Internal Assessment: A Framework for Organizational Diagnosis

by: Glenn John M. Balongag

There are 10 levels of internal assessment in evaluating the performance of an enterprise, or any organization.

First Level of Assessment: Evaluating Performance Outputs and Outcomes The first and most important level of internal assessment is to evaluate the enterprise or organization against the performance outputs and outcomes it had set out for itself. The outputs are the products or services which the enterprise has resolved to deliver to its customers. For a development organization, instead of customers, it would be catering to client systems or beneficiaries. The outcomes are the desired performance indicators like sales attained (from the outputs produced), profits earned, and customers satisfied as to their quality specifications, delivery time expectations and quantities ordered. Examples outcomes are enumerated in Table(3rd slide).

The enterprise or organization can analyze its performance over time (also called time series or longitudinal analysis) to see how it has performed in terms of outputs and outcomes over the years. A historical pattern or trend can be discerned. Alternatively, the organization can evaluate itself vis-a-vis the targets it has set. A third way is to benchmark the organization against the best performer(s) in the industry or against the average industry standards.

Table: Examples of Outputs and Outcomes

Outputs 1. Health services medicine given. delivered Outcomes or Performance Indicators and 1. Patient paid good money for services and medicines given. Patient got cured.

2. Number of students who have been 2. High level of skills and competencies graduated from a school. learned. Job in chosen field is found by students who have graduated.
3. Number of dresses made. 3. Sales of dresses. Highly satisfied customers who give repeat business.

4. Strict safety measures implemented. 4. Zero accidents. Preventive maintenance of machines. Workers forced to follow safe production methods.

The organization can proceed to more in-depth analysis by comparing the inputs poured in versus the outputs produced. This input-output ratio measures the efficiency of the organization. Other efficiency measures include: the number of wastes and rejects produced; the input-throughput ratio; the number of wastes and rejects produced; the inputthroughput-output ratio. Throughput is the processing of the product or service over a period of time. It is also called the Transforming Process. It can be measured in terms of cycle time (i.e. how long the process takes). A machine input, along with its technological characteristics, can be assessed as to how long it takes to process a specified quantity of products. This is the input-throughput ratio. From the other end, the organization can measure how many outputs are produced over one processing hour (or any time period). This is the throughout-output ratio.

The organization can compare the costs of producing a product or rendering a service to the benefits it generates (cost-benefit ratio). Investments can be compared to returns (investment-return ratio). These two are called economy measures.
The organization can then assess and relate the overall efforts it exerts and the resources it spends (in terms of people, pesos and physical assets) to the performance indicators or outcomes it is achieving. This is the effectiveness measure.

Finally, the organization can assess its impact on the customers or beneficiaries. Impact goes beyond producing goods, rendering services, generating revenues and attaining profits. It measures the efficacy of the organizations products or services from the customers or beneficiaries point of view. For example, a lending program designed to alleviate the poverty of very low income groups can assess its impact by finding out whether or not the beneficiaries increased their income, and not whether they repaid their loans. For a pharmaceutical company, impact is measured by assessing whether the customer who bought the medicine got cured without any negative side effects.

Second Level of Assessment: Evaluating Organizational Competencies and Capabilities

After evaluating the organization according to its performance indicators or outcomes, the second level of assessment looks at the capabilities and competencies of the organization in relation to its ability to carry out its chosen strategies, programs, activities and tasks (SPAT). Enterprises and organizations endeavor to craft the best SPAT possible that would allow them to achieve their performance outcomes and attain their vision and mission.

Take the example of a middle range furniture maker who decided to change its enterprise positioning. The owner discovered the technology and art of finishing furniture according to the very high quality standards of very discriminating buyers. The finishing process had eight layers. One layer painted the furniture with an off-white antique finish. Another layer painted cracks into the furniture. A third layer dappled the furniture with water marks. A fourth layer made it appear that the furniture was abused and thrown around for many years. A fifth layer revealed old paint to be peeling. And so on until the eight layer. The price of the furniture went up from US$200 a chair (unfinished) to US$1,500 a chair. It was no longer just furniture. It was an artistic masterpiece.

The owner realized that she could actually sub contract the entire making of the furniture without the high value finishing, which her company could concentrate on. It took her years of training, trial and error experimentation and long hours of painstaking craftsmanship before she and her people could do the job. She wanted to go for the sixteen-layer finishing priced at US$5,000 a chair but that would take some time. From producing middle range furniture, she had progressed to very high end furniture. The vision, mission and performance outcomes of the entrepreneur went up several notches. This had to be matched with a very difficult and hardto-copy strategy.

Necessarily, the operations process changed from a purely woodworking job to an artistic commissioning of a masterpiece. Marketing changed too, from one based on price and volume to one based on a snobbish approach if you have to ask the price, you cant afford it. Organization-wise, the enterprise had to hire artists rather than machinists, carvers and sanders. Financially, the ball game dramatically shifted. There was no more need for high levels of working capital due to inventories and account receivables. Each art piece commanded a fairly high price. Down the line, the specific activities and tasks carried out by the people were completely revised. This necessitated a complete overhaul of the organizations capabilities and competencies.

The example illustrates how the second level of assessment should be done. Specify very clearly the strategies, programs, activities and tasks (SPAT) needed to achieve the performance outcomes. Once this is done, the required capabilities, competencies, values and attitudes of the people in the organization should match the SPAT perfectly. If there is a mismatch, then there is a gap that could be addressed either by more training and development or by changing the people altogether. The SPAT is a hierarchical sequencing which starts from the detailed activities (or sets of tasks) and finally, the individual tasks themselves. The Strategy portion is done by top management. The Program part is done by upper level or middle managers. The Activities are most probably assigned to supervisors or first line managers while Tasks are done by the rank and file or staff. The organization can then proceed to demarcate broad bands of competencies needed based on the SPAT. High level competencies need higher level managers, and low level competencies need lower level staff.

Third Level of Assessment: Evaluating Utilization of Resources

The third level of assessment examines where the resources of the enterprise or organization have been allocated to, and whether or not they have been efficiently, economically and effectively utilized. Where the resources go is where the strategy of the organization really is, notwithstanding official pronouncements or annual report announcements. Funds flow and cash flow analyses are crucial in this.

An enterprise with investments in several products, geographical branches or lines of business should figure out whether its resources have been placed properly by using measures of profitability. Entrepreneurs should optimize the utilization of their resources by calculating the contribution margin of their product lines, area branches and functional departments or divisions. The entrepreneur should also calculate return on investments (or assets), return on sales and return on equity (if the resources are in the form of equity shares). For non-profit organizations, there are economic and social rates of returns and cost-benefit analyses. Social organizations can evaluate which resource allocations have created better impact on their intended beneficiaries. The evaluator must assess both past profitability and future viability.

Aside from profitability, the three other measures of enterprise sustainability are liquidity, activity and solvency. Liquidity has to do with meeting short-term obligations arising from working capital transactions. Can the organization sustain its sales growth and its corresponding demands on cash on hand, accounts receivable and inventory? Can the organization access funds from suppliers and creditors to meet these working capital requirements?

 Activity ratios are used to gauge the efficiency, effectiveness and economy of the enterprise operations by measuring asset turnover ratios (i.e. cash, receivables, inventory, fixed assets and total turnover).

Solvency looks at long-term sustainability by calibrating the companys capital structure in terms of short-term debt, long-term debt and stockholders equity. Debt to equity ratios and the risks of too much financial leveraging are assessed. Can the organization survive the cyclical highs and lows and still meet its debts obligations?

The analyst must then evaluate the investments made by the organization and the financing it had raised to make those investments. This is called asset and liability management. Is the organization properly allocating resources to the best investments? Are the investments generating sufficient rates of returns and cash flows? Does the financing raised fit the investment needs? Does the capital structure match long-term financing with long-term investments and short-term financing with short-term investment? Is the weighted average cost of capital kept to a low and manageable level? As the project returns higher than the cost of capital?

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