Glossary
ACCOUNTABILITY: The outputs that a work unit is expected to produce, and the performance standards that managers and employees of that unit are expected to meet.
ACTION PLANS: Business unit initiatives geared toward improving performance against an agreed-upon goal or strategic objective.
ACTIVITY: A unit of work, or task, with a specific output. Activities are distinct, normally are steps in a process, and are capable of being flow-charted and measured. Examples of activities are processing an order and issuing a check. ACTIVITY COST DRIVER: A unit of measurement for the level (or quantity) of the activity performed.
ACTIVITY-BASED COSTING: Under activity-based costing, costs are analyzed by applying them to activities (or pieces of work, such as processing an order) rather than general ledger accounts (e.g., salaries) that tell little about the drivers (i.e., causes) of costs. Activity costs are then traced to cost objects (e.g., a branch or set of customers) in accordance with how the activities are actually consumed (e.g., how many orders were processed by a central department for a branch). This is done by identifying output measures (e.g., the number of orders processed) and unit costs (e.g., $10 per order).
ACTIVITY-BASED MANAGEMENT (ABM): The management processes that use the information provided by an activity-based cost analysis to improve organizational profitability. The overall aim of ABM is to cut across the functional hierarchical view of costs, align work and resource consumption with customer value, and manage the business through its processes. The goal of ABM is to enable customer needs to be satisfied while making fewer demands on organizational resources.
ADAPTIVE AND DECENTRALIZED ORGANIZATION: An organization that operates with adaptive management processes and that devolves performance responsibility to front-line people close to the customer.
ADAPTIVE MANAGEMENT PROCESS: A process of planning and decision making that is not tied to a specific plan or budget. Operating managers and teams have significant local discretion to use their knowledge and judgment to make decisions that are congruent with the organization’s purpose and strategy. ANTICIPATE-AND-RESPOND: A description of a business that takes an “outside-in” view of business planning, first anticipating what customers will need and then responding to that need by acquiring the resources necessary to satisfy it.
ASPIRATIONAL GOALS: Goals that are set based on significant step-changes in performance and that are likely to be reached only with exceptional changes in performance over a number of years.
BALANCED SCORECARD: A strategic management and measurement framework that views a business unit’s performance from four perspectives: financial, customer, internal business process, and learning and growth. It enables managers to map and describe a business unit’s strategy, and review its progress periodically.
BENCHMARKING: The process of studying and comparing how other organizations perform similar activities and processes. These organizations can be either internal or external to the firm and are selected because they are known to have excellent performance for the benchmarked process or result.
BEYOND BUDGETING: A set of guiding principles that, if followed, will enable an organization to manage its performance and decentralize its decision-making process without the need for traditional budgets. Its purpose is to enable the organization to meet the success factors of the information economy (e.g., being adaptive in unpredictable conditions).
BUDGET: A plan expressed in financial terms, a basis for controlling performance, an allocation of resources, an entitlement to spend, and a commitment to a financial outcome.
BUDGET CONTRACT: A commitment resulting from the delegation of accountability for achieving agreed-upon outcomes to a divisional, functional, or departmental manager.
BUDGET GAMES: Attempts by managers to manipulate information and targets and take non-value adding actions to achieve their budgets and to attain high bonuses. BUDGETING PROCESS: The practice of preparing, submitting, and agreeing upon a budget between one organizational level and another.
CAPABILITY TO ACT: The capabilities that people have to execute their decisions. This includes the resources, tools, training, and information at their disposal, and the removal of bureaucratic constraints.
CAPACITY CONSTRAINTS: Limitations on the quantity that can be produced because the capacity committed for some activity resources (e.g., plant space or number of machines) cannot be changed in the short run.
CENTRAL CONTROL: The control exercised by senior executives over decisions taken by managers in divisions and business units to ensure that their actions conform with group policies, plans, and directives.
CONTINUOUS IMPROVEMENT: An approach to performance management that aims to continuously improve against benchmarks or competitors. COORDINATION: The linking of commitments between one part of an organization and another to satisfy the needs of external customers.
COST CENTERS: Responsibility centers whose managers and other employees control costs but not revenues or investment levels.
COST OF CAPITAL: The return that the organization must earn on its investments in order to meet the requirements of its investors. This is the interest rate that organizations use in their time value of money, discounting, or compounding, calculations.
CUSTOMER ACCOUNTABILITY: The emphasis placed on individuals being accountable for satisfying customers’ needs both internally and externally.
CUSTOMER PROFITABILITY: The net profitability of individual customers or groups of customers (e.g., channels and market segments) after assigning income and all the costs consumed (e.g., production, marketing, selling, distribution, and administration).
CUSTOMER RELATIONSHIP MANAGEMENT (CRM): The process of knowing and satisfying customer needs profitably.
CUSTOMER VALUE PROPOSITION: The unique set of promises (e.g., price, quality, product features, and service convenience) that defines the company in the eyes of the customer.
DECENTRALIZATION: The devolution of decision-making responsibility from the corporate center to divisions and business units. Radical decentralization delegates performance responsibility to managers and teams at (or near) the front line.
DEVOLUTION: The act of transferring performance responsibility from the center to operating and front-line managers and teams without defining this responsibility in terms of a specific plan or budget.
ECONOMIC VALUE ADDED (EVA): An evaluation of a business unit or product line’s financial desirability using its residual income. EVA is defined as the (adjusted) after-tax profit for the period less the (weighted average) cost of capital. Thus, if a company has after-tax profits of $20 million, shareholder funds of $100 million (with a cost of capital of 12 percent), and borrowings of $50 million (with a net of tax interest cost of 4 percent), its EVA would be $6 million (profit of $20 million less equity cost of $12 million and debt cost of $2 million).
EMPOWERMENT: The act of providing employees who are closest to operating processes, customers, and suppliers with the freedom and capability to make decisions that are consistent with the company’s strategy and values.
ENTERPRISEWIDE INFORMATION SYSTEMS: Computer-based management information systems that connect every part of an organization and provide information to those who need it when they need it.
ETHICAL INFORMATION: Information that is transparent and untreated by managers in an effort to make it look better than it really is.
FAST AND OPEN INFORMATION: Relevant information that can be accessed by individuals when required from an organization-wide data repository and interpreted in any way that supports their decision-making requirements.
FIXED PERFORMANCE CONTRACT: The outcome of a process of agreeing upon targets, incentives, plans, resources, cross-company commitments, and performance measures between a superior and subordinate for a specified period. Its terms and conditions can either be explicit (usually a written letter between the parties) or implicit (custom and practice tell the parties what the likely outcomes will be). In addition to the six elements just identified, the terms of such a contract are likely to include a time period within which targets must be achieved, the limits of authority, and the reporting intervals.
FIXED TARGET: A financial or nonfinancial target that is represented by a fixed number to be achieved within a specified period of time (e.g., an annual budget or Balanced Scorecard KPI target).
FORECAST: A periodic financial statement of the most likely outcome of income and expenditure related to a business or project for a specified period of time. Forecasts are often used to evaluate whether the current year is on track to achieve the approved budget. A forecast may also be made for a nonfinancial measure.
FREEDOM TO DECIDE: See empowerment.
GOVERNANCE: The framework of principles, values, boundaries, and control systems that is defined for managing empowered actions.
INCENTIVE COMPENSATION: The linking of rewards agreed upon in advance to the achievement of fixed targets within a specified period of time.
INTELLECTUAL ASSETS: There are three types of intellectual assets: Human capital or competencies include the experience, skills, and capabilities of people. Structural or internal capital includes patents, trade marks, and copyright; the store of knowledge in databases and customer lists; and the design and capability of information systems. Finally, market-based or external capital includes the profitability and loyalty of customers and the strength of brands, licenses, and franchises.
INTERNAL MARKET: The simulation of an external market between buyers and sellers but operated inside an integrated organization. Thus, internal service providers become suppliers to operating unit customers. Prices are negotiated and service levels agreed upon.
KEY PERFORMANCE INDICATORS (KPIs): Performance measures used to set goals and assess an organization’s performance based on its critical success factors.
KEY VALUE DRIVERS: Those elements, such as quality, time, cost reduction, innovativeness, customer service, or product performance, that create long-term profitability for the organization.
KNOWLEDGE MANAGEMENT: A process that makes the most effective use of the intellectual capital of a business. Its purpose is to enable people across a large organization to share information and insights that lead to performance improvement.t.
MAKE-AND-SELL: A description of a business that takes an “inside-out” view of business planning, first planning what to make and sell and then persuading customers to buy its output.
NET PRESENT VALUE (NPV): The summation of the current value of a stream of future net cash flows after adjusting for the time value of money.
NON-VALUE-ADDED ACTIVITY: An activity that presents the opportunity for cost reduction without reducing the product or service value potential to the customer.
OPERATING BUDGET: A forecast of revenues and expenses based on a plan that has been agreed upon by management as the target for the next operating period (typically one year). The operating budget also authorizes spending on discretionary activities, such as research and development, advertising, maintenance, and employee training, and is the basis against which such expenditure is controlled.
OPERATING MANAGEMENT CYCLE: A cycle of operating management reviews during which day-to-day operating issues are addressed.
PERFORMANCE MANAGEMENT MODEL: The whole process of setting goals and rewards, deciding strategies and action plans, managing resources, coordinating activities, and measuring and controlling performance for an organization.
PERFORMANCE RANKINGS (LEAGUE TABLES): The comparison of performance outcomes between a company and its subunits with their peer groups. The position in the league table can act as a spur to higher levels of achievement.
PROCESS: A specific ordering of work activities across time and place, with a beginning, an end, and clearly identified inputs and outputs, and in which resources are consumed.
PROFIT CENTER: A responsibility center whose employees control revenues and costs but not the level of investment.
RADICAL DECENTRALIZATION: The devolution of performance responsibility to managers and teams at (or near) the front line.
RELATIVE IMPROVEMENT CONTRACT: An implicit agreement between a superior and subordinate to use their best endeavors to continuously improve performance against specified benchmarks, peers, competitors, or prior years. Performance is evaluated with the benefit of hindsight.
RESPONSIBILITY CENTER: An organizational unit for which a manager is accountable in the form of cost (a cost center), revenue (a revenue center), profits (a profit center), or return on investment (an investment center).
ROLLING FORECAST: A financial forecast (usually including a few high-level figures such as sales, costs, and cash flows) that is updated on a rolling basis. A typical rolling forecast would be prepared each quarter to cover the following five quarters. It is not tied to a particular fiscal year-end review but enables managers to continuously review strategy and cash requirements.
ROLLING REVIEW CYCLES: The process of reviewing performance that is not tied to a particular fiscal year. Typical review cycles are annual (looking two to five years ahead) and quarterly (looking five to eight quarters ahead). SHAREHOLDER VALUE MODELS: Models such as EVA (economic value added) and VBM (value-based management) that enable managers to make decisions on the basis of their impact on shareholders’ wealth.
STRATEGIC CONTROL: The process of providing information about the competitive performance of the overall business unit, both financially and in meeting customers’ needs, for control purposes.
STRATEGIC INFORMATION: Information that guides the long-term decision making of the organization. Strategic information can include the profitability of products, services, and customers; competitor behavior and performance; customer preferences and trends; market opportunities and threats; and technological innovations.
STRATEGIC MANAGEMENT CYCLE: A cycle of strategic management reviews during which major strategic issues are addressed.
STRETCH TARGETS: Those targets that represent significant increases in the targeted amount or goal above the existing targets or goals, and is more than an incremental improvement over current performance.
TOTAL SHAREHOLDER RETURN: The sum of gross dividends plus the increase in share value expressed as an annual compound rate of growth (of the original share acquisition cost) between two points in time.
TRANSFER PRICE: An internally set transaction price to account for the transfer of goods and services between different parts of the same firm.
VALUE CHAIN: A sequence of activities whose objective is to provide a product to a customer or to provide an intermediate good or service in a larger value chain. VALUE-ADDED ACTIVITY: An activity that, if eliminated in the long run, would reduce the product’s service to the customer.
VALUE-BASED MANAGEMENT (VBM): A decision-support process that combines historic and predictive views with financial and nonfinancial drivers of the business. It enables managers to evaluate alternative plans by measuring their impact on (future) free cash flows and thus, by applying an appropriate cost of capital discount rate, on shareholder value today.
VARIANCE ANALYSIS: The decomposition of differences between actual and estimated costs into amounts related to specific factors causing the variance between actual and estimated costs.
WORK UNIT: A grouping of individuals who utilize the firm’s resources and are accountable for performance.
ZERO-BASE BUDGETING: An approach to agreeing on discretionary expenditures that assumes that the starting point for each item of discretionary expenditure is zero, and involves a process of ranking expenditure options.