Taking from the old to create a new.

8 Feb

The attempt of creating a modern framework which contributes to BPM must draw off the older frameworks and use the knowledge which they created and expanded on. Then move forward from that point.  As “the measurement mantra continues to reverberate throughout nearly every corridor of business life” [1]. In the light of drawing information from old ideas and building on them I will draw firstly from information gathered from the department of trade and transport UK. According to the UK’s department of industry and trade (for the case of this blog I will coin the department of trade and industry as DTI) there are four key steps in a performance measurement framework.

  1. The strategic objectives of the organisation are converted into desired standards of performance.
  2. Metrics are developed to compare the desired performance with the actual achieved standards.
  3. Gaps are identified.
  4. Improvement actions are identified. [2]

The UK DTI demonstrates simple and intuitive steps to creating a framework for BPM where they also state that for a simple framework/methodology keep it simple and smart. The DTI created a very intelligent little acronym which is to be applied to the development of a simple framework i.e. Specific, Measurable, Achievable, Relevant and Timely = SMART. The application of these attributes to the strategy will lead to direct returns from the framework in terms of measuring performance. The simple performance measurement framework described by DTI is like the EVA and ABC frameworks because it acts as a complimentary addition to the Balanced Scorecard framework.

Simple Measuring Framework

 

The Balanced Scorecard Framework

The balanced Scorecard is the most adopted framework in business performance measurement and it was introduced by R. Kaplan and D. Norton in 1992. The Balanced scorecard approach was to focus on leading indicators of a business rather than the lagging indicators. Lagging indicators are the measurement of actions, sales and data recorded which have already taken place i.e. past performances whereas leading indicators are the measurement of future performances such as financial performance, customer satisfaction, customer growth, customer defection and other business related predictions. The Balanced Scorecard was redesigned to measure the components which make up a business’s strategy in 2001 and it is composed of four perspectives i.e. 1. The financial perspective 2. The customer perspective 3. The Internal Business  and 4. The Learning and Growth perspective.

“The financial perspective The strategy for growth, profitability and risk from the shareholder’s perspective.
The customer perspective The strategy for creating value and differentiation from the perspective of the customer.

 

The internal business perspective The strategic priorities for various business processes that create customer and shareholder satisfaction.
The learning and growth perspective The priorities to create a climate that supports organizational change, innovation and growth.”

[3]

Image of the Balanced Scorecard

balanced_scorecard_6x4

 

Economic Value Added ( EVA); EVA is a metric of financial performance  and according to its developers at Stern Stewart Company, “ it is directly linked to the creation of shareholder value” [4]. Stern Stewart Co. developed a formula for EVA which is EVA = (Net Operating Profit After Taxes) – ( Capital *Cost Of Capital). The advantage of using the EVA framework is the information and motivation it gives to managers in relation to making decisions  to create the most shareholder wealth. The EVA framework is complimentary to the balanced scorecard framework and according to Kaplan “Using EVA alone can cause managers to invest in less risky, cost-reducing activities rather than in growth activities and as a pure financial model, EVA cannot serve as a vehicle for articulating a strategy. But coupled with the BSC, the trade-offs between short-term productivity improvements and long-term growth goals can be managed (Kaplan 2001)”[5]. The EVA framework is an excellent model for the internal measurement of a business. Therefore when it comes to determining the contribution of information systems to business performance, the results would be clear and precise direct returns from IT.

Image detailing the aspects of the EVA framework.

EVA

 

 

Activity-Based Costing 

ABC like EVA can be complimentary to the balanced scorecard framework. When applying the ABC methodology companies will gain valuable knowledge in relation to which business activity and which business activities are profitless. “ABC, then is a way of measuring which of the firm’s activities generate revenues in excess of costs and as a result, provide keen insight into what is really providing value for customers (Meyer 2002).”( Meyer, Marshall W. (2002). Finding performance: The new discipline of management, in Business Performance Measurement: Theory and Practice. Neely, Andrew, editor. Cambridge University Press.)[6] The activity based costing like EVA can be of benefit to assessing IS/IT contribution to business performance, due to the fact that it’s a financial related measure and that it looks at it activities within the business to determine which are performing and which are under performing. The reason it is of benefit is that ABC highlights certain activities of financial measures and when then the determining looked at under a microscope IS contribution is made evident.

 

Bibliography

1  http://www.kellen.net/bpm.htm

2 http://www.businessballs.com/dtiresources/performance_measurement_management.pdf

3 The Balanced Scorecard. 2001, R, Kaplan and D, Norton.

http://www.kellen.net/bpm.htm

5. The Balanced Scorecard. 2001, R, Kaplan and D, Norton

6.  Meyer, Marshall W. (2002). Finding performance: The new discipline of management, in Business Performance Measurement: Theory and Practice. Neely, Andrew, editor. Cambridge University Press.

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