Performance Accounting: A Competitive Edge
by Rich Rackers, Partner
Performance accounting is all around us. We see it in every facet of our lives. When we go to the doctor, our vital signs are measured. Our cars have built-in performance monitoring technology to alert us of any impending problems. Many schools are now being funded based on the performance of the students. Even the government is using performance accounting as a means of eliminating the wasteful practice of “managing to a budget” rather than improving outcomes. Measuring and managing performance has become an integral part of our lives.
This trend is especially evident in business. With technology ever improving, we are gaining access to more timely, accurate, and relevant information than ever before. This is providing a significant competitive advantage for companies that understand and embrace as a platform for continuous improvement and to establish the link between performance and compensation.
Performance accounting measures serve as indicators of progress toward specific goals that are critical to the success of your company. The corollary between sports and business illustrates this point very well.
In football there are three levels of scoring:
- Touchdowns represent how the team performs as a whole.
- Offense, defense and specialty teams reflect the unique efforts of select groups. For example, yards rushed, minutes of possession, sacks, turnovers, and 1st down conversions are some measures of performance.
- Individual performance measures serve as a yardstick of recruiting and training practices, coaching efforts, as well as each player’s ability to perform in their assigned position.
Rather than waiting until the game is over to review performance, coaches are constantly adjusting their strategy while the game is still in play. In addition to having better information to manage the game by, these various levels of performance measures also serve to motivate specific behavior since they are closely tied to advancement and compensation.
In much the same way, business has three corresponding levels of scoring:
- Profit and loss represent how the company performs as a whole.
- Activity and profit centers drill down to the function or department level to assess performance of a select group. For example, sales, operations and human resources are some functions.
- Individual performance measures serve as an indicator measuring the effectiveness of hiring and training practices, management efforts, as well as each person’s ability to perform their given job.
Although most companies use performance accounting as a means of calculating compensation for their salespeople, very few extend that same approach to other activity centers. You don’t often see a shipping clerk, accounting manager, or shop floor supervisor reviewing their performance every day in anticipation of a performance bonus.
Generally speaking, real-time feedback is limited in business. Without the benefit of predictive indicators, business decisions are based solely on a historical management approach, looking to the past to manage the future as opposed to a real-time performance accounting system.
