Performance Measurement Of Financial And Non Financial Results Accounting Essay
Every organisation strive for good performance. Performance improvement considers organisational change where management of the organisation puts in place some projects to help boost the current level of performance. In this respect the programmes may completely change the organisation behaviour and conducts to allow the changes to take effect. Management aims to increase the organisational effectiveness and efficiency in delivering its products and services.
As the matter of fact performance requires performance measures to evaluate the financial and non financial results. Thereafter performance gaps and future improvement actions are planned considering ethical aspects. Most organisations use performance indicators which serve as powerful approach to monitor and improve performance. Organisations use different methods and techniques they have developed to process changes for improvement purposes.
Most of people measure company’s performance by looking at ‘amount of money the company has just made’. They consider profit, ROI, revenues to be the measure for performance. The main problem of considering only financial aspects of the business is that these measures report the past actions that the company may have no immediate control. Taking an example of customer aspects, they are not directly covered under financial aspects. Focusing only on financial aspects may in the long run jeopardise the company’s relationship with the customers and may look for their needs with the competitor company.
In view of the above a more comprehensive and clear approach is needed that put equal weight and emphasis to both financial and non financial aspects. An approach that not only considers lagging indicators but also looks forward and consider leading indicators. This prompted the researcher to consider using the Balanced scorecard framework in evaluating the performance of the Local Authorities Pensions Fund (LAPF) and to recommend actions to improve the current level of performance.
The research topic explains by itself, and aims to find out the performance improvements that could be achieved when LAPF opts to implement the BSC approach. Thus the topic covers two aspects; performance improvement and the Balanced Scorecard.
Balanced Scorecard ( BSC) Approach
As it is mostly known, the BSC strikes the balance between the financial and non financial measures of performance. In short BSC is a framework used for evaluating business performance of a company. Kaplan and Norton consider BSC as ‘ Organisational performance management tool’. As will be reviewed in Chapter two,( section 2.3) BSC involves defining company mission, strategy and measures. These should be clear and agreed upon by the interested stakeholders. After the BSC is set management should try to understand the factors that cause change and fluctuations of the BSC. These factors are very important as will lead the organisation to fully understand where and when to spend to cover the performance gaps. The following diagram ( figure 1.1) shows a simple balanced scorecard template.( adopted from Kaplan and Norton,1992.)
Internal process perspective
Vision & strategy
Learning & growth perspective
Figure 1.1 Balanced scorecard template
For each of the four perspectives, strategic goals that link with the vision and strategy are established together with the relevant measures. For a beginner like LAPF this simple structure is recommended to maximise the chances for successful implementation. As the BSC is a continuous approach, management may later wish to adjust the objectives and measures to reflect the current operating and economic conditions.
Performance improvement cycle
Performance improvement is a continuous process. It can be thought of as a cycle. Consider the following diagram ( figure 2) with the explanations below.
Figure 1. 2 Performance Improvement Cycle
Plan: The organisation needs to know what should be accomplished and plans strategically. Plans should be integrated and aligned with the corporate strategy. Management also should set the objectives and goals to achieve the corporate strategy. The process also involves defining responsibilities and communication means, identifying talented personnel to lead the execution process.
Execute: The process involves putting the plans into actions. This entails the execution of the planned activities to achieve the budgeted profit and loss account, forecasted balance sheet and cash flow statement. Normally the plans are for a short time period covering one financial year. In most cases it is done in operational level. In this study the performance will be evaluated considering 2009/10 plan budget.
Check ( measure): The organisation then measures the performance using the indicators already established. This involves comparing the realised performance with the budgeted plans. Without measuring the performance ,the organisation does not know whether changes need be applied to reach the budgeted goals or to change the goals for the year.
Act: At this stage ,the organisation should think and decide on new ways that may result in improvement. Here changes are important but should be carefully considered if when implemented the results will be improvements. Brain storming takes place at this stage. It is also from this stage where management should find out the root causes of bad or unsatisfactory performance and identifies hurdles to success. As will be explained in chapter three (section 2.5) implementing changes pose a challenge to many managers. It is therefore recommended that a clear and systematic process be adopted to make changes successful. Performance improvement needs changes. In another words, this is the ‘improvement methodology’ stage where management can think of improvement approaches such as BSC, Six Sigma, TQM, etc.
1.2 SPONSOR COMPANY PROFILE- The Local Authorities Pensions Fund( LAPF)
The Local Authorities Pensions Fund (LAPF) is a social security institution established under the LAPF Act No 9 of 2006. This Act repealed the Local Authorities Provident Act No.6 of 2000.The difference is that the former Act no 6 of 2000 was meant only for Defined Contribution Plan while the existing Act No.9 of 2006 is for Defined Benefit Plan. LAPF as one of the six social security institutions in Tanzania was established with the objective of providing social security cover to the employees of the local government authorities, agencies and Institution owned by Local Authorities. As per the Tanzanian government regulation each of these six schemes was established by different legislation and covers a defined category of people or sector. LAPF has more than 70,000 members each contributing (on a monthly basis) a total of 20% of member’s basic salary (an employee’s basic salary), of which the employer’s share is 15% and 5% is contributed by the employee (member). Apart from the Head Office (in Dodoma region) the Institution has five Zone Offices throughout the country covering 4 to 5 regions for each Zone.
Vision, To become one of the best provider of social security cover in Tanzania (LAPF Act)
Mission Statement, To provide social security benefits with related services to its members. (LAPF Act). In summary, the following are the main functions of the Fund:
Pay benefits to insured person
Improve benefits payable under the Act
Register persons required by the law to contribute to the Fund
Safeguard members contributions and other Fund’s resources
Invest contributions in less risk and high returns yielding investments
1.3 PROBLEM DESCRIPTION
For years now LAPF uses financial measures in evaluating the success of the Fund. As the competition in social security markets becomes an intense and rapid development in business, reliance on financial measures becomes questionable. This results to some of the financial measures to be ineffective and inefficient in evaluating the Fund’s performance from its operations, e.g. how to measure customer satisfaction. Through the performance measurement system any Organisation gets a comprehensive view of how it is performing. LAPF as a performance-driven and achievement-oriented in a competitive social security industry, needs to maintain an efficient performance measurement system. The system is used to track the changes in overall performance. Thus, the researcher aims to propose the use of BSC framework as the approach that will be applied in evaluating and improving the performance of the Fund. LAPF may wish to adopt the BSC system in measuring its performance to solve the problem of ineffective measures of performance recently adopted. Thus at this initial stage the aim of the study is not to implement the BSC approach.
Balanced Scorecard involves both financial and non financial performance measures. In 1990, BSC was established by Robert Kaplan and David Norton to complement financial measures.The technique has recently become famous and widely adopted by some Organisations due to the benefits derived from its implementation. The application of only financial measures to evaluate performance may not give a real picture on how the Organisation performs. This prompted these Organisations to switch their strategies in assessing their performance applying critical measures (both financial and non financial) in each of the four BSC perspectives. Thus balance scorecard helps management to understand a comprehensive picture of the business operations grouped into these four categories i.e. Financial, Customers, learning and growth, and internal process.
LAPF as the first time user of BSC will have to choose relevant performance measures for each of the above categories keeping in mind the nature of its business. The adoption of BSC as a set of measures will help management in formulating strategy to achieve the Fund’s objectives. It is believed that BSC will bring about management revolution and will provide real insight in the operations of the Fund as both financial and non financial performance measures will be employed in evaluating the success of its operations.
1.4 RESEARCH OBJECTIVES
The main objective of the research is to find ways of improving LAPF performance. To achieve this, the researcher will adopt the Balanced Scorecard (BSC) framework to evaluate the performance of the Local Authorities Pensions Fund (LAPF) .The performance will be evaluated in each of the four BSC perspective i.e. financial, customers (members), internal process, and Learning & growth. In this respect the researcher will compare the expected planned performance (as per the LAPF policy, budget etc) with the current performance as perceived by employees and management (resulted from questionnaires and interviews). It should be noted that the researcher DOES NOT aim or plan for BSC implementation. Other objectives are as outlined below:
To assess the level of BSC understanding among employees
To build positive image of BSC in the eyes of LAPF management and staff
To persuade the Organisation to adopt the BSC approach
To propose a BSC structure relevant to the LAPF needs, objectives and operations
To find out whether the Fund has another alternative method for improving the performance besides using BSC approach
Lay down foundations for further research on improving performance measurement system.
1.5 RESEARCH QUESTIONS
1.5.1 Main Research Question
What can be the performance improvement by implementation of the Balanced Scorecard(BSC)?The case of Local Authorities Pensions Fund in Tanzania (LAPF)
1.5.2 Theoretical research questions
What is Performance Measurement?
How can it be improved?
What is Balanced Scorecard?
How widely is Balanced Scorecard used?
What are the benefits of using Balanced Scorecard?
What are the problems and /or challenges in implementing the BSC?
How to reduce the chances of BSC failure?
What are the metrics for measuring performance?
Are there any other tools for improving performance measurement besides BSC?
How do they differ from Balances Scorecard?
1.5.3 Empirical research questions
How does LAPF measure its performance?
What does LAPF understand about the BSC?
Is the approach known? To what extent?
Is the proposed BSC relevant to LAPF operating environment?
Will the LAPF management accept changes?
How does employees and management evaluate the current performance of the Fund? (As per the proposed BSC framework)
What are the benefits expected to LAPF from the proposed approach?
What are the challenges in the process of improving the Fund’s performance?
What are the efforts being adopted to improve the Fund’s performance?
Any other alternative besides the proposed approach?
1.6 PROPOSED BALANCED SCORECARD FOR LAPF
Table 1 below is a proposed BSC framework for LAPF as designed by the researcher. This framework stands as the main research area as it was used to evaluate the Fund’s performance. The questionnaire and interview questions were based on this framework to find out what should be the level of performance ( as planned by management), what is the current level ,and what should be done to improve the current level of performance. It is expected that the contents of the BSC ( goals and measures) may be adjusted after accommodating comments from the LAPF management and staff .This research does not cover implementation of the BSC, the decision on whether to fully implement the BSC approach lies with the LAPF management ,where the Fund will have to study and plan for the implementation process.
THE LOCAL AUTHORITIES PENSIONS FUND
PROPOSED BALANCED SCORECARD
VISION: To become the best and most preferred provider of social security in Tanzania
Actions ( Critical Success factors)
Invest the contributions received in a highly and secure yield investment ( Accurate investment decision making)
-Return on Investment (ROI)
-Increase in premium
-Percent increase in Cash Flows
-Return on Assets
Effective cost reduction
-Percent reduction in cost
-Percent reduction in risk occurrence
-Percent of loss due to risk
-Percent error in forecasts
Actions ( Critical Success factors)
Increase membership base
-Number of new members registered
-Frequency of members complaints
-Members Survey rating
-Complaints response time
-Timeliness of service
Provide seminar and education to members
-Number of seminars conducted
Attract more members and retain members
-Number of new members
-Increase in premium
Increase Benefits Packages
-Number of new packages
-Lead time (time taken to introduce new package)
Marketing LAPF and its products and services
Internal process Perspective
Actions ( Critical Success factors)
-Percent reduction in payment cycle time
Provide benefit package on time
-Claim processing time
-Number of customer problems reported over a period of time
-Percent reduction in rework
-Industry quality rating
Effective reporting/information system
-Average time for circulation information
- Percent of late reports
-Percent of errors in reports
Maintain inter departmental team work
-Number of days to communicate feedback
-Information circulation time
Learning and Growth Perspective
Actions ( Critical Success factors)
Training to employees
-Training time per employee
-Number of employees trained
-Employee turnover rate
-Chances for empowerment and promotions
-Level of freedom of opinion and suggestions
-Percent of employees suggestions and recommendations put in action
-Percent of complains about salary and incentives
-Response time to employees complaints
-New products /service
- Opportunity level to show creativity
Team building and effectiveness
-Percentage of empathy level
-Percentage achievement of goals
Table 1.1 LAPF proposed BSC
1.6 .1 Strategic Mapping
Strategic map shows the cause-and-effect relationship. Applying the four BSC perspectives, we are able to draw a cause –and –effect logic flow to show the relationship between them. In simple words it depicts the link that exists between the perspectives. It therefore outlines what a company wants to accomplish (financially and to members) and how to accomplish it ( through effective and efficient internal processes ,supported by competent, motivated and creative employees). Figure 1.3 below shows an example of strategic map relevant to LAPF operations.
Payment cycle timeInternal process
Employee’s competenceLearning &
Figure 1.3 LAPF Strategic Map
If LAPF employees lack incentives to boost their morale to work, it negatively affects the time taken to process members claims. In turn this brings members complaints that cause delay in submitting contributions in time. The ultimate effect of it is insufficient cash to operate,invest and pay other beneficiaries.
Incompetency employees make errors in processing the claims that necessitate reworking the claims. This increases the operating costs that reduce the cash flow status.
High employees morale, shorter payment cycle time lead to members satisfaction. In turn increases contributions that boost the cash flow.
Low morale, ignoring employees suggestions and incompetent employees all together result to employees dissatisfaction. This may in turn prolong the payment cycle time, which results to member’s dissatisfaction. Eventually this results to delay in contributions which at the end affect the Fund’s cash flow.
Note: Figure 3 shows only some few measures as indicated in the balanced scorecard. More measures can be added and a link with a logic flow be established to show the cause and effect relationship between the BSC perspectives.
1.7 ETHICAL CONSIDERATIONS
The research was conducted as per the LAPF’s code of ethics. Participants were free, to control their own willingness to participate, contribute or even to withdrawal. Where confidentiality and anonymity was demanded the study adhered to this and make sure no harm, pain or discomfort is caused to any participant. Adherence of ethical issues in each stage of the research process from, data collection, analysis and reporting is my priority consideration. The Fund will be briefed of the research findings.
1.8 ROAD MAP
This thesis comprises of five chapters.
Chapter one: Consists of general introduction and the topic to be researched. It also contains brief explanations of the concepts found in the main research topic, i.e. Performance improvement and the balanced scorecard.
Chapter two: Consists of all relevant literature concerning the balanced scorecard, performance improvement, and change management which is very important to consider before undertaking any programme to improve performance. I personally consider change management to be very critical and is influenced by several internal and external factors. From this chapter we will have an opportunity to understand stages that lead to successful changes. The common mistakes/errors done by the organisation when adopting changes ( which are the main causes of failure) as explained by John Kotter ,1996 are also found in this chapter. Moreover the chapter contains other performance management approaches beside the balanced scorecard and a review on how they relate or differ with the BSC.
Chapter three: Comprises of methodological section. In short questionnaire and interview are the main sources of data collection for this research. In addition to this, it also includes sampling and respondents information.
Chapter four: Includes the results and discussion thereof. It also includes analysis of data collected through questionnaire and interview.
Chapter five: Explains the conclusions and recommendations based on the data collected.
This study has the following limitations;
This research does not cover implementation of the BSC in LAPF. It is limited to the use of the proposed BSC framework to evaluate LAPF performance, where by the Fund’s objectives and their related measures are more specific. It is from the findings , conclusions and recommendations LAPF management may think and plan the implementation of this approach.
The study is limited only to the Local Authorities Pensions Fund due to time and financial constraints. It does not cover any other firm in the social security industry in Tanzania, neither LAPF performance will be compared to preceding years’ performance
The planned number of interviews to be conducted could not be reached as the targeted staff were out of the office for different reasons. In this regard the researcher decided to increase the number of questionnaires to be supplied from 30 to 40 in order to collect as many data as possible.
The indicators and measurement tools in this study make use of secondary data in measuring performance. Secondary data may have inaccuracies. Inaccuracies in data could result in results which are unreliable and unsuitable for measuring performance and in achieving targets.
Weights have not been placed on any particular dimension or goal area. LAPF priorities change with changing national Social Security needs and it may be necessary to accurately place additional weights on some dimensions to achieve the desired outcome.
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