The design of performance reports is regularly examined in Paper P5.
- December 2011, Q3 (b): Using the limited information available, evaluate the usefulness of the pack that is provided to the board of governors (6 marks).
- June 2012, Q1 (i): Critically assess the existing performance report and suggest improvements to its content and presentation (12 marks).
- June 2013 Q1 (ii): Evaluate the current strategic performance report and the choice of performance metrics used (Appendix 1) (8 marks).
- December 2013 Q4 (i): Evaluate the method of calculating and measuring the Force Scores for use in the league table in achieving the Department of the Interior’s aims and goals.
Of course, performance means different things to different organisations, so there is certainly no single correct way of measuring or presenting performance. For example, profit-seeking organisations will certainly be interested in sales and profits, but charitable organisations have neither sales nor profit. Furthermore, even within a single organisation different aspects of performance may have to be examined in more detail at different times and for different audiences.
The following approach is suggested as one that may give guidance for good performance report design. Decide on:
- Purpose. What is the fundamental purpose of the report?
- Audience. For whom is the report produced?
- Information. What information is needed? This ties back to the first two considerations.
- Layout. The important information, caveats and conclusions must be easy to see.
An organisation’s mission should define its purpose, and any judgment of performance report must report on the extent to which the mission is being achieved.
June 2013 Q1 contained the following:
- Its stated mission is: ‘to become the No. 1 hotel chain in Ostland, building the strength of the Kolmog brand by consistently delighting customers, investing in employees, delivering innovative products/services and continuously improving performance’. The subsidiary aims of the company are to maximise shareholder value, create a culture of pride in the brand and strengthen the brand loyalty of all stakeholders.
Sometimes the term ‘mission’ might not be used. December 2011 Q3 used the word ‘ethos’ as in:
- The school’s ethos is ‘to promote learning, citizenship and self-confidence among the pupils.’
December 2013 Q4 stated that:
- The aim of a Government Department was ‘…to provide a value-for-money service to ensure that the community can live in safety with confidence in their legal and physical security’.
As accountants we are prone to thinking that the measurement of profit is all-important. However, none of these missions, aims or goals mentioned ‘profit’, and only the last one mentioned ‘money’ at all. Therefore, successful performance cannot simply be rooted in profit: it depends on achieving the factors mentioned in the organisations’ missions, aims or goals.
In the June 2013 question the founders’ initial aim was stated as ‘to make money’. However, as a mission that is completely inadequate and could apply equally to any profit-seeking business. This question required an understanding that although money might enable a business to keep score (the more profit made, the better it is doing), measuring profit says nothing about how profits are to be made. Making profits in the long-term requires long-term performance in chosen areas such as cost leadership, differentiation, innovation, flexibility, quality, and customer service. More about this later.
Remember, performance can be judged only with respect to an organisation’s purpose and the ways it has chosen to achieve its purpose: performance reports must reflect that.
The audience for performance reports will normally be managers, owners, government or, more generally, those charged with governance. Often the audience will be sophisticated enough to understand the information presented without much explanation. However, sometimes the audience will have fewer skills and might need fuller explanations. For example, the report in the December 2011 Q3 was for use by ‘… a board of governors who are part-time and selected from the local community and parents’.
To quote from the answer:
‘… the current governors’ pack for the annual review suffers from a number of basic flaws. Firstly, there is too much information being provided and that information is too detailed for a non-expert audience such as the governors. The financial information may well be too detailed and since this is a review rather than an executive control meeting it would be more helpful to provide a summary of the financial highlights.’
Care has to be taken to assess the appropriate level of detail, layout and terminology used in reports so that users will properly understand the information that is provided.
Information can be classified as follows:
- Financial: sales, profits, costs, GP%, return on capital employed.
- Non-financial quantitative: percentage of product rejects, volume of sales, number of complaints.
- Non-financial qualitative: reputation, effectiveness, customer satisfaction, staff morale.
The information provided must match the purpose of the performance report. In particular, non-financial performance is a very important determinant of the long term success of any enterprise. For a business, short-term financial performance can often be improved by reducing quality, innovation and training. However, a business pursuing these approaches is likely to suffer financially in the long term. It is not so much that a business is interested in making high quality products for their own sake, but if the business positions itself as a high quality manufacturer it must deliver high quality and, therefore, quality needs to be monitored. If the business were known as a ‘cheap and cheerful’ supplier, the measurement of quality would be much less important but costs per unit would become more important. It is a common theme of questions for reports to display only financial information; this allows the opportunity for candidates to criticise the lack of relevant non-financial information.
It might be useful to think about the balanced scorecard in this context. The four perspectives are:
- financial perspective
- customer perspective
- internal business perspective
- innovation and learning perspective
The perspectives form a hierarchy: good financial performance is the result of delighted, loyal customers, and customers are delighted if the organisation does well what it purports to do – whatever that is. So if customers require fast delivery, then delivery times have to have targets and actual delivery performance has to be measured.
The need for non-financial information is more obvious in not-for profit organisations and, indeed, in those organisations non-financial performance is often an end in itself, rather than an enabler of profitability. If reporting on the success of the school described in December 2011 Q3 which has the ethos of ‘to promote learning, citizenship and self-confidence among the pupils’, then the following might be suitable:
Details of exam marks, grades and exams passed together with comparatives from previous years and neighbouring schools.
|Citizenship (participating in and contributing to the well-being of their community)||
Numbers of students involved in community service.
This is a difficult area. There are technical psychological approaches to measuring self-confidence, but something simple would be expected here. For example:
Non-financial qualitative information is likely to be as important as quantitative information, but is harder to pin-down. Technically, qualitative information is known as a ‘construct’, an attribute that cannot be measured directly. Examples of constructs are enthusiasm and empathy. Both are very important in business, but there is no direct way in which they can be measured. Usually, for communication, assessment and comparative purposes an effort has to be made to try to turn qualitative information into quantified information. For example, in a hospital it would be important for patients to feel that they were treated sensitively and with dignity. Assuming management feels that these are important qualities, targets need to be set for them and performance assessed. Inevitably this will be done by setting up some type of numerical assessment system so that qualitative becomes quantitative.
The transition from qualitative to quantitative can introduce distortions to the information. For example, does what is measured truly reflect what the undertaking wants to assess? For example, in an effort to measure enthusiasm an organisation might measure when staff arrive in the morning. However, the person who always arrives early might simply be a victim of an hourly train service: arrive 40 minutes early or 20 minutes late.
Question 4 in the December 2013 exam has an excellent example of how performance measure information can be distorted. In summary, divisional raw scores were translated into rankings and performance was judged on average ranking. However, this approach would change very similar scores of, say, 65, 64, 63 and 62 (perhaps well within measurement error) into rankings of 1, 2, 3, and 4. The effect is to greatly magnify the differences.
Another way in which information can be distorted in to use proportional or percentage changes without regard to absolute values. This is often seen in health scares where research claims that consumption of a product doubles your chance of succumbing to a disease. What the headlines might well leave out is that your absolute chance in increasing from 1 in 5,000,000 to 2 in 5,000,000. You might worry about that, but you should realise that it is insignificant compared to, say, the danger arising from crossing the road.
Graphical presentation is another way in which information can either be exaggerated or played down. For example, here is a graph of the €/£ exchange rate for 30 days:
It looks very volatile – until you see the y-axis scale and realise that the rate moves between only about 1.191 and 1.214, a percentage change of around 2%.
Narrative explaining the information is also needed. For example, even something as simple as an adverse material prices variance needs an explanation about what caused it. If no explanation is given it will simply mean that questions will be raised later. Explanations might be accepted or might be challenged, but simply to report a variance without stating how it might have arisen is rather useless.
Layout must help users to understand the information presented and to see quickly the important amounts, trends, results and explanations.
One of the most common criticisms of reports is that they present too much information and are much too cluttered. There might be valuable information there but it is almost impossible to find and interpret it. There is always the suspicion that large volumes of information have been deliberately provided to obfuscate the facts and to blunt the message.
Although the misuse of graphical information was mentioned above, graphical displays can be used to greatly enhance performance information.
For example, Question 3 of the December 2011 exam and Question 1 of the June 2012 exam both provide good examples of too detailed, cluttered and badly explained performance reports. It might be right to provide high levels of detail, but that should be in appendices. The main body of any performance report should be immediately understandable by users and easy to follow.
For Question 1 of the June 2012 exam, a bar chart of the 2010 revenue and costs of sales figures on a would look as follows:
The relative performance of the different sectors is now much more obvious.
Similarly, the addition of narratives can be very important in drawing attention to important matters and explaining their significance or causes. A much more satisfactory presentation of this report would be to have the detailed information in an appendix and then in the body of the report explain how each sector was performing – both financially and in terms of important non-financial performance measures.
Remember, when drafting or criticising a performance report consider:
- Purpose. The organisations purpose determines what is meant by good performance.
- Audience. Make the report suitable for the interests, responsibilities and ability of the audience.
- Information. Above all, remember the importance of non-financial information and beware of measurement distortion.
- Layout. Not too cluttered; allow the important information to be easily seen and understood.
Ken Garrett is a freelance author and lecturer