This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Traditional performance measurement systems are based on the accounting reports such as balance sheets and income statements. Therefore, organisations focus on short-term financial performance, resulting in the development and implementation of strategy caused confusion, not the organisation's long-term strategy and short-term actions linked together. The statement that 'the numbers speak for themselves', this focuses purely on financial information and ignores the use of non-financial data. Traditional measures were not offering a full understanding of the situation (being outcome focussed instead of being process oriented) (Yeniyurt, S., 2003, p. 134). Thus, Management accountancy has been criticised for being inward-looking and focusing too much on internal organisational efficiency. However, due to inadequacies of traditional measures, according to The American Institute of Certified Public Accountants (AICPA) state that management accounting as practice extends to the three areas: Strategic Management, Performance Management and Risk Management.
Therefore, according to Banker, Potter, & Srinvisan, (2000) state that performance measures should include not only financial measures of performance but also nonfinancial measures of performance as they capture different attributes of management. In order to identify three reasons organisations are adopting non-financial measures (Ittner & Larker 1998, p. 217-218):
Perceived limitations in traditional accounting-based measures;
Competitive pressures; and
Outgrowth of other initiatives.
Furthermore, the rapidly changing economic world, management accounting must help accomplish the three strategic objectives of quality, cost, and time to have strategic significance by providing information that, first, links the strategic objectives of an organization to the daily actions of managers; second, enables managers to in actual fact involve the entire extended endeavour of customers, suppliers, dealers, and recyclers in achieving the strategic objectives; third, look at the long-term view of the organisation (Ansari, Bell, Klammer, Lawerence, 1997). For that reason, Strategic management accounting focuses on a larger picture and a longer term than traditional budgeting. It appears that in using the term strategic to name the approach to management accounting conveys a longer term outlook and an externally oriented perspective that entails collecting and analyzing data on costs, prices, sales volumes, market shares, cash flows and resource utilization, for both a business and its competitors. Therefore, Strategic Management Accounting (SMA) is concerned with providing management accounting in the context of business strategies being planned and implemented by an organisation. For an organisation to be successful it is important for it to maintain or improve its competitive advantage; this will be helped by the information collected by SMA so that the company can judge the actions of its customers and competitors.
On the other hand, organisations have to consider the rise and fall of management techniques that we refer to Brickley, Smith & Zimmerman (1997, p. 26) raise a number of important questions:
What explains the popularity of these management innovations?
Why do they often fail to produce the expected benefits?
How can managers tell if a particular technique is right for them?
What can managers do it increase the likelihood that an adopted technique will be successful?
These questions are tailored to elicit the main reasons for continuing to implement the performance measures and the main reasons for not continuing. Successful companies are also asked to identify problems they has encountered but overcome. In order to address these questions according to Brickley, Smith & Zimmerman (1997) suggest the use of a framework they call "organisational architecture". Organizational architecture consists of three aspects of corporate organization: the assignment of decision rights within the company; methods of rewarding individuals; the structure of systems to evaluate the performance of both individuals and business units. These three components can be likened to a stool with three legs. If one of the legs is shorter, the stool is out of balance. These three elements must be in balance in the organization as well. According to Franco-Santas et al (2007, p.785) provides a fairly comprehensive summary of definitions of performance measurement:
From an operations perspective, a BPM (business performance measurement) system is mainly perceived as a "set of metrics used to quantify both the efficiency and effectiveness of actions" (Neely et al., 1995); or as the reporting process that gives feedback to employees on the outcome of actions (Bititci et al., 1997).
From a strategic control perspective, it reflects the procedures used to cascade down those performance metrics used to implement the strategy within the organization (Gates, 1999); or also provides it with the information necessary to challenge the content and validity of the strategy (Ittner et al., 2003).
From a management accounting perspective, it is considered to be synonymous with management planning and budgeting (Otley, 1999).
There have been a number of contemporary performance measurement practices that have emerged in recent times. It is the intention to provide a summary of trends. Prior to reviewing these trends, it is important to gain an understanding of the possible behavioural consequences of performance measurement systems have on the organisation. According to Ittner & Larcker (1998) provides a description of trends in performance measurement.
"Most economic theories analysing the choice of performance measures indicate that performance measurement and reward systems should incorporate any financial and non-financial measures that provide incremental information on managerial effort (subject to its costs)" (Ittner & Larcker 1998, p. 206).
The economics of incentive compensation largely is in term of the standard principal-agency model and in terms of multi-tasking principal-agency model. Refer to Brickley, Smith & Zimmerman (1997) state that incentive problems exist within firms because owners and employees have fundamentally different objectives. For example, shareholders of a research company want its scientists to develop marketable products, whereas these scientists might prefer to work on more intellectually challenging but less marketable ideas (Brickley, Smith & Zimmerman (1997, p.389). Therefore, different tools have been developed in order to assess accounting data. Nonetheless, in an era of increasing technological change and increased global competition has seen companies trying to better understand their strengths and weaknesses and improve their existing capabilities and create new ones. Furthermore, organisations go about designing and implementing performance measurement system they must ensure that the link between performance evaluation and incentive payments is fair and equitable. To ensure this, it is important for managers to appreciate and understand the behavioural consequences that have the potential to "high-jack" what might be good effort to implement a performance measurement system. Hence Strategic Management Accounting serves any useful purpose in assisting organisations in their strategic development. As a result, the organization's mission and strategy into a coherent system of performance appraisal measure, the complex and general concepts into precise objectives in order to seek financial and non-financial measures, between short-term and long-term objectives, and backward with leading indicators, and between the external and internal performance balance.
In summary, historically, organizations' operational and management control systems have been built around short-term financial measures that have not been linked to long-term strategic objectives. The choice of performance measures indicate that performance measurement and reward systems should incorporate any financial and non-financial measures. Therefore, organizational architecture consists of three aspects of corporate organization: the assignment of decision rights within the company; methods of rewarding individuals; the structure of systems to evaluate the performance of both individuals and business units. Thus Strategic Management Accounting (SMA) looks not only at the internal position of the company in terms of its resources, but more importantly on the external business environment. SMA will therefore focus on customers, competitors and suppliers so that it can monitor and assess the changes in the environment in which the company operates. Traditionally, management accounting has focused on managing the resources within the organisation, and is backward-looking. SMA looks to the future by assessing the likely trends in the external environment and helps management to make positive longer-term decisions rather than reactive short-term ones. This approach will be more in line with the areas of the various stakeholders, as these will be reflected in the strategic objectives of the organisation. SMA will not only look externally but will measure progress towards these longer-term objectives.