Introduction
Performance evaluation and decentralization are primary drivers of organizational success in today’s business context. Businesses that plan to increase profitability, revenue income, employee performance, and remain competitive should evaluate their performances regularly. Organizations can use measures, such as return on investment, economic value added, balanced scorecard, and residual income to gauge their current performances and design strategies for achieving future goals. Similarly, decentralization is essential because it helps top management centralize their attention on excessively essential business decisions while leaving important but non-emergency decision-making to subunit managers. In every organization, decentralization and performance evaluation should be integrated as primary part of internal processes that will lead the company to achieve set mission, vision, and objectives. The extensive analysis of performance evaluation and decentralization as discussed in Managerial Accounting by James Jiambalvo shows how the concepts can be applied today and in the 21 st century business environment .
Narrative of Key Issues in Decentralization and Performance Evaluation Topic
In the topic “Decentralization and Performance Evaluation”, James Jiambalvo shares essential information on the core needs of a business’ internal operations. The author notes that the mentioned components are essential for success in the competitive and dynamic business environment today and in the future. Jiambalvo begins the topic above by providing a short narrative of an organization that has embraced decentralization but is unsure if its current performance evaluation structure is comprehensive. The company accorded one of its managers a decision-making authority, which prompted its recorded 15% profit base within 5 years in the leader’s subunit. However, a top executive mentions that profitability is an insufficient measure to determine the mentioned subunit’s success and suggests the need to use other measures, such as return on investment.
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The author then defines decentralization as according a subunit manager decision-making authority. According to Jiambalvo, decentralization is important for three reasons. Firstly, subunit managers are more knowledgeable about their units’ functionalities and will respond quickly in urgent cases. For instance, if a department that is heavily dependent on photocopying has a machine breakdown, the subunit manager will quickly authorize the purchase of another because they are aware of its importance. In contrast, top executives may be made aware of the need to purchase a replacement photocopy machine but because they are unaware of its importance in the complaining subunit, they may stall authorization for its procurement. Secondly, Jiambalvo writes that decentralization is essential in an organization because it is assumed subunit managers are more motivated to drive success in their departments than top managers. Therefore, if a subunit leader is accorded decision-making permission, they will achieve outstanding results propelled by their intrinsic motivation to have a successful unit. Thirdly, the author reports that decentralization is essential because it helps the subunit manager acquire necessary skills for top management positions in the future. However, Jiambalvo records that decentralization may promote selfish goal seeking in subunit managers instead of aligning decisions made with organizational goals, vision, and mission.
Further, Jiambalvo (2019) introduces performance evaluation measures in the second part of the topic “Decentralization and Performance Evaluation.” The author first states that organizations must regularly evaluate the performances of their subunit managers to check for weaknesses that need remedy and strengths that can be optimized to attain company goals. For instance, after a performance evaluation, a company can decide to expand its profitable subunit and strategize on ways to better its unit making consistent losses. According to Jiambalvo (2019), organizations can evaluate the performances of their subunit managers through various measures, such as return on investment, economic value added, and the balanced score card. First, companies should check if subunit managers can be categorized under the cost, profit, or investment centers. Cost center managers control the costs incurred by the business solely while profit center managers centralize their focus on generating revenue income. Finally, investment center managers control the costs and revenue incomes of businesses.
The author then introduces the return on investment (ROI) performance measure, calculated as the investment ratio relative to capital. Jiambalvo (2019) notes that a subunit manager who influences more return on limited capital is more successful than one who receives similar return levels using higher capital base. However, the author indicates that companies should not over-rely on using ROI as viable performance measures because it may encourage under investment. Further, Jiambalvo (2019) writes that organizations can evaluate their performances using residual income (RI), which is measure of economic value added (EVA). RI or EVA is excessive profits made by a company relative to the anticipated revenue income in a specified period. For instance, if a business expected to make $20,000 in profits as of May 2021 but makes $30,000, then it has residual income. In the mentioned scenario, the organization’s assets generate surplus revenue. However, Jiambalvo (2019) cautions businesses from solely using RI or EVA to evaluate their performances because the measures can result to overinvestment. Businesses can invest more capital in the anticipation of regular RI, which may be catastrophic in the end.
Finally, Jiambalvo (2019) introduces balanced scorecard as a primary measure for performance in the business context. Balanced scorecards are measures companies are currently undertaking to generate value for stakeholders in the future. For instance, a subunit manager could re-train their sales employees on pitching to help them influence more revenue income in the future. Another subunit manager could focus on cost reduction strategies to ensure the organization’s financial structure can support its operations in the future. Alternatively, a different subunit manager could encourage innovation and creativity in their current employees to influence the development of superior products that will enhance the organization’s competitiveness in the future. Finally, a subunit manager could promote learning in existing employees for growth that will result to better performance in the future.
Finally, Jiambalvo (2019) notes that the balanced scorecard is the best remedy for underinvestment and overinvestments for companies. Core components of a balanced scorecard include targets, initiatives, responsibility, funding, and top management support. The subunit manager who uses the balanced scorecard approach should have a target for their current activities. For instance, the manager could re-train its sales-force with the target to improve sales income in the near future. Similarly, the subunit manager must design actions and execute them to achieve future goals. Further, the manager should assign every employee responsibility that aligns to the target and initiatives selected. Moreover, the organization’s subunit manager should request for adequate funding to achieve the goals of the balanced scorecard. Finally, the company’s top management should support the subunit’s manager’s balanced scorecard approaches, to ensure they benefit the organization in the future. Therefore, organizations can use the balanced scorecard approaches to evaluate the performances of their subunit managers.
Application of Decentralization and Performance Evaluation Today and in the Future
Today’s business environment is dynamic and highly competitive. Clients want to pay less and enjoy high quality goods. Further, customers’ needs and wants shift unpredictably and business revenue income base is no longer recurrent. Therefore, organizations must align their mission, vision, and objectives to satisfy their clients amidst described changes. First, large businesses with various departments should empower their subunit managers to make important decisions that impact performance outcomes. Often, the subunit manager interacts with employees and customers at a more personal level than top management and is best suited to determine the best course of actions the business should undertake whenever necessary. If a company embraces decentralization today, it will reap benefits in the future, such as improved employee performances, higher return on investment, and more residual income.
Similarly, organizations today must not evaluate the performances of their subunit managers based on profits generated entirely. Organizations must use measures, such as return on investment and residual income to gauge the performances of their respective departments. For instance, if subunit manager A generates 10% ROI and has similar profit income as B with 20% ROI, then the latter performs better. Similarly, if the sales department generates $5000 residual income and the customer service $3000, the subunit manager for the sales unit performs better ( Zamfir, Manea, & Ionescu, 2016) . Companies must design ways to help the underperforming unit managers perform better by identifying areas of weaknesses. Further, if the subunit manager generates 20% ROI over 10% of a competitor unit of the same organization, then it should consider expanding the performing subunit.
Finally, companies should encourage their managers to have balanced scorecards for their units. Subunit managers should design ways to improve company performance in the future in financial, customer service, internal processes, and growth and learning criteria ( Sahiti et al., 2016) . For instance, subunit managers should have a plan to help their companies grow financially in the future or handle anticipated financial burdens. Similarly, subunit managers should have ways to help employees improve their customer relations to influence more client base in the future. Furthermore, companies should encourage their subunit managers to have plans that promote staff learning for growth that will benefit the organization in the future. Finally, companies should mandate their subunit managers to design ways to improve their internal operations for a better company future. For instance, subunit managers could hire information technology employees to help digitalize operations to serve clients faster currently and in the future. Alternatively, the subunit manager could help its employees learn how to upsell company products for increased revenue income in the future.
However, organizations should ensure the balanced scorecards designed by their subunit managers meet the basic thresholds of responsibility, intentions, funding, and targets. The subunit manager should have a focus for activities executed by employees in the departments currently. For instance, procuring an IT department could be aimed to increase client satisfaction in the future. Similarly, the subunit manager should assign every worker responsibilities geared towards attaining set aims of a balanced scorecard. For instance, the IT team could comprise a systems administrator, data manager, portfolio manager, and automation expert. Further, the subunit manager using the balanced scorecard approach to drive unit performance should secure funding for actualizing their plans. Finally, in all organizations using the balanced scorecard approach in their subunits, top management should be highly supportive of mid-level managers heading departments.
In the future, organizations could use the balanced scorecard approach to correct underinvestment and overinvestment cases experienced. For instance, if the company has limited assets because of overdependence on ROI as a measure of performance, it could use the balanced scorecard to determine the same. For instance, from hiring an IT team to enhance future performance, the subunit manager will notice the need to add infrastructure to support their initiatives. In the mentioned case, the subunit manager will request the organization to purchase IT infrastructure, which adds to its current asset portfolio. Further, if the business has overinvested because of excessive reliance on RI to measure performance, it can use the balanced scorecard to remedy the same ( Sheikhmoradi & Sedaghat, 2016) . For instance, the subunit manager who re-trains its salesforce may notice the company has old techniques of storing files. If the organization accepts to be digitalized, the file store considered as an asset will be renovated to accomplish a different purpose or closed permanently. Therefore, the balanced scorecard can help business subunit managers to remedy problems of underinvestment and overinvestment as explained.
Conclusion
Performance evaluation and decentralization can be used to evaluate subunit managers’ performances today and predict future company outlook. Large corporations should decentralize decision-making to department managers because they understand internal operations better and can make remedial decisions in urgent cases quickly. Further, companies should use the return on investment and residual income approaches to measure the performances of their subunit managers. Finally, companies can use the balanced scorecard approach to influence future performances. The balanced scorecard comprises the financial, customer relations, employee growth and learning, and internal operations aspects that can be leveraged to influence future company excellence. However, companies must be aware of underinvestment and overinvestment issues that arise from using ROI and RI measures to evaluate subunit managers’ performance. If an organization experiences the above issues, it can use the balanced scorecard approach to remedy the same.
Glossary
ROI- Also return on investment and is calculated as:
ROI= Income
Capital Invested
RI- Also residual income and is calculated as:
RI=Net operating profit after tax-Required profit
References
Jiambalvo, J. (2019). Managerial Accounting (6th ed.). John Wiley & Sons. eText ISBN: 9781119158073, 1119158079
Sahiti, A., Ahmeti, S., Sahiti, A., & Aliu, M. (2016). The impact of balanced scorecard on improving the performance and profitability of the implementing companies. Mediterranean Journal of Social Sciences . https://doi.org/10.5901/mjss.2016.v7n4p60
Sheikhmoradi, S., & Sedaghat, P. (2016). Valuation of value by using the residual income approach of the listed companies in the Tehran Stock Exchange. International Business Management , 3 (1), 6286-6292. http://docsdrive.com/pdfs/medwelljournals/ibm/2016/6286-6292.pdf
Zamfir, M., Manea, M. D., & Ionescu, L. (2016). Return on investment – Indicator for measuring the profitability of invested capital. Valahian Journal of Economic Studies , 7 (2), 79-86. https://doi.org/10.1515/vjes-2016-0010
