In the mid
1980’s, managerial emphasis was on ‘planning, budgeting, and evaluation.’
In particular, the third sector utilized planning matrixes, budget
analysis, and program evaluation as the key to audit and control
in the organization.
Kaplan and
Norton suggest measuring organization performance in four key areas:
financial, customer, internal business processes, learning and growth
(Kaplan and Norton, ‘The Balanced Scorecard:Measures that Drive
Performance,’ Harvard Business Review, January-February 1992).
Kaplan and
Norton continue with recommendations for quantitative measurement:
Financial, Customer. Internal Business Processes, Learning and Growth.
Financial goals
listed by Kaplan and Norton include Revenue Growth including Sales
and Marketing share, Number of new customers and markets, Number
of new strategies; Cost Management including revenue generated
per employee and unit cost reduction; Asset Utilization including
inventory reduction (increase in turns), cash-to-cash cycle, return
on capital, and productivity/efficiency.
Integrated
with these financial goals, are the marketing segment objectives
to increase market share, customer retention, and customer acquisition.
The concern in capturing market share is forecasting the potential
number of customers to be captured. Within the realm of Customer
Retention: number of customer defections, increase in sales to
existing customers, and increase in frequency of contacts with customers.
Related to customer retention, is generation of leads into customer
acquisition: quantity of new customers, increasing ratio of sales
inquiries to closing, decreasing the cost of acquiring each new
customer, and increasing average order size.
Kaplan and
Norton suggest that improvements in internal processes do not effect
management of strategic business process. Perhaps it is the process
technique that needs to be addressed. Integrating audit and budgeting
functionality into defining profitability segmentation and percentage
of revenue from new customers addresses the audit limitations.
Product mix
needs to be clearly defined and adhering to time to market criteria
with a documented break-even point. Production issues can be defined
as including parameters on number of defects and on time delivery
points. Auditing can be increased to include psychological consumer
attitudes including customer satisfaction ratings, and percentage
of customers reordering.
Human capital
is part of the criteria vision business process including employee
capabilities, business intelligence, and personnel motivation and
alignment. Kaplan and Norton suggest that employee satisfaction,
Staff turnover, productivity, and the number of employees qualified
for key jobs.
Information
technology is not an entity onto itself; abet an extension of process
and techniques defined in the planning process.
Motivation
and Alignment
Firms solicit
opinions and suggestions from customers, suppliers, and media feedback
constitute suggestions received resulting in suggestions implemented.
In this feedback process, customers, suppliers, and media need to
be rewarded though special program to provide substantial objective
feedback.
There has been a tendency according to Kaplan and
Norton use of the scorecard at the strategic level, and allowing
the benefits to filter to other levels of the organization.
At the strategic level, the issue is to translate
the vision throughout the organization, integrating the vision into
measurable goals and objectives.
Certainly the
vision needs to be communicated to all levels of management, using
the budget process to embrace the vision. Traditional management
techniques suggest four budgetary centers; Revenue, expense, profit,
and investment:
Revenue
Centers
Organizational
units in which outputs are measured in monetary terms with a recording
of revenue.
Expense
Centers
Organizational
units are measured as inputs and associated with costs.
Profit
Centers
Areas measured with the difference between outputs (revenue) and
inputs (expenses).
Investment
Centers
Areas measured
with inputs with the potential for surplus output production.
Kaplan and
Norton’s scorecard measures are limited in scope by themselves.
Six Sigma is the foundation for process mapping process through
a common vision and shared language for improving business results
(How To Avoid the Four Most Common Mistakes of Process Mapping,
Michael J. Webb, isixsigma.com).
Webb emphasizes
the need to group activities according to goals creating focus;
the process map focuses on seller activities; create value for
the buyer; integrate tools, skills, and results measurements within
the process.
Customer
concentric goals with focus is the key for the process map. Identification
of the customers key requirements and providing options for those
requirements is the process most firms utilize.
Identification
of the key goals for the customer, or the board of directors,
or the key auditors is the driving factor behind process mapping.
The customer is the requestor of corporate information integrity
which is defined by the internal audit and scorecard.
Typically
the market department utilizes forecasting to build a profile
of potential outcomes. The balanced scorecard can be used in
forecasting and pricing models. James A. Brimson, of the Predictive
Management Institute offers insight on “Predictive Accounting.”
The use of pro forma reporting can be problematic, according to
Brimson. Pro forma statements are not audited, and may not adhere
to financial standards, like GAAP. The investment community closely
follows these pro forma statements. Financial reporting is a
historical analysis, not looking forward. Brimson argues that
that process information can be added to existing cost accounting
systems.
Brimson states
“predictive accounting projects future financial performance using
a statistical understanding of the organizations processes (James
A. Brimson, Valuecreationgroup.com). In this predictive model,
the process is a mapping of the sequence of events and assigning
economic values to the events. The process map defines upcoming
events assigning associated economic values to the event. These
events are translated into predictive financial statements using
resource modeling and statistical analysis.
The
Process Performance Statement
According
to Brimson, the financial statements should be expanded to include
the process statement. Traditional accounting allows for the
income statement, the balance sheet, and the cash flow statement.
The Process Performance Statement evaluates the value or elements
of work technique or process. Technique can be broken into two
segments; current and long term investment:
Current Investments are traditional cost centers such
as purchasing, accounting, financial management, operations, sales,
and personnel.
Long Term
Investment categories include research and development; new product
design; and marketing. The value to the organization according
to Brimson is the effectiveness of the outcome, efficiency through
a positive cash flow, and stability through Six Sigma compliance.
The primary
objective of the Six Sigma process is a qunatative analysis to
focus on defect or variation deviation through the implementation
of Six Sigma improvement projects. This is a two step process
employing DMAIC and DMADV methodologies.
DMAIC
Basic
methodology consists of the following five phases:
- Define formally define the process
improvement goals that are consistent with customer demands
and enterprise strategy.
- Measure to define baseline measurements
on current process for future comparison. Map and measure process
in question and collect required process data.
- Analyze to verify relationship and
causality of factors. What is the relationship? Are there
other factors that have not been considered?
- Improve optimize the process based
upon the analysis using techniques like Design of Experiments.
- Control setup pilot runs to establish
process capability, transition to production and thereafter
continuously measure the process and institute control mechanisms
to ensure that variances are corrected before they result in
defects.
DMADV
Basic
methodology consists of the following five phases:
- Define formally define the goals of
the design activity that are consistent with customer demands
and enterprise strategy.
- Measure identify CTQs,
product capabilities, production process capability, risk assessment,
etc.
- Analyze develop and design alternatives,
create high-level design and evaluate design capability to select
the best design.
- Design develop detail design, optimize
design, and plan for design verification. This phase may require
simulations.
- Verify design, setup pilot runs, implement
production process and handover to process owners.
(Source:
wikipedia.org/wiki/Six_Sigma#DMAIC)
Using
Six Sigma for Budget and Audit Control
The goal of strategic budgeting is estimating expenses
and revenues for the budget year (Internal Budgeting, Comalth Scientific
and Industrial Research Organisat, Commonwealth of Australia 2002,
p1).
According to the Internal Budgeting Report “The objective
of the audit was to evaluate the efficiency and effectiveness of
internal budget processes in view of their contribution to business
planning, resource allocation decisions, and the management of financial
performance.”
The Six Sigma
planning methodology integrates with the Internal Budgeting Report
by identifying process improvement goals that are consistent with
customer concentric requirements. The effectiveness of the internal
budget is a measurement on current processes as the foundation for
future planning periods. Analysis is to verify the relationships
and potential causality of defined factors. Through the Six Sigma
Design of Experiments, there is a road map for process improvement.
Control for pilot projects is critical for the DMAIC methodology
to complete the cycle.
DMADV methodology
is an extension of the traditional systems analysis approach: Define,
measure, analyze, design, and verify the results. Define the scope
of the problem, the goals of the design activity that are consistent
with customer demands.
According to
iSixSigma, CTQs Critical to Quality is the key measurable characteristics
of a product or process whose performance standards or specification
limits must be met in order to satisfy the customer. They align
improvement or design efforts with customer requirements (http://www.isixsigma.com/dictionary).
The goal is to measure the CTQ’s product capabilities, production
process, and risk assessment.
Analysis is
the development and design alternatives. The verification or testing
methodology quantifies the results.
Planning, budgeting,
and evaluation are still the foundation of financial analysis thirty
years after Jimmy Carter implemented Zero Based Budgeting. Most
organizations have structured processes for internal budgeting.
According to
The Internal Budgeting Report, clearly defined improvements in the
budget process are necessary. Organizations need to focus on:
●
Acquiring and Developing or Retraining Skilled Personnel in budgeting,
decision-making and financial management in an accrual-based environment.
●
Decentralizing of operational and line managers in budget and
audit matters transferring the process to the operational managers.
●
Clearly defined budget management responsibilities, and transfer
of authority for the planning cycle to the operational management.
●
Involvement from senior management in the adoption of new financial
management practices with training required to develop operational
staff in the budget and audit process.
●
Development and implementation of accrual-capable Financial Information
Systems or at least the implementation of reporting tools to provide
timely financial information throughout the organization.
According
to the Internal Budgeting Report, an effective budgeting and auditing
process has the following elements:
●
Principle – Internal budgeting should play a key role in the financial
management framework supporting the allocation and management
of scarce resources.
●
Evaluation Criteria – The Internal budget is driven by corporate
objectives and output delivery targets and is consistent with
external accountabilities.
●
Audit findings from the Internal Budget report cites that 84%
of respondents indicated that internal budget was linked to their
corporate planning process. Most respondents also reported that
the internal budget was a key part of the planning process.
The
Internal Budget Report offered the following better practices:
●
Communication improvement between internal and external stakeholders.
●
Definition of budget process and management responsibility defined
in personnel documents
●
A senior management committee to oversee the process (Internal
Budget Report, p 12).
Six Sigma is
the driver in translating Vision and Strategy into business processes.
Planning, budgeting, and evaluation are still the keys to achieving
success, and is the foundation of the Strategic planning process.
References
Brimson,
James A., “Predictive Accounting,” Predictive Management Institute,
The Value Creation Group, 2005.
Furst,
David, “Your Comfort Zone,” Accountancy, April 2005
Hay, David
and Davis, David, “The Voluntary Choice of an Audit of Any Level
of Quality,” Presentation at the 2001 Summer Workshop at the University
of Technology, Sydney.
“Internal
Budgeting,” Commonwealth Scientific and Industrial Research Organization,
Commonwealth
of Austria, 2002
PriceWaterhouseCoopers,
“Leading Strategies,” pwc.com, 2006
Van Grembergen,
Wim and Van Bruggan, Rik, “Measuring and Improving Corporate Information
Technology Through the Balanced Scorecard,” Electronic Journal
of Information Systems Evaluation, Paper 3-Issue 1.
Marvin Tanner
is a published author, living in San Francisco. He has co-authored
Using Unix, Second Edition, Que Press, 1984. Mr. Tanner is
a Ph.D. Student in marketing, and works full time as a web optimization
specialist. He has taught at the University
of California, Extended Education, San
Francisco State College, Peralta
Community Colleges, and since 2001 has been facilitating graduate
workshops at the University Of Phoenix
in eBusiness and Marketing.