Dimensions Explained
Companies compete across a range of dimensions besides financial performance. The Building Block model considers this and describes two categories of dimensions: ‘Results’ and ‘Determinants.’
‘Results’ are the outcome of decisions and actions taken by management in the past. These are captured under the first two dimensions of the model, financial performance and competitiveness.
‘Determinants’ refer to the forward-looking dimensions of the model: what areas of future performance are most important for a company to achieve positive financial and competitive results? Quality, innovation, flexibility and resource utilization are the determinants of future success.
Dimensions at SmartCourier
Results
As a listed company, the management of SmartCourier will be very interested in measuring financial success—is it delivering the right profits and returns for its shareholders? Competitiveness is also critical to measure as new competitors are entering the market in Maxland—is SmartCourier maintaining or losing market share?
Determinants
SmartCourier’s managers and staff need to focus on the dimensions of performance that will determine positive financial and competitive results. For example, on-time deliveries will lead to customer loyalty. This falls under quality of service. The company’s varied product range should meet the needs of different customer segments; this is an example of flexibility of service. Flexibility and quality of service should in turn drive positive financial results, for example, higher sales revenue.
Innovation is also important to SmartCourier as it is investing in new technology and improving processes with its smartphone app. Resource utilisation is critical to its financial success as efficient use of delivery vehicles, staff and financial resources will reduce costs and improve profitability. In other words, innovation and resource utilisation are driving financial success (higher profits) and competitiveness (maintaining market share).
Standards Explained
After an organisation’s dimensions are understood, standards can be set. These will be the benchmarks, or targets, directly linked to performance metrics under headings for each dimension. There are three aspects to consider in setting standards:
- Who is responsible for achieving the standard (ownership)?
- What level are the standards set at (achievability)?
- Can we use the standards for a fair appraisal across the company (equity)?
These three criteria are important. If it is unclear to whom targets are assigned, managers and staff will not have accountability and performance management will fail. If personal targets are unachievable, people will not work harder to achieve their goals and there will be little motivation. If appraisal is not fair and transparent, employee morale will suffer.
Standards at SmartCourier
Based on the dimensions above, we can suggest standards of performance for SmartCourier:
Financial performance
Growth in sales, net profit margin, and return on investment are potential targets for regional managers. For example, fixed targets could be set, such as 8% annual growth in sales or a target ROI of 14%. Or, SmartCourier could use a league table approach by ranking the regions according to these standards and then rewarding managers accordingly.
Competitiveness
With new players on the market it is important for SmartCourier to measure this area of external performance. It can set absolute market share as a standard for measuring competitiveness by dividing SmartCourier’s revenue by the total revenue of the industry in Maxland. A target for regional managers could be to maintain market share as competitive rivalry is increasing in the industry.
Quality
As a service organisation, it is critical that SmartCourier delivers quality of service to retain its customer base. It can set targets for courier agents such as 98% on-time delivery, or for call centre representatives average time to take an order of 3 minutes. It will be important to ensure that these targets are both fair and achievable to ensure employees are motivated (see below).
Resource utilisation
SmartCourier can measure resource utilisation by using efficiency standards such as average time per delivery or average number of deliveries per day. However, equity should be considered here, as urban regions could potentially out-perform rural regions as urban customers will be clustered closer together.
Flexibility of service and innovation
Flexibility of service can be measured with a targets such as 90% of orders scheduled to customers’ request and Innovation can be measured with % of customers using the smartphone app.
Rewards Explained
The last part of the model looks at the overall reward structure of the organisation and is the link to HR systems. Do compensation packages in the company lead people to achieve the standards of performance which are set out above? This part of the model has three aspects:
- Is the system understandable to all employees (clarity)?
- Will the system drive employees to achieve their objectives (motivation)?
- Do employees have control over their areas of responsibility (controllability)?
The reward system should be clearly understood by all employees: this means unambiguous performance appraisal and bonus triggers. Rewards should be sufficiently desirable so that employees are motived to work hard towards gaining them. Finally, if employees are assessed against factors out of their control, they will lose interest in working towards their rewards.
Rewards at SmartCourier
It seems like SmartCourier has an effective reward system. The compensation package covers a range of financial and non-financial rewards and benefits, which probably contributes to the motivation of employees by meeting their different needs. For example, new parents will be motivated by the child care facilities, other staff may be motivated by the flexible work place arrangements. It also appears that rewards are performance based (for example, 'goal based incentives') which will lead to increased motivation.
It’s important for SmartCourier to ensure that rewards are controllable and clear, for example, by making sure that targets are well defined and then agreed in appraisal meetings.
Conclusion
Like other modern performance measurement frameworks, the Building Block model connects an organisation’s strategic objectives to a range of forward-looking, non-financial performance measures. Where the Building Block Model differs, however, is that also considers reward systems and aims to create a framework of clearly understood and communicated individual metrics that aligns individual performance targets with organizational objectives.
Steve Willis is head tutor for Management Accounting exams at PwC Academy
References
(1) Philip Moon and Lin Fitzgerald, Performance Measurement in Service Industries, Making It Work, Chartered Institute of Management Accountants, 1996
(2) Philip Moon and Lin Fitzgerald, Delivering the Goods at TNT: the Role of a Performance Measurement System, Management Accounting Research 1996