Performance Measurement Frameworks And Systems

Systems

In current literature, reference is made to traditional and modern PMS and to how these two types of systems differ, which is of some indirect importance to

this study. This difference lies in the types of measures used by each. A tra- ditional PMS employs financial measures, and a modern system employs both financial and non-financial measures. Performance measures are introduced and described in Section 2.4.

Even though the aforementioned difference is a simple one, it has a great impact on the effectiveness and influence of a PMS on the organisation as a whole. Before describing how a PMS operates, an understanding of the pro- gression that lead up to its development is required. Folan and Browne (2005) provides a systematic process of the development of Performance Measure- ment Framework(s) (PMF) and PMS, a process which will be followed in the following sections.

2.3.3.1 Performance Measurement recommendations

Folan and Browne (2005) use the term performance measurement recommen- dations to refer to the ‘initial building blocks’ of both PMF or PMS. These recommendations are defined by Folan and Browne (2005) as pieces of advice regarding performance measurement and characteristics, and with in an accu- mulated form, may be used as a basis for developing PMF and PMS.

Performance measurement recommendations can be split into two funda- mental groups: performance measure recommendations, and both PMF and PMS design recommendations. A brief description of the two groups is pro- vided by Folan and Browne (2005), saying that the first group mainly consists of recommendations for good performance measures, and the second investi- gates the recommendations regarding PMF and PMS design.

The aim of this study is to introduce the reader to the concept of perfor- mance measurement recommendations as it contributes to the description of how PMF and PMS originated. It is not the aim of this study, however, to cover the actual recommendations for PMF and PMS design. Refer to Folan and Browne (2005) for more information regarding PMF and PMS design.

2.3.3.2 Performance Measurement Frameworks

The largest impact on performance measurement literature, according to Folan and Browne (2005), was made by the study of PMF. Since the late eighties, a multitude of different PMF were developed with varying complexities. Folan and Browne (2005) state that the variability among these PMF can be at- tributed to the sets of performance measurement recommendations used to design each; a set can lead to the design of a structural framework, or proce- dural framework.

In order to separate the concept of PMF from that of PMS, it is necessary to define a PMF with respect to the components it is made of; performance measurement recommendations. Rouse and Putterill (2003) provide such a definition, and is summarised by Folan and Browne (2005):

“A performance measurement framework assists in the process of performance measurement system building, by clarifying perfor- mance measurement dimensions or views and may also provide ini- tial intuitions into relationships among performance measurement dimensions.” - (Folan and Browne, 2005)

It is thus clear from this definition that PMF is not the same as PMS. In order to better understand what a PMF is, Folan and Browne (2005) briefly describe the two different PMF’s that exist. The first is in the form of a struc- tural framework, and the second in the form of a procedural framework, as previously mentioned.

A structural framework, Folan and Browne (2005) suggest, is a framework specifying a performance measure management categorisation, and describes a procedural framework as a piecemeal process for performance measure de- velopment from a strategy. Folan and Browne (2005) state that PMF which follow procedural frameworks are at a disadvantage due to the lack of a struc- tural element to performance measurement which will enable the management of separate performance measures, as well as their selection. And vice versa, as structural PMF lack procedure. In addition, ‘procedural’ and ‘structural’ PMF are designed in isolation from one another; only when a PMS is devel- oped are they eventually joined together.

Otley (1999) argues that there exists five main groups of issues that must be addressed when designing a PMF. He states that these five groups are given as questions, such that they remain relatively constant throughout literature. Otley (1999) also states organisations need to continuously develop answers to them due to ever-changing business environments and strategies. The five questions are listed below:

1. Central to the organisation’s future success, what are the key objectives? How does the organisation measure the achievement of each objective? 2. What are the organisation’s adopted strategies and plans, as well as the

determined processes and activities for the successful implementation of said strategies and plans? How does the organisation measure and evaluate the performance of said processes and activities?

3. For the areas in the first two questions, what level of accomplishment does the organisation need to reach in each respective area, how does the organisation set realistic performance targets for each?

4. What are the rewards and penalties for both managers and employees for the successful achievement of performance targets or failure to do so? 5. What are the necessary information flows, such as feedback and feed- forward loops, to empower the organisation to utilise the experience and knowledge gained to improve the organisations present behaviour? Otley (1999) asserts that the above questions are closely related to some of modern management’s core issues. The first question addresses the case of defining goals and how goal achievement is measured, considering both fi- nancial and stakeholder satisfaction. The issues of strategy development and implementation is tackled by the second question. The third question, Otley (1999) states, has been researched extensively and remains important, but he does not expand more on this. In the case of the fourth question, reward sys- tems have been neglected in PM due to it being viewed as the human resources’ area of responsibility. However, Otley (1999) states that the two fields’ inter- connection is critical in order to mitigate counter-productive reward systems; a topic touched on in Section 2.4.5.2. And finally, Otley (1999) comments on the last question, saying that its linkage to issues, such as a ‘learning organi- sation’, employee empowerment and emerging strategies, need to be improved. In conclusion, this thesis is not concerned with the PMF available and their differences, nor the validity of the five main groups of issues that PMF need to address. Only an understanding of what the role of a PMF is in the development of a PMS is covered in this study. However, further information is available on the comparisons between multiple major PMF, and the afore- mentioned questions and their roles in performance measurement, from Folan and Browne (2005) and Otley (1999) respectively. In addition, Bourne et al. (2000) provide a detailed discussion on how to implement and update PMS, and will thus not be addressed in this study.

2.3.3.3 Performance Measurement Systems

According to Amaratunga and Baldry (2002), Performance Measurement Sys- tems were created in the past to monitor and maintain organisational control; a process by which an organisation is ensured to implement strategies that will realise the completion of overall objectives and goals. Many organisations in the late 1980’s used PMS that were extensions of their financial reporting systems (Atkinson et al., 1997; Kloot and Martin, 2000). Those organisations defended this means of performance measurement because financial report- ing systems provided measures that were not only regarded as reliable and consistent, but also integrated with the main objective of generating prof- its. These companies felt that their operational performance would be clearly shown through the effect it had on their finances.

However, Atkinson et al. (1997) state that studies conducted during that time concluded that PMS which are primarily based on financial measures lack the variety of information decision-makers need to manage processes ef- fectively. Atkinson et al. (1997) highlights that such PMS lack the robustness and focus which is required for internal management and control. They argue that financial performance measures are obtained from financial accounting systems; they are designed to communicate financial information, not organi- sational performance information.

Since the 1980’s, considerable work has been put into creating PMS which are more effective and efficient at reflecting organisational performance. Mod- ern PMS serves different functions, aiding in communication and strategy for- mulation (Wouters, 2009). In addition, the structure and characteristics of more modern PMS strengthens an organisation’s strategy and guide managers on lower business levels. Wouters (2009) continues the discussion of modern PMS advantages, saying that it can be a type of diagnostic control through the measures employed; employees are evaluated on specific results, which in turn motivates the employees to improve their efforts. Further discussion on employee behaviour is provided in Section 2.4.5.2.

However, most of these PMS are still designed in-house; there are very few academically developed PMS currently available, according to Folan and Browne (2005). The majority of PMS used today are combinations of best practices and various PMF, but even so, Folan and Browne (2005) report that these PMS have varying effectivenesses, ranging from excellent to poor.

Folan and Browne (2005) found three academically developed PMS, and through investigating and comparing these, concluded that the core require- ments of a successful PMS consists of two PMF, one procedural and one structural, as well as other performance management tools. When these core requirements are combined, a methodology is produced which becomes the foundation of differing performance management aids, according to Folan and Browne (2005). The three PMS systems investigated were:

1. the Balance Scorecard (BSC),

2. the Business Process Re-engineering (BPR) system, and

3. Medori and Steeple’s Performance Measurement System(s) (PMS). The scope of this study does not include the comparison between the aca- demically developed PMS, nor the procedures for developing and implementing a successful PMS. However, it is beneficial to understand how a PMS works to understand how this study’s deliverable is applicable to an organisation’s PMS.

For this study, the use of academically developed frameworks and systems are preferred, since they are well recorded, validated and supported by multiple researchers and users. From the above listed PMS, the most popular is the BSC (Lipe and Salterio, 2000). Therefore, it is decided that the BSC is an adequate PMS to be briefly detailed in this study as it will represent most of, if not all, the necessary characteristics of a successful PMS. This is conducted in Appendix A.