To know what to measure in a company or organization in order to improve innovation capacity and performance has become increasingly important, especially from the 90’s of last century.
What is not measured can’t be improved. The use of methodologies such as total quality management, continuous improvement (kaizen), “lean”, “six sigma” and others has increased the need for measures and indicators other than financial ones.
On the other hand, the proliferation of measures and the existence of many indicators created from a departmental or functional views, has led some organizations to saturation, when not using conflicting or clearly negative measures.
Due to the accelerating changes in the environment, traditional financial indicators have long been insufficient and sometimes gave misleading information to take decisions.
A well designed system of measures, consistent with the vision and objectives, has proved to be the most effective tool to bring strategy into action for future success.
From development in early 90’s of the “Balanced Scorecard” (BS) by R. Kaplan and D. Norton, what began as a new system of corporate performance indicators, was transformed into what its authors define today as “a strategic tool.” By his own definition today “the BS is a management system (not just a measurement system) that enables organizations to clarify their vision and strategy and transform it into action. It provides a ‘feedback’ on both the internal and external processes and changes in the environment, to continuously improve strategic performance and results. Once fully implemented, the BS can transform strategic planning from an academic exercise to the very nerve center of the company”.
From this early model, there is no longer a doubt that performance measures system is a key strategic management tool, not only for strategy implementation and realization, but also a tool to transform people attitudes and influence their motivation.
Therefore, a system of measures adapted and consistent with the vision and strategy of the company or organization will be a transformer that will allow first, change attitudes and focus efforts on common goals, second, serve as a basis for decision taken and third foresee and anticipate future financial results in increasingly more refined way.
The usual financial measures
The financial measures and indicators are mainly produced and published to report the financial results of an organization. They are reduced to the transcription and summary, as close as possible, of all transactions.
Financial statements are established around three of them, known as 1) “balance sheet”, 2) the “income statement or profit and loss account” and 3) the “cash flow analysis”. There is a complementary relationship between them. The balance reflects the situation at a given point time, as a photo spot. The income statement is a statement which reflects the movements in a period between two balance sheets in order to extract the economic result, as margin, EBIT or profit from current revenues and expenses, and in which certain accounts reflect provisions of some accounts based in certain premises. As the cash flow analysis, reports the cash inflows or outflows and subsequent fluctuations in liquidity to meet payment or resources available for investment.
From there a number of financial “ratios” have been developed which relate various measures or compare different sets of them. The ratios are very useful for understanding past results and allow for certain predictions based on projections and assumptions. This related to what can be posted, i.e. monetary transactions, tangible assets or securities at their cost value, with some exceptions.
There is an “analytical accounting” supposedly used to take decisions under different assumptions or premises. This is based on what we know as “Budget” that reflect the assumptions and future financial statements under the hypotheses or premises taken. A leadership and management methodology has been also based on the comparison of these estimates or usually “annual budget”, with the data being obtained from the monthly financial results and ratios. But its effectiveness has been widely criticized and proved ineffective, precisely from the last decades of the twentieth century, when changes occur in the environment in an accelerated path. Budgets are often obsolete very soon after the time to be approved.
The financial indicators measure the past, his foresight and adaptation to change is therefore very limited. Additionally, items like provisions, depreciations and amortizations among others, are done with subjective criteria allowing some ‘creativity’ that may prioritize the short term, depending on certain interests. There are many examples of this “creative” accounting, some of them famous because they have occupied many pages in the world press.
These subjective elements often have to do with amortization, depreciation, provisions of various kinds, such as insolvency, valuations of assets, debts and so on. Since transactions are conducted and therefore reported at cost of acquisition, it also allows a broad discussion on the valuation date of certain resources or assets, in addition to its ability to perform.
Furthermore, although the modern accounting has made certain valuation concepts and the ability to account for certain intangible resources and assets (patents, “know-how”, Goodwill, etc.), In general, most of intangible assets and resources are not valued and therefore not taken into account in the financial statements. See the IAS / IFRS accounting.
It is widely accepted today, that more than 65% of the value of a company or organization is made up of intangible assets and resources. Therefore, we have a dilemma: should we establish a correction, additional values to the financial statements reflecting the status of these intangible assets? This does not occur or occurs only partially in our financial measures, and in most operational measures and indicators, i.e. those based on the ordinary processes of the company.
Financial data are the result of hundreds, thousands of accounting entries which are made daily in each transaction. If we consider that the various transactions are part of processes in the company by measuring the yields of each of these processes is becoming more reliable to have an increasingly better approximation to future results. That is, we can measure the processes in advance what would later be an accounting result. Clearly this is a better tool to make management decisions and management.
If we can evaluate and also include the intangible components involved in these processes, we can form a system of measures to better reflect what’s happening today, that will be the result of tomorrow and we can take decisions to improve yields where they are produced.
What we do, is to showdirect causallinesbetweenthe operating results oftoday’s processes with the futurefinancial results. Moreover, use the values ofintangible assets and resourcesthat make uptoday’sprocessesandto estimatethe performance valuesof these processesin the near future, thusleading toeasyavailability ofinformationasmore reliableindicatorsforkeydecisionsand drivethe futurestrategyof the company.
It can be shownthat theseassessments helpto a clear formulation ofa medium-term strategy and its deployment in a best way.
To conclude, acoherentmeasurement system,in line with thestrategy, with less than ten central measures is the baseand referencefor decision-taking, successful implementationof the strategy and the innovationin allbusiness processes. This leadsto increasedoverallperformance and productivity.
The path to excellence and integrated management
Integration is a word used in many areas and sometimes as a label. We intend to use this word first in the sense of wholeness, integration of all processes and business functions; second, including all subjects involved, named “stakeholders”, and third all resources, tangible and intangibles of the organization. This list is not an order of importance. To conduct the integration in harmony will assure the consistent sustainability of the results.
Several models of excellence have been described, some of them world renowned. In Europe we are very familiar with the EFQM model. But excellence is not a state or a point of arrival but a journey, a process of continuous change and innovation.
In this way, we will need some references, internal and external. Usually benchmarking is helpful in respect to what we call best practices. Over the past 10 years we have applied a methodology in many internationally recognized companies to direct their own path to excellence. Contains the following core areas:
- Vision and values.
- Integrated management by processes.
- Innovation management.
- Market / Customer Positioning /Management.
- Supply management.
- Support processes (HR, IT, F & An etc.).
- Data, information and knowledge. Management of Intangibles
- People and teams
- Quality and continuous improvement
- Measures and indicators
Complementary relationships can be established between this approach and the EFQM model.
Excellence is achieved by integrating all areas of the company considered as the most important source for innovation, introducing change management and minimizing risk. The integrated management model is a harmonic phase that is reached, once redesigned, optimized, integrated key processes, identifying the value streams and applying sets of key performance indicators.
There are also systems for key performance indicators and dashboards that have been also widely distributed, since the “Balanced Scorecard” to models that take into account the intellectual capital and intangible assets of organizations such as the “Skandia Navigator”.
Here too, the development of key indicators will differ specifically for each company, according its vision and strategy and starting points.
Currently, there are a lot of methodologies and initiatives to implement in companies, all promising more or less immediate impact on the results to improve the business. How to choose, among all, the appropriate?
How to exploit these initiatives? How to optimise the results, making them sustainable over time?
For each company, the starting points on this trip should be different, depending on the different degree of maturity of each organization and its particular business strategy.
Should apply only those initiatives and methodologies that the company requires and at the right time. With this we get:
- Exciting the management team with the vision and possibilities, committed leadership is essential to success.
- Inspire and mobilize the “change agents”
- Motivating employees to achieve new levels of performance and results
- Producing and making everyone feel proud of their achievements have become possible in reality.
- Sustain the improvements achieved; based on the solids basis created
Running a business is action.
The business requires continuous decisions, things change and time, as all resources scarce. To drive the action, it takes bases which, although reviewable, are the premises for decision-making.
Practice, is the final expression of knowledge and practice eventually becomes habit. Focusing on people and get their habits facilitate understanding of the need for change, share the vision and the enthusiasm and motivation.
Managing this change now becomes the key factor in the success of organizations and management. Change and continuous improvement are the foundation of the path to excellence.
It is important to assume that the path to excellence is specific to each company and organization, according to their starting point – the current state of maturity of the organization – and his vision and business strategy.
An important point is that the vision and strategy that is shared throughout the organization and accepted by all members is already a first step towards excellence.
 IAS/IFRS. IFRS Foundation and the IASB