 4,848.20
WACC = (1/2 × 15%) + (1/2 × 7.8%)
= 11.40%
EVA = NOPAT – (WACC × Capital Employed)
= `860.64 L – `4,848.20 L × 11.40%
= `860.64 L – `552.69 L
= `307.95 L
Assumptions and Notes
1. Debt/Equity 1:1
2. Cost of Equity is 15.00%
3. Cost of Debt (pre-tax) is 7.80%

4. Tax Rate is 30.00%

5. Interest charged in the period was `163.20 L.
6. In current fiscal year, BC spend `80.00 L in Training and Development by leveraging
the latest digital technologies including virtual classrooms to deliver highly relevant
training to staff at the point of need.
7. Marketing Expenditure has been `46.20 L each year for the last two years to build the
long- term brand.
8. The total R & D spending was `20 L during this year for in- depth study of the TCP/IP
protocols. The TCP/IP based products have not been launched yet.
9. BC has paid Tax of `260 L while the tax charged per the accounts was `269.60 L.
10. Capital employed during the Period (from the statement of financial position):
Opening `4,564.00 L
Closing `4,802.00 L
Balanced Scorecard
6. Your Bank Ltd., was established on the 30 th September, 1940 under the provisions of Co-
operative Societies Act by the eminent professionals to encourage self-help, thrift,
cooperation among members. Bank was issued Banking License under Banking Regulation
Act, 1949 on October 25, 1986 to carry out the Banking Business within the national capital
and since then the Bank has been growing continuously. At present, Bank has large number
of membership of individuals from different sections. The Bank has 12 branches in the NCT
of Delhi. Bank offers ‘traditional counter service’. Opening hours are designed to coincide
with local market days.
Board of Directors were worried from growing popularity of new style banks. These banks
offer diverse range of services such as direct access to executive management, a single
point of contact to coordinate all banking needs, appointment banking to save time, free
online banking services 24/7, free unlimited ATM access etc.
It has now been decided that the bank will focus on “What Customers Want” and will use a
balanced scorecard to achieve this goal.
Required
PRODUCE, for each of the three non-financial perspectives of a ‘Balanced Scorecard’, an
objective and a performance measure that the bank could use with appropriate reason.
7. B. Steels is a leading manufacturer of flat and long products and have state-of the-art plants.
These plants manufacture value added products covering entire steel value chain right from
coal mining to manufacturing Pig Iron, Billets, HR Coils, Black Pipe/GI Pipe, Cable Tapes etc.
conforming to international standards. The rock-solid foundation combined with nonstop
upgradation and innovation has enabled the B. Steels to surpass its goals consta ntly. Its

vision and values for sustainable growth is balancing economic prosperity and social equality
while caring for the planet. It is preparing its balanced scorecard for the year 2020-21. It has
identified the following specific objectives for the four perspectives.
▪ Improve post-sales ▪ Improve employee ▪ Improve employee job
service morale satisfaction
▪ Increase gross margin ▪ Increase number of ▪ Increase profitability of
customers core product line
▪ Increase plant safety ▪ Increase customer
retention
B. Steels has collected Key Performance Indicators (KPIs) to measure progress towards
achieving its specific objectives. The KPIs and corresponding data collected for the year
2020-21 are as follows:
Key Performance Indicator Goal Actual
Average replacement time (number of days) 2 1.5
Gross margin growth percentage 15% 16%
Number of customers 15,000 15,600
Number of plant accidents 0 2
Percentage of repeat customers 83% 81%
Core product line profit as a percentage of core-product line sales 5% 4.4%
Employee turnover rate (number of employees leaving/ Average 2% 3%
number of total employees)
Employees satisfaction rating (1-5, with 1 being the most satisfied) 1 1.2
For preparation of Balanced Scorecard report, the following format has been developed:
B. Steels
Balanced Scorecard Report
For the year ended March 31, 2021
Perspective Objective KPI Goal Actual Goal
Achieved
(Yes or No)
Financial × × × × ×
Customer × × × × ×
Internal Business Process × × × × ×
Learning and Growth × × × × ×

Required
(i) PREPARE a balanced scorecard report using the above-mentioned format. Place
objective under the appropriate perspective heading in the report. Select a KPI from the
list of KPIs that would be appropriate to measure progress towards each objective.
(ii) B. Steels desires to integrate sustainability and corporate social responsibility related
KPIs in their balance scorecard to adhere vision and values. ADVISE B. Steels, using
TBL framework.
8. History
In 2010, Luxo had monopoly in the eyewear market of America, but the problem with the
company was that it was selling variety of eyewear, by putting a big price on it. At present,
there is almost nothing that you can’t buy online, but at that time there were limited things
that you could order online. In 2010, Arby Signer Inc. launched a website to sell eyeglasses
online. Selling eyewear online and competing with Luxo was a challenge for Arby. Within just
4 years Arby break the monopoly of Luxo and capture the major market of America. People
find it really convenient to buy sunglasses and glasses online and get delivery at doorstep.
Following the footstep of Luxo, Arby eliminated the middleman from the manufacturing
process, launched its own optical lab to have its own manufacturing process. The range of
products/services offered by Arby which make different from Luxo include easy buying
process, delivery at door step, stylish glasses, customize eyewear glasses, products was
sold on the site at very affordable, with a starting range of just $95 etc.
Mission, Vision & Objectives
Mission “Improving people’s lives with our health care products in a socially cognizant
way”
Vision “To be a trusted health care partner”
Objective “To offer people designer eyewear at a revolutionary price”
As a mission- based brand, Arby needed a way to instill their team of employees with a
passion for the mission. Arby let their employee know ‘what they value’ and ‘what the
employee should value’ in ‘who they are’. This is important to setting up ‘what they do’ and
‘why they do it’ as a core foundation of their brand story. Arby also contributes in the
philanthropic work, it inspires the people with its mission. For every pair of glasses customer
pay, Arby donates a pair of glasses to needy person. In December 2021, Arby reported the
donation of 9,60,000 pairs of eyeglasses. The company also claims to be 90% carbon
neutral.

Extracts from the Balanced Scorecard

Performance Measure 2021 2021
Actual Target
Financial perspective
Return on capital employed (ROCE) 13% 14%
Net income $95 Millions $89 Millions
Customer perspective
Number of first-time buyers 1,20,000 1,00,000
Customer retention ratio 78% 75%
Number of complaints (per 1,000 customers) 1.5 2
Number of glasses donated to needy people 9,60,000 9,00,000
Internal processes
Number of business processes re-engineered 110 100
Number of new services made available through online 2 4
application
Incidences of fraud on customers’ accounts (per 1,000 3 10
customers)
Total CO 2 emissions (tons) 850 1,100
Learning and growth
Number of employees trained to instruct retailers 1,000 1,050
Number of hours (paid for) used to support social plans 10,200 10,000
Number of trainee positions from rural areas 189 200
Other Information
Arby Signer has recently invested heavily in IT security to prevent fraud.
Required
EXAMINE the performance of The Arby Signer in 2021.
9. Caregiver Ltd. is a multi-specialty hospital in a mid-sized town. A 300+ bedded facility offers
treatment across all medical disciplines of Cardiac, Oncology (Medical, Surgical and
Radiotherapy), Neurosciences, Urology, Nephrology, Kidney Transplant, Aesthetics and
Reconstructive Surgery, and other ancillary services. Most of the community members have
their livelihood linked with the hospital. Many of them are directly employed at the hospital as
doctors, nursing staff, lab technicians or as other support staff. While, others are indirectly
related as suppliers of medical devices or drugs to the hospital, catering or housekeeping
contractors etc. for the hospital. Hence, existence of the hospital is vital to the community.

Growing awareness about sustainable business prompted the management to identify areas
that can help the hospital operate in a sustainable manner that would be mutually beneficial
to the organization as well as the town that depends on it. Therefore, it has identified the
initiatives that have been put in place to create a sustainable business. Information captured
from various departments are being considered to prepare the Triple Bottom Line (TBL)
report that is for the consumption both to internal and external stakeholders.
Required
IDENTIFY, which of the following aspects need to be reported in the TBL report and under
which of the three categories. Provide reasons for classifying the aspect under a specific
category, if applicable.
(i) Medical staff conduct charity camps every month. Open to all members of the
community, who are provided with consultation free of charge.
(ii) Prompt and accurate tax payments based on records maintained without errors or
fraud.
(iii) Caregiver, with the help of traffic police, has implemented a "green corridor" for
ambulances that carry donor organs for transplantation. Organs harvested from the
donor at one hospital can reach another hospital with the recipient patient at the
earliest.
(iv) Medical waste is discarded at a landfill in a nearby dumpsite. Some of the waste are not
bio-degradable.
(v) During review of the supplier for housekeeping service, it was observed that the service
provider resorted to child labor to keep cost of operations lower.
(vi) Training and professional development programs doctors and nurses.
(vii) Lab reports are being made available online within the hospital computer system. This
would reduce printing costs and storage space needed to maintain older records.
(viii) Caregiver has a good track record of having no medical negligence litigation cases filed
against it.
(ix) The hospital is planning to market medical check-up packages so that facilities in its
out-patient department can be utilized better.
(x) The number of inpatient hospital deaths decreased 8%, from 776 in 2019 to 715 in
2020.
Assume all aspects are material enough to be reported in the TBL report.

Benchmarking
10. Delivery Services
PHL, South Asia's premier express air and integrated transportation & distribution firm, offers
a wide range of innovative supply chain services including Express Distribution, 3PL and
Consulting. PHL offers innovative logistics solutions to its customers, enabling them to focus
on their core competencies. The firm adds maximum value to businesses at every level, right
from providing world-class warehousing support to ensuring time-definite deliveries of goods
anywhere in Country ‘X’. The following information is available:
(1) Each warehouse of PHL is solely responsible for all customers within a specified area. It
collects couriers from customers residing within ambit of its own area for delivery both
within the specific area covered by the warehouse and elsewhere in India.
(2) After collections of couriers, a warehouse forward them for delivery outside its own area
to the warehouses from which the deliveries are to be made to the customers.
(3) Therefore, each warehouse must integrate its deliveries to customers to include:
(i) couriers that it has collected within its own area; and
(ii) couriers that are transferred to it from other warehouses for delivery to customers
in its area.
(4) Each warehouse’s revenue is based on the invoice value of all couriers collected from
customers in its area, irrespective of the location of the ultimate distribution warehouse.
(5) Each warehouse costs consist its own operating costs plus some allocated prop ortion
including centralised administration services (i.e. salary, legal & professional fees etc.)
and distribution centre costs.
(6) The management team and all employees of each warehouse are paid incentives which
remains payable quarterly. The bonus is based on the achievement of a series of target
values by each warehouse.
(7) Internal benchmarking is used at PHL as to provide sets of absolute standards that all
warehouses are expected to achieve.
(8) The Annexure exhibit the target values and the actual values achieved for each of a
sample group of four warehouses situated in City SG, City HK, City NY, and City NZ.
The target values consist of:
(i) Warehouse revenue and profitability;
(ii) Courier delivery services and customer care; and
(iii) Credit period control and administrative efficiency.

Incentives are based on a points system. It is also used as a stimulus for each
warehouse improving the operational effectiveness. One point is awarded in case where
the target value for each item in the Annexure is either achieved/ exceeded, and a zero
point where the target is not achieved.
Annexure
Revenue and Profitability
Revenue Profit
Target Actual Target Actual
Particulars `million `million `million `million
Company Overall 300 360 45 48
Warehouse
City SG 24.00 22.50 3.60 3.45
City HK 21.00 27.00 3.15 3.60
City NY 18.00 21.00 2.70 3.30
City NZ 27.00 33.00 4.05 4.20
In order to calculate points of each warehouse, actual profit as a % of actual revenue
must exceed the target profit as a % of target revenue.
Courier Delivery Services and Customer Care
Actual
Particulars Target %
SG % HK % NY % NZ %
Measure (% of total):
Late collection of couriers 3.00 2.85 3.15 2.70 3.60
Misdirected couriers 6.00 6.30 5.85 4.95 7.65
Delayed response to complaints 1.50 1.05 1.35 1.20 1.80
Delays due to vehicle breakdown 1.50 1.65 2.10 0.45 3.00
Measure (% of revenue):
Lost items 1.50 0.90 1.35 1.20 2.85
Damaged items 3.00 2.25 3.60 2.25 2.70
Credit Control and Administration Efficiency
Actual
Particulars Target
SG HK NY NZ
Average debtor weeks 5.50 5.80 4.90 5.10 6.20
Debtors more than 60 days (% of total) 5.00 ? ? ? ?
Invoice queries (% of total) 5.00 1.50 1.40 0.80 2.70
Credit notes as a % of revenue 0.50 ? ? ? ?

Other Information
(‘000)
Particulars SG HK NY NZ
Debtor Aging Analysis (extract)
Less than 30 days 1,950.00 2,250.00 1,770.00 3,000.00
31–60 days 481.50 199.50 229.50 828.00
Value of Credit Notes raised during the period 67.50 54.00 42.00 198.00
Note: PHL operates all year round.
Required
Prepare a report for the directors of PHL.
(i) ANALYSE the comparative performance of the four warehouses.
(ii) ASSESSE PHL from perspective of financial performance, service quality,
resource utilisation, flexibility, innovation, and competitiveness; and
(iii) EVALUATE the performance measurement system at PHL.
Performance Measurement in the Not-for-Profit Sector
11. West Coast community operates Homelessness Services (HS) on a not-for-profit basis as a
local solution to local housing needs. The primary objective is to meet the accommodation
needs of persons within its locality targeting those living in the low/middle income groups and
senior citizens. Accommodation is basically furnished; it consists of a small house, with
kitchen, bathroom, bedroom/(s), and a sitting room. HS manages 450 such houses across
various localities. Exclusive Services (ES) is a profit-seeking organisation which provides
rented accommodation to the public. ES manages 200 such houses across localities similar
to HS’ operations.
Income and Expenditure accounts for the year ended 31 st March 2021 were as follows:
HS (`) ES (`)
Rent Received 1,02,98,600 1,09,98,000
Less:
Employee Costs 24,00,000 38,00,000
Planned Maintenance and Substantial Repairs 34,19,500 10,41,000
Running Repairs 23,91,600 6,38,000
Miscellaneous Operating Costs 15,27,500 11,75,000
Insurance, Property Taxes, and Interest etc. 13,15,500 18,75,000
Operating (Deficit)/ Surplus (7,55,500) 24,69,000
Operating Information in respect of the year ended 31 st March 2021 was as follows:

House and rental information:

Size of House Number of Houses Rent per Week (`)
HS ES HS ES
1 Bedroom + 40 20 400 750
2 Bedrooms + 80 40 450 800
3 Bedrooms + 250 140 500 1,175
4 Bedrooms + 80 Nil 700 N.A.
HS had certain houses that were unoccupied during part of the year. The rents lost as a
consequence of unoccupied properties amounted to `18,17,400. ES did not have any
unoccupied houses at any time during the year.
Employees were paid as follows:
Number of Staff Salary per Staff Member (`) per annum
HS ES HS ES
1 2 3,00,000 5,00,000
2 2 2,50,000 3,00,000
4 11 2,00,000 2,00,000
8 - 1,00,000 -
Planned maintenance and substantial repairs undertaken:
Nature of Work Number of Houses Cost per House (`)
HS ES HS ES
Miscellaneous Building Work 10 - 12,500 -
Sanitary Fittings (Kitchen + Bathroom) 45 5 26,100 52,200
[all are the same size]
AC Upgrades/ Replacements 8 - 15,000 -
Replacement of Wooden Structure for 50 13 40,000 60,000
3-Bedroomed Houses
Running Repairs Information:
Classification of Number of Repair Undertaken Total Cost (`)
Repair HS ES HS
Emergency 480 160 6,72,000
Urgent 990 376 11,28,000
Non-urgent 560 102 5,91,600
Each repair undertaken by ES costs the same irrespective of the classification of repair.

Required
(i) Critically EVALUATE how the management of Homelessness Services could measure
the ‘Value for Money’ of its service provision during the year ended 31 March 20 21.
(ii) IDENTIFY, 2 performance measures in relation to Flexibility and Service Quality
(dimensions of performance measurement).
(iii) ANALYSE, 3 performance measures relating to ‘Cost and Efficiency’ that could be
utilised by the management of Homelessness Services when comparing its operating
performance against that achieved by Exclusive Services.
ANSWERS/ SOLUTIONS
1. (i) Calculation of last year ROI of Division II
= Controllable Profit/ Controllable Net Asset
= ₹16,80,000/ ₹52,50,000
= 32%
(ii) Calculation of ROI of New Product Line
Particulars Amount (₹)
Sales 90,00,000
Less: Variable Cost 58,50,000
Controllable Contribution 31,50,000
Less: Fixed Cost 25,20,000
Controllable Profit 6,30,000
Investment Available 30,00,000
Return on the Proposed Line (ROI) 21%
The manager of Division II will reject investment proposal (Invest additional ₹30 lacs in
new product line) because this would decrease the Division II’s ROI of 32% to 28%*.
(*) 28% = (₹16,80,000 + ₹6,30,000) / (₹52,50,000 + ₹30,00,000)
Note – Divisional performance measures have certain issues, one among them is lack
of goal congruence between divisions and organisation as a whole. The divisional
managers are forced to choose between the best interests of their division (because
their individual performance is linked division performance) and the best interests of the
company as a whole. It is obvious, a manager who is evaluated based on ROI will reject
any project whose rate of return is below the division’s current ROI even if the rate of
return of the project is above the company’s minimum required rate of return. In present
case too investment proposal with ROI of 21% which above organisation wide ROI i.e.
18%. This will give birth to situation of sub-optimisation.

(iii) RI is capable to overcome the inherent shortcoming of ROI. If divisional managers are
evaluated using residual income then every such investment proposal will be
acceptable whose rate of return is above the minimum required rate of return, because
it will increase their residual income. Hence if decision is based upon RI rather ROI,
division II will accept the proposal to invest additional capital of 30 lacs, because it will
fetch them 21% which more than 18% the required rate of return; in the best interest of
the company as a whole because capable to add ₹ 90,000 each year for next 5 year to
profit of company
Working Note – Calculation of RI for division II (from proposed investment).
Particulars Amount in ₹
Controllable Profit 6,30,000
Cost of Capital (18%) 5,40,000
Residual Income (RI) 90,000
Note – Where RI is capable to overcome the sub optimisation but has its own
shortcomings. Being an absolute measures RI is not capable to compare the
performance of divisions which are different in size.
Alternative
To overcome the dysfunctional consequences of ROI, the residual income approach can be
used. For the investment decision for Divisions II, the residual income calculations are as
follows:
Proposed Investment ₹ 30,00,000
Controllable Profit ₹ 6,30,000
Cost of Capital (18%) ₹ 5,40,000
Residual Income (RI) ₹ 90,000
Advise
This calculation indicates that the residual income of Division II will increase if manager
accept the project. However, it is important to note that Residual Income does not always
point to the right decision, because notional interest on accounting capital employed is no t the
same as IRR on cash investment.
This Project has 1.65% IRR.
Overall, Residual Income is more likely than ROI to improve when managers make correct
investment decisions, and so is probably a ‘safer’ basis than ROI on which to measure
performance.
2. (i) ROI
Division ‘Y’
Controllable Profit = ₹5,290K
Net Assets = ₹19,520k + ₹4,960K – ₹5,920K = ₹18,560K
ROI = 28.50%

Division ‘D’
Controllable profit = ₹3,940K
Net Assets = ₹29,960K + ₹6,520K – ₹2,800K = ₹33,680K
ROI = 11.70%
Responsibility accounting advocates that manager’s performance shall be judged based
upon how well he or she manages the items under his or her control, hence in
computation of ROI of both division, controllable profit has been taken into
consideration; because head office costs are not controllable by divisional managers.
Figures of Non-current and current assets apart from the current liabilities have been
taken into consideration as they are such items over which divisional managers have
complete control.
(ii) Bonus
Bonus to be paid for each whole percentage point is ₹21,600 (₹7,20,000 × 3%), But
there is ceiling limit as well, i.e. 20% of salary hence the maximum Bonus will be
₹1,44,000 (₹7,20,000 × 20%).
Division ‘Y’
Divisional ROI is 28.5%, which result in 16 whole percentage points above the minimum
required ROI of 12%. Hence the bonus according to each whole percent of excess ROI
will be ₹3,45,600 (16 × ₹21,600). But there is upper cap of ₹1,44,000 Therefore HAI
will be paid the bonus of ₹1,44,000.
Division ‘D’
Divisional ROI is 11.7%, since same is less than the minimum required ROI of 12%,
hence FAI will not be rewarded with bonus.
(iii) Discussion
FAI will not receive any bonus since he has not earned any point above minimum
percentage. This is due to the larger investment base on which the ROI figure has been
computed. Total investment of Division ‘D’ are almost 1.81 times to that of Division ‘Y’.
The major reason behind this is that Division ‘D’ invested ₹13.6 million (₹13,600K) in
new equipment during the year. Ignoring this investment of division D is just 1.1. times
to that of division Y and net Investments would have been only ₹20,080K and the ROI
for Division ‘D’ would have been 19.62% resulting in payment of a bonus ₹1,44,000 (7 ×
₹21, 600 i.e. ₹1,51,200 but subject to upper cap of ₹1,44,000) rather than the nothing.
So, FAI is being penalized for making investment decisions which are in the best
interests of his division and company, because new investment enhance productivity
which will support customer loyalty, dedication to customer services and quality, the
CSFs for BYD. It is very surprising that he decided to invest where he knew that he
would receive lesser bonus subsequently. On the other hand, HAI has taken benefit
from the fact that he has not invested anything even though it was needed for computer
system updation. This is an example of sub-optimal decision making.

Further, Division ‘Y’’s trade payables are more than double those of Division ‘D’. In part,
one would expect this due to higher sales (almost 66% more than Division ‘D’) and low
cash levels at Division ‘Y’. Higher trade payable leads to reduction in net assets figures.
The fact that BYD is rewarding HAI with bonus, even though relationships with suppliers
may be badly affected, is again a case of sub-optimal decision making.
If the profit margin (excluding head office cost) as percentage of sales is calculated, it
comes to 18.24% (₹5,290 / ₹29,000) for division ‘Y’ and 22.64% (₹3,940 / ₹17,400) for
division ‘D’. Therefore, it can be seen that division ‘D’ is performing better if capital
employed is ignored. ROI is simply distorting the division ‘D’’s performance.
FAI might feel extremely disappointed by getting nothing and in the future, he may opt
to postpone the investment to increase the bonus. Non- investing in new technology
and equipment will mean that the BYD will not be kept updated with industry changes
and its overall future competitiveness will be affected.
Briefly, the use of ROI is resulting in sub-optimal decision making and a lack of goal
congruence i.e. what is good for the managers is not necessarily good for the company
too and vice versa. Hence ROI is not justifiable basis to for computing the bonuses of
divisional managers and also cause problem for BYD.
3. Conventionally the X Greetings considered EPS and Share Price as performance measure,
but management has shown interest in using EVA as performance measure now.
EPS - The performance of X Greetings has gone down since earnings per share is down by
15.03% (WN2) from last year. This indicates the company is not performing well and it is not
in the favor of investors to continue with their investment in X Greetings or invest further.
Share Price and Index - However, the share price seems relatively better than of sector and
stock market as whole. The share price of X Greeting declined by 7.79% in comparison to
17.97% decline in retailing sector index and 22.49% decline in Stock Market all -share index
(WN3). The sector comparison is relevant for determining the performance of X Greetings
rather stock market all-share index. According to this measure, performance of X Greetings is
acceptable, because it registered comparatively less destruction of market-cap.
This implies that the within retailing sector X Greetings is seen as company with better
prospects and this will encourage the shareholders to continue to hold their shares in the
company.
EVA - X Greetings has generated positive EVA KRW 37.03 million during 2020-21 and same
is less then what it earns during year ago (KRW 53.96 million) (WN1). No doubt EVA falls by
around 31% over a year, but still positive; means value is generated. Hence perf ormance is
acceptable.
To Conclude, even in the bearish market X Greetings is capable to generate value for fund
providers including shareholders hence performance of X Greetings is acceptable can be
consider as good investment option.

Working Note-1 (EVA)

EVA calculations for the periods given are:
2020-21 2019-20
Particulars KRW in million KRW in million
Profit after interest and tax 55.55 65.38
Add Back: Interest (net of tax at 30%) 10.92 5.60
Net operating profit after tax (NOPAT) 66.47 70.98
Opening Capital employed 273.58 198.40
Assumptions
– There are no non-cash expenses to adjust the profit.
– Economic depreciation and Accounting depreciation are equal.
– No lease exists for capitalisation.
Cost of Capital
WACC 2020-21 = 0.60 × 14.20% + 0.40 × 5.60%
= 10.76%
WACC 2019-20 = 0.60 × 11.50% + 0.40 × 4.20%
= 8.58%
EVA = NOPAT – Capital Employed × WACC
EVA 2020-21 = 66.47 m – 273.58 m × 10.76%
= KRW 37.03 m
EVA 2019-20 = 70.98 m – 198.40 m × 8.58%
= KRW 53.96 m
Working Note-2 (EPS)
Particulars 2020-21 2019-20 Change
EPS KRW 17.36 KRW 20.43 -15.03%
Working Note-3 (Index and Share Price Movement)
Particulars 2020-21 2019-20 Change
KOSPI (capitalization-weighted index 1,985 2,561 -22.49%
of all common shares)
Retailing sector index 1,155 1,408 -17.97%
X share price KRW 22.50 KRW 24.40 -7.79%

4. (i) Computation of NOPAT

Particulars ` in Crore
Operating Profit 162.00
Add:
Non-Cash Items 14.00
Accounting Depreciation 118.00
Doubtful Debts 4.00
Research and Development 24.00
Less:
Economic Depreciation 166.00
Tax Paid 18.00
Tax Saving on Interest (`46 × 30%) 13.80
NOPAT 124.20
Computation of Capital Employed
Particulars ` in Crore
Capital Employed as on 31.03.2020 1,495.00
Add:
Provision for Doubtful Debt as on 31.03.2020 5.00
(i.e. ₹9 - ₹4 crore)
Other Non-Cash Items (incurred in 2019-20) 12.00
Adjusted Opening Capital Employed 1,512.00
WACC = 0.45 × 14% + 0.55 × 6% × (1 – 30%)
= 8.61%
= ₹124.20 – (8.61% × ₹1,512)
= ₹124.20 – ₹130.18
= – ₹5.98 Crores
Evaluation
Presently, WUS is distorting value as it is not able to meet the economic cost of its own
capital. This put the company into the question of perpetual succession and lead the
company against shareholder’s interest. The reason could be a higher cost of equity for
WUS. The investing risk should be low since 75% of the services that the company
renders are important for the economy and demand is guaranteed in future. Optionally,
WUS needs to either increase its NOPAT enough for break even on economic value
added or slash its capital employed by selling unutilized or under-utilized assets.

(ii) Regulatory ROCE: Target 7.00%

 OperatingProfit 
ROCE =  Capital Employed  ×100.00%
 
 95 
=  1,422   100%
 
= 6.68%
The ROCE is within the acceptable ROCE of 7.00%.
(iii) Operating Margins
Water Distribution Operation = 17.12%
Water Bottle Operation = 36.02%
Advise
Operating margin from WBO is 36.02% compared to 17.12% (WDO). WUS may use the
WDO activities as a trusted source of cash profit to reinvest in expansion of the WBO.
Expansion through acquisition of appropriate non-regulated businesses using the cash
generated by the regulated activities might be a good decision.
Further, WUS may improve profitability by controlling costs within WDO activities
through performance measurement. The regulatory body cannot argue that the
company is overcharging its customers to increase profit margin. This is possible
through strict observance of expenses and using cost savings techniques through
efficiency improvements. In order to control cost within WDO, targets should be based
on minimal variances and adopting cost cutting methods.
Overall, In WDO, there is only a limited scope for increase in the operating profit since
the maximum operating profit allowed is ` 99.54 crore i.e. 7.00% of ` 1,422 crore of
capital employed. Thus, WUS should go to expand its WBO as this is producing higher
operating profit margins.
5. Report
To: CEO, Beta Control
From: Performance Management Expert
Date: 31st May 2021
Subject: Evaluation of EVA at Beta Control
EVA provides a link between decisions, performance measures and rewards, which focuses
managers on performing better. Incentive schemes based on EVA provide better quality
information and motivation in making decision which in turn maximise shareholder’s w ealth.
In other words, EVA links the operating returns to the assets that were used to generate
those returns. The learning which flows from EVA analyses can be perceptive and can allow
the manager not only to identify areas of weakness in performance but also to easily find

solutions. BC is a multiproduct company having number of factory sites. EVA can help to
appraise divisional contributors to, or detractors from, overall profitability. Thus, managers
may be educated through EVA and pursue such objectives that improve operating profits
investing more capital.
In addition, this report deals with evaluation of the accuracy and assumptions used in the
calculation of BC’s EVA. There are many errors in the present calculation of EVA. These
have been discussed below and revised calculations are enclosed.
▪ Non-Cash Expenses have been correctly added back to the profit as these are
expenses which do not affect the cash flow of a given period.
▪ Addition back of Marketing Expenditure is also correct as spending contributes to future
value-creation. For the same reason, the prior year spending is also added in to capital
employed.
▪ Training and Development Expenses should be capitalised. Training and Development
Expenses have been treated as an expense in the income statement, they should be
added back to profit, and added to capital employed (at the end of the year).
▪ Research and Development (R & D) Expenses should be treated as marketing
expenditure for long period.
▪ The tax expenses in the EVA calculation should be the tax paid with adjustment for lost
tax relief on interest and not the adjusted amount of tax charged in the accounts.
▪ The WACC is incorrect because it should be based on post-tax cost of debt.
▪ Generally, a company takes, at least, a year’s time to earn a return on investment.
Thus, the capital employed figure should be based on the beginning numbers.
NOPAT
Particulars Year ended 31st March
2021
` in Lacs
Operating Profit 1,102.80
Add:
Non-Cash Expenses 30.20
Marketing Expenditure Capitalised 46.20
Training & Development Expenses 80.00
R & D Expenses 20.00
Less:
Tax 260.00
Lost Tax Relief on Interest 48.96
Net Operating Profit After Tax (NOPAT) 970.24

Capital Employed
Particulars ` in Lacs
From the Statement of Financial Position (Starting) 4,564.00
Marketing Expenditure Capitalized 46.20
Adjusted Capital Employed 4,610.20
WACC = (1/2 × 15%) + (1/2 × 7.8% × 70%)
= 10.23%
= `970.24 L – `4,610.20 L × 10.23%
= `498.62 L
The recomputed EVA has increased from `307.95 Lacs to `498.62 Lacs which shows a
positive position for BC as it adds up the shareholder’s wealth.

For calculating NOPAT, following most common adjustments to accounting profit as
remarked by the Stern Stewart has been considered.
▪ For Advertising, Research and Development Items expensed, Staff Training
- Impact on Profit: Increase CY’s profit, deduct economic depreciation on PY’s EVA
adjustment.
- Impact on Capital Employed: Increase capital employed at the end of the year,
increase capital employed in respect of similar add backs of PY’s investments not
treated as such in financial statements (net of economic depreciation).
▪ For Depreciation
- Impact on Profit: Add accounting depreciation and subtract economic depreciation.
- Impact on Capital Employed: Alter value of non-current assets (and capital
employed) to reflect economic depreciation not accounting depreciation.
▪ For Non- Cash Expenses
- Impact on Profit: Add back to profit.
- Impact on Capital Employed: Add to retained profits at the end of the year.
▪ For tax charge, this will be based on ‘cash taxes’ rather than the accruals based
methods used in financial reporting.
Further, the revised calculation of EVA is largely based on the following assumptions:
▪ There is an implicit assumption that accounting depreciation (included in operating
profit) is equivalent to economic depreciation (which should be used for EVA
calculations). This assumption is doubtful, although there is no information for more
accurate calculation.
▪ For Additional Marketing Expenditure, no estimation of economic life (expected period
during which an asset remains useful) in building the brand and corresponding
economic depreciation has been considered in the above calculation.
▪ No amortisation on the R & D Costs is required to be recognised as the product has not
been introduced yet. This is in line with the accounting treatment of such items. There
was no Research & Development expenditure in the previous year.

6. Internal Business Process Perspective

Objective: Cross-sell Products
Measure: Products Purchased per customer
Reason: Cross-selling, or encouragement customers to purchase additional products e.g.
insurance, forex etc. is a measure of customer satisfaction. Only if a service is perceived as
highly satisfactory the service would be repeated/ additional products or services would be
accepted.
Learning and Growth Perspective
Objective: Increase the Number of New Products or Services Sold
Measure: Number of Customers Buying the New Products/ New Services
Reason: Long term financial success requires bank to create new products / services (e.g.
internet banking, ATM access) that will meet emerging needs of current / future customers
such as 24/7 banking.
Customer Perspective
Objective: Increase Customer Loyalty
Measure: Number of Accounts Closed or Closure Request Received
Reason: Customer loyalty describes the extent to which bank maintains durable relations to
its customers. The share of existing customers should have a high importance as it indicates
about image and reputation. Closure request is not a good sign for ban k. Bank should
investigate reasons for the same and take appropriate actions to improve services offered to
retain customers.

Other Objectives and Measures are also possible but they must relate to the bank’s Goal.
7. (i) B. Steels
Balanced Scorecard Report
For the year ended March 31, 2021
Perspective Objective KPI Goal Actual Goal
Achieved
(Yes or No)
Financial Increase Gross margin growth 15% 16% Yes
Gross Margin percentage
Increase Core product line profit as 5% 4.4% No
Profitability of a percentage of core
Core Product product line sales
Line

Customer Increase Number of Customers 15,000 15,600 Yes

number of
customers
Increase Percentage of repeat 83% 81% No
customer customers
retention
Internal Improve post Average replacement 2.0 1.5 Yes
Business sales service time (number of days)
Process Increase plant Number of plant 0 2 No
safety accidents
Learning Improve Employees satisfaction 1 1.2 No
and Growth employee job rating (1-5, with 1 being
satisfaction the most satisfied)
Improve Employee turnover rate 2% 3% No
employee (Number of employees
morale leaving/ Average number
of total employees)
(ii) “Triple Bottom Line” concept encourages companies to measure not only their
financial profits, but also the impact that its operations have on the society and
environment. Therefore, this framework measures the full cost of doing business by
measuring the following bottom lines (i) Profit (ii) People and (iii) Planet.
Diminishing non-renewable resources have forced businesses to focus on sustainable
manufacturing. This term refers to managing manufacturing processes such that they
minimize any negative impact on the environment by conserving energy and natural
resources. In many instances, improved operational efficiency not only reduces waste
(thereby costs) but also improves product safety, it strengthens the brand’s reputation
and builds public’s trust about the company. As a long- term strategy, this improves
business viability and provides a competitive edge to the company. This concept is the
“Planet Bottom Line” within the Triple Bottom Line framework. Metrics on the following
aspects may be investigated to find out the environment impact of business operations:
▪ Material consumption
▪ Energy consumption
▪ Water utilization
▪ Emissions, treatment of effluents and waste (include emissions affecting air,
water, and land)
▪ Fuel consumption by tracking freight and transportation costs
▪ Land utilization
▪ Recyclability and disposal of product

“Corporate Social Responsibility” enables the company to become conscious of the

impact its operations has on the society. CSR programs, through philanthropy and
volunteer efforts can forge a stronger bond between itself, its employees, and the wider
community. Again, this improves both the brand image as well as builds public’s trust
about the company. This concept is the “People Bottom Line” of the Triple Bottom
Line framework. Metrics on the following aspects maybe investigated to find out the
social impact of business operations:
▪ Work place environment and labour relations
▪ Occupational health and safety, accident rates
▪ Human rights practices – child labour, employee work-place security policies
▪ Training and education
▪ Equal opportunity employer – diversity of workforce and opportunities available for
employees’ growth
▪ Suppliers – local sourcing versus sourcing from external markets
▪ Philanthropy and volunteer programs organized
▪ Product safety in terms of customer health and safety
▪ Pricing of essential products to enable wider reach within the society
▪ Transparent and ethical business practices
B. Steels can study these aspects, determine the relevant metrics, and prepare periodic
KPI reports that can help in measuring responsibilities towards sustainability and social
impact.
8. The balanced scorecard approach looks both financial performance and non -financial
performance. In order to gain competitive advantage, organizations have to be conscious of
the needs and convenience of their customers. The Arby signer has a vision and strategy
which goes far beyond just making money. They want to help the community and give
something back to customers also. Hence, performance measures which address whether
the Arby is being successful in pursuing their vision has been incorporated in Balanced
Scorecard. The performance of the Arby will be considered under each of the titles used in
the balanced scorecard:
Financial Perspective
The Arby has had a year of diverse achievements when looking at the extent to which it has
met its financial targets. Its ROCE shows how efficiently it has used its assets to generate
profit for the business. The target of ROCE for the year was 14% but it has only achieved
13% return. The Arby’s Net Income, however, was in fact $6 million higher than its target,
which is good. The most likely reason for the under target ROCE is possibly the investment
which Arby has made in IT security. Whilst this may have reduced ROCE, thi s investment is
essentially a good idea as it helps Arby to pursue its mission and will keep customers happy.

Customer Perspective
Regarding its customers, Arby’s performance is better in the current year. It has not just
exceeded its target sale to first time buyers by 20,000 but also improved its customer
retention ratio, which is good for company to pursue its vision of being a trusted healthcare
partner.
Customers complaints has reduced from 2 complaints to 1.5 complaints for every 1,000
customers, the exact reason is not clear but it might be because of improved processes and
team efforts of employees.
Also, the number of glasses donated exceeded the target. It shows that company has
exceeded its target of helping people which is good for the company’s reputation.
Internal Processes
Number of business processes within Arby re-engineered has exceeded the target, which is
very good and the impact of which may be reflected in the lowering of level of customer
complaints. Likewise, the investment to improve IT security has been a great success, with
only three incidences of fraud per 1,000 customers reported compared to the target of 10.
However, only two new services have been made available via online application, instead of
the target of four, which is unsatisfactory. But fortunately, its CO 2 emission is below to the
target level.
Learning and Growth
The Arby has succeeded to train its employees to instruct retailers. However, the number of
employees trained to instruct retailers are comparatively lesser than targeted, shortfall in
training of employees to give instruction to retailers may have an impact on the Arby’s failure
to meet its target of market expansion.
Number of hours (paid for) used to support social plans are comparatively higher, it results in
additional costs which could have contributed to the fact that the Arby did not quite meet its
target for ROCE. Further, company has not met aim for helping the rural area as targeted.
This may be because the number of candidates applying from these areas was not as high as
planned and this situation is beyond company’s control.
In general, the Arby Signer had a successful year, meeting many of its targets.
9. Aspects that need to be reported in the TBL report:
S.N. Aspect Category on the TBL Report
(i) Medical staff conduct charity camps every Social bottom line, as it benefits the
month. Open to all members of the local community.
community, who are provided with
consultation free of charge.
(ii) Prompt and accurate tax payments based Economic bottom line, since tax
on records maintained without errors or payments impact an organization’s
fraud. bottom line and money flow.

(iii) Caregiver, with the help of traffic police, has Social bottom line, since green corridor
implemented a "green corridor" for would unable the ambulance to transport
ambulances that carry donor organs for harvested organs between the hospitals
transplantation. Organs harvested from the at the earliest this would be beneficial for
donor at one hospital can reach another patients in need of critical care.
hospital with the recipient patient at the
earliest.
(iv) Medical waste is discarded at a landfill in a Environmental bottom line, as it
nearby dumpsite. Some of the waste are affects the ecological surroundings of
not bio-degradable. the town.
(v) During review of the supplier for Social bottom line, since employing
housekeeping service, it was observed that child labor leads to exploitation of
the service provider resorted to child labor children within the community.
to keep cost of operations lower.
(vi) Training and professional development Social bottom line, since it contributes
programs doctors and nurses. towards employee development.
(vii) Lab reports are being made available online Environmental bottom line, since
within the hospital computer system. This paper, cartridge and storage
would reduce printing costs and storage requirement would be lower. This
space needed to maintain older records. preserves environmental resources.
(viii) Caregiver has a good track record of having Social bottom line, since this is an
no medical negligence litigation cases filed indicator of the quality of services
against it. provided to patients.
(ix) The hospital is planning to market ‘medical Not relevant to TBL report. This is a
check-up packages’ so that facilities in its marketing strategy to improve
outpatient department can be utilized better. profitability.
(x) The number of inpatient hospital deaths Social bottom line, since hospital
decreased 8%, from 776 in 2019 to 715 in mortality rate measures the clinical
2020. quality.
10. Report
To: The Directors of PHL
From: Management Accountant
Subject: Warehouse Performance
Date: 11th May 2021
(i) NY has achieved the best performance with (12) points. SG and HK have given a
reasonable level of performance with (8) points each. NZ is under performed earning
only (4) out of the twelve points.
NY is the only warehouse which has achieved both increased revenue and increased
profit over targets.
In the courier delivery services and customer care, NY has achieved all (6) of the target
standards, SG (4); HK (3). The data of NZ indicates, the need for investigation due to
achievement of only (1) out of six targets.

In respect of the credit control and administrative efficiency, HK and NY have achieved
all (4) standards and SG has achieved (3) of the four standards. Once again, NZ is the
‘bad performer’ and achieved only (2) of the four standards.
(Refer points table)
(ii) The terms mentioned in the question might be seen as representative of the dimensions
of performance. The analysis of dimensions may be translated into results and
determinants.
Results are the outcome of decisions and actions taken by management in the past.
Measurement of the results may be done by focusing on financial performance and
competitiveness. Financial performance may be measured in terms of revenue and
profit as shown in the points table. The point’s system shows which warehouses have
achieved or exceeded the target. Besides, liquidity is another criterion for the
measurement of financial performance. The total points in table showed that HK and NY
warehouses appear to be the best performer in aspects of credit control.
Competitiveness may be assessed in terms of sales growth or in terms of market share
or increase in customers etc.
The determinants are the factors which may be seen to contribute to the achievement
of the results. In other words, Determinants refer to the forward-looking dimensions of
Fitzgerald and Moon model, for example- what areas of future performance are most
important for PHL to achieve positive financial and competitive results? Quality,
resource utilization, flexibility and innovation are the determinants of future success and
they are also the contributors to the achievement of competitiveness and financial
performance.
In PHL a main quality issue seems to be courier delivery services and customer care.
Points table shows that the NZ warehouse has a major problem in this area and
achieved only (1) point out of the six available.
Resource utilisation for PHL is critical to its financial success and may be measured by
effective and efficient use of drivers, vehicles, and financial resources. To some extent,
such measurement can be seen in the data relating to courier delivery services and
customer care. For example, the reason of late collection of couriers from customers
may be a shortage of vehicles and/or drivers. Such shortages might be due to sickness,
staff shortage, problems of vehicle availability, vehicle maintenance etc.
Flexibility may be an issue like varied range of service as to meet different segment of
customer is unavailable. Possibly, a short-term sub-contracting of vehicles or
collections or deliveries may help in overcoming late collection problems.
The points table i.e. ‘target vs actual’ may be considered as an example of innovation
by PHL. This gives a comprehensive set of measures providing an incentive for
improvement at all warehouses. The points table may demonstrate the extent of
achievement or non-achievement of PHL strategies for success. For instance – the firm
may have a customer care commitment policy which identifies factors that should be
achieved on a continual basis. For example, timely collection of couriers, misdirected
couriers re-delivered at no extra charge, prompt responses to customer claims and
compensation for customers.

(iii) The performance measurement system used by PHL is simple to use. However, it may
be looked upon measuring the right things since the specific measures used in point s
table encompass a range of dimensions designed to focus the organization on factors
essential for PHL’s success and not restricted to traditional financial measures.
At PHL, internal benchmarking has been used to provide sets of absolute standards that
all warehouses are expected to achieve. This will help to ensure a continu ous focus
upon the adoption of ‘best practice’ at all warehouses. Benchmarks on delivery
performance give importance to quality of service whereas benchmarks on profitability
i.e. target profits focus solely upon profitability.
Incentive schemes have been used at PHL, linking the achievement of firm targets with
rewards. It might happen that the profit incentive would act as a booster to each
warehouse management team. However, what is required for the prosperity of PHL is a
focus of management on the determinants of success rather than the results of
success.
Workings
Warehouse – Points Table
for the year ended 31 March 2021
SG HK NY NZ
Revenue and Profit
Revenue 0 1 1 1
Profit (see note below) 1 0 1 0
Total Points earned …(A) 1 1 2 1
Ranking II II I II
Courier Delivery Services and Customer Care
Late collection of couriers 1 0 1 0
Misdirected couriers 0 1 1 0
Delayed response to complaints 1 1 1 0
Vehicle breakdown delays 0 0 1 0
Lost items 1 1 1 0
Damaged items 1 0 1 1
Total Points earned …(B) 4 3 6 1
Ranking II III I IV
Credit Control and Administrative Efficiency
Average Debtor weeks 0 1 1 0
Debtors more than 60 days 1 1 1 1
Invoice queries (% of total) 1 1 1 1
Credit notes (% of revenue) 1 1 1 0
Total Points earned …(C) 3 4 4 2
Ranking II I I III
Total Points …(A)+(B)+(C) 8 8 12 4

(a) Profit Points Calculation

Actual Results e.g. SG = 3.45/22.50 = 15.3% (1 point); HK = 3.60/ 27.00 = 13.3% (0 point)
(b) Debtors more than 60 days (% of total)
Particulars SG HK NY NZ
Revenue (’000) 22,500 27,000 21,000 33,000
Debtor weeks 5.80 4.90 5.10 6.20
∴ Debtors …(A) 2,510 2,544 2,060 3,935
Less than 30 days …(B) (1,950) (2,250) (1,770) (3,000)
31–60 Days …(C) (481.50) (199.50) (229.50) (828.00)
More than 60 days …(A) - (B) - (C) 78.50 94.50 60.50 107.00
Debtors in more than 60 days (% of total) 3.13 3.71 2.94 2.72
(c) Value of credit notes raised as a % of revenue e.g. SG = `67,500/ `2,25,00,000 = 0·30%
11. (i) For commercial enterprises, generating profits is a very important objective. Likewise,
not-for-profit enterprises have certain cultural, social or educational objectives for which
they are created. Regardless of the type of organization, it is important to know
whether the internal operations meet certain performance benchmarks, that will ensure
that the organization achieves its objectives in a better manner. Moreover, even if the
organization does not operate for profits, it is important for it to be “c ost effective”.
Resources (including money) should be used optimally to achieve intended outcomes.
For example, HS can use this benchmarking tool to look into the following questions:
(a) Does the organization function in an efficient and cost effective manne r?
(b) Does the estate management make best use of the buildings to achieve the
objectives of the organization?
(c) Does the estate management function manage upkeep of buildings in terms of
repairs and improvements in an effective manner?
(d) Are the tenants satisfied with the service provided by the estate management and
the suitability of the accommodation for their needs?
“Value for Money (VFM)” is an assessment made based on the criteria of economy,
efficiency and effectiveness.
Economy involves minimising resource consumption while meeting specified
requirements of quality and quantity. Minimize the cost of resources / required inputs
(implies to spend less) while ensuring that the desired quality of service is achieved. For
HS, inputs could be purchases made for maintenance and repair work like sanitary
fittings, AC, wooden structure for the houses etc., while resources could be the labour
employed to carry out these services. HS should aim at purchasing required quality of
inputs at the least possible price. Skilled labour needed for this job should be procured
at the lowest pay scale possible. Procuring these at lower cost leads to savings for HS.
At the same time, HS should ensure that cost cutting / saving does not come at the cost
of quality. Lower quality, implies inferior service levels, which ultimately will compromise
HS’ social commitment to provide quality housing to needy members of its community.

Efficiency involves maximising the ratio between resources (input) and the output of
goods, services or other results.
The focus of efficiency is on the process of rendering service. The objective of efficient
operations is to maximize output using minimum resources. Improved productivity
means that resources procured are used in an optimal way (implies spending well).
In the case of HS, one of the resources is the labour employed for repair and
maintenance work. Efficiency (productivity) measured would be the relationship
between the employees available and the repair work performed by them. If the pool o f
employees do more repair work than the benchmark set, productivity is higher. This also
closely ties up with economy (cost) of operations. If the given pool of employees
(resources), who are paid optimum salary (cost), cater to more repair and maintenanc e
work, economy of operations is achieved due to higher productivity of operations. In
case these activities are outsourced, efficiency and economy can be achieved by calling
for tenders. Select the tender that provides maximum work for least cost.
In addition, HS may explore options for efficiencies from business process
improvements, shared services as well as further efficiencies with in assets
management.
Effectiveness involves ensuring that the outcome achieves the desired policy aims and
objectives. Have the objectives been achieved, how does the impact of the actual
output / service compare with its intended impact? (implies to spend money wisely to
achieve desired objectives). In the case of HS, effectiveness could be assessed based
on the following questions
(a) Are the housing needs of the targeted community members met?
(b) Are the tenants satisfied with the accommodation?
(c) Given its social cause, are the staff friendly, courteous and hospitable to the
customers?
(d) Do the housing accommodations comply with safety standards and other legal
requirements?
Each measure is inter linked with the other. For example, HS has replaced sanitary
fittings in the kitchen and bathroom in 45 houses for `26,100 each, costing a total of
`11,74,500. Compared to ES that has spent `52,200 on each house for sanitary fitting
replacement. For the cost of `11,74,500 ES could have replaced fittings in only 22
houses (`11,74,500 / 52,000) as compared to HS’ ability to replace fittings in 45 houses.
Therefore, HS’ decision has been economical, getting more work done for same cost. At
the same time, this does not indicate whether the fittings replaced by HS are of similar
or better quality as compared to ES. ES could have used better quality fittings that last
longer, enhance customer experience, safety etc. The spending by ES could have been
more effective than HS because it helps achieve the desired objective of customer
satisfaction, safety and lesser running cost for maintenance. Therefore, to achieve
economy, HS may have compromised on effectiveness.

Benchmarking is a good method of measuring performance it enables a comparison of

the process, costs etc. with those of a close competitor. Services will be expected to
use benchmarking information to learn from best practice, change procedures and
processes to achieve enhanced methods of working, and reduce unnecessary
expenditure.
However, benchmarking of performance against ES is not ideal. The performance of HS
can be better measured by adopting benchmarking against similar charities whose
primary objective is the provision of accommodation to the communities in which they
operate.
Thus, HS must have permanent membership of the House Benchmarking
Organisations, which helps social housing property-owners to compare the costs of
service delivery, resources, and key performance indicators across all areas of the
business. For example, the management of HS can enquire about a norm in respect of
the repair charges, sanitary charges or wood structure replacement charges etc. of
similar non-profit seeking organisations.
Further, benchmarking should be conducted annually to analyse all areas of the
business and is used to identify high performing, low cost services. Using the annual
benchmarking exercise results, the HS can plan to target those areas that are low
performing and high cost.
Overall, HS should have strong commitment to value for money, which needs to be
reflected in the business plan and in service-delivery plans. By applying these principles
HS would be able to achieve the optimum utilisation of resources, which will in turn lead
to extra capacity and allow HS to provide better services.
(ii) The Building Block Model proposed by Fitzgerald and Moon, gives six dimensions of
performance measurement including service quality and flexibility.
Service Quality
Service quality is the measurement of how well a delivered service conforms to the
customer’s expectations. As a not for profit organization, HS provides housing services
to cater to the needs of lower and middle income groups as well as senior citizens in the
local community. Although service is provided at a concessional rate compare d to its
commercial peer ES, quality of HS’ service needs to be judged based on certain
parameters that were promised by the organization to its tenants. These could be used
as parameters to assess service quality. Some of them could be:
▪ Behaviour, attitude, proactivity of staff employed by HS.
▪ Quality of basic amenities provided.
▪ Availability of on-site service for the residents
▪ Safety within and around the residential unit
Data for assessment of quality can be collected from feedback of tenants, analysing the
number and nature of complaints made by tenants, tenant retention rate/loyalty etc.
Feedback form tenants can be taken on specific issues or could be general in nature.

Flexibility
Flexibility is the ability of the organization to adapt to customers’ requirements. This can
be measured through service delivery time, promptness in responding to customer
requests, ability of employees to perform different kinds of work etc. In the case of HS,
the following performance measures can be used to assess the flexibility:
▪ The average waiting time for a tenant for a house to become available. Lower the
wait time better the flexibility as it indicates that there are sufficient housing units
available for rental accommodation.
▪ Following change in requirements, ability to meet the tenant’s request for another
house of a different size. This indicates whether the range of housing units offered
is sufficient (flexible) to cater to the tenants’ changing demand.
▪ Waiting time for undertaking repairs of an emergency nature, once notified by a
tenant. Lower the waiting time during emergencies indicates the availability of
appropriate personnel to carry of the repairs on short notice.

Students are only required to provide two performance measures. These others have
been given for completeness.
(iii) The management of HS could use the following performance measures

An organization should aim at achieving results with maximum efficiency at the least
possible cost. Efficiency measures the relationship between the input resources utilized
and the output service achieved. Few of the measures that HS could use to compare
performance with ES are:
The Average Employee Cost per week per house
Here, the resource (input) are the employees, which is 15 in case of both HS and ES.
The employees at HS cater to 450 houses as compared to 200 houses catered by ES.
Therefore, HS is more efficient as compared to ES.
Likewise, cost of resources to HS is the employee cost, for which the pay structure and
remuneration policies are different in both the organizations. HS has the ability to hire
most of its resource at an annual salary of `1,00,000, which is the least level in the pay
structure. Comparatively, ES also hires cheaper labour but at a slightly higher pay level
of `2,00,000 annual salary. Therefore, the total cost of labour is higher by `14,00,000
(58%) for ES as compared to HS.
To compare the figures on a common factor, the employee cost can be calculated per
week per house.

HS ES
The Average Employee Cost per week per house `102.56 `365.38
[`24,00,000^/ (450@ × 52)] and [`38,00,000^/ (200@ × 52)]
^ Employee cost from the income and expenditure table
@ Number of houses (given): HS = 450; ES = 200
The average employee cost per week per house of ES is `365.38 (2.46 times) more
than of HS. It can be concluded that HS is both efficient, in terms of being able to cater
more houses with same number of employees, as well as cost effective due to the use
of cheaper labour.
The Average Day to Day Repair Cost per week per house
Here, the resource (input) is measured in terms of the cost spent on repairs to maintain
the rental houses. Running repairs are generally do not add much value to the rental
houses. Therefore, lesser the repairs, higher the efficiency. From the income and
expenditure table, it can be seen that HS has spent `23,91,600 as running repair cost
for 450 houses versus ES that has spent `6,38,000 for 200 houses. To compare them
on a common factor, the average repair cost per week per house has been calculated.
HS ES
The Average Day-to-Day Repair Cost per week per house `102.21 `61.35
[`23,91,600^/ (450@ × 52)] and [`6,38,000^/ (200@ × 52)]
^ Running repair cost from the income and expenditure table
@ Number of houses (given): HS = 450; ES = 200
The average day to day repair cost per week per house for ES is `40.86 less than that
of HS (-40%). This may be due to the fewer repairs required and the fact that there is no
extra cost required for emergency and urgent repairs. The cost of repairs whether
emergency, urgent or non-urgent to ES is the same, `1,000 [`6,38,000/ (160 + 376 +
102)] whereas the cost of emergency repairs to HS is `1,400 (`6,72,000/480), urgent
`1,139 (`11,28,000/990) and for non-urgent repairs it is `1,056 (`5,91,600/560).
ES’s low cost of repairs (which is identical for all types of repairs – emergency, urgent
and non-urgent) may have been achieved through entering into a contractual agreement
for repairs. HS should also think of entering into such contracts in order to save money.
Percentage of Rent Lost
Occupancy of rental houses indicate whether the capacity (in terms of houses rented) is
being optimally utilized. Lesser the vacancy better the efficiency in terms of capacity
utilization. This represents opportunity cost of not letting out the property.
HS ES
Percentage of Rent Lost (= Rent Lost / Gross Rent) 15% ---
[(`18,17,400/ `1,21,16,000]
Gross Rent = Rent Earned + Rent Lost
= `1,02,98,600 + `18,17,400 = `1,21,16,000

ES did not have any unoccupied properties at any time during the year; it has 100%
occupancy. This shows that ES’s properties are in high demand. On the other hand, H S
has lost rent worth `18,17,400 through un occupied properties; this is about 15% of the
gross rent receivable.
The management of HS should identify the reasons why the houses remained
unoccupied when the occupancy rate is 100% for an organisation like ES, a peer
organisation should be used to benchmark the performance.
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8

After studying this chapter, you will be able to:

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Entrepreneurial Functional Divisional Matrix

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Matrix Organizational Structure

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PERFORMANCE MANAGEMENT SYSTEM

Evaluate the degree of delegation of control and also identify the

Establish the performacne measures (both financial and non-financial)

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DIVISIONAL PERFORMANCE MEASURES

Financial Measures Non Financial Measures & tools are

Return on Investment (ROI) Balanced Scorecard

Residual Income (RI) The Performance Pyramid

Economic Value Added (EVA) Building Block Model

The Performance Prism

Triple Bottom Line (TBL)

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Pros and Cons of the use of Performance Measures

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The major problems are–

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FINANCIAL PERFORMANCE MEASURES

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Additional information provided is as follows:

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NON - FINANCIAL PERFORMANCE MEASURES

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Management of Human Product and Service Brand Awareness &

Monitor & Control staff in Qualitative Product and In term of;

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Customer Perspective: “How Do Customer View Us?”

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Why Balanced Scorecard fails to provide for the desired results?

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The following figure summarises the ideas of a Balanced Scorecard:

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Target or threshold NPS performance was

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