Evaluation of Corporate Performance Appraisal Techniques in India

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  1. Introduction

India is a huge country with developed corporate sector. Over the last 60 years since independence the corporate India have undergone a see change, specially there has been a paradigm shift in the business scenario since 1991 after the liberilisation of economy namely LPG i.e. Liberilisation, Privatization and Globalization.

Since the progress in the corporate have been prolific, so the performance evaluation of the corporate India as well is dynamic. Traditionally Ratio Analysis, Cash Flow are the main techniques and for performance analysis of a business. But with the complexities in modern business centre new technique like Common Size Statement, Balance Scorecard, etc have gained importance throughout the globe. India is not an exception to it. Most of the big corporate house have started performing these exercise to estimate it real performance and to maintain checks and balances for all the activities of the concern.

It is therefore very essential to do a research work as to which technique or combination of techniques are appropriate for which type of corporate entities, along with a comparative look at all the modern techniques. This would help us decide which technique a most appropriate in India.

  1. Objective

To make a comparative study of all the techniques used for performance evaluation in India corporate to understand which technique or group of techniques are most effective under different situation.

  1. Literature survey and research methodology

This area is very rich in literature over last 6 decades a lots of excellent text books, magazines, annual reports research paper been published. After a through study of all the method’s  some of them are short listed for further analysis. The following literature are worth mentioning.  

The performance measurement system of a firm has a strong influence on the behavior of its people. As Robert W Hall says : “Performance measurement is the basis of every system in company : cost systems, planning systems, capital budgeting systems, personnel assignments promotions, reorganizations, budget allocations – the mechanisms, built up over years, by which everything runs.” In a similar vein, Robert Kaplan and David Norton argue: “An organisation’s measurement system strongly affects the behavior of people both inside and outside the organisation. If companies are to survive and prosper in information age competition, they must use measurement and management systems derived from their strategies and capabilities.”

More than 70 percent of those who responded to a recent Economist Intelligence Unit – KPMG survey said that they were dissatisfied with their company’s performance measurement system. Some of the problems with the performance measurement systems are as follows :

  • An excessive focus on operational and financial measures most of which are tactical and historical.
  • A tendency to measure wrong or irrelevant things, just because they are easy to measure.
  • Lack of proper alignment of measures either with each other or the strategy of the firm.

 

In an interesting 1991 HBR paper titled “The Performance Measurement Manifesto”, R. G. Eccles argued that “within the next five years, every company will have to redesign how it measures its business performance”. The heightened interest in business performance measurement since the early 1990s suggests that he was substantially right.

Apart from these a lots of Annual Reports and Corporate Booklets have spoken about different means. In Indian context Dr. Prasana Chanda in his book Financial Management have discussed all techniques practiced by Indian major corporates and definitely do rationalize the use of these. Prof. I. M. Panday in his text book, The Financial Management states his views on modern techniques of performance evaluation but from his work it revels that he gave more emphasis on the traditional approach than the modern one.  

From the detail literature survey it is clear that in modern business focus is on it mainly because of the following, reasons as pointed out by Dr. P. Chandra in his work, Financial Management 6th edition, TMH 2004, which is discussed below:-

Rationale for the current focus on business performance measurement

Business performance measurement is receiving a lot of attention today due to a variety of reasons. the important ones seem to be as follows:

  1. i) Heightened Competition : Global competition has become a fact of life. In the wake of increased competition, firms are emphasizing quality, productivity, cost, innovation, flexibility, and customization. Improvement initiatives such as total quality management, world class manufacturing, total productivity management, and total cost management are gaining currency. All these tools and techniques rely on performance measurement.
  2. ii) Growing Empowerment : Many organizations have realized the benefits of empowering people down the line. Empowerment works well when the top management spells out clearly what it expect from people at various levels. For this purpose, well defined performance measures are required.

 

iii) Quality Awards : To recognize outstanding performance and motivate companies to excel, a number of national and international awards have been established. Notable among them are the balridge Award (U.S.), the European Business Excellence Model (Europe), and the Deming Prize (Japan and Asia).

Each of these awards requires a comprehensive self-assessment by the companies who wish to be considered for these awards. As more and more companies are applying for these awards, the interest in business performance measurement is growing.

  1. iv) Expanding Organisational Roles : Professional bodies like the institute of Chartered Accountants in England and Wales (ICAEW), the Chartered Institute of Management (CIMA), the institute of Chartered Accountants of India (ICAI), and the Institute of Cost and Works Accountants of India (ICWAI) are prodding their members to participate actively in developing balanced performance measurement systems. They are arguing that the role of the management accountant is to provide comprehensive information to run the business, and not just to prepare information required for external reporting.
  2. v) Greater External Demands : Organisations today have to satisfy various external demands. One such demand comes from the regulatory authorities. In the wake of deregulation of sectors such as telecommunications, power, airlines, and insurance, regulatory authorities have been set up. The regulatory authorities demand certain performance standards from the firms falling under their jurisdiction. This has implications for business performance measurement.

Research Methodology :

Research Methodology includes through literature survey of the different aspects of performance apprised. Investigation of annul report of Blue Chip India corporate is done. Finally all the different techniques are evaluated based an the need the organization and situation to come to a conclusion from which a suggestion can be made to find the best possible techniques under a circumstances. Relevant website are surfed to collect secondary data. Statistical tools likes trends, pie chart, percentage etc. are used in the analysis portion.

  1. Analysis

Analysis is done for the following techniques which are commonly used in Indian corporate :-

If we take a clear look at all the above measures use can find that the traditional technique are more concern with the financial indicators like ROI, ROCE etc. but the modern techniques consider both final and non financials. Now lets go through some of the modern techniques frequently used for performance evaluation of modern corporate apart from Ratio Find Flow and Cash Flow Statement which are very basic techniques for performance evaluation.

  1. BALANCED SCORECARD

Most companies have a performance measurement system that includes financial measures as well as non-financial measures. Financial measures are used primarily by senior managers to monitor the performance of the firm as a whole and its business units or divisions; non financial measures are employed mainly by operating managers to control short-term operations. Till recently, not much effort was made to combine financial and non-financial measures in an integrated measurement framework. The balanced scorecard approach pioneered by Robert Kaplan, David Norton and others seeks to develop an integrated performance measurement system.

 

Features at Balanced Scorecard.

  1. The balanced scorecard is strategy driven. It is a mechanism for implementing the strategy of a business unit into a comprehensive system of performance measurement and management. As Robert Kaplan and David Norton say : “The balanced scorecard is more than a tactical or an operational measurement system. Innovative companies are using the scorecard as a strategic management system to manage their strategy over the long run. They are using the measurement focus of the scorecard to accomplish critical management processes.”
  2. The balanced scorecard covers four important perspectives in a business viz., Financial, Customer, Internal Business, and Learning & Growth. The key issues relating to these perspectives are as follows : -

Perspective

Key Issue

Financial

Is the company attractive to shareholders?

Customer

Does the company provide value to its customers?

Internal Business

What must the company excel at ?

Innovation and Learning

Is the company improving and innovating continually?

Robert Kaplan and David Norton believe that these four perspectives are fairly robust for a wide range of businesses. Fig. 4.1 shows the structure of a Balanced Scorecard.

iii) The balanced scorecard represents a linked series of objectives and measures. The linkages capture cause effect relationships obtaining in a business. As Robert Kaplan and David Norton say : “The multiple measures on a properly constructed balanced scorecard should consist of a series of objectives and measures that are both consistent and mutually reinforcing. The linkages should incorporate both cause and effect relationships and mixtures of outcome measures and performance drivers.” Fig. 4.1 shows how the important measures under the four perspectives are linked in a cause effect relationship

Fig. 4.2 Shows the detail and systematic view of key measurement and cause effect relationship.

A variant of Balance Score Card is ABB’ Balance Score Card which is shown in Fig 4.3.

B. PARTA SYSTEM

The ‘parta’ system is widely used in Birla Companies as a performance measurement and control system. Its salient features are as follows:-

 

  • The ‘parta’ represents the commitment of the unit in charge to the chairman of the company or the group. It is arrived at taking into account various factors like manufacturing capacity, operational efficiency, consumption norms, market situation, supply of materials, and labour productivity.
  • The performance of the unit in-charge is monitored on a daily basis by the group chairman on key variables like :

 

  • Quantity produced
  • Value of production
  • Sales
  • Material consumption
  • Fuel efficiency
  • Material cost
  • Variable conversion cost
  • Contribution
  • Fixed costs
  • Profit
  • Cash flow
  • The rewards to the unit in-charge are linked to the extent to which the ‘parta’ commitment is fulfilled.

 

Evaluation of an indigenously developed responsibility accounting, the parta system is eloquently supported and defended . This is evident from the following observations :

 

Siddharth Birla : “Essentially, it emphasizes the speed of reporting, even sacrificing some accuracy in the process. So there is a mental pressure on the manager to perform daily. It is a very short reaction time”

 

Sudarshan Birla : “The parta system is not a static or hide bound system. It is adapted to the changing needs and we that principles work very well”.

 

C. The European Business Excellence Model

 

Launched by the European Foundation for Quality Management (EFQM) in 1992, the European Business excellence Model is the European version of the Balridge Award.

The European Business Excellence Model consists of two separate sections, viz., Results and Enablers. Companies are marked out of 1000 and the weightages assigned to various categories of criteria are as shown in Fig. 4.4

  1. Tata Business Excellence Model

Patterned after the Balridge Award, the Tata Business Excellence Model, adopted by the business house of Tata in India, evaluates the performance of Tata companies along seven criteria. The criteria and the points assigned to them are as follows :

  1. Leadership 125
  • Organizational leadership 85
  • Social responsibility and citizenship 40
  1. Strategic Planning 85
  • Strategy development 40
  • Strategic deployment 45
  1. Customer and Market Focus 85
  • Customer and market knowledge 40
  • Customer relationship and satisfaction 45
  1. Information and Analysis 85
  • Measurement and analysis of organizational 45
    performance
  • Information management 40
  1. Human Resouces Focus 85
  • Work systems 35
  • Employee education, training, and development 25
  • Employee well being and satisfaction 25
  1. Process Management 85
  • Products and service processes 45
  • Business processes 25
  • Support processes 15
  1. Business Results 450
  • Customer focused results 125
  • Financial and market results 125
  • Human resources results 75
  • Organisational effectiveness results 125

Now, let us understand how Indian corporate could use these concepts to there benefits, and business control. The 30 Sensex Corporate are observed and it is seen how many of these are using which techniques. It is shown in Table 4.1 followed by a graphical representation in Fig. 4.5.  

From the above table and figure it is evident that all the corporate do still use the traditional techniques but at the same time they use another parallel technique like Balance Scorecard, Parta System to confirm and complement the financial measures. Thus it is easily understood that modern techniques namely Balance Scarecard is the most widely used techniques now a day since 20 of 30 companies are using the technique. It is mainly because of it uniqueness to take care of both financials and non financial aspects to make an overall balanced evaluation.

Another observation made out of 100 blue chip companies over last 3 years on Balance Scorecard in Indian corporate which is show table 4.2 and fig. 4.6. 

From all the table and graph it is clear that Balance Scorecard is gaining more and more popularities since it is very effective and is a balance measure. It is to be noted that most of the companies, are using the Keplan Model but they have restructure it a bit as per there unique need.

 

  1. Findings : From the research and analysis the following finding can be observed.
  1. Both traditional as well as modern techniques are concurrently used to have a balance performance evaluation of modern and complex corporate world.
  2. Both financial and non financial aspects are given due importance in the evaluation is modern times.
  3. Balance Scare card is the most widely used modern technique of performance measurement of Indian corporate which is used in 20 out of 30 corporate which constitute the BSE sensex.
  4. Detail Research shoals that Balance Scare card as used by different corporate have changes the relative weightage on different parameter based on the requirement of that company.
  5. In modern business would it is very essential to go for multi technique approach to have a performance measure of an organisation. So most of the corporate are doing exactly that.

 

  1. Conclusions

From the analysis and finding it can be concluded that both financial and non financial aspects should be considered to have a perfect performance means of a modern Companies, the weightage depends upon the nature of business and the corporate philosophy.

        The commonly used fiancé measure used traditionally are :

  • Return on capital employed
  • Return on investment
  • Return on equity
  • Return on sales
  • Profit before depreciation interest and tax
  • Profit before interest and tax
  • Profit after tax
  • Net operating profit after tax
  • Cash flow
  • Free cash flow
  • Economic value added
  • Residual income
  • Economic profit
  • Earnings per share
  • Dividend yield
  • Total shareholder return
  • Market capitalization
  • Market value added

      Again the commonly used non financial measurement are –

  • Customer satisfaction index
  • Customer returns
  • Market share
  • New product introduction
  • On-time delivery
  • Manufacturing cycle time
  • Defects percentage
  • Throughput
  • Employee productivity index
  • Patents obtained

Based on the salient features of both of these Balance Scarecard and other modern technique techniques are invented which compliments the financial as well as non financials of an organization to have a performance measure which is very much balanced in approach.

It is often said that Balance Scarecard is balanced, mainly because of it’s capacity to take care of most of the key aspects of the corporate to be reflected in the performance measure. This is the reason why most of the blue chip now a days are going for Kaplan Model or a variant of this which may be a parta system, Tata Business Excellency Model etc.

  1. Limitation of the study

The study suffers from the following the major limitation.

  1. i) The study is limited to only 30 BSE sensex corporate on 31/3/2006. There are at least another 100 blue chip corporate, which are not considered Mid Caps and Small Caps are ignored.
  2. ii) The study confined in India corporate only.
  3. Scope of further research

Since the sphere of the study is huge so there are tremendous scope of further research. Some of these can be maintained below:-

  1. i) A comparative study can be made are Large Caps, Mid Caps and Small Caps in relation to the nature of performance maker.
  2. ii) A study can be made on the effectiveness of the multi technique approach to performance measure.

iii)     A cost benefit analysis of using multi technique approach for performance measure can be done.

  1. Suggestion

Based on the entire study, its conclusion, findings, scope the following suggestions are provided:-

  1. Both financial as well as non financial aspects have to be considered for a proper judgement of performance measure of any corporate, Indian corporate are not an exception to it.
  2. Since the most popular performance measure is Balance Scarecard, so it has to be improved as per the organizational need. The Balancing of Balance scare card shall be made feasible as per the stabilities of different corporate need.
  • The performance measure techniques which shall be used must be represented in a simple manner however complicated it might be, so as to easily understood by the all the stake holders with or without technical or financial knowledge.
  1. Any performance measure must have a quality of being either being a tool of feed forward control or a tool of feedback control if not both.
  2. Balance Scarecard, Tata business Excellency Mode etc. are so much widely used in Indian corporate because these models have the capacity of detecting frauds, errors omission, mistakes etc. It is suggested to follow the model in full so as to derive the 100 % benefit out of it.
  3. Any performance measure follows check lists to qualify for the awards for the best performance evaluation which assure the quality of performance evaluation if self.

        Instituted in 1987, the Balridge Award inter alia seeks to stimulate American companies improve quality and productivity for the pride and recognition while obtaining a competitive edge through increased profits.

        Balridge awards are given annually to companies that have achieved the highest levels of performance excellence. The criteria for judging performance consist of seven categories  as shown.

  1. Leadership : The company’s leadership system, values, expectations, and public responsibilities.
  2. Strategic planning : The effectiveness of strategic and business planning and deployment of plans, with a strong focus on customer and operational performance requirements.
  3. Customer and market focus : How the company determines customer and market requirements and expectations, enhances relationships with customers, and determines their satisfaction.
  4. Information and analysis : The effectiveness of information collection and analysis to support customer driven performance excellence and marketplace success.
  5. Human resource focus : The success of efforts to realize the full potential of the workforce to create a high – performance organisation.
  6. Process management : The effectiveness of systems and processes for assuring the quality of products and services.
  7. Business results : Performance results, trends and comparison with competitors in key business areas : customer satisfaction; financial and marketplace; human resources; suppliers and partners; and operations.

 

Source :   National Institute of Standards Technology home page (www.NIST qualiy.gov).  

Posted by: Institute Of Management Study. in General | Date: 20/01/2016

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