Masaryk University

Faculty of Economics and Administration

Field of study: Business Management

PERFORMANCE OF MULTINATIONAL
COMPANY
Diploma thesis

Thesis Supervisor: Author:

Ing. Bc. Sylva ŢÁKOVÁ TALPOVÁ, Ph.D. Henrik MEJLUMYAN

Brno, 2016
 Masaryk University
Faculty of Economics and Administration

Department of Corporate Economy

Academic year 2015/2016

ASSIGNMENT OF DIPLOMA THESIS

For: MEJLUMYAN Henrik

Field: Business Management (Eng.)
Title: Performance of Multinational Company

Principles o f t h e s i s w r i t i n g:

Objective of the thesis:

The aim of the thesis is to analyze and critically assess the performance evaluation of
subsidiaries in MNE.

Approach and methods used:

The thesis will consist of two parts. Theoretical part will be devoted to introduction and
discussion of methods that will be used in the practical part in order to achieve the goal of the
thesis. In the practical part, these methods will be applied to a real MNE. Specifically, it will
analyze how headquarters evaluate performance of subsidiaries and critically assess this process
with respect to the importance of such evaluation in MNE, including economic assessment.
Student is expected to define the problem and choose appropriate methods to reach the goal of
the thesis, as well as to find a suitable company to cooperate with.

The thesis length without appendices: 60 – 80 pages

List of specialist literature:

 VERBEKE, Alain. International business strategy: rethinking the foundations of global

corporate success. 1st ed. Cambridge: Cambridge University Press, 2009. xxiii, 481.
ISBN 978-0-521-86258-5.
 SCHMID, S. and K. KRETSCHMER. Performance Evaluation of Foreign Subsidiaries:
A Review of the Literature and a Contingency Framework. International Journal of
Management Reviews, 2010, roč. 12, s. 219–258. doi:10.1111/j.1468-2370.2009.00259.x.
 GOODERHAM, Paul N. and Odd NORDHAUG. International management: cross-
boundary challenges. Malden, MA: Blackwell Pub., 2003, xiii, 473 p. ISBN 06-312-
3342-3.
 DERESKY, Helen. International management: managing across borders and cultures :
text and cases. 7th ed., International ed. Boston: Pearson, 2011. 480 s.
ISBN 9780132545556.

Diploma thesis supervisor: Ing. Bc. Sylva Žáková Talpová, Ph.D.

Date of diploma thesis assignment: 04/04/2015

Submission deadline for Diploma thesis and its entry in the IS MU is provided in the valid
Time schedule of the academic year.

…………………………………… …………………………………………
Department Head Dean

In Brno on 11/05/2016
Name and surname of the author:
The title of the thesis:
Department:
Diploma thesis supervisor:
Year of defending:
Henrik Mejlumyan
Performance of Multinational Company
Department of Corporate Economy
Ing. Bc. Sylva Ţáková Talpová, Ph.D..
2016

Annotation
The goal of the submitted thesis: “Performance of Multinational Company” is to analyze
the performance evaluation method of an MNC and its subsidiary in multinational enterprise.
The first part is concentrated on specifics of multinational enterprises and performance. These
terms are subsequently synthesized in an overview of subsidiary performance evaluation. The
second part contains an analysis and assessment of performance evaluation system of chosen
company. It also includes a suggestion how to improve the currently used method with the help
of alternative evaluation system methodology, which can be a real improvement to the current
system according to analysis.

Keywords
Multinational company, subsidiary, performance, performance evaluation, financial measures,
non-financial measures, key performance indicators, Kepner Tregoe Method
Statement
"I hereby declare that I worked out the Diploma work Performance of Multinational Company
myself, under the supervision of Ing. Bc. Sylva Ţáková Talpová, Ph.D, and that I stated in it all
the literary resources and other specialist sources used according to legislation, internal
regulations of Masaryk University and internal management acts of Masaryk University and the
Faculty of Economics and Administration".

Brno, 2016

Aut ho r ’ s s ig nat ure

Acknowledgement
I hereby wish to express my appreciation and gratitude to the supervisor of my thesis Ing.
Bc. Sylva Ţáková Talpová, Ph.D, who was also the professor of my International Management
class, from which a lot of academic knowledge has been used in this work. I would like to also
thank the company SAP and the employees of SAP BSCE for the information and consultation.
Intentionally left blank
Table of contents
Introduction....................................................................................................................................11
Theoretical Part..............................................................................................................................13
1. Multinational Companies and Subsidiaries............................................................................13
1.1 Reasons for Going International.....................................................................................15
1.1.1 Reactive reasons (Deresky, 2011)...........................................................................15
1.1.2 Proactive reasons (Deresky, 2011)..........................................................................16
1.2 Foreign Market Entry Strategies.....................................................................................18
1.3 Organizational Structure.................................................................................................22
2. Performance............................................................................................................................26
2.1 The Importance of Performance Evaluation...................................................................26
2.1.1 Performance Management Definition......................................................................27
2.2 Performance Measurement Methods..............................................................................27
2.2.1 Sources of information............................................................................................28
2.2.2 Methods of Financial Analysis................................................................................29
2.2.3 Non-financial Indicators..........................................................................................33
2.3 Factors Affecting the Selection of Indicators.................................................................36
2.4 Subsidiary Performance..................................................................................................37
2.5 KPI (Key Performance Indicators).................................................................................40
2.6 The Use of Kepner Tregoe Method as an Addition to KPI System................................41
Methodology..................................................................................................................................45
Practical Part..................................................................................................................................47
3. Introduction to SAP and SAP BSCE......................................................................................47
3.1 Organizational Structure of SAP.....................................................................................47
4. Research and Analyzes...........................................................................................................49
4.1 Performance Evaluation Process in SAP BSCE.............................................................50
4.2 Performance Evaluation Measures in SAP.....................................................................50
4.2.1 Financial Indicators used in SAP (go.sap.com/integrated-reports).........................50
4.2.2 Non-Financial Indicators used in SAP (go.sap.com)...............................................52
4.3 Analysis of Data..............................................................................................................54
4.4 Performance Measured By KPI......................................................................................59
4.5 Performance Measured By Kepner Tregoe Method.......................................................60
4.6 Results Compared and Analyzed....................................................................................69
4.6.1 The results for KPI...................................................................................................69
 4.6.2 The results for Kepner-Tregoe Method...................................................................69
4.6.3 Analysis of the results..............................................................................................69
5. Suggestions and Recommendations.......................................................................................70
5.1 Recommendations to Improve Performance Evaluation Process...................................70
Conclusion.....................................................................................................................................73
References......................................................................................................................................75
List of the Abbreviations...............................................................................................................80
List of Figures................................................................................................................................81
List of Tables.................................................................................................................................81
List of Appendices.........................................................................................................................82
 Abstract

The submitted thesis focuses on analysis and critical assessment of

subsidiaries performance evaluation method used by multi-national enterprise (MNE) SAP with
focus on SAP BSCE (Business Service Centre Europe) - SAP office in Prague, Czech
Republic. The first part of the thesis is concentrated on description of the concept of MNE and
strategies implemented by MNEs. Theoretical part as well introduces reader to different
performance measurement methods and compares them. Practical part contains an analysis and
evaluation of subsidiaries performance evaluation system implemented in SAP and its Prague
branch and whether or not the method can be improved. Thesis is concluded by
recommendations to improve subsidiary performance evaluation process for SAP BSCE.
 Introduction
Some MNCs control subsidiaries from the central office, while others do it directly
from the subsidiary. Therefore, performance of subsidiaries in different branches of same
company can differ depending on how they are run. Some MNCs are using the method when
subsidiaries are controlled by the central office, and others are managed within. Multi-
national enterprises need to closely monitor the performance of each subsidiary to be able to
evaluate their performance on various levels, including sales, capital, and distribution of
products. Evaluation is essential in order to adopt successful methods and understand the
nature and reasons of branches showing poor results.
This thesis will analyze SAP as an MNC that has multiple branches all over the world.
A worldwide network of SAP consists of 287 subsidiaries in 180 countries. Headquarters in
Waldorf, Germany control subsidiaries both directly and indirectly. The thesis will focus on
performance evaluation methods applied in SAP to evaluate the performance of its
subsidiaries, with a special focus on the SAP subsidiary in Prague known as SAP BSCE
(Business Service Center Europe). I will focus on this subsidiary which is also known as SAP
GFSS (Global Finance Shared Service) because I am a current employee for already six
months there and know employees and the performance evaluation process used in SAP
BSCE quite well. The results of performance evaluation are needed both by the managers of
the subsidiary and HQ, and they are important because they are compared with other global
finance shared service centers such as subsidiaries in Singapore and Buenos Aires to evaluate
the overall performance of the subsidiaries.
SAP opened its 18th international subsidiary in the Czech Republic in 1993. In 2005,
Czech Republic was chosen as a location for new shared services center, Business Services
Centre Europe (BSCE). SAP BSCE is responsible for the establishment of human resources,
finance, and administration services to branch subsidiaries in European and the Middle East
and Africa regions. BSCE supports 43 countries operating in 15 languages by providing
different types of support such as creating sales orders, invoices, manual invoices, making
changes in the staffing lists for consultants, billing customers and so on. (www.sap.com)
For performance evaluation of its subsidiaries, SAP uses Key Performance Indicator
method in all its branches. KPI defines whether or not the subsidiary is performing well
through various gauges. As I work for SAP BSCE, it was easier to me to contact with my
colleagues from HQ based in Waldorf. I was informed that they are very happy with the
evaluation process used in SAP with the help of KPIs. These results give their managers a
possibility to compare achieved KPIs with different subsidiaries and, hence, be aware of their
success in performance. However, I am adopting subsidiary perspective because the main
problems with KPIs are there. I know from my colleagues of the Prague subsidiary that most
of them are not very satisfied with the current use of KPIs and think that it does not show the
real picture. From my research, it came out that rework rate, reputation, and service quality
are the most problematic KPIs for SAP BSCE employees that took part in the survey.
Moreover, based on the interview results, I found out that high employee turnover rate is one
11
of the problems for SAP BSCE as well that needs to be solved. Because of that, in the
practical part, I chose these KPIs and tried to solve these problems by the implementation of
Kepner Tregoe troubleshooting and decision-making method.
Evaluation of how an MNE evaluates the performance of its subsidiaries could be
done through comparison of its existing performance evaluation method to suggested
alternative. For instance, a great way of knowing if the KPI method is enough for SAP BSCE
can be through research on how useful will be the usage of Kepner Tregoe method combined
with KPI. If the research shows that Kepner Tregoe will make a cost effective addition to
KPI, it can be suggested as an improvement for SAP management strategy and can be applied
to other branches. If it proves to be not worth investment, the credibility of current KPI
method will be confirmed.
 Theoretical Part

1. Multinational Companies and Subsidiaries

There is no standard definition for MNC, and it varies depending on whether the research
subject is globalization, performance management or something else. For example, A.
Lazarus describes MNC as “a business organization whose activities are located in more than
two countries and is the organizational form that defines foreign direct investment” (Lazarus,
2001),(Columbia Business School). On the other hand, Miller defines it as an organization
that has a headquarter in one country, at the same time, has operations in one or more
different countries. (Miller, 1979)
This definition is suitable for globalization research. When it comes to financial research,
D. K. Fieldhouse suggests defining MNCs as “a business enterprise which owns and controls
income-generating assets in more than one country.” (Fieldhouse, 1986)
The operations, in this case, will refer to the production, promotion, and selling. The
existence of multinational enterprises is enabled by the free market system and economic
liberalism. Through venturing into international markets, companies are always seeking ways
through which they can enhance their sources of revenue after they exhaust local markets.
(Dunning, 2009)
Another definition for an MNC is given by Organization for Economic Co-operation and
Development (OECD). It says that multinationals are companies or other entities that can
have public, private, or mixed ownership registered in two or more countries and related to
each other in such a way that they are able to organize their activities in different ways.
Although one or more of these entities can have a considerable effect on others’ functions,
their autonomy degree with the entire organization may vary a lot. (OECD, 2008)
Several other authors say that an MNC is a company that with the help of its foreign
subsidiaries in various countries provides, distributes and ensures its products. These
subsidiaries are controlled and managed by headquarters from a global perspective. While
other authors add that the development of MNCs is linked with the volume of production
overseas and not only their export sales. (ProQuest, 2003)
MNC can also be defined based on the volume of foreign investments. For example,
according to Victor Priel an organization can be defined as an MNC if more than 20% of its
total assets are abroad. (Priel, 1974) In contrast, other authors state that to be considered as an
MNC, the company should obtain more than 35% of its sales and profit overseas. (Report of
International Business) In fact, the biggest portion of popular companies worldwide are
multinational companies, and people can quickly identify them as their names, products and
services are very trendy. According to the statistics given by United Nation, there are over
60.0 MNCs in the world. However, the biggest impact has Top 500 of them. These 500
companies do eighty percent of the whole foreign direct investments (FDI) worldwide.
According to the 2003 data, most of them are based in the US (189 of them) and EU (153 of
them).
 From all these definitions made by different authors, it becomes clear that an MNC is an
organization that operates subsidiaries in more than one country and through them produces
and sells goods and services out of its production.
To describe MNCs, two famous indexes can be used. One of them is TNI index (the
Transnationality index). It indicates the level of internationality and can be achieved using
the following three shares: (Štrach, 2009)
 The share of foreign assets to total assets,
 The ratio of foreign sales to total sales and
 The ratio of foreign workers in the total numbers of employees.
The second index is the internationalization index that can be calculated by dividing the
number of foreign subsidiaries to the total number of branches. (www.eujournal.org)
Enterprises that are involved in oligopolistic markets are always observed to be the most
active in foreign market investments. It is because they are always looking to make sure that
they can be able to take advantage of the available and untapped foreign markets after
exhausting the local ones. For highly competitive markets it is usually of high importance to
remain ahead of competitors basically by being able to enter more markets and sell more units
thus being able to be flexible and competitive enough. Therefore, it can be said that
multinational enterprises have an escape route from saturated local markets. (Dunning, 2009)
Indeed, it is very complex and costly proposition to run MNC. It is necessary to employ
the best managers and experts to be sure that the laws and other regulations of numerous
foreign countries are followed and be able to embrace when the laws change. Certainly there
should be opponents and proponents of MNCs. Opponents are unhappy with the fact that
MNCs are too big and have extremely large power. Besides, they claim that multinational
companies sometimes block the development of less developed countries and instead, are a
huge boost for developed countries. (Priel, 1974, p. 57) Proponents, on the other hand, call the
fact that MNCs provide with a magnificent amount of job places, which helps developing
countries improve and increases their living standards. (Report of International Business, p.
57) It seems striking, but some Top 100 MNCs have such a big budget that even eclipses the
budgets of modest countries. (UN, 2013)
Subsidiary is an entity based in another place from the HQ. It can be located in a foreign
country or even in the same country, however, in another city. It belongs to the parent
company which is in the control of the most of the shares. The HQ assigns the CEO of the
subsidiary. (Gray, 1972) According to Rossini, a subsidiary can be defined as: “A subsidiary
is a corporation owned by 50% or more by another company. The owning organization is
usually called the parent or holding company. A company that is 100% owned and controlled
by a holding company is known as a wholly owned subsidiary. “ (Christine Rossini, 1998) It is
interesting, but the subsidiaries can have entirely different goals and activities from what do
the parent company. So, subsidiaries are different from mergers, and while creating a
subsidiary, there is no need for the approval of the stockholders which is a must thing during
merging with another company. (DePamphilis, 2007)
Companies open or purchase subsidiaries for different reasons. The most important
reasons are making their brand known in foreign markets, seeking new growth opportunities
and isolating risks. As subsidiaries are separate legal entities, parent companies are not
automatically affected from the losses of the subsidiaries. The risks inborn in the subsidiary
stay within it and do not transfer to the parent company. This gives great opportunities for
more diversifications and improved efficiencies for the home company and a subsidiary.
Furthermore, the CEO and high-level managers do not need to engage in daily operational
activities of the subsidiary. (Rating Parent/Holding Companies and Their Subsidiaries, 2010)
For sure, subsidiaries have disadvantages as well. Worth to be mentioned the fact that
parent companies are obliged to pay for the debts of their subsidiaries because lending
institutions usually ask for guarantees from parent companies before lending to subsidiaries.
They have to pay, otherwise parent companies will risk their reputation and will have
problems. Another disadvantage is that, if the parent company does not own one hundred
percent of the shares of the subsidiary, it will not have full access to the cash flow of the
subsidiary. (Rating Parent/Holding Companies and Their Subsidiaries, 2010)
Major driver for companies’ decision to go global is relocation of its plants, factories and
offices to geographically profitable locations. The reasons could be either cheap production or
workforce, entrance to a new market or desire to widen product range. (Biggs, 2013)
Therefore, in the next chapter we will discuss the reasons for going international in order
to understand better why companies decide to become multinationals.

1.1 Reasons for Going International

All companies go international for various reasons- some of them reactive (defensive)
and others proactive (aggressive). In this fast growing world, in order to remain competitive,
companies who adopt aggressive global strategy want to move quickly to make stronger
positions in the world’s markets with products or services tailored to the demand of highly
distinct and huge amount of customers. (Deresky, 2011)
1.1.1 Reactive reasons (Deresky, 2011)
Globalization of competitors
Most popular reason that pushes a company to go international is global competition
or as it is also known – globalization of competitors. Can you imagine what will happen if
companies stopped going “overseas” for some period? In that case, other enterprises that
already have international operations or investments will become so powerful and rich in
foreign markets that it will become extremely challenging for other companies to enter some
time later. Furthermore, these global companies will also have domestic advantages over their
local competitors. However, we understand that nowadays, the process mentioned above is
extremely rare, as we live in an era of globalization where all big, ambitious companies want
to run better and run simple. Remember this motto, as we will come to it in the practical part.
Authors Rugman and Collinson add to this also so-called “follow the competitor” strategy,
when companies evolve into multinationals trying to save their share in the home market in
response to enhanced foreign competition. These companies get two outcomes. Firstly, they
enter the markets of their competitors and start to conquer their businesses by offering better
products or services for customers. And secondly, by this way, they make the competitors
aware that if they have in mind to take away their businesses, they will always attack in
response. (Rugman & Collinson, 2006)
Trade barriers
During the recent years, different types of trade agreements have been made amongst
particular countries ( NAFTA, EU,…). Nevertheless, there are a lot of cases when because of
restrictive trade barriers of some countries companies usually are changing from exporting to
overseas manufacturing. This is another reactive reason example.
Regulations and restrictions
With the case of regulations and restrictions as well, domestic government policies
may become so unbearable and high-cost that companies will start to do business outside of
their home countries looking for less restrictive places and more suitable business
environments.
Customer demands
Sometimes foreign customers, for instance, can be highly interested in having their
supplier company operate in their country in order to have better regulations over their
supplies. (Deresky, 2011)
1.1.2 Proactive reasons (Deresky, 2011)
Economies of scale
Companies who have long-term strategy planning are sometimes forced to go
international for proactive reasons. Only by this way they can benefit from economies of
scale. For example, the high prices of research, such as in the medical sphere, along with the
cost of going on with the new technologies, can often be refunded only with the help of global
sales.
Growth opportunities
There are various low speed growing economies in the world where domestic growth
is stable or even declines. Because of this, opportunities that can be found overseas look much
more engaging. It even becomes easier due to the Internet which gives the opportunity to
easily link to contacts in foreign countries. Rugman also adds that the reason is to use the
advantages of a quickly growing market where there is a huge demand for goods and services.
Usually, the examples of such countries have a large population and, at the same time, high
income per capita or high GDP level. The best example is the USA. (Rugman & Collinson,
2006)
Resource access and cost savings
The opportunity of having the required raw materials and other resources offers fewer
costs for transportation and more inputs control. Another important factor is having lower
labor costs.
In some cases, just the fact of “going overseas” enhances competitiveness at home.
This reason is also mentioned by Rugman and Collinson. According to them, one of the
reasons of becoming an MNC is to cut down the costs. This strategy is known as
“internalization of control” in the MNC. The idea is to be closer to the foreign customer,
therefore, to avoid delivery delays or other issues related to customer needs, use the
advantages of the local country such as low wages or taxes and so on. (Rugman & Collinson,
2006)
Incentives
Governments of various countries – mainly developing ones - looking forward to have
new capital, know-how and technology are more than ready to provide incentives. These can
be in forms of loans, tax exemptions, subsidies, and property use. Unsurprisingly, these
incentives are proactive for MNEs. (Deresky, 2011)
International diversification
Authors Rugman and Collinson add to these reasons also so-called international
diversification reason. While diversifying themselves against the risks that can happen in the
home country, companies launch operations in other countries, hence, diminishing the
unfavorable effects of economic fluctuations in the home state. This model is extensively used
by Japanese MNCs. (Rugman & Collinson, 2006)
In addition, other authors such as Barlett and Ghoshal also differentiate decisions about
entering foreign markets and the reasons related to them. According to them, the first step in
the procedure is the management decision about expansion into foreign markets. Companies
enter foreign markets for many reasons which can be characterized as defensive and offensive
approaches. Defensive approach means responding the situation caused by external factors
and the effort to solve it ex-post. (Barlett & Ghoshal, 2002)
Defensive reasons can include:
o Trade barriers, regulations, restrictions
o Demand and customer requirements
Offensive approach is characterized by the improvement of the ex-ante solution and proactive
decision making.
Offensive reasons can include:
o Economies of scale, cost savings
o Access to international markets and to limited resources
o The growth possibility
Looking at the statements made by authors above, it can be concluded that the reasons
for going abroad are more or less characterized in a similar way. So, they can be defensive or
reactive and offensive or proactive.
Thus, there are a lot of reasons to become an MNC, and companies should take into
account all these factors and decide what is the best option for the whole company.
As previously mentioned, if companies want to go overseas, they are required to have a
good knowledge of foreign market, well organized managerial system in order to control
various office branches from headquarters. (Biggs, 2013) That is why multinational
enterprises develop strategies and follow structures suitable for international operations,
which are different from those employed at domestic market. The next chapters are devoted to
these fields in order to make it clear for us which structure and strategy will be the most
suitable and appropriate to use for the chosen company used in the practical part.
1.2 Foreign Market Entry Strategies
The form of entry into foreign markets is one of the most important decisions in the
process of internationalization. The strategy which the company chooses has a significant
impact on the overall organizational structure. Entry strategy is affected by the investment
demands of foreign markets and business competitiveness in the market. Entry forms are
distinguished according to whether production takes place in the home country or abroad, and
also if the entry associated with an investment or not. Figure 1 shows these relationships of
entry strategies regarding to the amount of capital and management situated at home and
overseas for each strategy.

Figure 1: Entry strategies- Capital and Management in the home country and overseas

Capital and Management at home

100%
Exporting
Licensing

Franchising

Off-shoring
Contr. man.

Outsourcing

Turnkey op.

Joint

Fully owned
100%
Capital and Management abroad
Source: Meffert and Bruhn, 2003, p. 56

As we can see, there are various entry and ownership strategies that companies
seeking to become international can choose from. This is not an easy decision as managers
should carefully investigate the new countries, markets, risks and critical environmental
factors related to their entry strategies. Ownership and entry strategies include exporting,
franchising, licensing, off-shoring, contract manufacturing, service-sector outsourcing,
turnkey operations, management contracts, joint ventures, fully-owned subsidiaries set up by
the firm, and e-business. (Deresky, 2011)
An important thing to keep in mind is that these strategies can be used at the same
time – they are not mutually exclusive. These strategies are also can be divided into two
modes. (Gooderham & Nordhaug, 2003)
Non-equity modes
- Exporting
- Licensing
- Franchising
- Contract Manufacturing and service provision
Equity modes
- Joint ventures
- Fully owned subsidiaries
Let’s investigate one-by-one.
Exporting
Undoubtedly, this alternative contains the lowest risk for the companies who want to begin
international expansion or just to test what means to go overseas. As huge capital is not
prerequisite for exporting, it is the main entry strategy used by SMEs to contend on an
international level. (Deresky, 2011)
Franchising
As exporting, franchising also involves comparably low risks. The franchise gives a license
for its brand, products and services to the franchisee for a basic amount of money. The most
popular franchises are in the fast food industry such as Pizza Hut. This strategy also can be
quite useful for small business as outlets require little investment in capital, advertising or
such other issues. Critical success factors for franchising are quality control of franchisee and
franchise operations. (Deresky, 2011)
Licensing
Similar to franchising, licensing involves low risks as well. An international licensing
agreement gives the legitimacy to a firm in the host side the rights to produce or sell a
product, or both. According to the contract, the rights to patents, technology, trademarks
transfer for some time of period in return for a fee that the licensee has to pay.(Deresky, 2011)
Offshoring
The process during which a company moves one or all of its branches or factories from the
home country to another place is known as offshoring. The main benefit of offshoring is that
it gives the company the opportunity to have access to outside markets at the same time
avoiding trade barriers. Furthermore, they usually have lower costs of production, too.
(Gooderham & Nordhaug, 2003)
Contract Manufacturing
Contract Manufacturing is also sometimes called outsourcing which involves making
agreements with foreign companies for the production of finished goods, raw materials or
component parts. After production, these materials are moved to the home country or to other
destinations, for assembly or sale. However, they can be sold in the host country as well. If
managers are able to secure the quality and reliability of the producer, this strategy can be a
fascinating entry into a country requiring not a high capital investment and no problems
related to local ownership. (Deresky, 2011)
 Turnkey Operations
The process when a firm designs and opens a facility overseas (e.g. different types of plants),
trains local employees, and after turns the key over to home country management for some
amount of money, for sure, is known as a turnkey operations. (Deresky, 2011)
Management contracts
During the management contract strategy, foreign companies have the authority to manage
day-to-day activities of a company, but not make decisions related to financing, ownership, or
policy and strategic changes . Often management contracts are used with other agreements
such as joint ventures. (Deresky, 2011)
International Joint Ventures
As we go ahead, with explaining strategies, the risks related with them become higher.
International Joint Venture ( IJV ) is considered to be more risky strategy and requires higher
level of investment. It involves a process when two or more companies agree to produce a
product or service together. In IJV the ownership is shared, usually one part is MNC, and
another owner is a local partner. With the help of this strategy, MNCs can have an
opportunity of quick entry to new foreign markets using the partner’s abilities, connections
and power. Furthermore, it provides MNCs a chance to achieve economic of scales,
overthrown trade barriers, spread the risks and much more. (Gooderham & Nordhaug, 2003)
Fully Owned Subsidiaries
This strategy is considered as the most risky and expensive entry mode. There are even some
countries where fully owned subsidiaries are prohibited by law. With this strategy, an MNC
seeking to have an absolute control of its operations can launch its own product or service
business from zero, or as it usually happens, it can purchase an existing company in another
country. (Gooderham & Nordhaug, 2003)
E-business
E-business is an entry strategy at the local market. The example of E-business can be the
purchase of Arabic-Language web portal in 2009 by Yahoo. The advantages of E-business are
rapid entry into new markets and relatively low risks. (Deresky, 2011)
Doing international business does not always mean to become an MNC. This is the
last point of going abroad. (Rugman & Collinson, 2006)The figure below shows different
foreign market entry strategies. As we can see, Rugman and Collinson differentiate entry
strategies in another way compared to Deresky, Nordhaug and Gooderham. Licensing has the
lowest depth of involvement in foreign markets and the least time required. Other entry
strategy modes are different from the ones suggested earlier by other authors. In order to
understand better, let’s investigate them deeper.
Figure 2: Entry into foreign markets: the internationalization process

Source: International Business, Fourth edition, Alan Rugman, p.41

Export via agent or distributor

Sometimes companies prefer to sell their product themselves and export it overseas using a
local agent or distribution in order to get access to the foreign market easily. It can happen
that a company exports to a particular market just once or twice. However, if the business
turns out to be profitable, the companies start thinking about setting up their own sales
representatives in those markets which is the next level of internationalization process.
Export through own sales representative or sales subsidiary
At this level, companies realize the importance of establishing sales subsidiaries.
Furthermore, they launch a separate export department to be able to maintain sales and
production in foreign markets.
Local packaging
When the company learns the local market better and realizes the uncertainty related to
entering the particular foreign market is conquered, it usually sets up a foreign production
procedure. Firstly, the firm may use local labor force in order to better get involved in the new
environment, deal with wage rate, cultural traits, employees expectations and so on.
Foreign Direct Investments (FDI)
In the last step of becoming a truly MNC, a company considers a foreign direct investment
activity. FDI has the biggest depth of involvement in foreign markets and requires the most
time. As a result, the firm establishes a subsidiary where it may produce its services or
products in the host country and sell the output in the local market or even export to other
countries. The decision of re-exporting depends on the costs of the host country. For instance,
if the company launches its subsidiary in the country where the labor force is inexpensive to
maintain (India, Vietnam) more exporting is highly possible than from expensive countries.
(Rugman & Collinson, 2006) Other authors such as Davidson (1932) and Root (1987)
generally focus on the following three specific modes showing that control level for these
entry modes varies a lot: licensing, joint venturing, wholly owned subsidiaries. In terms of
control should be understood the level of authority on operational and strategic decisions. For
example, in the case of wholly owned subsidiaries the level of control is comparably higher
than for licensing agreements. According to Hwang and Kim (1990) the control level of joint
ventures varies over time, however, it is somewhere between the control level of wholly
owned subsidiaries and licensing agreements. (Journal of International Business Studies 2006,
ProQuest European Business, p.29, 2006)
The choice of the entry strategies, which can be one or the combinations of the several
strategies, will depend on the strategic evaluation of cons and pros of each entry strategy
taking into account the potential of the firm, environmental factors, and the impacts and
benefits the chosen strategy would have on the global mission, vision and goals of the
company. (Deresky, 2011)

1.3 Organizational Structure

As the practical part considers a big MNC, it is very important to understand why
multinationals have to be able to change their organizational structures in order to fit the
chosen strategy while entering foreign markets. However, as the practical part mainly focuses
on the performance evaluation process and methods, the theory for organizational structure
will not go deep, and will be based only on the view of authors such as Deresky, Gooderham,
Nordhaug, Harzig, Barlett and Ghoshal.
The company selects its organizational strategy and structure based on two factors - the
importance of local responsiveness and degree of global integration. Based on these factors
we can define four basic organizational structures for multinational companies –the
international, the multi-domestic, global product division and the transnational (Deresky,
2011) (Gooderham & Nordhaug, 2003).

Figure 3: Local responsiveness, global integration, and organizational structure

Source: Gooderham and Nordhaug, 2003, page 56

The international
The international structure is the simplest form of organizational structure (Gooderham &
Nordhaug, 2003). It involves creation of an international division, which is responsible for the
international activities of the company. Nevertheless, the company is primarily focused on its
domestic market, the primary activities are centralized, and overseas activities are not
recognized as essential to the company. Figure 4 shows that structure in the situation of the
company which produces a single product.

Figure 4: The international structure

Chief
Executive

Marketing Finance Personnel Research

Domestic Domestic Domestic International

Division A Division B Division C Division

International
subsidiaries

Export
Department

Source: Gooderham and Nordhaug, 2003, page 45

According to Gooderham, the international organization form is actually an impermanent type

for companies, as they gradually involve into the more globally integrated form of
organization.
The multi-domestic organizational
The multi-domestic organizational structure represents a strong local responsiveness and a
low degree of integration. Companies use the geographical structure by creating divisions,
managing activities in the region and taking into account local differences (Barlett & Ghoshal,
2002). If the company is based in the small market country, in order to expand, they need to
establish operations overseas. As a result of expansion, companies start to realize that there is
a need for customizing the products because tastes and preferences for people are
tremendously different form country to country. So, centralization has to be as low as
possible. To solve this problem, companies specially hire highly qualified managers for
subsidiaries abroad who are aware of local tastes and preferences, and can manage the
marketing and manufacturing strategic issues. Figure 5 summarizes the basic structure.
Figure 5: The multi-domestic structure

Chief Executive

Staff
(domestic)

Domestic Foreign
Subsidiaries Subsidiaries

President,
Domestic President, Foreign
subsidiary Subsidiary

President, President,

subsidiary Subsidiary

Source: Leontiades ( 1985 )

Global product division

Global product division structure is based on a high degree of global integration and low local
responsiveness. Branches of the company are centralized, implement the strategy of the parent
company and the products are standardized, ignoring to adapt to market needs. (Gooderham
& Nordhaug, 2003). When foreign subsidiaries settled, they don’t need to change the
production design, style or taste in order to catch the foreign market demand. Subsidiaries, in
terms of strategy formation, product development and key manufacturing are considered as
either off shore or server plants. Companies that follow the global product strategy have to
have three specific organizational capabilities. They should be successful in:
 Obtaining the input of subsidiaries into centralized activities
 Being sure all functional tasks are linked to market needs
 Integrating diverse functions such as development, production and marketing by
managing the transfer of responsibilities among them.
(Barlett and Ghoshal, 1995,p.581)
The major structural aspects of the global product division are summarized below.
Figure 6: Global product division structure

Chief Executive

Corporate staff,
International area, and
functional specialists

Gobal Executive, Global Executive, Global Executive, Global Executive,

Product group A Product group B Product group C Product group D

North and South

America

Europe

Asia/Africa

Source: Gooderham and Nordhaug, 2003, page 49

The Transnational
Transnational organizational structure can be characterized as having a high level of global
integration and strong local responsiveness seeking a balance between the previous structures
mentioned above. Companies using this strategy try to adapt to customers' needs while
effectively performing their primary activity.
For better understanding the difference between multi-domestic, global and
transnational types, let’s have a look at Harzing’s test of typologies of MNCs ( Table 1 ).

Table 1: Harzing’s test of typologies of MNCs

MNC type Characteristics
Multi-domestic Decentralized federation
Low level of HQ dependence
Low level of interdependence
High level of product modification, adaption of marketing
Global Subsidiaries have a „pipeline‟ role
High level of HQ dependence and interdependence
Low level of product modification and adaptation of marketing
Transnational Network structure, centers of excellence, inter-subsidiary flows
Medium level of HQ dependence
High level of interdependence
High level of product modification and adaptation of marketing
Source: Harzing 2000, Gooderham and Nordhaug, 2003, page 57
Harzing shows the characteristics for the three MNC types and examines the differences
among them helping to finalize the understanding of these different and somehow similar
organizational structures.

2. Performance
Performance is recognized as a typical measure of achievements of individuals or groups.
The basis is how the inputs in the finished goods or services are evaluated. (Veber, 2011)
Also, performance is considered as a management tool that helps achieve concrete goals.
(Lebas, 1995). Other authors define organization’s performance as the progress of indicators
and information collection in order to illustrate and analyze performance. (Marshall, Wray,
Epstein, & Grifel, 1999).
Typically, in order to evaluate the performance, it is needed to look at if the organization
accomplished the goals set and how successfully the achievements were done.
The evaluation of the performance is done not only for managers or the CEO. Different
people highly demand this information for various reasons. For example, stakeholders and
managers need to have it in order to be aware of whether the resources are being used
effectively, and whether there is a need to make further investments or amend something in
the company. On the other hand, banks, investment companies and insurance companies are
interested in the results of operations related to the provision of their services. Also, suppliers
need to be sure that their customers are financially stable since for them having a customer
whose financial performance is not in a satisfying level is a real risk. Similarly, customers are
interested in the financial situation of its suppliers to ensure smooth operation of the
production. Other examples can be financial authorities and rating organizations that use
information of the performance of companies very often. (Veber, 2011)

2.1 The Importance of Performance Evaluation

In most of MNCs, value chain activities are spread throughout the world. (Porter, 1986).
Foreign subsidiaries have the most part in making the value within and for the multinational
companies. Although some MNEs are familiar how their subsidiaries commit to the whole
performance, others have an unclear understanding of the input of performance of
subsidiaries. Yet, performance evaluation stays as one of the most fundamental aspects in
management. (Schmid & Kretschmer, 2009). To make important strategic selections on
international extension, HQ management should be aware how their subsidiaries operate.
( Chung et al. 2002, p.112). Besides, managers have to look at subsidiary performance ahead
of strategy implementation. As an example can be adjusting strategy with systems and
structures. ( Wolf and Egelhoff 2001, p. 122-127). Evaluation of performance is crucial in
favor of exposing correct image of activities of subsidiaries. It can notify HQ of fruitful
development, as well as unfortunate ones. Outstanding practices can be deducted when the
result of evaluation is good, and initial warnings may be a consequence of negative
evaluations ( Choi and Czechowicz 1983; Rolander et al. 1989). Moreover, performance
evaluation is needed for motivation and inspiration of subsidiaries, and especially for
subsidiary managers. ( Abdallah 1984 ) So, performance evaluation participates in the process
of coordination and control within multinational companies. ( Egelhoff 1984)
The objective of the performance evaluation of subsidiaries is finding out the financial
and non-financial situation of the developing subsidiary and where profit comes from.(Jingna
et al., 2011). Some authors think that the purpose of it is the evaluation and monitoring the
accomplishment of strategic goals and implementation of corporate strategy in the subsidiary.
The MNC gains a complete picture of all subsidiary activities and determines spaces where it
profitably developed them or vice versa - identifies not successful areas where could be
managed higher efficiency. The purpose of evaluation can also be local managers’
performance evaluation and motivation of employees in the subsidiary. (Schmid &
Kretschmer, 2009).
Evaluation of performance is essential not only in case of each subsidiary but also at the
level of multinational companies, where it can play as a consolidating and coordinating tool
for the company as it adds value to consistent actions. (Chang and Taylor, 1999 ).
Additionally, in the concept of performance evaluation, subsidiaries can be compared based
on distinct criteria that, as a result, may be indispensable for navigating resource allocation in
the MNC. ( Watty and Terzioglu, 1999).
2.1.1 Performance Management Definition
Performance management is often connected to employee performance evaluation,
however, in the case company, employee performance is part of overall subsidiary
performance evaluation. Performance management is a process of active communication
between the supervisor, or, in this thesis case, the HQ office, and an employee or subsidiary.
The process is ongoing throughout the year and is aimed to support accomplishment of
strategic objectives of an organization. The communication consists of various parts and can
be implemented throughout different methods, including the setting of objectives,
identification of goals, receiving and providing feedback and analysis of the results.
(Berkeley.edu)
In order to understand whether the objectives have been met, companies use different
ways of performance evaluation which will be described in the following chapter.

2.2 Performance Measurement Methods

When talking about performance measurement, it is essential to mention the source of
performance measurement: it can be either subjective or objective, where subjective stands for
primary source of data and objective for secondary. Literature review on the subject has
shown that researchers tend to use subjective data in their articles. However, papers that
assess the financial dimension usually use objective data. (Ramsey, Bahia 2013 )
MNCs base their offices and plants in a number of host countries, controlling the
production facilities from the headquarters. Depending on the style of operations, different
performance evaluation systems will suit different companies.( Pun & White, 2005 )
Different performance measures do exist that have been classified in various ways by
numerous authors. The most regularly used and globally accepted is the division between
quantitative and qualitative measures of performance. Often quantitative measures
are
recognized as objectively measured. On the other hand, qualitative measures suggest a certain
amount of subjectivity. Generally, qualitative criteria are more challenging to measure than in
the case of quantitative. ( Pun & White, 2005 )
Quantitative measures are usually based on financial or non-financial data. ( Fisher,
1992 ). For financial measures, two groups are frequently identified. Firstly, traditional
accounting based measures are distinguished, for example, profit and ROI (return on
investment). The second group includes measures based on value like EVA (economic value
added) or CFROI ( cash flow return on investment). Similarly, non-financial measures are
also known to be distinguished into two groups: internally determined or externally
determined measures. (Neely, 2000) For example, productivity is an internal non-financial
measure, but market share is considered to be externally determined measure. Qualitative
principles used for performance evaluation can also be categorized into either internal ( e.g.
employee satisfaction) or external ( e.g. customer loyalty) qualitative criteria.(Gregory, 1993 )
One of the most often used performance evaluation methods is using the financial analysis. In
this case, the evaluation is done by accounting based financial indicators. These indicators are
known as financial indicators. (Jingna et al., 2011). Starting from not long ago MNCs are
using non-financial indicators as well because sometimes financial indicators are not
sufficient. As a result, the use of non-financial indicators is increasing rapidly and is almost
the same as financial indicators. Non-financial indicators supplement the financial indicators
and highlight the difference between performance of MNC and performance of subsidiaries as
a service (Domanovice and Bogicevic, 2009). As well as, they commit to the implementation
of the strategy of the MNC, to a bigger understanding of those strategies and superior
allotment of resources and tasks. The outcome shows that non-financial indicators are
beneficial for the communication, cooperation and sharing of knowledge among HQ and
subsidiaries, and these factors are a real improvement (Dossi and Patelli, 2010). By using non-
financial indicators, organizations can also avoid issues related to indicators showed in
foreign currency. The practical part of the thesis is more concentrated on non-financial
indicators and its improvement suggestions than on financial indicators.
Financial analysis illustrates a standardized analyzes of captured data generally
involved in financial statements. Therefore, financial analyzes include the evaluation of the
firm’s present, past and forecasting of future financial situation. The major objective of the
analysis is to present data that will be a guide for the company’s managers while making
essential decisions about the functioning of the organization. Moreover, financial analyzes has
a significant influence on the whole organization besides being an important element of
financial management. This analyzes is considered to be a famous instrument for the
assessment of the organization’s financial situation. (Brealey, Myers, Stewart, & Marcus,
2001)
2.2.1 Sources of information
The information can be obtained from the external and internal sources.
External information involves the data collected not only from the company, but also outside
of it including local and foreign environment. The examples of external information sources
are International Analysis, Statistics or Marketing Reports. It can also include non-financial
external sources of information which includes the financial position or rating of competitors,
the company’s market position or the quality management (QM).
Internal – Internal information deals only with the specific organization that is being
analyzed. However, some of the information is internal or confidential and unreachable for
public. Public information can be found in the financial statement of the company which
contains Balance Sheet, Income Statement, Cash Flows and some others.
The information users are also divided into external and internal users. The
members of external users are investors, shareholders, business partners, managers,
commercial banks, government, etc. Meanwhile, internal users include managers, staff, and
trade unions. (Zalesakova, 2010)
The obtained information from external or internal sources should be both with high
quality and easy to understand. Financial statements are considered to be the abbreviation of
the financial information proposed to be used by managers and stakeholders. According to
Fabozzi, a financial statement is the data formulated in accordance with logical and
accounting process.
Balance Sheet is the short statement of the main points of all company transactions
registered in the accounting and hence it gives important information required by financial
management regarding the financial situation of an accounting item.
Income (P/L) Statement presents information about the performance of the
organization through an accounting period. An essential element of the statement is “net
income on operating activities”
So, the main difference between these two statements is that the balance sheet provides
information about assets and liabilities for a particular moment, whereas the income statement
is the overview of occurring transactions through some period of time
Statement of cash flows - The main idea of the statement of cash flows is to present
information about the situation of financial resources at the start and at the end of some
accounting period. (Peterson & Fabozzi, 2003)
2.2.2 Methods of Financial Analysis
According to Veber and Kislingerova there are two methods of Financial Analysis:
Analysis of Absolute Indicators and Subtractive Indicators. The first method uses direct
information included in financial statements for evaluating and following a particular
company’s financial situation. The examples of analysis of Absolute Indicators are horizontal
analysis and vertical analysis (Kislingerová, 2007). On the other hand, analysis of subtractive
indicators is more oriented to the liquidity of the organization while analyzing financial
situation of the company. Net working capital in considered as the most essential subtractive
indicator. It is the difference between Total Current Assets and Total Current Liabilities.
(Veber, 2000)
However, Sedláček (2005, p. 171 - 202) also adds two other methods for financial
analysis: Analysis of Ratio Indicators and Analysis of Cumulative Indicators.
The analysis of Ratio Indicators Include:
 Profitability Ratios (evaluate the company’s usage of its assets and managing its
expenditure to produce a satisfactory rate of return).
  Activity Ratios (evaluate the agility of converting non-cash assets to cash assets by a
company)
 Liquidity Ratios (evaluate the possibility of paying the debt by cash when it’s needed).
 Debt Ratios (evaluate the company’s capability to pay back long-term debt).
 Capital Market Ratios (evaluate the cost of releasing a stock and an investor’s reaction
to possessing a firm’s stock).
Whereas the components of the analysis of Cumulative Indicators are:
 Kralicek Quick Test
 Altman’s (Z-score) Model
 Du Point Analysis
The aim of financial analysis is to evaluate an organization’s operating performance and
financial situation. Analysts can have access to the most essential financial information about
a company with the help of quarterly and annual financial statements prepared by the
company.
Cash Flows (Brealey, Myers, Stewart, & Marcus, 2001)
Cash flows are considered as important elements for the valuation process because a
company’s current value is the present value of the cash flows that are expected to be in the
future.
So, when the financial analyst figures out past and present cash flows, it may be a
great hint for future cash flows’ forecasting, and, as a result, in the determination of the
organization’s value. Furthermore, the ability to understand cash flow helps the analyst
evaluate the company’s capability to retain current dividends and its policy for capital
expenditure without counting on the financing from external sources.
One of the simplest examples of calculating of cash flow of the company is:
Estimated cash flow = Net income + (depreciation + amortization)
EBITDA (earnings before interest, taxes, depreciation, amortization) is considered as
another way of cash flow estimation which is easy to calculate. However, it does not include
taxes and interest that can be generous cash outflows for some organizations.
The two estimates of cash flow mentioned above are practically useful because of their
simplicity and broad usage before the announcement of much more thorough information in
the cash flow statement.
Financial ratios are assessment tools applied in the financial analysis. They help
understand the relationship between specific items or data included in the financial statements
of a company. With the help of financial ratios it’s easy to understand the financial situation,
health and performance of a particular organization, also be aware of risks, returns and be able
to compare the company with other organizations. As mentioned above, there are 5 different
types of financial ratios that are classified in accordance with the financial aspects they
describe and their construction way. Let’s investigate them one by one.
Profitability ratios (Brealey, Myers, Stewart, & Marcus, 2001)
Financial tools or measurements used to evaluate a company’s capability to produce
earnings taking into account the expenses and other costs acquired through a particular period
of time. In case of Profitability Ratios, when we get a value that is more than competitor’s
ratio or at least the same ratio as it was in the last period means that the firm is in a good
shape. In order to calculate these ratios, a relevant data from the balance sheet and income
statement is required. They are effective in fundamental analysis that scrutinizes the financial
health of organizations.
Profitability ratios are useful in fundamental analysis which investigates the financial
health of companies. (Sulak and Vacík, 2005). Below is shown the examples of most popular
Profitability Ratios.
Basic earning power ratio indicates the success of the company using its assets in its
activities
Basic earning power ratio=
∑
Return on Assets (ROA) evaluates the overall efficiency of the firm, profit-making
ability and production power. ROA illustrates the capability and effectiveness of a firm in
creating total earnings. As ROA calculates profit (from all types of activities) including total
invested assets, no matter where the sources of financing come from (external or equity), it
makes possible to compare organizations that have distinctive financial structures. ROA
indicator is considered to be the best and the most truthful indicator for sophisticated
evaluation of invested resources.

ROA = EBIT * 100 / total assets

Return on Equity (ROE) calculates the profitability of equity invested by

shareholders or company owners. In other words, it measures the return on equity invested by
the owners’ of the company and evaluates the profitability gained from the investments.
Having ROE calculated is significantly essential for the company owners. If it is generally
lower than the risk free securities rate or the interest rate securities guaranteed by the
government, it means that the business is not doing well.
ROE illustrates the success of an organization in using investment funds to produce
better and improved earnings. When ROEs are between 15% and 20%, it usually means that
the company is in a good shape.
Return on Equity (ROE) = profit after tax * 100 / Equity
Return on capital employed (ROCE) characterizes growth in the owners' capital
potential using long-term foreign capital. This indicator should never be equal or less than the
borrowing rate of the company, if not, any time when the company borrows something, it will
reduce earnings of shareholders.

Return on sales (ROS) indicator is very popular for evaluating the operational
efficiency of an organization. Alternatively, it is also called as operating profit margin. The
formula for it is shown below.
 Return on invested capital (ROI) demonstrates the effectiveness of long-term
external invested capital.
ROI = net profit after tax * 100 / invested capital

Gross Profit Margin determines the connection between gross profit and sales. This
ration is widely used for determining the intensity of competition, marketing strategy, policies
of pricing and the effectiveness of production and acquisitions.
Gross Profit Margin = gross profit * 100 / sales

Capital Market Ratios (Brealey, Myers, Stewart, & Marcus, 2001)

Earnings per share: in the case of this ratio a firm’s net profit is expressed in terms of
profit per share. This makes it possible to compare with the firm’s market price per share. The
formula for Earnings per share is the following.

EPS illustrates the amount earned by the company from each share’s fraction during a
particular accounting period.

Dividend per share is widely used by public because of its simplicity to understand.
It shows the money amount of dividends accumulated per share. If the future operations are
announced to be financed out of retained profit, it means that dividends will be at a low
degree. On the other hand, the earnings for dividends’ payment and required investment
amount can be financed primarily by loans, and therefore, dividends will not suffer.

Payout ratio calculates the part of earnings shared as dividends. Therefore it

illustrates the dividend policy of the organization.

Plowback ratio gives the information about the amount of the profit the firm reused in
investments. So, this ratio partly demonstrates the company’s future plans as well.
Plowback ratio = 1 – payout ratio

Dividend Yield: The formula is the following:

 For the detailed explanations of Activity Ratios, Liquidity Ratios and Value Indicators
(EVA, MVA) please see in Appendix 5 because in the practical part these ratios and
indicators will not be used.
2.2.3 Non-financial Indicators
Non-financial indicators are intended to exclude the drawbacks of financial indicators.
(Kislingerová, 2008).Using these indicators and achieving the targets set serve as evidence of
performance improvement and leads to long-term prosperity. Companies select special range
of indicators depending on their strategy and long-term goals. However, the problem related
to indicators is the measurability. Indicators can be divided into hard and soft groups. The
measurement of hard indicators is not a tough task. The example of hard indicators can be
customer number increase. Hard indicators are subdivided into quantitative and qualitative
indicators. On the other hand, soft indicators are difficult to be measured such as the goodwill
improvement. While choosing hard and soft indicators, it is essential to choose such one that
are connected to each other. The difficulty is that they are shown in different units
(percentage, time, ratio ..)
Non-financial indicators portray the functions and activities of the organization.
Therefore, they can be grouped into the following divisions. And each group has specific
examples of non-financial indicators (Shaw, 1999).

Table 2: Examples of non-financial indicators

Manufacture and Sales and Employees Research and Environment
production marketing development
Production Customer Employee Improvement of Workplace
efficiency satisfaction performance products environment
analysis indicators
Production plan On time delivery Overtime work Investments in Uniformity
flexibility percentage innovation
Percentage of New products and Employee Evaluation targets Cleanliness
leftover services satisfaction for R and D
Waste measurement Market share Quality of
employees
Fault analysis Sick-leave
percentage
Level of inventories Employee turnover
rate
Defective delivery
percentage
Source: Shaw, 1999

In addition, the figure below shows the advantages and disadvantages of non-financial
indicators.
Figure 7: Advantages and disadvantages of non-financial performance indicators

Source: ACCA, Advanced Performance Management, p.124

As one of the research questions is related to the turnover rate, it is essential to

understand the concept of employee turnover rate and realize the difference between it and the
retention rate.
It is essential for companies to have skilled workers for a better performance and
strategy. No matter what types of technological innovations are created, competent and
experienced labor force is the key success factor. Some companies admit that employee
turnover rate could cost a lot to their organizations. However, not all of them actually
recognize the impact and magnitude of it. Therefore, companies started to pay much more
attention to this factor in order to find ways to avoid a huge amount of expenses caused by
high employee turnover rate.
According to Deborah Rupp, 1% increase in employee turnover rate, leads to 3 %
decrease in ROA and 8% decrease in ROE. The consequence could be even more for small
companies. It is vital for companies to manage their human capital as better as possible.
(Rupp, 2012)
The definitions below are taken from the book named “Metrics Standard Book,
Success Factors, SAP SE”.
Turnover Rate calculates the employee percentage that left the company in the course of the
announced period.
If for inventory evaluation it is accepted that high turnover means high sales and
increased revenue, for turnover rate it is different. When the turnover rate is too high or low,
it could be a real problem.
The standard and most accepted definition of Turnover Rate (Termination Rate) is the
following:
 Employees can leave voluntary or be sacked, or because of retirement, serious illness
or even death. All these cases are involved in the termination numbers.
For the average headcount, the authors of the book suggest using daily average headcount
that is considered as the most correct method that can be available for the company.
In order to continue its steady growth, a company should find a replacement for every
employee who leaves. Here come the following problems that the company should take into
account. First of all, when a company hires a new employee, it has to waste money on this
hiring and onboarding process. Furthermore, as there is a gap between the time when an
employee leaves and a new one is hired, company’s productivity decreases. In addition, it is
not a rule that the new hire will always prove himself or herself as a good worker. So, it is a
real risk. All these examples show that termination of employees could cost thousands or even
millions of dollars for organizations. According to the article, if a company has 10.000
employees, one percent decrease in the employee turnover rate may save around seven
million dollars in a year for the company. This is a huge effect that should be considered.
On the other hand, if the employee turnover rate is very low, it can be bad for the
company as well. The results of low turnover are lack of innovation, fresh ideas and
stimulated insularity. Moreover, it becomes harder to find out bad performers as a result of
non-effective performance management.
It is important to understand another essential rate as well – the Retention Rate
because some people confuse the exact meaning of it as well. The rate calculates the
percentage amount of employees not terminated in the reporting period time.
Retention rate gives a clear picture of the organization’s ability to retain its workforce. The
Retention Rate is calculated:

The aim is demonstrating the percentage amount of retained employees that were enrolled in
the workforce initially.
One hundred percent retention rate means that the company managed to retain its
employees during the reporting period, including all the new hires. No terminations happened.
It should be remembered is that Retention Rate should not be considered as the inverse of
Termination Rate.
Termination Rate calculates leaving rate of the workforce. On the other hand, Retention Rate
shows the percentage amount of the employees that did not terminate.
To conclude, Termination or Turnover Rate is the finest measurement for showing how the
company is financially affected by losing employees while also to compare with competitors.
If a company is able to keep the best employees, it leads to customer satisfaction,
happy co-workers, improved performance and continues increase in profits. With the help of
Retention Rate, it is possible to concentrate on the significance of keeping the staff members.
However, if the outcome of using this metric is not satisfying, there is a need to shift to
Termination Rate (then, if it’s necessary, to other measurements and investigations) for
developing a broad insight of the root cause or causes.
Before switching to the specification of subsidiary performance evaluation it is
essential to define the factors that affect the selection of indicators.

2.3 Factors Affecting the Selection of Indicators

The three levels of influencing factors that can be categorized are the MNC level, the
subsidiary level, and the environment level. Most studies, however, concentrate on MNC and
subsidiary level influencing factors, and sometimes close eyes on environment factors.
Numerous influencing factors can be mentioned for each level of influencing factors. For
MNC level, most used factors can be nationality, industry, size and internalization degree,
organizational structure, operation area and dependence between HQ and subsidiaries. At
subsidiary level, generally illustrated influencing factors are size, country, and
interdependence between them and the HQs. In the case of environmental factors can be
mentioned environmental unclearness, observed host market attractiveness or market risk.
(Schmid & Kretschmer, 2009). The table below provides an overview of abovementioned
factors that influence the rating system.

Table 3: Overview of influencing factors that influence the selection of indicators in MNCs

Source: Schmid and Kretschmer, 2009, page 229

Let’s describe some of the most important the influencing factors one by one.
There is no doubt that MNCs’ home country should be considered as a serious control
process influencing factor. The factor of home country affects more financial criteria. In
contrast, it does not affect so much non-financial ones. So, different countries act differently.
In the international management, it is known that MNCs based in the USA are usually
managed more by formal control processes in comparison with the European and Japanese
competitors. For Japanese multinational companies, performance control is more accepted.
(Chung et al. 2002)
Size of MNEs is another considerable influencing factor on the control process. Size
of companies and formal control are approved to be positively relative to each other.
Meanwhile, the increase of MNCs’ size is connected with the increase of cultural control,
again in a positive way. ( Harzing and Sorge, 2003 ) Furthermore, the size of MNCs
influences the choice of quantitative indicators. According to Schmid and Kretschmer MNCs
started to use fewer indicators related to growth. Furthermore, these MNCs realized the
importance of non-financial indicators and use them much more to secure more performance
related aspects. (Dossi and Patelli, 2010)
Some authors state that purpose of evaluation can also be considered as a factor that
influences the choice of financial or non-financial indicators in evaluating the performance. In
other words, if the determination of the profitability of the subsidiary is the purpose of
evaluation, the MNC should use earnings and sales indicators. On the other hand, if the
organization observes the implementation of the goals and strategies, it is preferable to apply
the difference between budget and actual earnings. (Jingna et al., 2011).
Another factor that affects the financial indicators is the degree of centralization. If
the company is decentralized, it uses profit based indicators. More centralized companies use
non-budget linked indicators. (Shimizu, 1999).
This is another example of influencing factor suggested by Shimizu. The HQ and
subsidiary interrelationship influences the evaluation process in a way that when a
subsidiary has more degree of autonomy and participates in the evaluation process creation,
the MNC operates more non-financial indicators. (Chung et al, 2002)
It is not relevant to employ the same performance indicators if the subsidiaries have
different strategic roles in diverse business fields. These indicators should be diversified
according to the area where the role of the subsidiary is better noticeable, establish applicable
criteria related to this area and pick up an essential aspect of its performance. (Jingna et al.,
2011).
To conclude, in general, evaluation of performance is influenced mostly by the subject
and purpose of evaluation, the size of MNC, organizational structure and strategy. In the case
of the subsidiary level, the most popular influencing factors are increasing home country
influence level, the interrelationship between HQ and the subsidiary, and the risk associated
with the external environment.

2.4 Subsidiary Performance

If a company decides to go international, it definitely thinks whether entering foreign
market will be beneficial or not for its performance. When companies enter foreign markets, it
automatically means that the company’s profit will depend on some extra factors. ( Verbeke,
2009)
 First of all, an MNC must compare the expected expansion of investment in
international level with the domestic one. When all the risks are considered, organizations
should apply only economically more profitable foreign projects that are more attractive than
domestic projects.
Secondly, the transfer of experienced workers from home country to abroad can be
somehow expensive. Hence, to be successful overseas requires considerable investments and
learning over time.
Finally, expanding MNC does not always lead to better performance. In order to adapt
to the new environment, companies will have to increase the costs of internal management. It
is a big issue for the headquarters to choose between different options for expansion.
Hence, the MNC will manage better performance by achieving specific strengths that it
will feature the level of competition, and will help get more benefits while expanding abroad.
The MNCs still pursue evaluation by financial indicators, as they are simple in
understanding, clear and easily measurable.
Of course, the key issue MNC would evaluate in its foreign subsidiary is whether or not
this investment is sustainable and profitable. Currently, the field of performance research
lacks information since the performance data is hard to access. Moreover, reporting standards
often differ depending on the country. Another reason is that some MNCs might provide
unclear or incomplete data on subsidiary performance for tax performance. They try to show
financial performance of their subsidiaries to be in a worse state to lower taxes.
Research on subsidiary performance can be divided into five streams: location system,
industry system, stream of MNC’s capability, stream of subsidiary role and the stream of
entry strategy. (Gwozdz & Wencke, 2013)
The location stream strategy is described by the fact that the host country can serve both
as the performance enhancing or performance limiting factor. Cheap labor force, natural
resources, growth of market and purchasing power all have an influence on performance of
subsidiaries.
The industry stream is highly influenced by the factors like bargaining power of
suppliers, customers and degree of competition in the industry. Hence, when doing
performance evaluation of a subsidiary, it is essential to consider the competitive conditions
in the industry in country of operating.
As for the MNC capability stream, it does not focus on the outside factors like location
and industry streams, but describes the way how unique resources of a firm, that cannot be or
are hard to be replicated by competitors, can be transformed into capabilities. Three types of
MNCs capabilities have impact on subsidiary performance. First kind is the capability
creating the brand image and giving MNC the competitive advantage. It can be competencies,
designs, technology etc. The second one is capability, essential for success when operating in
the international arena. It can either be internalization experience, specific knowledge of
specific countries or multinational presence. The third one measures benefits that MNC gets
from internalization and defines whether or not the inputs of the company into internalization
are worth the output received.
 The subsidiary role stream defines the strategic role played by subsidiary in overall
performance picture. The more parent company is interdependent on the subsidiary, the more
support and resources the subsidiary will receive which will positively affect its performance.
Strategic importance of subsidiaries differs depending on its functions. The ones that play key
strategic roles, including regional, product or functional operations, will receive more support
from the parent company rather than subsidiaries that are auxiliary portfolio investments,
especially in case of crisis.
The entry strategy stream is closely related to MNCs capability stream and examines
the best way in which company can enter its subsidiary into foreign market. It can be IJV,
fully owned subsidiary and several others that have been discussed thoroughly in the chapter
1.2, Entry strategy affects subsidiary performance in several ways. For example, joint venture
brings MNCs quicker access to customer and labor markets and investors, however, it might
as well lead company to the necessity of compromising its way of operations in order to fit
the cultural, organizational and strategic methods employed in the company of alliance.
(Gwozdz & Wencke, 2013). As for most commonly used subsidiary performance measures,
there can be divided three areas of performance evaluation: financial performance, operational
performance and organizational/ managerial performance. Those areas interact with each
other, and J. Ramsey and B. Bahia put special focus on interaction between operational and
financial performance. Specific techniques of performance evaluation will be discussed in
next chapters.
In order to have better picture of performance evaluation, while evaluating the
performance of their subsidiaries, MNCs have to choose such rating system that is in
accordance with their mission, vision, goals and strategies (Domanovice and Bogicevic,
2009). Therefore, it can happen that different branches will have to use different indicators for
the evaluation process. Moreover, in order to achieve the most definite results of their
performance, the rating system should be the mix of non-financial and financial indicators.
Outstanding evaluation system requires assimilation with corporate strategy and use of such
indicators that are easy to understand, straightforward, and measurable indicators.
It is essential to differentiate performance management and performance of subsidiaries.
Performance of subsidiaries is influenced by a lot of factors over which managers do not have
control. Their performance is an outcome of decisions of local and HQ management and
governments. Therefore, it is highly feasible to attain satisfying level of managerial
performance for the whole MNC, but the bad performance for subsidiaries. (Domanovice and
Bogicevic, 2009) Moreover, even though subsidiary and managerial performances are
interdependent, a well performing subsidiary could have shown better results if management
approach would differ and vice versa a subsidiary with poor performance would have end up
in even worse state if manager did not do superior job. (www.uni-goettingen.de)
The MNC should evaluate the subsidiary performance before making any strategic
decision and its implementation. Conjointly, the results of the evaluation are usually used for
the allocation of resources across MNCs. ( Child, 1984)
2.5 KPI (Key Performance Indicators)
I used the concept of KPI because Key Performance Indicator (KPI) method is
employed in the case company of this thesis and that is why it will be described specifically.
According to David Parmenter, performance measures should be grouped into three forms:
(Parmenter, 2007)
 Key result indicators: shows how someone or something did in a specific period.
 Performance indicators: shows what needs to be done.
 Key Performance Indicators: shows what needs to be done in order to greatly improve
the performance.
Let’s describe the most famous and the most useful ones – Key Performance
Indicators. KPIs are targets agreed to beforehand, that reflect the defined project or
operational goals. In other words, KPIs help companies define and measure the progress
toward the organizational goals. (Zanotta, 2013)
Performance indicators refer to a type of performance measurement. KPIs are
selection of a number of performance indicators, which evaluate success and performance of a
subsidiary. KPIs are usually focused on the essential aspects of organizational performance.
Enterprise resource planning (ERP) consider that the most crucial part of the choice of KPIs is
understanding what is important for the organization and what goals subsidiary was intended
to achieve. (Ganesan & Ramesh, 2009)
Key performance indicators are used in companies and industries and include a
number of quantifiable measures which define whether or not the performance of the
company is meeting the strategic and operational goals. KPIs are chosen individually
depending on the company, its goals and industry in which it is operating. KPIs are used to
measure the amount of progress towards achievement of strategic objectives of a
company. Usually, organization defines limited number of KPIs, depending on the degree
they contribute to the overall business strategy of an organization. KPIs can include: customer
retention rate, operating margin, and system uptime. (help.sap.com)
KPI is an inexpensive and powerful management tool, it is simple and helps companies
focus on MNC's activities. Since successful implementation of KPIs requires a deep
understanding of what is important. Indicator selection is based on number of different
techniques and knowledge of key activities. If defined correctly, the measured performance
indicators can show the way to potential improvements. (KPI, Fast Easy Overview. Article
about Performance indicators. )
In order to be effective, KPI needs to include several features. The features differ
depending on the set objective and may overlap each other. The characteristics defined
academically are: relevance and consistency with the vision and strategy of MNC, focus on
wide strategic benefit rather than small local outcomes, representativeness of appropriate to
the MNC together with its operational performance. Moreover, KPI needs to be realistic and
cost effective, specific in order to avoid misinterpretation, attainable and measurable.
(Strategic Management, Key Performance Indicators, 2010)
2.6 The Use of Kepner Tregoe Method as an Addition to KPI System
Despite all positive sides of KPI, it has its disadvantages as well. First of all, its
simplicity does not allow deep and detailed analysis of issues subsidiary is facing. Secondly,
sometimes MNCs choose too many performance indicators to measure and hence it does not
lead to performance approval but rather to failure.
One of the topics covered in this thesis will be the implementation of Kepner-Tregoe
(KT) problem-solving and decision-making method, and thus, the method needs to be defined
before comparing it to KPI. KT is used as a decision-making tool, it is a structured
methodology, which helps its users to gather and prioritize information, and evaluates it.
KT may as well be referred to as a root cause analysis. KT is also implemented to solve cases
of troubleshooting when the cause of a problem is unknown. ( is.muni.cz )
In order to understand why it is needed in the first place, the following statistics are
provided. As the world’s leader at troubleshooting methodology, Kepner Tregoe has proved
to deliver the following results to its customers: (kepner-tregoe.com)
Reduced Mean-Time-To-Resolution by
50% Increased Customer Satisfaction to
+90% Improved first-time-fix-rate by 40%
Reduced backlog by 60%
Kepner tregoe problem-solving method involves several stages, each of them answers
separate question.(is.muni.cz)
First of all, the What? question. At this stage company needs to identify what is and is
not the problem, define the difference between the not a problem and a problem state and,
finally, understand what causes the problem.
After that goes the Where? part. At that stage company needs to define where the
problem does and does not occur and define the difference between those locations and
understand its cause.
In order to define the solution for problem correctly, timing is essential. The
seasons/times when the problem does and does not occur are defined, the difference in timing
is understood as well as the cause. At this stage company also needs to know when the
problem was first and last observed and what is the difference in timing and what is the cause.
After all those questions have been answered, the extent magnitude is developed. It
focuses on questions as: How far does problem extend? How localized is the problem? What
is the distinction? How many units are affected? How many not affected? How much of any
one unit is affected and how much is not affected? (courses.cs.vt.edu)
Table 4: KT Problem Analysis

Source: is.muni.cz

So, the effective process of problem-solving starts from answering three major
questions: when, where and what, through which the decision-making unit needs to
understand what is and is not the problem, understand the decision and possible cause. After
that, extend magnitude is decided. After summarizing all findings, performance indicators
which can solve the problem best can be chosen.
In implementing KT procedure, the organization is required to identify its position and
where it wants to be. This involves analyzing the situation which includes problem analysis,
decision analysis and potential issue analysis. The organization is required to organize the
work area which helps in standardizing daily operations. In analyzing the situation, the
organization should begin with identifying and defining the existing faults. This therefore
helps in establishing how the faults can be corrected by measuring the level of impact,
seriousness as well as urgency. The organization should then develop plans on how to prevent
the occurrence in the future by developing actions to be taken by making decisions on those to
be involved (Mislick & Nussbaum, 2015)
The organization should additionally make decisions based on the existing choices by
establishing the elements that should be decided on. The objectives of making the specific
choices should be clearly stated in order to separate priorities and wants from the stated goals
categories. The generated alternatives should then be evaluated to establish scores between
priority objectives against the wants objectives. The suitable choice should be made based on
the results of the consequences that each of the chosen choices holds. These reviews are
therefore based on risk assessment and evaluation to ensure that maximum benefits are
generated from the choices (Mislick & Nussbaum, 2015)
 Potential opportunities should additionally be listed down to enable the involved
individuals in identifying suitable solutions by developing actions to address the possible
effects of the causes. Problems generated should be stated down through detailed description
and definition. Problem specification is, therefore, important in developing potential causes of
the issues. The potential cause should additionally be verified and tested to ensure that there is
reliability, accountability and accuracy. Once the suitable cause is determined, the
assumptions should be verified thoroughly and then try the suitable solution in order to
monitor the situation.
Problem analysis is the next step in the implementation procedure of KT. This
involves identifying and analyzing the real cause of the identified issues. Solutions are raised
regarding things that can thus be done in order to verify the existing assumptions by
examining how the cause can be observed. The process also involves determining how the
relationship between the causes and effects can be demonstrated to show the effectiveness.
This demonstration also shows how the actions which are aimed to correct the effects can be
checked (Mislick & Nussbaum, 2015)
Potential problem analysis is also conducted in order to prepare the organization from
the future threat as well as rising opportunities. This process is essential because it helps in
combing prior experiences and innovative insights in regard to the future in order for the
organization to fully prepare for the risks and loot that waits in the future. The procedure,
therefore, involves identification of critical plan areas and assessing the threats and
opportunities that may occur. Hence, this process requires that the organization utilizes other
individuals in translating plans that have been developed into actions. This is achieved by
developing plans on how future issues can be avoided and separated from opportunities
benefits. Therefore, the organization should respond quickly in order to avoid mistakes that
are costly (Lussier, 2008)
The problem management procedure helps the organization in solving the issues
completely for long-term periods, increase its efficiency, quality and decline cost utilization
(Mislick & Nussbaum, 2015).
The implementation of KT is illustrated by the figure below.
Figure 8: The implementation of KT method

Decision making analysis In relation to the past

Establish and define what the problem is

Determine how the problems can be corrected

Situational Analysis Problem analysis In relation to the present

Evaluation of potential problems How can the occurence of the problem be prevente
In relation to the future

Source: KT method available in www.toolshero.com

KT is a useful addition to non-financial KPIs as it provides more detailed analysis of

the problem and it can be useful addition to performance evaluation system as it helps to
better define performance indicators.
 Methodology

The problem solved in the thesis is the method of performance measurement used in
multinational companies. The aim of the thesis is to analyze and evaluate the current
performance evaluation method employed in SAP, and to suggest an improvement way of
finding problems and solving them which will lead to better performance for the company.
Research process was elected as a model of meeting the objectives.
The main research question of the thesis is the following:
RQ: Does the KPI method employed by SAP BSCE in Prague portrays the actual
degree of performance in the subsidiaries?
In order to come to the answer of the main research question, two sub-questions are used.
Sub-questions of the research are the following:
RQ1: What are the weak-points of current performance evaluation measures in SAP
BSCE in Prague?
This question is essential since it provides the overall picture of performance
evaluation system in the company. Additionally, this question also involves the identification
of problems raised in SA BSCE. The answer to this question was achieved due to the
willingness of some of the employees of SAP BSCE and HQ to help me get the required
information.
RQ2: How can be the current performance evaluation system improved?
If any problems are revealed, the solution needs to be provided. This will definitely
improve the performance of the company, therefore, the current performance evaluation
system as well. So, the additional problem-solving method such as Kepner Tregoe
troubleshooting and decision-making method will be suggested. It will help much easier
identify the problems and find solutions to them.
The sub-questions were answered through an interview held among the employees of
SAP BSCE. Semi-structured interviews gave employees opportunity not only to evaluate
current performance measurement system but also to suggest ideas for its
improvement. Interviews were based on the written questionnaire which was completed
during the interviews. Results of the questionnaire are the basis of the research. The answers
provided the insight view on the company.
The research question was answered by synthesis of questionnaire results and the
proposition of areas where KT method can be used and the ways it can be implemented.
Initially, the questionnaire was sent to 30 employees, but I got 15 responds. Therefore, I have
50% response rate. The employees that took part in the survey work for SAP BSCE in the
Finance Operations department. The list of the questionnaire can be found in the Appendix 1.
The employees are from different sub-departments mainly from order-to-invoice,
record-to-report and cash collections. Those employees were chosen because they are the ones
responsible for sales orders and creating invoices for EMEA region countries. Hence, they are
evaluated by KPIs. The employees from HR have not been selected because their evaluation
process is done only individually by their managers. They don’t use KPIs. On the other hand,
Finance Operations employees are evaluated by KPIs, but not individually, but group by
group. In EMEA region, they support 43 countries, and each group that support different
countries get their KPIs on a monthly basis. Among that 15 respondents, there are answers
from two Finance Operations Managers and others are Finance Operations Associates.
 Practical Part

3. Introduction to SAP and SAP BSCE

SAP is the name of the company founded in 1972 by five young men from Germany
under the German name (Systems, Applications, and Products in Data Processing). SAP is the
biggest enterprise application software company in the world with almost 77.000 employees
worldwide and 300.000 customers in 190 countries. SAP’s 2015 annual revenue calculated as
17.56 billion euros. On stock exchanges, it is under the name of “SAP” with the current price
of 69.9 euros per share. As stated in the announcement from July 7, 2014, SAP changed its
legal form from a German stock corporation (AG) into a European Company (Societas
Europaea, SE). The SE is the legal form available to international companies based in Europe
that comes closest to a “global company”. The change of legal form reflects SAP’s position as
an internationally-oriented company.
SAP plays a very active role in our daily life. It looks impressive, but it is a fact that “79%
of all chocolate in the world is manufactured using SAP software”. SAP business software
offers companies solutions to produce efficiently and effectively with minimal risks and costs.
There are some other interesting facts that prove how big influence has SAP in today’s world.
85% of the Top 500 companies run SAP software
70% of the world economy's transactions in some way connected with SAP system
SAP , the world’s leader in enterprise applications, opened its Business Service Center
Europe as newest shared services center in 2004 in Prague, Czech Republic as a separate SAP
legal entity with only 24 employees on board supporting only few countries and processes
aiming to distribute an exceptional customer service and quality. During its ten year history, it
has become the best in class, captive, multifunctional shared service provider, adopting more
and more responsibility. Today, SAP BSCE provides the following services to SAP branch
offices in the Europe, Middle East and Africa (EMEA) region: human resources
(HR), finance and administration (F&A) . BSCE is run by Heiko Knocke with approximately
800 employees, who support 43 countries in 15 different languages. SAP BSCE represents the
backbone that allows the SAP business field units to fully focus on the software products and
services to be delivered to its customers.
SAP BSCE is also called as GFSS (Global Finance Shared Service). Most of the
employees are women, and the average age is just 28. As a truly multinational company’s
subsidiary, SAP BSCE has employees from 27 different nationalities. Most of them are
Czech, then employees from Slovakia, Russia, Ukraine and many others. (www.sap.com)
Before the performance evaluation of SAP BSCE will be analyzed, it is important to
observe how the organizational structure of SAP looks like and where actually stands SAP
BSCE in the whole SAP SE. This will help better understand the objectives and activities of
SAP BSCE.

3.1 Organizational Structure of SAP

Employees of SAP BSCE support customers, local employees and consultants in
EMEA (Europe, Middle East, Africa) region.
 SAP has for big regions- EMEA, APJ, South America and North America. Both HQ in
Waldorf and SAP BSCE are located in EMEA region. SAP BSCE as a Global Finance Shared
Service supports all the subsidiaries located in EMEA region. It has four departments -
Procure-to-pay (P2P), Order-to-Invoice (Consulting and Education Billing), Order-to-Invoice
(Software and Maintenance), Cash Collections, Record-to-Report (R2R). So, the main
purpose of the SAP BSCE is to serve as a GFSS and support customers and local employees
in EMEA region. Of course, there are other departments at BSCE as well such as Human
Resource Department and Payroll Department whose task is supporting the employees of SAP
BSCE.
Regarding organizational structure, SAP follows “global product division” structure.
Each division is located in different parts of the world and contains different activities to be
performed. For instance, SAP BSCE along with other two Shared Services (SSC) in the US
and Singapore are included in the GFSS (Global Shared Service Centre) team.
Now let’s look where stands SAP BSCE (GFSS ) in the global organizational structure.

Figure 9: Organizational Structure of SAP

SE
GFSS within SAP

Global Controlling

Corporate Financial Chief Operating Office

Reporting F&A

Global Facility
Global Legal
Management

Data Protection and Strategic Finance

Office of the CEO
Privacy Projects

Global Finance & Global Finance Global Finance

Administration Infrastructure Shared Services GFSS
SAP SE

Global Procurement
Human Resources CFO Concur
Organization

Global Cutomer Global Tax and

Global Licenzing
Operations Treasury

Products and Business Model

Investor Relations
Innovation Innovation

Global Service and CFO Global Customer

Support Operations

Business Network

Source: portal.wdf.sap.corp
 This simple organizational chart shows the connection between GFSS or SAP BSCE
and other units. It helps to understand the role and illustrates the position of GFSS within
SAP. In a fast moving organization with more than 70.000 employees, it’s not easy to
orientate and follow all the changes in the organizational structure even for the employees
themselves. Nevertheless, for getting to understand GFSS as a whole and its overall
importance within SAP as such, it is also good to know who are the people and structures
influencing the development and strategic focus of GFSS. Starting from the top, SAP divides
itself into six main units headed by the members of the Global Managing Board and lead by
Bill McDermott, the Chief Executive Officer of SAP. On this first organizational level, the
information for GFSS is coming from Luka Mucic, the Chief Financial Officer of SAP and
the Head of Global Finance & Administration (GFA) unit of the company. This
organizational unit involves nine sub-units out of which the Global Finance Infrastructure
(GFI), led by Peter Rasper, is the most relevant for GFSS. This sub-unit is then formed by
seven organizations with Global Finance Shared Services (GFSS) being the largest one within
GFI.(portal.wdf.sap.corp). The figure below shows the specific regions supported by each
Shared Service Center.

Figure 10: The organizational structure of Global Shared Services

Source: portal.wdf.sap.corp

4. Research and Analyzes

The fact that I am a current employee at SAP BSCE was very beneficial for doing the
research as most of the information in SAP is not public and therefore, it would have been
almost impossible to organize interviews, surveys and obtain information without having
access to the database
 SAP tries to keep the information regarding the performance evaluation process internal.
Therefore, I was allowed to disclose only the public data.

4.1 Performance Evaluation Process in SAP BSCE

Nowadays, SAP BSCE is a classic model of offshoring, which is a common thing for
MNCs in the world. Shared services are defined as follows: “Shared services are unification
of business processes which are used by various parts of the same enterprise.” They are cost-
efficient because of the elimination of redundancy as a consequence of centralized back office
activities. Currently, the model of shared services is usually operated for consolidation of
operations related to finance, human resource management and information technology. As a
result, it is not only cheaper but also more productive. (Bangerman Olavi, 2005, pp. 12-17)
SAP BSCE’s activities related to the delivery of service, including the support of
internal and external customers via emails or Business Skype (Lync). Internal customers are
staff members of SAP who work in EMEA region. They are supported by the employees of
SAP BSCE in the case of issues related to Finance and Administration or HRM. So, it means
that all the work associated with those fields backed by one point, and there is no need to have
such departments in each country of EMEA region where SAP is based.
The external customers usually have enquiries related to Finance and Administration
such as billing, cash collections, staffing, sales orders and so on. When external customers
from EMEA region create orders, employees from SAP BSCE Finance Operations Team have
to complete them, and they can see these orders in the ERP system.
In order to develop the research framework, inside information on KPI and performance
measurement both in Waldorf headquarters and BSCE subsidiary has been requested. The
received data stated that even though the major evaluation framework is same for all
subsidiaries, it still differs in certain aspects depending on the department and KPI is not
employed everywhere. For example, BSCE uses KPI reports in the Finance department but is
not employed in HRM. HR are measured through the method where employees define their
own performance goals (after confirmation from their manager) and try to succeed in its
achievement. At the end of the year, HR controlling department evaluates performance based
on whether or not employees have achieved their own goal, or the success factor. This
procedure is extremely strict in Waldorf but more moderate in BSCE.
As the Analysis of Data section shows, SAP BSCE might need an additional method for
better identifying problems in their early stages, improving and solving them, which will
bring to a better performance and that is why the estimated results of Kepner Tregoe Method
for SAP BSCE will be provided.

4.2 Performance Evaluation Measures in SAP

Performance Management System described in the annual report of SAP for the year
2014 provides an overview for management measures implemented throughout SAP
corporations.
4.2.1 Financial Indicators used in SAP
(go.sap.com/integrated-reports) Measures used to
manage operating financial performance:
Cloud subscriptions and support revenues (non-IFRS)
Software and software-related services revenues (non-IFRS)
New and upsell bookings
Operating profit/margin (non-IFRS)
Measures used to manage non-operating financial performance:
Net financial income
Days' sales outstanding
Days' payables outstanding
Measures used to manage overall financial performance
Earnings per share
Effective tax rate
Operating, financing, investing and free cash flows

According to the integrated report chart of SAP for 2015, there was an improvement in
every financial indicator in the financial statement of the company. Below is shown some of
the most important indicators for the year of 2014 and 2015 respectively.
(go.sap.com/integrated-reports)

Table 5: Integrated financial report of SAP, 2015

Total revenue (in € millions) 2015 2014
Software and software-related service revenue (IFRS) 17 214 14 855
Software and software-related service revenue (non-IFRS) 17 226 14 874
Total revenue (IFRS) 20 793 17 560
Total revenue (non-IFRS) 20 805 17 580
Operating profit and profit before and after tax (in € millions) 2015 2014
Operating profit (IFRS) 4 252 4 331
Operating profit (non-IFRS) 6 348 5 638
Profit before tax 3 991 4 355
Profit after tax 3 056 3 280
Operating margin (as a percentage) 2015 2014
Operating margin (as a percentage, IFRS) 20,5 24,7
Operating margin (as a percentage, non-IFRS) 30,5 32,1
Return on equity (as a percentage) 2015 2014
Return on equity (profit after tax in percentage of average equity ) 14 18
Earnings per share and dividend (in €) 2015 2014
Earnings per share, basic 2,56 2,75
Dividend per share 1) 1,15 1,10
Dividend distributions in € millions 2015 2014
Total dividend distributed 1 378 1 315
Dividend distributions (in %) 2015 2014
Total dividend distributed (as a percentage of profit after tax) 45 40
Source: SAP website
 According to the CEO of SAP SE Bill McDermott , 2015 was a tremendous year for
SAP in every aspect of performance. The truthfulness of this statement shows the data above.
We can see that for every financial indicator an increase was achieved.
4.2.2 Non-Financial Indicators used in SAP

(go.sap.com) Measures used to manage

non-financial performance

Employee Engagement Index (in %) 2015 2014

SAP 81 79

According to SAP one percent change in Employee Engagement Index has almost $45
million impact on operating profit.

Customer Net Promoter Score (in %) 2015 2014

SAP 22.4 19.1

Customer net promoter score indicates customers’ willingness to promote SAP to

others.

Employee Turnover Rate (in %) 2015 2014

SAP 11.1 9

According to the integrated report chart of SAP for 2015, the employee total turnover
rate for all SAP SE was 11,1 %. Below is shown the rate for each region in 2015.

Total turnover rate (in %)

EMEA 7,6
Americas 14,1
APJ 13,8
SAP Group 11,1

Looking at this statistics, it seems that EMEA region is the best for the employee
turnover rate and is far ahead of other regions. As we know, SAP BSCE is also included in
EMEA region. So, does it mean that employee turnover rate is in a good position here as
well? Unfortunately, the answer is no. Actually, EMEA region has such a good employee
turnover rate result because it also involves the HQ in Waldorf, which has more than 10.000
employees. During an interview with Galina Wick who is in SAP for more than ten years and
works in HR team at Waldorf, I was informed that very few people there decide to leave SAP
or particularly HQ because of very good salaries, great working conditions, and learning and
growing opportunities. The only minus of Waldorf is that it is based in a small city where
almost all the population are SAP employees. For some people it might seem boring, but
Galina told that if you have a car, you can easily get to the nearest big cities in an hour. So, as
everything else is perfect, most of employees are very satisfied to work for SAP and never
think of leaving it.
Thus, mainly because of the influence of Waldorf EMEA has such a good rate. For
SAP BSCE the employee turnover rate is a real problem which needs to be solved.
Unfortunately, the disclosure of this rate is prohibited as it is confidential information,
however, with the help of interviews with employees, and from my own experience, it can be
concluded that something has to be done in order to reduce this rate in SAP BSCE.

Employee Retention Rate (in %) 2015 2014

SAP 91.8 93.5
And as for per region:
Employee retention (in %) 2015
EMEA 95
Americas 89,7
APJ 88,7
SAP Group 91,8

The same comments as mentioned above. The influence of Waldorf subsidiary is too
much, and therefore the rate for EMEA region which is very good ( 95%) does not illustrate
the real situation in SAP BSCE.
The importance of Employee Retention rate and its impact on operating profit of the
company is huge. According to SAP, one percentage change in the Retention Rate has 40-50
million euros impact for the Operating Profit of SAP. Furthermore, Meifert also mentions
about the connection between retention rate and revenue of a company. (Meifert 2005 ).
Moreover, Koys states that there is a negative impact on customer satisfaction rate if the
employee turnover rate increases.( Koys 2001). Last but not least, the Global Workforce
Study (2012) indicates that employees’ decision to stay with the company is mostly connected
with the salary and the career growth opportunity. Therefore, in order to have a better rate of
Employee Retention, companies should try to make it possible for their employees to have
career growth and be always motivated to achieve something better. In this case, they will
never leave the company.

Business Health Culture Index (in %) 2015 2014

SAP 75 72
 Another very important non-financial indicator for SAP is the Business Health Culture
Index (BHCI). According to McKinsey (2007), BHCI shows the willingness of employees to
adopt changes. This score illustrates employees’ understanding of leadership, their stress
level, empowerment, satisfaction, and life balance at the company. At SAP, they found out
that one percentage change of BHCI has an impact of around 70 million euros for the
operating profit of SAP. BHCI index is measured with the help of regular employee surveys.
This is a score for a general cultural condition in a company.

4.3 Analysis of Data

To get an insight look into SAP operations, the following questionnaire has been held
among SAP BSCE employees in order to get their opinion on the current state of performance
evaluation system employed in the subsidiary. Besides, I had qualitative semi-structured
interviews with different employees both from HQ and SAP BSCE subsidiary where I got
very useful responses, comments and suggestions regarding the current status of performance
evaluation of SAP SE and SAP BSCE which will be presented later in this chapter.
Before the questionnaire results, I will present the results of interviews respectively
with Veronika Markova and Ian Tollett. Based on these qualitative semi-structured, I got
fruitful information regarding some of the current challenges in SAP BSCE.
So, according to Veronika Markova, who works at SAP BSCE HR department as a head
of recruitment team, one of the problems is the high turnover rate of employees in SAP
BSCE. What is interesting, that for the whole SAP SE, the level of turnover rate of employees
is more or less favorable. It is just 11 percent (SAP annual report 2015). Actually, it is a
common thing that shared service centers have this kind of problems. The reason could be the
fact that usually SSCs hire a lot of new graduates, who are very ambitious, and it is highly
possible that they will leave for another job with better salary in one or two years. It’s a fact
that most of the employees at SAP BSCE are young, new graduate students who don’t have
work experience. They are very happy to start their career with SAP. But after working for
some time and getting an offer from other companies with better salaries they just move.
Another reason for leaving is that a lot of students in the Czech Republic are from abroad. So,
after studying and working for some time in CZ, they decide to go back to their home country
as they miss their family friends and the country. As a result, managers of SAP BSCE have to
find new employees periodically and train them (at least three months) in order to fill the open
positions. This process is costly and time-consuming. Moreover, as the newly hires are not
experienced, their productivity is too low. Sometimes, they can make mistakes or cause
delays which bring to another problem – dissatisfied customers and employees. So, it is really
a big challenge for the subsidiary which needs to be solved.
The next interview that I held was with Ian Tollett who works at SAP BSCE Quality
Management Team. According to him, another challenge is the service quality improvement
to the company and customers. The evaluation is mostly done with the help of internal
surveys. And this is done by HR team. In the case of Finance and Administration, the
evaluation becomes more challenging as both internal and external customers should be taken
into account. Internal customers are employees of SAP subsidiaries in EMEA region. Their
evaluation is based on certain KPIs such as rework rate which shows the percentage amount
of canceled invoices by customers because of mistakes caused by SAP employees. On the
other hand, the evaluation for external customers is done with the help of special
questionnaires. Unfortunately, the response rate is sometimes too low. Furthermore,
customers are willing to give feedback only when they have some problems or complaints. As
a result, the good service is ignored.
Trying to solve the problems related to service quality, SAP BSCE launched a new
team called Quality Management Team. The employees of QM team have many tasks. One of
them is being a connecting object between subsidiaries in EMEA region and SAP BSCE, also
between various departments in SAP BSCE. As a result, the different processes will be
managed faster and easier. In order to solve the problem related to missing face-to-face
contacts between employees in SAP BSCE and EMEA region, the managers should organize
much more meetings between them by e.g. Skype Lync which is cheap in cost but could be
very effective. Moreover, business travelling quantity should be increased as well which is in
the range of 0-10% now for Finance Operations Associates. It means that, for example an
employee working for a Greece company code could happen that he or she has never met the
local colleagues. Therefore, the trust and connection is not on the satisfied level.
Another task is controlling and monitoring the quality of the service and find solutions
how to improve it. It is QM team that every month makes the quality service KPIs table where
is shown the rework rate KPIs in percentages for each company codes. The figure below
shows how it looks like. It’s very simple and easy to understand. For example, company code
0001 is for Germany. We can see that employees of SAP BSCE, working under the
management of Jana Sidorova in the Finance Operations Team, while supporting the internal
and external customers in Germany did a pretty good job, as the target was <6 %, but they
managed to have 2.1% for the whole 2015 year and 4% for the December 2015.

Figure 11: Rework Rate KPI data example

Source: SAP BSCE Management

In addition, QM employees also periodically organize meetings with different teams in

SAP BSCE and analyze with them their performance stats in order to understand how further
improvements could be achieved.
 So, based on these above mentioned two interviews it is clear that there are already
two problems that should be analyzed and solutions to them should be suggested by
implementing KT method. Before coming to this, let’s also look at the analyzes and results of
the questionnaire.
Initially, 30 emails were sent to the employees of SAP BSCE asking them to take part
in the survey. But, only 15 answers have been received.
So, the reply rate is 50% which shows that the results of the survey can be counted on
and they are productive and useful. The employees who have taken part in the questionnaire
are Finance Operations Associates and two Finance Operations Managers.
Participants have been asked to answer three questions through Likert scale and one
open format question. The questions and results are presented below.

Figure 12: Survey results for question A (Do you think that KPI is enough to measure efficiency of BSCE subsidiary?)

Source: Author

The suggested answers have been presented in the form of the Likert scale where 1
was “Strongly disagree”, 2 - “Disagree”, 3- “Not decided”, 4 - “Agree”, 5 - “Strongly Agree”
which are shown as the horizontal scale. The vertical scale defines the number of answers for
each of the options.
Figure 13: Survey results for question B (Does KPI help SAP to achieve its objectives set for BSCE subsidiary?)

Source: Author
The suggested answers have been presented in the form of the Likert scale where 1
was “Strongly disagree”, 2 - “Disagree”, 3- “Not decided”, 4 - “Agree”, 5 - “Strongly Agree”
which are shown as the horizontal scale. The vertical scale defines the number of answers for
each of the options.
Figure 14: Survey results for question C (In your opinion, is KPI an effective performance evaluation tool for SAP?)

Source: Author
 The suggested answers have been presented in the form of the Likert scale where 1
was “Strongly disagree”, 2 - “Disagree”, 3- “Not decided”, 4 - “Agree”, 5 - “Strongly Agree”
which are shown as the horizontal scale. The vertical scale defines the number of answers for
each of the options.

Figure 15: Survey results for question D (What financial and non-financial indicators would you consider adding to
current performance indicators? )

Source: Author

As can be seen, the majority of employees disagree with the fact that only KPI is
efficient enough to measure the efficiency of SAP BSCE. However, most of them agree or do
not have denial of the fact that KPI is useful for SAP as a tool for the achievement of
objectives of BSCE subsidiary. The same result has been achieved for question number three,
defining whether or not KPI is an effective performance evaluation tool for SAP.
As for financial and non-financial indicators that might be considered as an addition to
current performance indicators, even though 8 of employees stated that no additions are
required, four answers have stated that Reputation needs to be measured, and three of them
would like to have Service Quality added.
Below are listed the additional comments made by several employees, which provide
more clear vision of what SAP BSCE lacks.
Hola Pavlina - Finance Operations Associate - Consulting
"I think that KPI's are not that bad measure, but in the case of our department, it is not pretty
useful because it supposed to be the indicator of our rework rate, but don't consider the
mistakes, which are not done by us but e.g. on local side."
Monika Dudasova - Finance Operations Associate - 5 years in SAP
"It is very difficult to measure the KPI performance because there are many unmeasurable
influences."
Sergey Davidyan - Finance Operations Manager - Order to invoice - 3 years in SAP
"Basically, I think that KPI's are not enough and do not give 100% performance feedback. As
current KPI' does not count with cancellations and that are actually our fault ( e.g. your local
colleague provides with incorrect info regarding the price rates and you invoice it wrong)
KPI does not count this situation and many more. KPI takes cancellations and credits as one
piece and does not divide between "my fault" and fault of someone else – therefore, KPI is not
a 100% measurer."
Anonymous Employee
"There should be a clear indicator if the rework is caused by a mistake (BSCE) or customer
decision, till this time the KPI could not be objective."
As can be seen, the employees of SAP BSCE consider KPI measure useful for overall
corporation performance estimation but not quite suitable for effective performance
management in SAP BSCE . The major issue is that KPI method does not provide 100%
feedback on performance and does not divide the performance of an individual from the
performance of a group. That is the reason for the clear need of an additional performance
method implementation. Since Kepner Tregoe method provides deep and detailed analysis of
the problem, it can be suggested for better definition of KPIs.

4.4 Performance Measured By KPI

KPI has been reported to be most effective in the measurement of financial
indicators. According to the survey results, most of the complaints have gone towards non-
financial factors that could not been measured through KPIs and required more detailed
analysis.
KPIs implemented throughout all SAP subsidiaries are divided into several groups:
(help.sap.com)
● Quality/service
● Production control
● Supply chain flexibility
● Inventory control
● Supplier performance
● Human resources
According to the results based on my interview with Heiko Knocke ( Head of GFSS)
and based on theoretical analysis, it can be suggested that KPI method is enough for
100% evaluation of following areas: supply chain flexibility, inventory control and
production control.
As for HR, supplier performance and quality/service control, KPIs need to either be
improved or strengthened by KT methodology. In HR, the success factor approach has proved
to be useful as well.
The reason for this differentiation is that the financial rates do not have human factor
affection involved and that is why they can be presented in the form of KPIs. In the case of
SAP BSCE KPIs are considered useful for the Finance and Administration department of the
subsidiary, but for the HR unit and non-financial indicators adjustments need to be involved.

4.5 Performance Measured By Kepner Tregoe Method

It is essential to measure and monitor the performance of business, however, having a
focus on the wrong key performance indicator on your business is detrimental. Poorly
structure KPIs are costly to obtain, difficult and also monitoring on a regular basis. The
choice of KPIs needs to align with the main goals and objectives of the business, be
attainable, and keep everyone on same pace and direction. The SAP BSCE uses the KPI
method as its performance evaluation criteria. In measuring the company performance, the
company focuses on measurement of certain factors that indicate success or the performance
status of the corporation. (Problem Solving & Decision Making - Kepner-Tregoe, 2016)
The table below shows the list of current measures managed by SAP BSCE and the
ones that can be added. The table was based on the questionnaire completed by 15 employees
of SAP BSCE. The KPIs in the table have been chosen based on the responses.

Table 6: Kepner Tregoe Decision Making Analysis for SAP BSCE

Weighted Score or Potential
Category Weight/Importance Criterion Rating
Score
Rework Rate 3 3 9
Service Quality 2 3 6
Reputation 3 3 9
Employee Turnover R. 1 3 3
Sales and Profit 1 3 3
Capacity Utilization 0 3 0
Market Access 0 3 0
Source: Author

Weighting: 3=Critical, 2=Very important, 1=Important, 0=Not important

Rating: 3=Excellent, 2=Good, Reasonable, 1=Little, Few, Fair, 0= Unacceptable, Poor

The table above has been created in accordance with KT decision-making analysis
template. As can be seen, it is based on existing data on SAP BSCE KPIs and the results on
the questionnaire. KT decision-making table has been prepared as following:
Weight or Importance is also can be viewed as a Satisfaction Score. Weights are
assigned by decision makers (www.is.muni.cz). So, I assigned these weight scores based on
the results of the questionnaire and interviews.
Criterion Rating illustrates the importance of the criteria in the global market. In our
case, all the above mentioned KPIs are considered to be very important for organizations,
therefore, their score is 3 (excellent).
Thus, Potential Score is obtained by multiplying weighting by the maximum rating of 3.
The results show that Rework Rate, Reputation and Service Quality have the highest potential
score at SAP BSCE, hence, solutions should be primarily found for these KPIs.
 Employee turnover rate is an important part of HR. However, there were no issues
connected to this indicator which arose during the interview. Nevertheless, the KT analysis
framework will be prepared for this performance indicator as well, since one of the research
questions is related to this KPI as well. Moreover, the interview with Veronika Markova
showed that currently this KPI can be considered as a problem for SAP BSCE. As for sales
and profit measurement, it has not been mentioned as a priority indicator.
So, the performance measurement by KT is advised to be done as following:

Rework Rate
Analysis
Weight 3 Potential Score 9 (taken from the table above)
What?
The problem:
Current rework indicator counts both mistakes of SAP BSCE employees and local
mistakes (mistakes caused by employees from other subsidiaries). So, one KPI includes
mistakes of different subsidiaries. For example, during the interview with me, Monika
Dudasova who is working at Order-to-invoice team and her company code is 0256 – Turkey,
complained that because of several local mistakes caused by her Turkish colleagues, their
team’s KPIs were low for 2015, and she did not get the whole bonus for that year. However, it
was not her fault at all. So, the problem can be defined as:
Current rework indicator does not count the mistakes which are not done by employees
separately from local mistakes.
The problem has been defined as “critical” by SAP BSCE employees and its potential score
is at the highest point of 9 which means that the problem requires immediate solution.
Where?
This problem does occur in SAP BSCE, it is essential to find out whether other
subsidiaries face the same problem with this indicator.
According to monthly KPI reports, rework rate in SAP BSCE is sufficient. It is in the
range of +4% to +6% depending on the country codes. And this result is much better than, for
example, the Singapore subsidiary which works for APJ region. Their numbers are in the
range of -8% to +2%. It means that the rework rate is actually not such a big problem for SAP
BSCE compared with Singapore subsidiary. And the HQ managers are very happy to see
those KPI results for SAP BSCE. However, the problem is that the employees and managers
of BSCE themselves are not satisfied with this evaluation system as because of mistakes made
by the local (employees working in other branches in EMEA region) employees, they
sometimes get low KPIs and therefore low bonuses or even no bonuses in the end of the year.
It can be explained by the fact that this subsidiary is operating in 43 countries within EMEA
region in both financial and HR tasks which gives more room for possible mistakes. However,
SAP BSCE employees cannot control all the processes and correct all mistakes hence it is
important to differentiate employee caused mistakes from local errors (mistakes done by local
employees working in other subsidiaries) in this particular subsidiary. Therefore, for BSCE
people, rework rate is a critical problem as we could see from the surveys and interviews and
needs to be solved.
When?
Has this problem been noticed from the introduction of this KPI or did it emerge with the
growth of employee turnover rate or increase in the number of employees or clients?
The problem has got to the critical level over years, as the BSCE subsidiary has been
established in 2005 and throughout over 10 year period its operations have expanded and
required more human resources to handle the operations. Hence, the problem has switched
from “very important” to “critical” over last two years, as suggested by the management of
the subsidiary.
Extent magnitude:
Does the problem extend throughout the subsidiary or is it localized in one unit?
The problem has been reported both in non-financial and financial departments of SAP
BSCE.

Solution
The most favorable solution for incorrect rework rate calculation is to introduce employees
and their supervisors to a new reporting system, where every mistake will be defined either as
local one or employee caused one. After that, two rework rates will be used in performance
measurement: one for local mistakes and one for employee caused.
The numbers in the table are my estimations based on the result of experts‟ assessment.

Table 7: KT method for the solution of rework rate problem

Criteria/Want objectives Criteria Weight Rating Potential Score
Rise in level of employee motivation 1 3 3
Reduced number of employee caused
3 3 9
mistakes
Reduced time and money cost of training 1 3 3
Switch to new reporting system 2 3 6
Source: Author

Weightning: 3 - critical, 2 - very important, 1 - important, 0 - not

important Potential score calculated the same way as in the KT table.
The table above shows four criteria/want objectives. The achievement of each of these
criteria is definitely beneficial for the improvement of the rework rate because they are
connected with that KPI.
The rise in employee motivation got weighting score of 1, since the employees of SAP
BSCE are professionals dedicated to their work and change in rework rate does not
necessarily affect their work dedication.
Reduced number of employee caused mistakes can be achieved since employees will be
more cautious in order to have better rework rate in employees side compared to common
mistakes one. It has got the score of 3 since the reduced number of mistakes is beneficiary for
the company.
The time and money costs for a company of size of SAP are important, but not critical.
Finally, switching to new reporting system might cause misunderstandings and delays in
company’s operations. Hence, it is very important side effect to consider.
As a result, the primary attention should be paid to trying to reduce the number mistakes
caused by employees. This is a simple example of implementing KT troubleshooting and
decision-making tool in a company which gives us a more detailed picture of the problem and
ways how to solve it.
To conclude, the current method of measuring the rework rate does not indicate the
number of errors done by the employees separately from the local mistakes. The problem
does not only occur at SAP BSCE but also at other subsidiaries thus the recording on the
headquarters will not reflect the performance of the subsidiaries. The KT method will
improve the measure of the rework rate by including the values from other subsidiaries and
also the wider period. The analysis and comparison of the rework rates at SAP BSCE and
other subsidiaries varies widely. The employees and supervisors will be introduced to a new
reporting system which will record all mistakes made and then used to measure the
performance for local mistakes and another for employees.

Cost Estimations:
As for new reporting system implementation, the cost of services for all SAP divisions has
been 3 million EUR (according to SAP Annual Report 2015). So, the new reporting system
cost can be estimated as something ranging from 20 EUR to 40 EUR per employee (3 million
divided by the total number of employees), and the implementation cost of something around
2000 to 10 000 EUR based on market prices, and also annual training costs, which will almost
cost nothing as the training can be done by Quality Management team employees once in
three months. This is relatively cheap, taking into account that switching to a new reporting
system usually costs around $245.000 for MNCs going by the current rates in the market
(Gupta et al., 2012).

Service Quality
Analysis
Weight 2 Potential Score 6
What?
The problem: SAP BSCE lacks the performance evaluation on service quality of the
employees to the company and customers, and employees would like to have this unit to be
monitored more precisely.
Where?
This problem does occur in SAP BSCE, it is essential to find out whether other
departments face the same problem with this indicator. If any subsidiary does not face the
problem, find out why.
Since SAP BSCE is the one concentrating on finance and HR departments, service quality is
not controlled there as precisely as it is in other subsidiaries and headquarters.
When?
Has the need for service quality developed recently due to lower rates of service
satisfaction among customers or have the sales levels dropped?
The need for service quality improvement has become more clear after 2012 crisis which
revealed problems connected to quality measurement.
Extent magnitude:
Does the problem extend throughout the subsidiary or is it localized in one unit (HR,
Finance or Administration)?
The problem has been most reported from HR department.

Solution:
The provided HR services need to be improved. The main problem reported is not
precise quality monitoring and hence it is suggested that additional quality monitoring system
is implemented in HR department of SAP BSCE subsidiary. The system will include
reporting system from employees side on which managers will consider necessary
improvements.
On service quality of the employees to the company and customers, there is need to
compare the expectations and the actual performance of each employee. Using the KT
method, I will measure the expected performance and the actual performance of each
employee in SAP BSCE. I will clarify the problem through situation analysis, then conduct
actual analysis so as to find the actual cause of the problem. Next, I will use the decision-
making criteria to make the choices that will help me to arrive at the potential problem
resolutions. Feedback from customers regarding responsiveness, tangibility, and reliability
during service delivery will be stored in a system after which I will use to measure the level of
service quality.
Unfortunately, because of limited information access and the security policy of SAP, I
am not able to make such a deep investigation of this KPI now. Therefore, I can only do the
first steps of the analysis by implementing KT method and try to find the ways how to
improve Service Quality KPI.
The numbers in the table are my estimations based on the result of experts‟ assessment.
Table 8: KT method for the solution of service quality problem
Criteria Potential
Criteria/Want objectives Rating
Weight Score
Additional working hours for personnel responsible for
1 3 3
service quality
Sufficient time and money spending on new system’s
1 3 3
implementation
Improved quality monitoring 3 3 9
Increased level of job satisfaction among employees →high
2 3 6
retention rate
Source: Author

Weightning: 3 - critical, 2 - very important, 1 - important, 0 - not

important Potential score calculated the same way as in the KT table.

Again, the table above shows four criteria/want objectives. The achievement of each of
these criteria is definitely beneficial for the improvement of the service quality to the
company and customers because these objectives are connected with that KPI.
Additional working hours for personnel responsible for service quality got weighting score
of 1, since SAP can allow spending on improvement and hiring extra personnel if required,
the same is for time and money spending.
Since the level of job satisfaction is connected to employee retention, it makes this criteria
very important.
Based on the results, improved quality monitoring is the only criteria that is considered
“critical” and has the biggest potential score. Therefore, the management of SAP BSCE is
suggested to start the improvement of Service Quality to the company and customers by
primarily focusing on by implementing additional quality monitoring system.
Cost estimations:
The estimated cost of implementing the system is about 5.000 EUR based on the cost of
system design and training of users going by the current charges in the market (Enterprise
Solutions, IT Service Provider, Business Intelligence, Business Analytics Services, 2016).
Satisfaction of customers will increase customer base and thus more sales will be generated.

Reputation
Analysis
Weight 3 Potential Score 9
What?
The problem: SAP BSCE lacks the performance evaluation on reputation and employees
would like to have more data available on subsidiary’s reputation compared to other
departments.
 Where?
Waldorf Headquarters sets standards of reputation for the whole subsidiary chain, however,
BSCE represents FA and HR for whole EMEA region and hence needs to have competitive
reputation in those areas.
When?
Did new competitors enter the market so that SAP needs to stand up for its reputation or
has reputation of BSCE particularly been damaged?
The reputation for all SAP units needs to be strengthened as due to tough economic
situation customers are searching for cheaper competitor options.
Extent magnitude:
Have other subsidiaries reported the need for more precise data on reputation indicator as
well?
Yes, this indicator has been reported by the majority of SAP subsidiaries.

Solution:
Increase brand power by extra marketing and advertising spending in order to earn
customer loyalty and strengthen reputation.
The numbers in the table are my estimations based on the result of experts‟ assessment.

Table 9: KT method for the solution of reputation problem

Criteria/Want
Weightning Rating Potential Score
objectives
Increased Marketing
1 3 3
Costs
Improvement in
3 3 9
reputation
Stronger Brand Image 2 3 6
Source: Author

Weighting: 3 - critical, 2 - very important, 1 - important, 0 - not

important Potential score calculated the same way as in the KT table.
Based on the results of the table above, it can be seen that the improvement in reputation is
a critical criteria, and needs to be achieved. However, as these want objectives are strongly
mutually inclusive, in order to attain improved reputation, SAP BSCE should firstly increase
its marketing costs which will lead to having stronger brand image, and eventually, the
reputation of the subsidiary will be improved. Even though the marketing spending will
increase, SAP is able to take this risk since the need for reputation improvement is clear. And
empowerment of brand image is essential in face of rising competitors’ threat.

Cost Estimations:
According to SAP Annual Report 2015 official data, SAP total revenue was 20,793 million
EUR out of which 5,401 million EUR was from sales and marketing. On the other hand, the
average marketing cost percentage for the company is 7-8% of revenue (Burns, 2005), and as
can be seen, the 5,401 mln EUR of total revenue of 20,793 mln EUR is 3.8 %. So, SAP can
increase it to somewhat around 7 to 9 mln EUR. However, this is my cost estimations for the
whole SAP SE not for the subsidiary in Prague. The revenue of that subsidiary is not
published and is confidential. Therefore, I could not get any cost estimations for a specific
subsidiary case.
To conclude, the reputation of the SAP BSCE is not badly off, but it could require some
improvement using the KT method. A higher and good reputation will establish and increase
a loyal customer base. As a result, the SAP BSCE will gain a bigger market share, be more
competitive with additional benefits of customers being willing to pay at higher prices, and
good performance in the stock market.

Employee
retention
Analysis
Weight 1 Potential Score 3
Employee turnover is an effective criterion for measuring performance in various ways. In
this company, the involuntary and voluntary rates of turnover will be used to determine
employee and employer performance. When there is high voluntary turnover, it signals poor
working environment that fails to motivate and engage contingent workers effectively, and
the wages are below the market values. The employee retention rate is the ability of the
company or employer to retain employees for longer.
o What?
The problem: SAP BSCE faces a low retention rate, which means that more employees are
choosing to leave the company.
Where?
Has retention rate fallen through all subsidiaries or is this a problem for BSCE unit
specifically?
Compared with HQ employees, BSCE employees’ retention rate is quite low. They leave
for other subsidiaries or mainly to HQ in Waldorf. The main cause why they leave is low
salaries compared with other countries. For example, in Waldorf, they can get almost 2.5
times more salaries than in Prague. Hence, it is real problem for Prague BSCE managers to
keep experienced workers there. And they have to waste a lot of time, efforts and money
while training new hires very often.
When?
Has the rate fallen dramatically over last period of time or has it been lowering throughout
several years?
Change in numbers has been noticed in SAP BSCE in the last year according to its annual
reports.
Extent magnitude:
Did the rate fall among female or male employees or is it equal for both genders? Is there
any age differentiation among those who left or are they coming from approximately same
age group? If the majority of those who left were from the same group, what factors might
have affected it: changes in salary, training or corporate governance policy?
 The fall rate is equal for both genders. However, it should be noticed that 84% of
employees in SAP BSCE are female. Usually, people who stay longer than 3 years, become
loyal and decide to continue working in Prague. On the other hand, according to statistics,
employees with experience from 1 year to 3 years are the ones who leave BSCE subsidiary
most often.
As mentioned above, the salary is a big cause. However, another huge problem is
related to the fact that employees don’t feel that they can have a career growth by staying in
SAP BSCE, as it is very rare to see people who were able to get better positions in 1 or 2
years.
The financial factors are already successfully using KPI, and consequently, there have
been no particular complaints on those issues, and since financial data could not be received, I
could not be able to analyze or predict the results of KT implementation.
In order to improve the employee turnover rate in SAP BSCE, another suggestion
could be the improvement of talent management in the subsidiary. It means having much
more training for the progress of employees’ skills and knowledge. As a result, the best
employees would be easier to be identified and moved to better positions. The cause of high
turnover rate is not only low salaries, but it is mostly the feeling that no real career growth
opportunities are possible in SAP BSCE. This is because there are a lot of examples at Prague
subsidiary when you can see an employee working 5 to 8 years for SAP on the same position.
Hence, rotation is needed. It will bring more motivation and interest to employees. This
rotation should be done regularly not only between the departments in Prague subsidiary but
also through different regions such as moving employees to Waldorf, Singapore and many
other locations.
The financial factors are already successfully using this KPI, and consequently, there
have been no particular complaints on those issues, and since financial data could not be
received, I could not be able to analyze or predict the results of KT implementation.
In conclusion, the use of the method of key performance indicator can help the SAP
BSCE attain its major goals and objectives. However, in the analysis of the corporations’
performance, I realized that the method is not very effective as it does not reflect the actual
degree of performance of its subsidiaries. To ensure the effectiveness of the method, I
recommend the KPI method to be improved with the use of Kepner Tregoe method which
will be a useful addition to the process of identifying problems, choosing objectives, making
decisions and in the end- improving the performance of the company. KT method is
suggested to be implemented on a regular basis because it is very essential to find the
problems in their early stages in order to be able to find solutions much easier. In the case of
SAP BSCE, to achieve the better performance it is suggested to use the KT method that will
focus on the criteria including rework rate, service quality, and the reputation.
As we can see, all these problems could be solved. With the help of KT methodology,
and the solutions suggested above, the managers of SAP BSCE can get rid of the problems
(except the employee retention rate) which will lead to having more motivated and loyal
employees. Hence, the SAP BSCE will be improved more and will be able to have even better
results that they had in 2015.
4.6 Results Compared and Analyzed
In order to compare and analyze the results, it is important to summarize the findings
from previous sections and provide analysis based on that.
4.6.1 The results for KPI
KPI is implemented throughout SAP SE and has proved to be an effective evaluation
tool for the majority of branches, especially for the financial ratios. In SAP BSCE
subsidiary case the results have differed for two of its main departments: Finance and
Administration and Human Resources. While employees did not have any improvement
suggestions or complaints on KPI usage in financial ratios calculations, the majority of them
have concluded that KPI is not the efficient tool for measurement of the performance in
BSCE subsidiary, even though most of them approved it efficiency for whole SAP SE.
Hence, the need for implementation of additional problem solving and performance
measurement tool has been derived.
4.6.2 The results for Kepner-Tregoe Method
Kepner-Tregoe method has been introduced as the possible solution for improvement of
the performance evaluation system since this tool allows its users to get a detailed and
specific analysis of the issue, which is the major weakness when using KPIs.
If implemented in SAP BSCE, KT method is expected to prove improvements in following
performance areas: rework rate, service quality, reputation and employee retention rate.
Moreover, according to statistics implementation of KT has proved to be extremely useful in
improvement the rates of customer satisfaction, fixed-time-fix rate, to reduce mean-time-to-
resolution and backlog. (kepner-tregoe.com)
KT method will be a valuable addition for the majority of non-financial indicators
measured in SAP BSCE. I definitely suggest for SAP BSCE to use KT method in order to
identify problems in a more effective way, investigate the cause and effect relationships, find
solutions to those problems and improve the overall performance evaluation system. KT
method can be implemented on a regular basis.
4.6.3 Analysis of the results
When analyzing whether KT will be a useful addition to KPI it can be seen that the tools
are aimed towards different targets. KPI is used in financial field, it is simple, effective, not
time-consuming, but lacks deep analysis. KT methodology is not so useful in financial area,
however, it is required for improvement of the areas where human factor affects the
performance and where detailed analysis of the issue is required in order to implement the
correct methodology or find the right solution to the problem.
That is why even though KPI is successful throughout SAP, the SAP BSCE subsidiary is an
exception since it combines areas where both KT and KPI need to be implemented in order to
achieve the most realistic performance evaluation results.
 5. Suggestions and Recommendations

5.1 Recommendations to Improve Performance Evaluation Process

1) Suggestions for problems identified – additional performance measures
SAP BSCE is recommended to add more responsibilities to the current Quality
Management team. They should not only review all KPIs used in the subsidiary but also
should add to those KPIs the ones that have been proposed in the practical part of the thesis,
namely Service Quality and Reputation and define which factors need additional analysis in
the form of KT method. After the factors have been defined, it’s needed to conduct the
problem analysis using the KT framework developed in the thesis and implement it. KT
method is suggested to use to identify problems on a regular basis. So, it is essential to make
surveys through employees from time to time and identify problems, find the factors that the
employees are not satisfied, analyze cause-and-effect relationships. These should be done by
KT Problem Analysis technique. It means that after getting the results of the survey, Quality
Management team is firstly supposed to identify what is problem and what is not. Answer
the question: What difference between is and is not? And what is the possible cause? Then
comes the question where (location): Where is problem found and where is not? - What
difference in location? Third question is when (timing): When does problem occur and not
occur? - What difference in timing? And the last thing is identifying the extent (magnitude):
How far does problem extend? How localized is problem? Or how many units are (not)
affected? - What is the distinction? For all these cases the cause also should be identified by
answering the question: What is the possible cause? So, this procedure should frequently be
repeated to identify more problems.
The survey and semi-structured interviews with my colleagues showed that the main
problems at SAP BSCE are Service Quality, Rework Rate, Reputation and Employee
Turnover Rate.
Successful implementation of KT will allow SAP BSCE to boost employee's loyalty as they
will feel their opinion appreciated, improve performance evaluation system of subsidiary and
receive more clear and specific data in areas as the rework rate.

2) Suggestion for KT method implementation for future problems

Implementation of KT method will allow SAP BSCE to solve any future problems
occurred more quickly as the management team will have a ready template for identifying
problems in their very early stages for both financial and non-financial indicators.
However, it has been proven that financial indicators do not need to be monitored as
specifically as non-financial ones and hence if problems occur connected to human resources
department, SAP BSCE will have effective solution in the form of KT and KPI for financial
department.
So, the suggestion to improve performance evaluation process has the following steps:
1) Introduce KT decision-making method for non-financial indicators of SAP BSCE.
2) In order to solve the problem related to reputation, it is needed to increase the brand power by
extra marketing and advertising spending. In that case, SAP will be more popular, specifically
 in the Czech Republic, and this will lead to better customer loyalty and strengthen reputation.
It is suggested to increase marketing costs to match 7-8% of the total revenue to improve
reputation.
3) Additional quality monitoring system needs to be implemented in order to reach better service
quality to the company and customers. The system will include reporting system from
employees side on which managers will consider necessary improvements. By implementing
the KT method, I will measure the expected performance and the actual performance of each
employee in SAP BSCE. This will give me an opportunity to identify the problem. Then, the
problem will be clarified through situation analysis and actual analysis where the actual cause
of the problem will be determined. Next step is using decision-making criteria to make the
choices in order to reach the potential problem resolutions. For measuring the service quality, I
will use the stored feedback from customers regarding responsiveness, tangibility, and
reliability during service delivery. The estimated cost of implementing the system is about
5.000 EUR based on the cost of system design and training of users going on the current
charges in the market.
4) In order to raise employees’ contribution and achieve better rework rate, which indicates the
percentage amount of mistakes done by employees that leads to cancellation of invoices
created, SAP BSCE needs to introduce new reporting system. It will help managers and
employees to get more precise view on inside operations on the company and find new ways
of improvement. Reporting needs to include the self-evaluation of employees and suggestions
for overall subsidiary improvement. To achieve this, it is suggested that in the new reporting
system every mistake is defined either as local one (mistakes caused by employees from other
subsidiaries) or employee caused one. Hence, two rework rates will be used while measuring
the performance of the teams: one for local mistakes and one for employee caused. The benefit
of it will be less dissatisfied, happy and motivated employees who usually lose their bonuses
because of mistakes caused by employees from other subsidiaries which lead to cancellation of
the created invoices. The suggested KT method will improve the measure of the rework rate by
including the values from other subsidiaries and also the wider period. Furthermore, the
implementation of KT method will be very useful for identifying the future problems related to
rework rate, investigating cause-and-effect relationships and improving the problems with the
help of answering to questions what, where, when and to what extent. The estimated cost of
implementing the system is about 3.000 EUR based on the cost of system design and training
of users going by the current charges in the market. It’s relatively cheap compared to market
prices taking into account the fact that SAP is a business software company and has its own
ERP system, so making such kind of a system is not a big issue for SAP IT specialists.
5) The last problem that I found during my research with the help of a semi-structured
interview with HR representative Veronika Markova is employee turnover rate. The fact that
this KPI is not a problem for the whole SAP SE, as we could see from the annual report 2015,
and also according to Galina Wick who works at HQ, might be one of the reasons why the
CEO and other high-level managers are not very concerned with solving this high turnover rate
level problem at SAP BSCE. However, in order to improve the performance of this subsidiary,
I think it is essential to find some solution to this problem. Firstly, it is suggested to improve
the talent management in the SAP BSCE by organizing much more training, workshops to
improve the skills and knowledge of employees. This will give the opportunity to easier
identify the best employees and move them to better positions. Moreover, managers should try
to create the right environment that will cause the employees to make the decision to stay with
the organization. Only when they truly engaged with their job, great individual results will be
delivered and high levels of performance achieved. Therefore, it should be a priority for
managers to understand the factors that will influence each division to perform and stay. The
best way to find out this information is to ask, talk with the employee, learn what will motivate
him or her. A lot of skilled employees leave SAP BSCE not only because of low salaries
compared to HQ or other subsidiaries based in developed countries but also because of limited
career growth opportunities. So, rotations are definitely suggested to implement on a regular
basis and not only between the departments in SAP BSCE, but also through different
subsidiaries worldwide. Implementation of KT method will not have a big impact on solving
the employee retention rate problem, however, it still can be useful in identifying problems and
causes related to this KPI.
When implementing KT method, it is important that employees go through training on
how to report with this method to avoid misunderstandings and difference performance
results.
 Conclusion
In order to evaluate the value of presented work, the initial research questions will be
presented and analyzed, whether they were answered or not.
First of all, the results for each of sub-questions:
RQ1: What are the weak-points of current performance evaluation measures in SAP BSCE
in Prague?
The willingness of some of my colleagues of SAP BSCE and HQ to participate in the
qualitative semi-structured interviews and answering questions of my survey was a real help
for my research in finding the weak-points of the performance evaluation measure used in
SAP BSCE and therefore the problems that need to be solved or improved. With the help of
the questionnaire answers that I got and analyzed, I found out that the KPI method that is
currently being used as a performance evaluation method in SAP is not very effective in the
fields of such KPIs as Rework Rate, Service Quality and Reputation. Furthermore, the results
based on the interviews showed that Employee Retention Rate is not a problem for SAP SE,
but a big problem one for SAP BSCE and it is another weak-point for the subsidiary which
needs to be developed.
RQ2: How can be the current performance evaluation system improved?
After finding out the weak-points of the current performance evaluation method and the
consequences, it’s needed to implement something new that could improve the evaluation
process. In order to improve current performance evaluation system, Kepner Tregoe
troubleshooting and decision-making method is suggested to be used on a regular basis. The
practical part shows that KT method is very useful in identifying problems and finding the
best solution for them. In the analysis chapter, it is shown how currently problematic KPIs in
SAP BSCE such as Service Quality, Reputation and Rework Rate can be improved with this
troubleshooting method with the help of famous KT questions “ what, when, where, to which
extent” that help identify problems and analyze cause-and-effect relationships. Firstly, it
gathers, prioritizes and evaluates the information. Then it establishes and classifies objectives
into “must” and “want” objectives. Here, weights or criterion ratings are assigned respective
weight scores, where the highest score indicates the most important “want” objective. After,
the alternatives should be generated and evaluated by scoring the “wants” against the main
objective. In the end, the negative consequences should be reviewed and the best possible
choice of “what to do” should be made.
Additionally, this research question also covers the research on employee turnover rate
KPI which is currently a problem for Prague subsidiary and the improvement of this rate can
be a huge boost for the level of the current evaluation system. The analysis showed that
employee turnover rate cannot be significantly improved by KT method, however, it can be
effective in analyzing the causes of high turnover rate and finding the ways of improvement.
For SAP BSCE implementation of such method is essential. KT method is suggested to be the
best solution for identification of non-financial problems and the improvement of KPIs, also
the success factor rate has proved to be effective for HR department. KT is needed to be
implemented for non-financial indicators as an enhancement of KPIs, while KPI is effective
for financial ones and does not require improvements.
Answers for these sub-questions lead to the solution for the main research question of the
report:
RQ: Does the KPI method employed by SAP BSCE in Prague portrays the actual degree of
performance in the subsidiaries?
After analysis of different data and conduction of own research among SAP BSCE
employees, it can be concluded that KPI method does not portrait the actual degree of
performance in this particular subsidiary. While Finance and Administration department did
not have particular issues connected to KPI, the rework rate, service quality and reputation
were the areas where usage of KPI has been considered insufficient since it did not take the
human factor into consideration and could not differentiate own mistakes of employees from
those coming from outside, which has been affecting performance results and employees
motivation.
However, it is believed that if SAP BSCE employs KT method for those indicators that
have responded low level of results satisfaction, coordination of KPI and KT might be a real
improvement for the SAP BSCE and SAP HQ in the future. The implementation of KT
method is cheap, it does not take much time. I strongly recommend using it in other
subsidiaries as well, because it is really easy to implement.
The thesis answered all research questions which have been set for it, does include actual
practical research and will be useful for SAP BSCE subsidiary management team and for
those who are making research on performance evaluation systems, especially focusing on
Key Performance Indicator and Kepner Tregoe methods.
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 List of the Abbreviations
AG - Aktiengesellschaft (a corporation limited by share ownership)
APJ - Asia Pacific Japan region
BHCI - Business Health Culture Index
BSCE - Business Service Center Europe
CEO - Chief Executive Officer
CFO - Chief Financial Officer
CFROI - Cash Flow Return on Investment
DPS - Dividend per share
EBIT - Earnings before interest and taxes
EBITDA - Earnings before interest, taxes, depreciation, and amortization
EMEA - Europe, the Middle East, Africa region
EPS - Earnings per share
ERP - Enterprise Resource Planning
EU - European Union
EVA - Economic Value Added
FDI - Foreign Direct Investment
GDP - Gross Domestic Product
GFA - Global Finance & Administration
GFI - Global Finance Infrastructure
GFSS - Global Finance Shared Service
HQ - Headquarters
IFRS - International Financial Reporting Standard
IJV - International Joint Venture
KPI - Key Performance Indicators
KT - Kepner Tregoe
MNC - Multinational Company
MNE - Multinational Enterprise
MVA - Market Value Added
NAFTA - The North American Free Trade Agreement
OECD - Organization for Economic Co-operation and Development
P2P - Procure-to-Pay
QM - Quality Management
R2R - Record-to-Report
ROA - Return on Assets
ROCE - Return on Capital Employed
ROE - Return on Equity
ROI - Return on Invested Capital
ROS - Return on Sales
SE - Societas Europea
TNI - Trans-nationality Index
UN - United Nations
US - The United States
 List of Figures
Figure 1: Entry strategies- Capital and Management in the home country and overseas..............18
Figure 2: Entry into foreign markets: the internationalization process.........................................21
Figure 3: Local responsiveness, global integration, and organizational structure.........................22
Figure 4: The international structure.............................................................................................23
Figure 5: The multi-domestic structure.........................................................................................24
Figure 6: Global product division structure...................................................................................25
Figure 7: Advantages and disadvantages of non-financial performance indicators......................34
Figure 8: The implementation of KT method................................................................................44
Figure 9: Organizational Structure of SAP SE..............................................................................48
Figure 10: The organizational structure of Global Shared Services..............................................49
Figure 11: Rework Rate KPI data example...................................................................................55
Figure 12: Survey results for question A (Do you think that KPI is enough to measure efficiency
of BSCE subsidiary?)....................................................................................................................56
Figure 13: Survey results for question B (Does KPI help SAP to achieve its objectives set for
BSCE subsidiary?)..........................................................................................................................57
Figure 14: Survey results for question C (In your opinion, is KPI an effective performance
evaluation tool for SAP?).................................................................................................................57
Figure 15: Survey results for question D (What financial and non-financial indicators would you
consider adding to current performance indicators? )...................................................................58

List of Tables
Table 1: Harzing’s test of typologies of MNCs.............................................................................25
Table 2: Examples of non-financial indicators..............................................................................33
Table 3: Overview of influencing factors that influence the selection of indicators in MNCs.....36
Table 4: KT Problem Analysis......................................................................................................42
Table 5: Integrated financial report of SAP, 2015.........................................................................51
Table 6: Kepner Tregoe Decision Making Analysis for SAP BSCE............................................60
Table 7: KT method for the solution of rework rate problem.......................................................62
Table 8: KT method for the solution of service quality problem..................................................65
Table 9: KT method for the solution of reputation problem.........................................................66
 List of Appendices
Appendix 1: Semi-structured interview
Appendix 2: Divisions of regions in SAP SE
Appendix 3: Connection between employee retention rate and other
measures Appendix 4: The implementation process of Kepner Tregoe method
Appendix 5: Activity Ratios, Liquidity Ratios and Value Indicators
 Appendix 1: Semi-structured interview
Survey - performance evaluation system of SAP BSCE
1. Do you think that KPI is enough to measure the efficiency of BSCE subsidiary?(Please
tick one of the answers)
o Strongly Agree
o Agree
o Not decided
o Disagree
o Strongly Disagree
2. Does KPI help SAP to achieve its objectives set for BSCE subsidiary?(Strongly disagree,
Disagree, Not decided, Agree, Strongly Agree)
1. In your opinion, is KPI an effective performance evaluation tool for SAP?
( (Strongly disagree, Disagree, Not decided, Agree, Strongly Agree)
2. What financial and non-financial indicators would you consider adding to current
performance indicators?(Please state one or two and explain why)
Interview questions:
1. What are the current major challenges for SAP BSCE nowadays?
2. According to you what are the main reasons that make employees of SAP BSCE leave,
hence increasing the employee turnover rate?
3. In your opinion, how the problems related to reputation, rework rate, service quality and
employee turnover rate can be improved in the subsidiary in Prague?
The list of employees that took part in the qualitative semi-structured interviews.
Respondent Position
Heiko Knocke Head of SAP BSCE, 17 years in SAP
Galina Wick HR Recruitment Manager, Waldorf, HQ, 16 years in SAP
Veronika Markova HR Recruitment Manager, SAP BSCE, 10 years in SAP
Sergey Davidyan Finance Operations Manager, SAP BSCE, 4 years in SAP
Hola Pavlina Finance Operations Associate, SAP BSCE, 4 years in SAP
Monika Dudasova Finance Operations Associate, SAP BSCE, 1 year in SAP
Hayk Hakobyan Finance Operations Associate, SAP BSCE, 1 year in SAP
Petra Svobodova Finance Operations Specialist, SAP BSCE, 8 years in SAP
Ian Tollett Quality Team Management Specialist, SAP BSCE, 6 years in SAP
Appendix 2: Divisions of regions in SAP SE

Appendix 3: Connection between employee retention rate and other measures

Appendix 4: The implementation process of Kepner Tregoe method
Appendix 5: Activity Ratios, Liquidity Ratios and Value
Indicators Activity Ratios (Brealey, Myers, Stewart, & Marcus,
2001)
These indicators evaluate the organization’s ability to make use of its resources. Activity
ratios are also known as turnover ratios because they are used to assess the benefits made by
particular assets (inventory or accounts receivable) or to measure the benefits made by total
assets. In other words, it calculates the effectivity of the company in its assets management. With
the help of Activity Ratios, analysts can know whether the reported assets amount in the Balance
Sheet is acceptable or not. This is very important for the company because having more assets
that can be used by the company, may lead to additional costs. At the same time, shortage of
assets leads to a loose of potential revenues and hence, increased opportunity costs because the
firm is not able to involve in worthwhile investment projects. In other words, both increased and
shortage of turnover can be alarming for the organization.
Asset Turnover
This indicator is one of the KPIs and calculates the utilization of the total asset. It is
beneficial for the company to have high level of Asset Turnover ratio.

Total Assets Turnover

This indicator is the ratio of sales to total assets. Here again, companies should try to
have high Total Assets Turnover as the higher the result of this ratio, the better companies
manage to utilized their assets. Generally, it should be more than the average ratio of the
subsidiary.

Fixed Assets Turnover (Vochozka, 2011).

This ratio calculated how well the company uses its fixed assets while making sales.
Also, it gives the information about the frequency of reversing the fixed assets into revenues in a
year basis.

Inventory Turnover Rate

This ratio determines the regularity of selling inventory items during the given period and
storing again. It shows how efficiently the company sells its products. If the Inventory Turnover
Rate is more than the average, it means that the organization is doing well as it lacks redundant
illiquid stocks.
Liquidity ratios (Peterson & Fabozzi, 2003)
Liquidity ratios evaluate the company’s capability of paying the obligations on time. An
important thing to understand is that liquidity and solvency differ somehow. Liquidity shows the
ability of the firm to turn its assets to cash in order to pay its liabilities. On the other hand,
solvency is a company’s ability to repay all the obligations within a particular period in the
appropriate form. The liquidity indicator calculates what the company obtains to be paid such as
current liabilities, and what it is feasible to pay for (current assets). The examples of Liquidity
ratios are Current Ratio, Cash Ratio and Quick Ratio indicators.
Current Ratio states how many times the firm can use its current assets to cover its
current liabilities if required. If the Current Ratio decreases, it means that Current Liabilities are
improving faster than Current Assets, and therefore it presumes that the company is in trouble.
Current ratio = current assets / current liabilities

Another indicator is Cash Ratio which is calculated by:

Quick Ratio
Quick Ratio ignores inventories from the calculation because inventories have the least
liquidity, and it’s usually problematic to turn them into cash. As a result, this ratio is considered
to be a more accurate tool for evaluation. So, with the help of Quick Ratio, analysts can learn
about the company’s capability to pay its short-term debt without depending on the money from
inventory sales.

Debt Ratios
Debt Indicators display the situation when a firm decides to finance its activities by
outside sources. Total debt is the most typical example of measuring debt situation in the
company. If the ratio is high it means that the company carries some financial risk.
(Kislingerová, 2007)
Total indebtedness = total foreign equity * 100 / total capital
Debt Ratio

This ratio calculates the percentage of total funds maintained by using debt.
Equity Ratio
Another debt ratio indicator that illustrates the firm’s financial independence is Equity Ratio. It
also demonstrates the relative amount of firm’s assets that is supported by stockholders.

Financial Leverage (Vochozka, 2011)

Similar indicator is financial leverage that is the inverse ratio compared with equity ratio.

Debt to Equity Ratio

This ratio demonstrates the way a company finances its activities with debt relative to the
value of its owners’ equity:

An important difference between Debt Ratio and Debt to Equity Ratio is that the first
ratio is possible to increase till one hundred percent, while Debt to Equity Ratio is able to
increase to infinity. (Peterson & Fabozzi, 2003)
Value Indicators
It is also essential to evaluate financial performance in terms of maximization of
shareholders’ value. Value Indicators are formulated with the help of weighted average cost
capital also known as WACC and an operating profit or net operating profit after tax known as
NOPAT. (Ryan, 2006) Two main evaluation methods for assessing company’s financial
performance are Market Value Added (MVA) and Economic Value Added (EVA) measures.
Generally, non-profit organizations prefer to measure their financial performance with the help
of EVA. On the other hand, investor owned healthcare organizations find it better to use MVA
measurer. (Gapenski, 2011)
The most popular value indicator is EVA (Economic Value Added) (Peterson &
Fabozzi,
2003)
EVA is an essential criterion for performance evaluation of companies. The calculation of
this indicator is based on economic profit.
In order to measure EVA, three major values are used. So, the formula of EVA is the following:
EVA = NOPAT - WACC * C, where C is the total invested capital.
NOPAT represents profit produced as a result of the main activity of the firm. NOPAT
does not include extraordinary items and profit generated from non-core business. As a result,
NOPAT equals to:
NOPAT = EBIT * (1 - t)
While to calculate WACC several important items are also required:
WACC = rd * (1 - t) * D / C + RC * E / C ,
where rd = foreign capital cost,
t = tax rate on corporate
income D = foreign capital
(dept)
C = total invested
capital E = equity
RC= cost of equity capital
The resulted amount of EVA should be positive. Otherwise it means that owners’ wealth
is decreasing. (Fotr and Soucek, 2005).
There are some important characteristics for EVA that needs to be mentioned. (ACCA)
 EVA concentrates on the long-term net profit value of the organization.
 Economic Value Added is based on cash flow. Therefore not much deceived by the
chosen accounting strategies.
 EVA calculates an absolute number.
 Shows performance in terms of money.
 Not easy in calculation and understanding.
 It is tough to make required adjustments during the calculation of EVA.

Market Value Added (MVA)

Market Value Added is the difference between a company’s total market value and the volume
of the capital brought into the company by investors. So, the formula is the following:
MVA = total market value - total capital supplied.
The idea of MVA is to show how much the wealth of shareholders increased. (Gapenski, 2011)