Activity-Based Costing

One tool that can aid a company in measuring success is the balanced scorecard. In 1992, this concept was created by Dr. Robert S. Kaplan and Dr. David P. Norton. By integrating a measurement with management an organization can effectively and quickly implement strategic decisions. Major government departments such as the American Cancer Society, Blue Cross Blue Shield, Department of Commerce, and U.S. Army and thousands others use the balanced scoreboard. It is also used by institutions such as the Department of Energy. This concept uses the organization's vision and measures it against four performance indicators (1) financial (2) customer (3) internal business processes and (4) learning and growth (Universus Networks, 2006). These indicators are used to measure success progress and long term drivers of success

Customer metrics was introduced by the balanced scorecard into the performance management systems. Such metrics used are market shares, account shares, acquisitions, satisfaction, and retention which summarize customer profitability. At the customer level the percentage of unprofitable customers can be measured by profitably metrics. These profitability measures can provide signals such as satisfaction, retention, and growth in customer relationships that are valued when these relationships contribute to higher profits (Kaplan, 2005, August 8). Customer profitability metrics are very effective too. What if you have an important customer that is unprofitable? One thing that can be done is by first looking internally which would help in improving internal processes at a lower-cost-to-serve.

We have talked about a balanced scorecard measuring success and customer profitability. The balanced scorecard can also aid in measuring performance. Focusing on internal and process performance and even the size of the budget for the fiscal year, many Federal agencies have measured their organizational performance using the balanced scorecard (U.S. Office of Personnel Management, 1997, April). One effective way to get the whole picture of an employee's work performance is to approach the employee performance appraisal with balance. When measuring by behaviors or actions only managers can have a complete picture and know where to make improvements by balancing internal and process measures with results and financial measures. Sometimes employees are scored higher on their performance even when the company as a whole is not meeting their objectives. When balancing measures are used in employee performance plans the company can see the complete picture of performance.

A tool that can aid a company in controlling operations at the group-level is the economic value added (EVA) concept which balances easiness, theoretical correctness and right steering (MÐ'kelÐ'inen, 1998, September 2). The facilitation of easiness helps the knowledge seeking process of operating people. This concept assesses and measures different units better. Be wary though because with every adjustment comes an increase in the complex concept. A suggestion for this concept according to MÐ'kelÐ'inen, E. (1998, September 2), is that "When an organization has first adopted the basic concept well, it might be good to slightly modify the concept later on." Economic value added equals the rate of return - the cost of capital multiplied by capital which equals NOPAT divided by Capital -minus the Cost of capital multiplied by Capital. Economic value added affects the way capital is viewed and could cause a change in management's attitude. Like any change in organization, this concept should be implemented with care that way understanding and commitment can be achieved.

Some usages of the economic value added concept is (1) to set organizational goals (2) to measure performance (3) to determine bonuses (4) to communicate with shareholders and investors (5) motivate

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