MODELACIÓN PLANTA CHST DET

Mechanics of performance measurement deal with the technicalities and procedure of performance measurement. The measurement process to be used must be clear-cut, unambiguous and useful. Description of measurement must convey what is measured and what not measured. Units of measurement must tell the basic unit of measures.

4.3.1.1 The technicalities and procedure

The technicalities and procedure of measurement of performance include the following.

• Unit of measure of performance

• Performance dimension & Performance thrust

• Financial and non-financial emphasis

• Single Vs Multiple indicators

• Entity whose performance is to be measured

• Time frame of measurement

• Process of measurement

• Periodicity of measurement

• Personnel involved in measurement and

• Adjustments made in measurements.

a. Unit of Measure of Performance:

What is the unit of performance measurement? Is it a monetary value? Is it a ratio? Is it a count? Is it the change or rate of change or the aggregate? Financial performance is generally measured in dollar or rupee or other currency terms. Ratios express relative performance, expressing one performance variable in terms of another.

Non-financial performance can be measured by counts as well as ratios. Certain complex units of measurement are also needed in typical cases, like passenger-kilometer revenue, ton-kilometer-cost, profit per employee hour to production per employee hour, rate of growth in market share to growth rate in profit, etc.

b. Performance Dimension & Performance Thrust:

Authors from differing management disciplines tend to categorize various performance dimensions and thrusts as are available in Table 4.2. Competitive advantage and Financial performance are outcome performance dimensions. Flexibility, Innovation, etc are contributing performance dimensions.

Table 4.2: Performance Dimension & Performance Thrust

Another way of categorizing these sets of dimension, as given in Table 4.3 is to refer to them either as upstream or as downstream dimensions.

Table 4.3 Upstream Determinants and Downstream Results

Source: Performance Measurement in Service Businesses- Lin Fitzgerald, Robert Johnson, et al.

Improved quality of service is an upstream dimension leading to better financial performance which is a downstream dimension. Non-financial quantitative performance measures of interest include response time, reliability, availability, safety, security, survivability, correctness, timeliness, and efficiency. Financial metrics include returns, revenues, costs, gains, etc.

c. Financial vs. Non-Financial:

In many companies in the UK, as in the USA, the familiar measure is ‘the bottom line’, that is the ‘net earnings’. Financial indicators remain the fundamental management tool and could be said to reflect the capital market’s obsession with profitability as almost the sole indicator of corporate performance. Opponents to financial indicators based approach suggest that myopic focus on financials encourages management to take a number of actions that are short term at the expense of investing for the long term. It results in such action as cutting back on R & D revenue expenditure in an effort to minimize the impact on the expense side of the current year’s P & L Account or calling for information on profits at too frequent intervals so as to be sure that targets are being met. These actions might actually jeopardize the company’s overall performance rather than improve it. The opponents of “the bottom-line school” state that because of the pre-eminence of money measurement in the commercial world, the information derived from the many stages preceding the preparation of the annual accounts, such as budgets, standard costs, actual costs and variances, are actually just a one dimensional view of corporate activity.

Executives should realize the importance of the non-financial type of performance measurement. Research in support of this approach has come up with new dictums for the workplace : “the less you understand the business, the more you rely on accounting numbers” and “the nearer you get to operations, the more non-financial performance indicators you realize could be valuable aids to better management”; or “graphs and bars carry much more punch than numbers for the non-financial manager”. Not every aspect of corporate activity can be expressed in terms of money and that if managers aim for excellence in their own aspects of the business, then the company’s bottom line will take care of itself.

d. Single Vs Multiple indicators:

Executives tend to avoid using multiple indicators because they are difficult to design and sometimes difficult to relate, one to another. Executives have a strong preference for single indicators of performance which are well tried and which produce ostensibly unambiguous signals. But the new school lays great emphasis on the fact that multiple indicators are made necessary by the sheer complexity of corporate activity. Headquarters should evaluate subsidiaries and their managers on a number of indicators rather than relying too heavily on one.

Financial criteria tend to dominate the evaluation of foreign operations and their managers. Budget compared with profit and budget compared with sales value, market-share increase, quality control, and managers’

relationship with host governments are some relevant measures.

e. Entity whose performance is to be measured:

The entity whose performance is measured matters. Individual performance or group performance, divisional performance or segment performance, parent performance or subsidiary performance, each needs different approach. Even in the same category, say individual performance, performance measure of operative staff member differs from that off supervisory person and from managerial person. When subsidiary’s performance is measured lot of adjustments are called for, lest there results under-assessment or over-assessment.

f. Time frame of measurement:

Performance measurement must cover fairly longer period so that seasonal pulls and pressures, impact of certain booting and busting influencers and at the same relevant history is covered. Too long a period makes no sense, especially in the case of market valuation of subsidiary. What is measured and time frame are relevant,

because cash-flow like things are measured on day-to-day basis, while market share may be measured on a quarterly basis.

g. Process of measurement:

Process of measurement involves accumulation of happening on the performance dimension to be measured over the time frame of measurement. Meantime, the tool of measurement – a yardstick, a check list of performance or a questionnaire or work-sheet or trip sheet or record of happenings in terms of the prescribed unit of measurement, is kept ready. The entity whose performance is to be measured is assessed by the application of the tool concerned. The measurement may be on-the-job or off-the job, on-line or off the line, programmed or non-programmed, participatory or non participatory and so on. It might involve clinical-type observation of every minute elements or sketchy perusal of broad contours, filling up of structured questionnaire or mechanical ticking of check-list and so on. It might involve oral or written report or on the spot visual oversight of happenings and so on.

h. Periodicity of measurement:

Performance measurement may be more frequent or less frequent. More frequency measurement facilitates effective control, though there may be intervention in work flow. Key performance areas require more frequent measurement.

i. Personnel involved in measurement:

Decision as to employing external or internal personnel and decision as to employing superior and subordinate in performance appraisal individual concerned are involved. External people involved in assessing performance are supposed to ensure objectivity. The appraisal firm chosen must be totally independent. Having one’s broker, intermediary, or consultant perform the appraisal is not the best choice. If the company is valued by anyone close to, or working for the owner, most buyers feel that the value is biased. If financing is necessary, most banks will require an independent third party appraiser. But external evaluators may not be having all the opportunity to assess persons or departments, because they would go by records only. There would be un-recorded but important achievements or otherwise that go unevaluated. Internal people when used for performance appraisal, their vested interests and personal biases would have their coloring of the appraisal process. Normally appraisal is by superiors, but superiors may not know the ground realities. The involvement of subordinates in appraising the performance of their boss is gaining ground. A consensus must be established before the scheme is put into operation.

j. Adjustments made in measurements:

Performance appraisal needs lot of adjustments. Contextual, Competitive, Constituent, Cannibalism, Contributive, Concessional and Content factors need adjustment. The performance appraisal of a new subsidiary in an un-explored territory needs contextual adjustment. The performance appraisal of a subsidiary facing toughest competition from the arch rival needs adjustment. A subsidiary with problems of cultural-mix needs adjustments. A subsidiary that cannibalizes parent’s revenue needs adjustment. For concessions and friendly contributions received by subsidiary from whatever sources, adjustments are called. Finally, one should look beyond the numbers while appraising. That is content factor adjustment.

4.3.1.2 Attributes of sound measurement mechanics

There are at least three major attributes expected of any good measurement mechanics.

These are: Reliability, Validity and Objectivity. Each characteristic is examined in detail.

The concept of reliability is examined for its two major components viz. internal consistency and temporal stability. The different components of validity viz. content validity, construct validity and criterion related validity are discussed. Then a discussion of the concept of objectivity is attempted.

a. Reliability

Reliability of a measurement mechanism refers to the dependability or consistency of the measures provided by it. It refers to “the accuracy of the data in the sense of their stability, repeatability, or precision” There are two ways of looking at dependability. One is comparability of measures provided by different parts of the same test.

Second is comparability of measures provided by the test on different occasions. In both the procedures, we produce two sets of measures which can be correlated to provide an estimate of reliability.

Comparability of measures provided by different parts of a measurement system:

This procedure is based on the rationale that different parts of the measurement mechanism (different items) should make comparable estimates of performance of an entity. Let us illustrate this with an example. Suppose

‘Item 1, say cash-flow of a subsidiary” shows that the firm is a very superior achiever. Normally ‘Item 4, say market value addition’ should also make the same assessment, superior performance, of the firm, if the measurement mechanism is a satisfactory measure of achievement. If for some reason ‘Item 4’ makes a poor estimate of the firm’s ability (suppose ‘Item 4’ assesses the firm as one of inferior achievement), then both the items, 1 and 4, will be looked upon with disbelief. The method used for estimating reliability using this argument is called the ‘Split-Half Method’. A narration of this method is called “Odd ~ Even method”. This form of reliability is called Internal Consistency.

Comparability of Measures provided by a measurement system on different occasions:

This method of assessing reliability is based on the rationale that a good measurement system must give almost the same measurement when applied on the same entity on different occasions. Suppose a test of emotional intelligence of the chief of the overseas subsidiary shows his EIQ (emotional intelligence quotient) as 8 on a 1-10 scale, which stands for superior EI. But suppose we used the test on the same person after one monthand found that his IQ as revealed by the test as 6 (which indicates just an average performance), the measures provided by the test are not dependable. Ideally, the two scores must be the same. But when we take into consideration the inaccuracies which enter into mental measurement (factors like maturation, forgetting, varying test conditions etc.), we are willing to admit small differences. Any way we will be satisfied with the test only if the test provides comparable measures from time to time. This form of reliability is also called temporal stability.

b. Validity

Validity refers to the ability of a measurement tool to measure what it is supposed to measure. Validity is defined as ‘the extent to which the procedure actually accomplishes what it seeks to accomplish or measure what it seeks to measure’. Validity has been classified mainly into three forms , namely, content, construct and criteria.

Content Validity:

The contents of the measurement tool must adequately and comprehensively cover the major elements d of the performance dimension that is measured. For instance, measurement of ’intangibles’ of a firm must cover its goodwill, brand equity, corporate governance, corporate social responsibility, environmental concerns, cherished values, and so on. A very simple example would be: the question paper as a measurement tool of student learning, must cover the whole syllabus and not few areas only.

Construct Validity:

Construct validity measures the logical or the underlying factor that explain a performance. Performance is measured through performance boosters like ability, behavior and commitment. From these performance level can be constructed. Alternatively, we can establish this type of validity by logically analyzing the contents of the measurement yardstick.

Criterion related Validity:

Criterion validity makes use of the statistical comparison of the performance scores of a firm with some independent criterion. Reasonable agreement between the two measures is interpreted as evidence of this type of validity. The external measure for comparison is termed the criterion for validation. The external criterion is

justified on the basis of some logical connection which should exist between the test and criterion. For example firms with higher profitability must also come good on the external criterion factor namely, higher market valuation as well.

c. Objectivity

The extent to which a measure is a function of the trait measured, is referred to as objectivity. This is exact opposite of the term called subjectivity. A subjective measure is one in which the human being who makes the measurement permits his own values, judgments and prejudices to enter into the measurement. Examples of subjective judgments are many.

Some techniques of measurement are more likely to be subjective. Interviews, for example, can yield results which are not completely objective, unless adequate precautions are taken to make them objective. The behavior, appearance, voice, etc of a person may make the evaluator to mark the person high or low, though the person is neither high nor low, but average.

Objectivity in measurement is now ensured by providing standard measurement tool, veiling the identity of the person/entity assessed, standardized conditions for scoring and interpreting measurement scores and specific directions using the scores, etc. Many of the precautions taken for attaining reliability of measurement will very often be of help in ensuring objectivity.