Performance Measurement on Wall Street

For some folks in court administration, the subject of performance measures is an anathema – the revenge of the number crunchers and spreadsheet guys -- for others, it’s their lifeblood. Apparently, the financial world sits up and takes notice when someone messes with its numbers.

Today’s Wall Street Journal reports that accounting-rule makers around the world, in the coming months, may eliminate the bedrock measure of business health and value: net income or net profit, the bottom-line figure showing what is left after expenses have been met.

Net profit is the measure of business performance millions of investors use every day to buy or sell stocks and bonds. It is used to determine executive bonuses and other forms of compensation. The single net profit number is the most commonly used measure to evaluate a company’s health, especially when it’s compared to the price of the company’s stock, what’s called the price-to-earnings ratio, or simply P/E. For example, the P/E ratio of company with a share price of $10 and earnings per share of $2 is 5.

This is a big deal. The Wall Street Journal, which put the story on today’s front page, says that the overhaul of profit as we know it “could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century.” If adopted, the changes will cause every accounting textbook to be rewritten and anyone who uses profit as a gauge to rethink how to measure business performance. “The cost of this change could be monumental,” writes the Wall Street Journal, quoting John Previts, an accounting professor at Case Western Reserve University. “All the textbooks will have to change, every contract and every bank arrangement will have to change,” he says.

The overhaul of the profit measure reflects the don’t-put-all-your-eggs-in-one-basket argument of the balance scorecard concept of performance measurement. As the Wall Street Journal points out, giving so much power to a single measure has been a recipe for fraud and stock-market excesses. Company executives in the past have gamed quarterly earnings by sacrificing the overall health of their businesses.

The goal of the accounting-rule makers is to blunt this over-reliance on a single number and come up with a more comprehensive gauge of how companies are doing. “I know the world likes single bottom-line numbers and all that, but complicated businesses are hard to translate into just one number,” says Robert Hertz, head of the Financial Accounting Standards Board, one of the groups working on changing the profit measure.

How does all this apply to court managers and courts?

When answering the question “How are we doing?” you should not rely solely on a single measure such as on-time case processing or court-user satisfaction. Be sure to look at a balanced scorecard of core measures that reflect an accurate picture of your court’s performance, a scorecard that cannot mislead or be easily manipulated as a single measure can. And, finally, carefully examine the court’s core measures every so often to ensure that they are truly aligned with the key success factors you’ve identified for your court.

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