Chapter 2
Rose stated that "performance measurement is the language of progress of the organization. It indicates where the organization is and where it is heading. It functions as a guide to whether the organization is en route to achieving its goals. It is also a powerful behavioral tool, since it communicates to the employee, what is important and what matters for the achievement of the organization's goal" (Rose, 1995)
Performance measures must be:
• Significant, absolute and widely interpreted
• Possessed and carried off by the teams in the organization
• Based on a superior of data integrity
• Such that data assembling is embedded within the normal operations
• Capable to cause betterment
• Associated to vital goals and key drivers of the organization
Benefits of Performance Measures
Enhance Ability to Recognize and Reward Extraordinary Individual Performance
Enhanced Capacity for Individual Cooperation
Satisfied Customers
Effective and Satisfied Employees
Continuous Process Improvement
Increased Profits
Enhanced Reputation
Innovation
Effective Management
"What make sports or work fun? Everyone Knows The Rules and Everyone Knows the Score."
Victor Dingus of Tennessee Eastman in 1990
"You have to measure things that are basic. If it's not simple, not easily understood, nor easily tracked, then don't bother measuring it because nobody will ever use it."
Gould, L.; "Measuring Business Reengineering is Part of Its Success", Managing Automation, May 1993, pp. 45-47.
"The principle purpose of performance measures is to gauge progress against stated program goals and objectives, presupposing that the strategic program objectives are known."
Shycoff, D.B.; Key Criteria for Performance Measurement, Comptroller of the Department of Defense, Directorate for Business Management, 1992.
Why we measure performance?
Why measure performance? Many authorities on the subject have provided answers to this question.
Some of them are quoted below.
The National Performance Review (NPR) in 1997 in their benchmarking study report(Serving the American Public: Best Practices in Performance Measurement) states that:
" Performance measurement yields many benefits for an organization. One benefit is that it provides a structured approach for focusing on a program's strategic plan, goals, and performance. Another benefit is that measurement provides a mechanism for reporting on program performance to upper management."
The U.S. Department of Energy proposes in 1996 (Guidelines for Performance Measurement)
" Performance measurement improves the management and delivery of products and services. A recent opinion poll asked a group of adults what they thought the Federal government's top priority should be. Almost half wanted emphasis put on better management. In a world of diminishing resources, improving management of programs and services is critical"
The General Services Administration's (GSA's) in Performance-Based Management: Eight Steps to Develop and Use Information Technology Performance Measures Effectively states that:
" Measurement focuses attention on what is to be accomplished and compels organizations to concentrate time, resources, and energy on achievement of objectives. Measurement provides feedback on progress toward objectives. If the results differ from the objectives, organizations can analyze gaps in performance and make adjustments"
Wisner and Fawcett provide a nine-step process for developing a performance measurement system:
Defining the mission statement of the firm clearly.
Identify the strategic targets and objectives of the firm by using the mission statement (market share,quality,dependability, profitability,cost, flexibility,and innovation).
Develop an understanding of each of the operational area's function in achieving the several strategic aims.
For each functional area, prepare global performance measurements that are capable of specifying the firm's total competitive position to top management.
Communicate performance goals and strategic objectives to lower levels in the organization. Establish more specific performance measures and its criteria at each level.
Ensure consistency with strategic objectives amongst the performance measures and criteria used at each level.
Ensure the compatibility of performance measures used in all functional areas.
Use the performance measurement system to identify competition, locate problem areas, assist the firm in updating strategic objectives and making tactical decisions to achieve these objectives, and supply feedback after the decisions are implemented.
Periodically reassess the appropriateness of the established performance measurement system in view of the current competitive environment.
In the end, it's of significant importance that the performance measurement systems practiced by employees in the organizations be continually reviewed and revised as the environment and economy changes. Failure to establish the essential modifications can inhibit the ability of the organization to be an efficient and effective global competitor.
A simple performance measurement framework
An effective performance measurement model will concentrate on the customer and measure the suitable things.
There are five significant steps in a performance measurement and improvement model - the strategic aims of the organization are turned into suitable measures of performance, metrics are built up to compare the suitable performance with the effective attained standards, gaps are discovered, and improvement activities are started. These steps are continuously carried out and reexamined:
Focus on a few key goals that are critical to the success of the organization or business, and ensure
They are SMART, i.e:
Specific
Measurable
Achievable
Relevant
Timely
The performance measurement revolution - why now?
Bob Eccles(In 1991) published a paper in Harvard Business Review titled -"The performance measurement manifesto". In it he anticipated that "within the Incoming five yrs, all companies will have to redesign however it evaluates its business performance". Given the current levels of activity in the area, it Comes out that Bob Eccles' assertion was average, even if his time scale was Compacted. The question that this raises, however, is why now? If the Restrictions of conventional financial measures have been known for some time, then how come a lot of people become so concerned and interested in business performance measurement so recently?
It's not possible to respond to this question definitively, but proves and evidences suggest that there are seven main reasons:
The ever-changing nature of work;
Rising competition;
Particular improvement initiatives;
National and international awards;
Dynamic organizational functions and roles;
Changing external necessitates; and
The power of information technology
How business performance measurement can be done?
It is widely accepted that business performance and its measurement are a multi-faceted concept and Therefore it's not unexpected that over again the query of how business performance can best be measured has been took on by a variety of people from various disciplines.
"If you are not keeping score you are only practicing not playing"
Vince limbordi
How to decide which performance measures to adopt?
As already indicated, the issue of which performance measures a given business should acquire is a topical and complex one. Several authors have proposed prescriptions such as that measure should be educed from strategy (Keegan et al., 1989). Several authors have suggested performance measurement frameworks which prescribe which attributes of performance organizations should need supervising (Fitzgerald et al., 1991; Kaplan and Norton, 1996). Others have followed another stance and formulated audits which assist organizations to discover the strengths and weaknesses of their measurement systems in terms of "gaps" and "false alarms" (Dixon et al., 1990). While still Other people have admitted the statement that measures have to be derived from strategy and therefore attempted to document processes designed to assist management teams determine and choose which measures are suitable for their organization (Neely et al., 1996).
"As someone working on ways to improve organizational performance measures, I know how important it is to look for guidance and the best of what others have done. Those looking to improve their choice and use of key performance indicators will find thought provoking ideas and valuable examples of good practice."
Professor Sir Andrew Likierman(London business School)
The usage of objectives and performance measures to manage and meliorate the performance of an organization has been widely written in literature in the fields of organizational management, strategic planning, and quality improvement. In that respect there are numerous known methodologies for improving organizational performance.
Many authors put emphasis on the importance of evaluating the performance measure in order to achieve competitiveness.
Several authors have emphasized the importance for all major businesses of assessing and altering performance measures in order to accommodate to the quickly changing and extremely competitive business surroundings (Eccles, 1991; Kennerley and Neely, 2002). To this end Dixon et al. (1990) formulated the Performance Measurement Questionnaire that is a collection of questions that should help managers discover the improvement requires of their organization, find out to which extent the present performance measures support betterments and establish an agenda for performance measures improvements. Also Medori and Steeple (2000) suggested a model comprising of a performance measurement grid and a checklist for auditing existing performance measures in order to discover the measures no longer applicable or valuable for the company ("false alarms") and the measures that are not being assessed by the company but are all important for the company's success ("gaps"). Another technique for the evaluation and revision of performance measures has been suggested by Tangen (2004). The technique, called "the Performance measurement progression map", is constituted as a flowchart and comprises of nine steps divided into three phases. Phase A concentrates on determining an appropriate and important/useful set of measures; Phase B is concerned with how each individual performance measure is organized, while Phase C includes the actual execution of the outcomes from the previous two phases
Business performance measurement is on the radar screen of business concern managers and academic scholars likewise From 1994,fresh articles and reports about the topic have been coming out at a rate of one every five hours of every working day (Neely, 2002). Online searches on the topic discloses that more than 12 million internet site dedicated to Business Performance Measure.(Marr and Neely, 2001). Like in several emerging research areas developments are fast and rapid. Past years have seen the development of fresh approaches of performance measurement, such that as activity-based costing (Kaplan and Cooper, 1997) and shareholder value (Rappaport, 1986).
The latest trend in performance management is incorporated of a result-focus(Pulakos, 2008). Organizations progressively focus on attaining results, not just drive towards efficient and effective behaviors. Employees should strive to attain results that contribute to the achievement of organizational objectives and goals. Therefore it's essential to evaluate both the results employees attain as well as how they worked to achieve these, and so their job behavior (Pulakos, 2009)
"It is inconceivable that a world-class organization exists without a metrics-based management system. Metrics enable organizations to know where they are, assess the need for improvement, improve, and then monitor processes to ensure that they are under control and producing desired levels of quality."
Marvin T. Howell,Actionable Performance Measurement: A Key to Success, American Society for Quality, 2006.
A Essential condition to accomplish superior performance standards is being capable to effectively assess and monitor company's performance. As a matter of fact, the truthfulness of some renowned sayings like "What gets measured gets attention" or "What you measure is what you get" is widely accepted both among academics and practitioners (Eccles, 1991; Kaplan and Norton, 1992). Consequently performance measurement systems are viewed as a way to acquire competitive advantages and endlessly respond and adjust to external changes.
Thus performance management constitutes of how organizations put across expectations and drive behavior to accomplish and achieve organization's goals; it is also how organizations discover Uneffective performers for development programs or some other personnel activities (Pulakos, 2009). Performance management is a system, thus comprising of specific principles and steps, which interact and work collectively in an interdependent direction to Attain defined objectives. However, there's no exact or correct way on how to set performance management systems, because for each one of organization has different Demands,needs, structures and models and the organization must value all those, hence its design and execution varies from organization to organization.
Performance measures and indicators must be intentionally linked up to the organization's vision and strategy. The system must efficaciously tie up the vision and strategy with indicators, which find out its achievement a thus require its managing.(Papula, 2008).
Performance measurement (PM) techniques historically developed as a means of monitoring and maintaining organizational control (Nanni, Dixon, & Vollmann, 1990), which is the process of ensuring that an organization pursues strategies that lead to the achievement of overall goals and objectives.Traditional models of PM largely evolved within the large industrial firms of the 1920s (Johnson & Kaplan, 1987), focusing on the achievement of a limited number of key financial measures (for example, earnings per share (EPS), and return on investment (ROI)). However, more recently, evidence from a selection of research disciplines including Management Accounting, Operations Management and Strategy has highlighted increasing dissatisfaction with traditional forms of PM.
Financial and Nonfinancial Measures:
Financial performance measures are used to offer financial information to the managers and additional users, also to assess effectiveness and efficiency. The most common financial measurements in use are for example are: return on investment; return on assets; return on capital employed; and earnings per share (Ittner and Larcker, 2003). Though the use of financial performance measures is important in performance measurement, researchers seem to indicate that there are limited in range. For example, Ittner and Larcker, (1998); Neely, (1999); Kaplan and Norton, (1996): (2001); and Banker et al, (2000) reason out that there is agreement about the limits of financial measures such as, they're too financially oriented, intrinsic looking, historical and concentrating on inputs not outputs, and are short term oriented. These limitations show that financial measures should be elaborated to incorporate the evaluation of the company's intangible and intellectual assets such as; high quality products, driven and competent employees, responsive and predictable procedures, and content and loyal customers in order to reflect the assets and capabilities that are vital for success in today's competing environment (Kaplan and Atkinson, 1998). These types of measures can be classified as non-financial performance measures. Moreover, Kaplan and Norton (1996) indicate that measuring only financial measures could damage an organization's capacities and they urge that a combination of financial and non-financial measurements are best suited for assessing and evaluating performance.
Turney and Anderson (1989) argue that the financial measures have largely failed to adapt to the new competitive environment where continuous improvement in the design, manufacturing and marketing of a product/ service is key to success. Additionally, Emmanuel and Otley (1985) stated that organizational success depends not only on the achievement of financial measures, but also on how well the organization adapts to the environment within which it exists. Effective performance can be achieved if the organization responds and adapts to its environment demands appropriately.
Several recent studies have provided empirical evidence on the positive impact of non-financial performance measures on the organizations' financial performance in the long-term (Anderson and Lanen, 1999; and Banker et al, 2000). Nonfinancial performance measures provide managers with timely information concentrated on the causes and drivers of success and can be used to design integrated evaluation systems (Fitzgerald et al, 1991; Kaplan and Norton, 1996; Banker et al, 2000). Fisher (1995) states that there are three main reasons for the emergence of non-financial performance measures: the limitations of traditional financial performance measures, competitive pressures, and the growth of other initiatives. In addition, Neely (1999) points out several reasons for this performance measures revolution such as increasing competition, changing organizational roles, changing external demands and the power of information technology. This in turn has led to the recognition that financial performance measures do not present a clear picture of organizational performance (Bourne and Neely, 2002). Most studies of non-financial performance measures are related to manufacturing with very few studies including services firms (Kald and Nilsson, 2000). Several studies (Fitzgerald et al, 1991; Kaplan and Norton, 2001; Hussain, et al 2002; Lorenzo, 2008) have emphasized the need to use multidimensional performance measures
Numerous literary argument have been brought up referring that the determination of non-financial performance measures are the leading indicators of financial performance. Ittner and Larcker (1998) argued that the improvements in various non-financial areas such as , quality, customer satisfaction and innovation would affect future financial performance.
Overall, academic research indicates that non-financial performance measures are relevant for predicting and forecasting future financial performance (Maines et al., 2002). Furthermore, there's the aspect that nonfinancial measures are better predictors of the company's long-run performance, and that they sustain managers in monitoring company's progress towards objectives that's has been set by the company. (Kaplan and Norton, 1996; Banker et al., 2000). Management accounting studies have focused on the relationship between performance measures (Atkinson et al., 1997).
Financial measures of performance are used to gauge organizational performance, some organizations have gone through the unfavorable consequences of trusting entirely on these measures. Conventional financial measures are better at measuring the consequences of yesterday's actions than at projecting and proposing tomorrow's performance. Consequently, it is better that managers not trust on only one set of measures to provide a well-defined performance target. To be effective, performance yardsticks should continuously develop in order to properly measure the performance and focus resources on motivating personnel and continuous improvement.
The use of performance measures is split into two main subdivisions.
The measures come from strategy, the initial purpose for which they had better be put is that of assessing and evaluating the success of the implementation of that strategy (Vitale and Mavrinac, 1995; Kaplan and Norton, 1996).
The information and feedback from the measures should be applied to challenge the suppositions and examine the validity of the strategy (Eccles and Pyburn, 1992; Kaplan and Norton, 1996; Feurer and Chaharbaghi, 1995).
In fact, authors have indicated that they should be used for both functions (Grady, 1991; Feurer and Chaharbaghi, 1995; Kaplan and Norton 1996). Therefore, assessing and evaluating the implementation of strategy'' and challenging the strategic assumptions'' are the two important subdivisions for the purpose of the performance measures.
Two stresses that performance measures are important for managers to track and to measure performance for their subunits, as well as for employees at lower levels to understand the financial impact of their operating decisions. In addition, the importance of use contemporary performance measures like quality service, customer satisfaction, come from the highly competitive financial industry, particularly the banking sector, as well as in other services and even in manufacturing organizations (Hussain, 2002).
A useful way of categorizing performance measures is provided by Fitzgerald, et al., (1992). They refer to two categories of performance measures. First are results-oriented performance measures which focus on competitiveness and financial performance. Second are performance measures which are viewed as determinants of competitive success. These latter performance measures are subdivided into quality of service, flexibility, resource utilization, and innovation. The new wave of performance measures falls into the "determinants" category.
The factors which give rise to a specific corporate structure are mostly external, while those which prescribe the measures of performance are mostly internal. Corporate strategy evolved in response to external factors whereas performance measures, which focussed largely on the cost of outputs and ratio analysis, persisted largely unchanged until the rise to prominence of the quality movement. The quality movement came in emphasis on no monetary measures like customer satisfaction, product quality, time to delivery (Zairi & Letza, 1994). Quality concerns, which at the beginning concentrated on manufacturing, gradually changed their emphasis to complete all the areas of business activity, and culminated in an external customer-oriented focus. The emergence of management advances such as Total Quality Management and Continuous Improvement has resulted in a progressively more widespread and vital and critical use of performance measures.
It's challenging and difficult for the researchers to build upon a body of knowledge produced by past researchers because contributions are spread out in literature over different disciplines. Academic disciplines often function in Functioning silos but those go against the efforts to incorporate knowledge in order to Make a cohesive aspect and understanding of organizations (Neely et al., 2002). Marketing researchers could finish up with their marketing measurement framework and HR researchers could develop an isolated HR scorecard. Consequently a different challenge the Area of BPM faces in the future is the Conception and creation of a body of knowledge that reflects the theoretical bases of BPM as an autonomous and independent research field.
A lot of this body of work centers on the subject of planning and then designing measures and measurement systems. Once the systems have been designed, nevertheless, they've to be implemented, and then they've to be applied to carry off the business on an ongoing basis. These two topics - the implementation and execution of measurement systems and utilizing them to carry off business performance - both seem to be areas in which further research effort or enquiry is required.
