Assessing Performance in a Global Organization

By admin, on July 16th, 2009

The Opportunity

Some corporations become global in structure and function with growth over time. Some are “born” global. This presents some interesting challenges for managers and executives who need to assess performance and make decisions on those assessments. This article offers some long-overdue guidance, from the perspective of a corporation based in the United States with foreign components.

The Solution

Performance Evaluation for our purposes is the periodic review of operations to ensure that the objectives of the enterprise are accomplished. A corporation’s performance evaluation system is part of its financial control system. What this means, is that the Global Organization must have and use accounting information to evaluate domestic and foreign operations. Assessing performance of a Global Organization therefore must be accomplished through the use of corporate information systems.

Because of the possible impact of errors in performance evaluation, companies should be flexible in their approach when establishing the rules, methods, etc. Using corporate information systems to evaluate foreign and domestic operations is an imperfect process, but, because of foreign exchange rate fluctuations, evaluating foreign operations is even worse. One must understand the companies’ consolidation policies and how they translate the financial statements of their foreign operations. If one is to use the parent company’s currency for financial measures, then one must also understand the environment nuances that each subsidiary operates within.

Common Corporate Information Systems

The primary tool then, for assessing performance and management control must be the corporate information system (s). These systems are not just used exclusively used by controllers, but are used more and more by managers throughout the organization. These systems provide the information necessary to plan, control, evaluate and coordinate all business activities. The design of accounting information systems is extremely critical to the success of any company, especially a transnational or global firm. There are many design points for information systems, but at a high level and primary among them, they must be easily shared, transferred and updated between the parent and its subsidiaries.

Because accounting information needs vary between countries, cultures, senior management and individual country management, the only viable approach to current consolidated information is through these information systems. Foreign subsidiaries, therefore, should not be forced to use the same system as the parent company (assuming of course that parent and subsidiary are in different countries.) Since these systems provide the capability to compare or model various financial statements and reports using differing accounting approaches to account for economic, political environments, legal constraints, and even sociological differences in the country (s) of operation. They must therefore be designed or modified to adapt to each other.The organizational form needs to be understood in order to get a clearer picture of the information flows. Although flow may change, the information itself does not. In any case, information about foreign operations is collected, processed, integrated and reported with in the parent companies systems.

Financial Performance

Foreign subsidiaries must be evaluated on their performance as a supplier, as well as how much after tax profit in USD they earned. Foreign subsidiaries may not necessarily be or possibly shouldn’t be evaluated on after tax USD as their primary objective. This evaluation can be accomplished via information flow and reporting through the parent and subsidiary information systems. Foreign subsidiary financial reporting in their own currency may present a more meaningful picture of their activities. Global Corporations should require their managers and directors to become familiar with the foreign currency (s) operating results in addition to their own currency information. This would reduce the load on the information systems until such time as they can be integrated, modified or replaced. Integrating systems on this scale, although technologically feasible, is by no means quick and easy. Nonetheless, the education for senior management could be eye opening.

Enterprise/ Local Power

In addition to financial performance measurement in a Global Corporation, the attitude of senior management toward the various business subsidiaries is very important. Their approach should be to narrow in on worldwide objectives and consider their foreign subsidiaries as part of the whole. This means that senior management must establish standards for evaluation and control that are not only universal, but local as well. The structure needs to facilitate global decision coordination, while responding to host governments and consumers.