Performance Management

Turning to performance measurement, Lydia continues:

"I am not even sure if this focus on profitability and customer contribution margin will do us any good. Are there alternative measures to tell us whether our customers are profitable or not, or what the state of our relationships with them are so we can improve our performance?"

In addition to growing the business and enhancing TSL's brand reputation as an environmentally responsible business, Tony wonders if this focus on online customers is all too much.

"I am worried about the cost of introducing a new distribution channel and whether we are over extending ourselves. Our current growth is already causing profitability issues - what good will expanding our customer base and activities do?"

Given the problems that Tony and Lydia have faced in the past year, they are worried about how to best manage their performance in the future. They understand that ROCE is a key performance measure for any business and have set a target of 15%. However, Tony and Lydia know that the ROCE will be well below that target by the end of this financial year, and just monitoring ROCE each month or quarter does not tell them how to make improvements. How are they going to improve performance and ensure that their target ROCE is achieved next year?

Tony and Lydia try to relax over a coffee one evening, but inevitably the conversation returns to the business. Lydia expresses her concern about the commitment of the divisional managers to TSL.

"The business has a clear mission and a clear financial target. Moreover, we have given Victor, Cathy and David the same ROCE target for their individual divisions and the authority to run them how they choose, within limits. Now they are complaining about a transfer pricing system that has been fine in the past, and they seem to be competing with each other and losing sight of the fact that we are all in the same business working for a common goal."

Tony replies: "David wants to be able to negotiate his own transfer prices with Victor and Cathy; he says that would give him 'real' autonomy. But won't it just cause arguments and waste time?"

Lydia has some sympathy for David's view.

"He has a point, he has to agree on prices with other suppliers and I haven't witnessed any fights yet! What is more important is how we get buy-in from the divisional managers to your proposed initiatives on supply management and quality, and my proposal to be more environmentally responsible. They are simply going to object to anything that reduces ROCE in the short term unless we can find a way of clearly highlighting the potential longer-term benefits."

Tony recounts a discussion he had with Crystal, a fellow CA, at a recent 'Business Breakfast' meeting.

"I was asking Crystal whether she thought ROCE was really the right measure for us to concentrate on at TSL, especially down at the divisional manager level. Her answer was rather cryptic. She asked me if I would try to fly a plane using only an altimeter. I told her I ride scooters and can't fly a plane, but I did suggest that I would also like to have a speedometer, and a fuel gauge, and some navigational equipment. She said, "well there you are then, running a business is not so different from flying a plane".

Lydia looked confused.

"What did she mean?"

Unfortunately, Tony didn't know exactly.

"We ran out of time, but we agreed to meet for lunch next week and discuss it further. I think she might be able to help us find a way of encouraging divisional managers, and other employees, to focus on all the things we need to achieve to determine the company's future success. Well, I hope so!"

Lydia is pensive:

"Well, we certainly need a way to curb the current "penny pinching" attitude of divisional managers and get them to support some investment in the things that really matter."

CONCLUDING COMMENTS

Tony and Lydia agree that they are getting a little out of their depth and need some advice if they are going to sort out the numerous issues they have been battling with.

They decide that Tony will meet with Crystal and see what her suggestions are for an improved performance measurement system. Then they will sit down with their business adviser (accountant) and work out a plan of action that will get the company firmly on track to meet their challenging performance targets.

(a) Calculate the return on capital employed (ROCE) for each of the three divisions of TSL

AND compare your result with the target set by TSL.

(b) Outline THREE key disadvantages of the managing director and CFO using divisional ROCE and whole company ROCE as the key financial performance measures to monitor

the performance of the TSL Ltd.

(c) Construct a 'balanced scorecard' type performance measurement model that would be suitable for use by the managing director and CFO to help them manage business performance at TSL Ltd.

i.) Suggest at leastEIGHTkey performance measures that you believe could be usefully applied at TSL Ltd to ensure the issues identified in the case are addressed. Explain how each could be measured and the goal it helps TSL to achieve.

ii.) Choose anyFOURof your measures and explain how each should be used within your performance measurement model to improve the effectiveness of performance management and to drive improvement in financial performance at TSL.

Note: Your suggested measures should cover a broad range of measurement categories and be relevant to the case study.