We are at that timeof the year when it becomes critical to start planning on how we need to manage organisational performance in the new financial year. Not that we do not need to manage performance at any other point of the business, but if one has not started, it would be appropriate to begin with at least the new financial year.

Before discussing about managing performance, it may be relevant to check if a business plan and a budget for the financial year have been drawn up as those are reference points against which the performance is monitored. One is reminded of a famous quote which goes as “If you don’t know where you want to go, any road will take you there”. This is very appropriate in the context of preparing a business plan which starts with the identification of goals, the strategies and the budgets therefrom.

In the context of managing and monitoring performance one is reminded of Peter Drucker’s famous quote “you cannot manage what you don’t measure”. It is desirable that all monitoring be in quantitative terms as that would clearly give the basis for action.

The key issue is how do we monitor and manage the performance of organisations. It would largely depend on the extent of the resources available and maturity of the system. Mature ones with resources could use sophisticated ones, like the balanced scorecard that monitors performance on four major parameters, namely, financial, customer centric processes and learning and development; each of these categories would require definitive parameters that are capable of quantitatively being measured and monitored. The parameters of staff satisfaction and environment and community, to make it inclusive of other stakeholders, can also be included in balanced scorecard as recommended by David Parmenter

A question is often asked if there is a singular measure that one could look at. This has never been an easy question to answer and would depend upon the organisational stage, namely whether it is an early-stage company, a growing one or a mature one. This could also change from industry to industry as the core capabilities of them change.

In the context of organisations that are in the growth or maturity stage, I am inclined to believe that the ROCE would be the metric that warrants close monitoring and management. In doing, the drivers should be tracked which would be asset Utilisation, asset velocities or efficiencies and a third dimension, which would be cost of quality and ESG scores, both actions for future.

Even to drive or monitor the ROCE, it is important to understand how it is computed, which is earnings before interest and tax (EBIT) divided by capital employed where capital employed is total assets as reduced by current liabilities. It is evident that to improve the ROCE, one has to address the numerator, by increasing it, and simultaneously ensuring that the denominator is kept as low as possible to ensure the maximisation.

The maximisation of EBIT can be dealt with by closely monitoring the asset utilisation and the gross margin on the sales. The higher asset utilisation should ideally be accompanied with high gross margins. High utilisation with low gross margins would indicate commoditisation of the business, indicating risks to price volatility. Asset utilisation could be defined differently for various sectors depending upon the industry in which they operate namely manufacturing would include fixed assets, where service companies would include human resources. The key issue is to address the revenue drivers to ensure better utilisation.

The next vector would be the efficiencies and velocity of utilisation of assets, namely the fixed assets, inventory as well as receivable turn times. This again is computed by dividing the sales by fixed assets, cost of goods by average inventory and sales by receivables. The faster or higher the number is the better as that would mean that the total capital employed could reduce.

The final vector needs to be a little futuristic to address the cost of quality, as well as the organisational compliance to ESG as that would go a long way to prepare the organisation for future challenges. The cost of quality would also go to increase the EBIT that constitutes the numerator of the equation.

One can visualise the drivers of ROCE as the points of a triangle, first being asset utilisation and gross margin together with other being asset velocity and cost of quality with ESG compliance. Organisations need to drive balance in the triangle without skewing it at any point of time. The vectors of this triangle can be redefined for other organisations too; for start-ups it could be fund-raising or ensuring break even. This could also be defined for a not-for-profit organisation.

The need for managing organisational performance can be best described by Marshall Goldsmith’s famous quote “What got you here won’t get you there”.

(The writers are with RVKS and Associates, Chartered Accountants. )