The traditional management accounting system (MAS) has many limitations to the current MAS as it is not fully applicable to use currently due to the complexity of costing, and changes in the technologies. In Kaplan & Johnson criticisms, managers rely heavily on monthly management reports to reduce costs and increase productivity but not on the quantity and quality measures. Therefore, MAS failed to control on the operations level. Monthly reports are used to aim for short-termism instead of long-termism. Furthermore, MAS unable to allocate production cost accurately because labour costs are being emphasised. Financial costing are being priorities thus MAS unable to develop much. In 1990s, residual income (RI) and the return on investment (ROI) have been developed to measure the company’s performance and improved the setbacks.
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ROI measure the return of investment in every division. The composition of ROI consists of the operating ratio and stock turn (sales to assets). However, every division is accountable for the cost of capital investment and the profitability of it is owns divisional. MAS focuses on the divisional profits whereas, ROI focuses on probability and the return of capital of the divisional. One of the problem is managers will forgo investments or reduce costs by targeting on the short-termism to increase ROI. Furthermore, comparisons are done on the performances of the divisions instead of historical performance on the division. RI is derived from ROI. RI is the net income after deducting the “capital charge of the investment.” However, this approach had been rejected because ROI has more financial data to report to the shareholders. Besides, other frameworks started to developed and improved the criticism of the traditional MAS as it focus on the past information which unlikely to make decisions.
Development of performance models.
Economic Added Value (EVA) is developed in 1990s which is the alternative of RI and ROI. EVA is calculated as the net operating profits after taxes minus the cost and expenses included the debt, equity and the cost of capital. (Abdeen, A. & Haight, G. 2002) The function of EVA is to “measure the economic profit”. (Griffth, J. 2004) EVA measures the shareholders’ value indirectly measuring the company’s value and an indicator of the stock performance of the company. (Johnson S. & Bamber M. 2007)
Manager’s decision will influences the EVA value and also the manager’s incentives. (Johnson S. & Bamber M. 2007) In ROI, short term results are being emphasised and results are being measure among the divisional performance however, in EVA results are being measured on the company’s values and emphasise on the short and long term results which is one of the remedies suggested by Kaplan and Johnson. EVA users can get higher returns than other non users. (Kleiman (1999) and Ehrbar’s (1999) citied in Griffth, J. 2004) However, some researcher have done researched on the adopters of EVA argues it will underperforms the companies and neither a useful indicator for the company’s performance. (Griffth, J. 2004) Perhaps, this is due to the difference types of research methodologies that had been done. Consequently, EVA failed to measure the shareholders value efficiently as this model did not measure the intangible factors which contribute to the company’s value. An organisation must look for an alternative performance measure which is the Balanced Scorecard (BSC)
BSC is introduced in 1990 which is different from RI, ROI and EVA because this model integrates financial and non financial performances to developed a strategic management process. (Kaplan R. & Norton D. 1992) Kaplan and Johnson suggested that besides the financial indicator, the non financial indicator must be emphasised as well. Traditionally, BSC focused on the four perspectives to measure the financial performance and the focus shifted to the strategy of the management process which is known a strategy map. (Bible R., Kerr S. & Rahim M. 2006) The development has make BSC a universal model to measure a company’s performance and also a medium of communication from all levels. (Hepworth P. 1998). BSC helps the managerial level to make decision from the scorecard or strategy map. BSC consists of four perspectives namely customer, financial, internal business and learning and growth perspective. (Bible L., Kerr S. & Zanini M 2006) These perspectives can be integrated to form objectives to manage the daily operations. By using the objectives, managers able to identify the problems arise and plan, research on the linkage of the relationship, feedback, learn and turn everything into actions. (Bible L., Kerr S. & Zanini M 2006) However, studies shows that companies unable to link the perspectives to produced a strategic outcome as company able to focus on certain perspectives but not all together. Moreover, BSC cannot apply to the operational level. (Ghalayini et al. citied in Tangen S. 2004) BSC focuses on the strategy but not as a form of control (Kaplan R. & Norton D. 1992) as the strategy that identified may not be implemented. The manager need use the “lagging indicator” which is past information to complements with the “leading indicators” to achieve the goals. (Pandley M. 2005) Overall, BSC is a useful because it is easy to understand, and tool of communication for all levels. BSC is recommended to use for companies despite guidance are not provided on the improvement of measures. (Tangen S. 2004) Perhaps more research on the improvement must be done.
The performance pyramid was developed in 1992 from the setbacks of BSC model. However, it is not widely use by the companies. It is able to integrate the corporate vision and daily operations together to the objectives (Tangen S. 2004) unlike, the BSC model unable to integrate it. The performance pyramid is “hierarchical view starting from the top which is corporate vision and end with the daily operations”. (Tangen S. 2004) It is able to provide information from three different views to the stakeholders namely customers, shareholders and management to measure the performance. It consists of four levels. Firstly, it is the corporate visions, followed by the business units (market and financial) in second level which focuses on the short and long term results. Traditionally, business emphasised on the vision, financial, productivity and waste on the financial measure which is the internal efficiency. Lynch and Cross (1992) argues internal efficiency must not be focus as it emphasis on the short term results only. Thirdly, is the core business where “the bridges the top level and the operational level” on the customers satisfaction, flexibility and productivity. Lastly, departments need to operate their daily operations on the quality, delivery, cycle time and waste. This model combines the internal and external interest of the company to measure the performance towards achieving the goal which in the traditional MAS did not have such combination. However, managers find it hard to operate this model. (Neely A. 2000) It is not encourage using this model as there is no further development on this model to become the performance indicator. (Anderson K. & Adam R. 2004)
The pyramid prism is one of the most popular models and was developed to improved BSC model. It has border perspectives on stakeholders views compare to the traditional MAS who emphasise on the shareholders view and internal efficiency and much more comprehensive views compare to performance pyramid and BSC model. (Neely A. 2004) This model has five parts namely stakeholders, satisfactions, strategies, processes and capabilities and contributions. A better objectives will be set if managers accommodate the stakeholders needs. Neely & Adams (2002) argues that stakeholders’ needs must given priority to the company and the company needs from them. This will give the company the right way to manage the business. Besides, strategies focus on the implementation of strategy to accommodate the stakeholders’ needs. Processes emphasised on the process that can be done to achieve the strategies. Capabilities meant by the capabilities on the technology, people, practices and infrastructure in achieving the goal. Lastly, contributions refer to the capabilities of the stakeholders in contributing to the company. Overall, performance prism has broader aspects and focuses on the company and stakeholders needs compare to BSC and performance pyramid but it is hard to implement. (Anderson K. & Adam R. 2004) Perhaps, improvement on this model should be done.
European Foundation Quality Model (EFQM) Excellence Model comes from the principal of Total Quality Management. EFQM provide a system on the performance management which different from the models that are mentioned above. (Wongrassamee S., Gardiner P. & Simmons J. 2003) and are used in self assessment in the Europe organisations to improve the leadership qualities in decision making. (McAdam R. & Welsh W. 2000) EFQM divided by two areas which is enablers and results. (McAdam R. & Welsh W. 2000) Enabler refers to the things that we do whereas results refers to the achievement that have been done. Enablers consist of leadership, people, policy & strategy and partnership & resources. Results consist of people results, customer results, society results and key performance results. Enablers will affect the outcome of the results in future. (McAdam R. & Welsh W. 2000) Moreover, studies show that enablers and results are linked. (Eskildsen and Kanji citied Bou-Llusar J. et al. 2003) Thus, the enablers will affect the future results. EFQM has multiples objectives however, guidance are not provided on implementing this model compare to the BSC model strategy map is being used to measure the strategy.(Wongrassamee S., Gardiner P. & Simmons J. 2003) Thus, difficulties in implementing will occurred. However, studies show that EFQM model able to use with BSC. (Wongrassamee S., Gardiner P. & Simmons J. 2003) The similarities of BSC and EFQM are not required to set a targeted performance. BSC applies strategic function to the organisation and EFQM model will assess the outcome. The two model able to improve business performances and improvement of quality in the same time.
Besides EFQM model, Six Sigma also measures the quality of management. However, Six Sigma focuses continuous improvement in customer satisfactions (Dasgusta citied Jones E. et al. 2010) and “error free in the business environment”. (Pyzdek citied in Kamran Moosa K. & Sajid A. 2010) Six sigma is different from other models as the model focuses on minimizing errors whereas EFQM focuses on self assessment of the outcome. This model is developed by Motorola in 1987 (Hagen M. 2010) and it is widely use. It is an ultimate tool as it able to help the organisation for continuous improvement based on the customer needs and improvement on product detects using statistical models The model has five stages to improve the organisation process which are define, measure, analyze, improve, and control. These processes are handled by the black and green belts which are highly trained to improve the projects. (Caulcutt R. 2001) However, the problem arises when “the black and green belts offers unwavering support to the organization” and emphasizes on statistical methods which the company will overlook other supporting cultures. (Caulcutt R. 2001) Black belts projects are managed by the managers. They need to set the objectives inline with the company objectives and these objectives must be deployed to the organization. (Caulcutt R. 2001) If it is succeed then Six Sigma will be effectively implemented.
Impacts on the implementation of framework on both companies and consultants.
Despite there are disadvantages on the frameworks, companies still adopts the framework. However, the implementation of performances indicators may somehow bring impacts to the companies or consultants. Impacts on the significant models only will be further elaborate below.
According to a research, EVA users from 47 companies among the Fortune 500 companies use EVA find difficulties in calculating the net operating income after tax and the cost of capital it is very complex and mostly required to made adjustments. Furthermore, EVA calculation some objective can be unreasonable in performance evaluation due to the organisational levels. Lastly, the EVA value may portrait a good and a bad value in the same time as in the research EVA users perform better in terms of profits and non users perform better in the investor’s return. This will affect the evaluation of the performances. (Abdeen A. & Haight G. 2002)
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This case study is done by CIMA on the implementation of BSC in BAE Systems, British Aerospace. The implementation of BSC was able to change the culture of BAE. The changes have brought success on the operations as the information from the scorecards is extractable from BAE’s SAP R/3 system. BSC become the organisation control system and integrated with the traffic light model to show the status of projects. Besides, monthly reports are able to visualise in online and shared to all employees to view the data so that employees are inform on the work and the contribution of their work to the business units and the whole business. However, from the researcher’s view the scorecards has time lag between the variables when it comes to identifying the scorecard’s values during the cause and effect relationship. (Murby L. & Gould S. 2005)
The performance prisms have been used by DHL International (DHL UK). The management are frustrated in reviewing the monthly report as there no solution from the problem arises and persisted. The model was applied with a success map that consists of the needs of the company and stakeholders’ and ways to achieve the goals. The success map outlines the problems on the cost, revenue volume and customers value that interrelated. Problems are solved by solving the challenges and the issues occurred in the business instead focussing on the detailed report monthly. Consequently, issues are solved in teamwork instead of focussing on the individual function responsibilities. (Neely A., Adams C. & Crowe P. 2001)
Implementation of Six Sigma in Bharti Infotel, India has improved the customer satisfactions. Secondly, employees able to think critically while relating to the statistical tools, complex issues and the business benefits to minimize the defects. Besides, employees focuses more on fact rather that the experience in resolving problems. Another changes occurred where the cross-functional teams where by employees work as a team to improve projects. The major shift can be seen when improvement of quality is one of the business strategy instead of the quality department’s responsibility. Besides, selections of project are emphasized on business priorities not based on employee wishlist. (Shukla A. & Srinivasan R. 2007)
Integrating BSC and EFQM model has given the partnership of UK electrical utility with the Uster Business School in 1995 some impacts. Improvement on the customer satisfaction has become the first utility to win the Prestigious Charter Mark award for customer award. Indirectly the achievement of ISO 9000 achieved. Furthermore, the partnership able to the link the company strategy and leaders’ objective together like a manager’s objective able to link the improvement activities on the reduction of costs on the overall company’s strategy. (McAdam R. & O’Neill E. 1999)
Conclusions.
In nutshell, the traditional MAS have limitations but the developments of the models have improved the deficiencies. All the models are useful but it is based on the company’s requirements in accessing the performance. EVA focuses on the shareholders values whereas BSC focuses on the financial and non financial indicators to form a strategic management using the causes-effect relationship. Besides, performance pyramid and prism both focuses on the stakeholders’ perspectives but performance prism has a broader view, widely used and objectives are set according the customers and company’s needs. EFQM and Six Sigma focuses on quality management which one emphasises on self assessment and another model focuses on minimising defects. These models are developed to improve the operational system. Models such as EFQM and BSC able to integrate and enhance the performance evaluation. However, some model are developed theoretically in which the actually outcome may not feasible.
The criticism of Johnson and Kaplan has somehow overcome as the developments on the models able to evaluate the financial and non financial indicators and improved on quality and strategic management instead using the financial information to measure the performance. Besides, the developments of models able to decentralised all the divisions in achieving the organisation objectives. A deviation on the short-termism to the long-termism on the subsequent developments has helped the organisation to increase efficiency and effectiveness of the business environment. However, the developments models able to help the organisations to evaluate the management performances to a certain extent. This is because every models has in own boons and banes and it is not applicable for all. Thus, more development on MAS should be done.
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