Extract from a paper presented at Manufacturing Accounting Conference, 11-13 June 2014, Copenhagen Denmark by Pall Rikhardsson, Throstur Olaf Sigurjonsson, Audur Arna Arnardottir, School of Business, Reykjavik University
The use of performance measures and performance measurement frameworks has increased significantly in recent years regardless of company type or industry. Performance measures are defined here as measures used to support decision making by managers and thus do not include e.g. externally oriented financial measures. The type and variety of performance measures in use has been researched in various countries and linked to different variables such as the external environment, performance measurement frameworks, and management characteristics. However, this has not been researched to any extent in Icelandic context. This was the focus of a study carried out at year-end 2013 by a team of researchers form the Reykjavik University. We surveyed 82 CFOs in large Icelandic companies and asked them about their use of performance measures in various categories and the characteristic of their performance measurement systems. The companies surveyed covered a wide spectrum in size, ownership structures and industries.
Iceland is a small western society, with good access to top-level managers for data gathering, and with strong educational system on all levels. Iceland was one of the countries that was hit the hardest by the financial crisis in 2008 with the 3 largest banks collapsing, a subsequent intervention by the International Monetary Fund and a host of court cases, bankruptcies and political and regulatory changes in the years following. Iceland is therefore interesting in this context as environmental uncertainty has been relatively high surrounding and following the collapse, which could have impacted on the design of Icelandic companies performance measurement systems.
We asked about the use of in all 59 different performance measurements. These are shown in the list below. We also asked about what information systems were used to collect, process and report the performance measurements.
Customer & Service performance
Reputation and image
Sales & Marketing performance
Finance & Accounting performance
Return on investments
Return on assets
Contribution margin of products
Contribution margin of customers
Contribution margin of company
Cost of goods sold
Indirect costs (overhead)
Manufacturing, Purchasing & Maintenance performance
Outsourcing partners performance
Product or service quality
Operating asset maintenance
R&D and Innovation performance
New product introduction
New product design
Supply Chain, Inventory & Logistics performance
Information Technology, e-Business and Social Media performance
IT service levels
Social media use
Company web site impact
Human Resources performance
Compliance, Governance & Legal performance
Governance standards compliance
Risk assessment and management
Internal audit and control
CSR, Sustainability and Health & Safety performance
Code of conducts compliance
The figure below shows the importance attributed by Icelandic CFOs to financial and non-financial performance indicators on a scale from 0 (not important) to 3 (very important). It seems that Icelandic CFOs are well aware of the importance of non-financial indicators although financial indicators are rate as more important.
Among the 82 firms surveyed, the number of total performance measures used ranged from 14 to 59 measures. The average performance measurement system (shown in the figure below) contains about 11 out of 13 financial measures (81%), and 29 out of 46 non-financial measures (63%). The most frequently used non-financial sub-category were Human Resource measures (83%) also with the highest mean importance rating of 2.08. Customer & Service performance measures (77%) with mean importance rating of 1.89, and Compliance and Governance (76%) with mean importance rating of 1.87. All responding companies use a combination of financial and non-financial measures and all seem to use a high number of the measures asked about, with the exception of R&D and innovation where only 31% of the companies indicated those kinds of measures being in use. It thus seems that the average Icelandic performance measurement system uses a relatively large number of different indicators both financial and non-financial.
The most important financial indicators are operating profit, sales revenue, variances, labor costs and company contribution margin. ROI, ROA, material costs, indirect costs, and customer contribution margin are not given as much importance.
We also asked about what information systems mainly support the processing and reporting of performance indicators. The answers from the 82 CFOs are shown below.
It seems that Icelandic CFOs – like their counterparts in other countries – rely heavily on Excel as a tool for processing and reporting performance information measures with almost 90% of the companies using Excel for this purpose. Microsoft BI (which is a combination of SQL, Excel and (sometimes) SharePoint) seems to be most widespread of the BI vendor’s solutions with Wise (an Icelandic BI solution) and Cognos following.
When asked about how performance measures are communicated to managers a rather strange picture emerges as shown below. While self-service and dashboards are relatively widespread there is still much use of the good old paper report and e-mail distribution of reports with almost half of the companies using printed reports and more than 80% sending reports by e-mail to managers.
In summary it seems that the respondents use varied financial and non-financial performance measures extensively. Looking at similar studies from the US and from Europe the impression is that Icelandic companies use performance measurement systems with more variety of performance measures and give more importance to non-financial measures. If this is true then a possible explanation – applying contingency theory – is that the crash of 2008 has prompted managers to develop more comprehensive performance measurement systems wowing never again to be caught unawares like many companies were during that time.
Looking at the information technology used in performance measurement a more schizophrenic picture emerges. Icelandic companies use similar technology as other companies and have relatively more focus on e.g. dashboards end end-user self service than studies from abroad show. But also seem to place much emphasis on printed reports and e-mail distribution of (Excel) reports.