Managing performance can be visualized as a circle encompassing five steps:
- Set performance standards and goals
- Using Key Performance Indicators that align with and promote the organizations larger goals and objectives
- There are leading and lagging indicators
- Leading indicators provide information that can be acted upon and that can change results
- Lagging indicators show only historical results
- Measure performance
- KPIs should be based on controllable items for each kind of responsibility center
- For instance, for a revenue center that is based on sales, a KPI could be the number of sales calls made
- The purchasing department may be held accountable for negotiating the best price and measured against standard costs
- The production department may be held accountable for cost overruns due to waste measured by standard volumes
- Net income is a lagging indicator of financial performance
- KPIs should be based on controllable items for each kind of responsibility center
- Compare actual performance to established performance standards
- Management communicates KPIs to responsibility centers, departments, and other managers
- Each KPI should have a benchmark, target, or goal
- Management communicates KPIs to responsibility centers, departments, and other managers
- Take corrective action
- Managers should be held accountable for the costs and performance measures that they can control
- For example, the sales manager can control the number of calls made but not the price that competitors are charging
- Managers should be held accountable for the costs and performance measures that they can control
- Use information gained from the process to set up future performance standards
- Setting KPIs is an iterative process, and should be constantly reviewed for effectiveness.
Finally, here is a quick overview of the concept:
You can view the transcript for “Responsibility Accounting” here (opens in new window).
Or a longer overview here:
You can view the transcript for “Performance Evaluation and Responsibility Centers” here (opens in new window).