Performance Measurement Systems in Practice

As Performance Measurement Systems evolved, several PMSs were developed to overcome the drawbacks of traditional performance measurements systems. According to Frigo and Krumwiede (1999), survey data suggest that between 40 and 60 percent of companies significantly changed their measurement systems between 1995 and 2000. Five of the commonly used PMSs namely, the Balanced Scorecard (Kaplan and Norton, 1992), the Tableau de Bord (a French approach developed in the 1930s), the Performance Prism

(Neely and Adams, 2000), the Performance Pyramid (Lynch and Cross, 1991), and the Productivity Measurement and Enhancement System (Pritchard, 1990) are discussed next.

4.4.1 The Balanced Scorecard (BSC)

Since Balanced Scorecards focus on organisational performance or can at least be considered as a means of reaching organisational objectives (Townley et al., 2003), they may be regarded as a type of performance measurement system (PMS). The concept of the balanced scorecard was introduced by Kaplan and Norton in the early 1990s and has continued to gain wide acceptance and usage in business. It is claimed that the use of non- financial performance measures via three perspectives (i.e. customer, internal business processes, and learning and innovation) to supplement traditional financial measure- the fourth perspective, collectively underpin the achievement of the organisation’s vision as well as enables organisations to achieve an integrated and aligned balanced focus thus providing an excellent balanced solution for facing challenges (Kaplan and Norton, 1992,

1993, 1996).

Customer perspective

Learning & growth perspective F in a r^ l perspective

Internal business perspective

Figure 4.2: Kaplan and Norton’s balanced scorecard (1992).

They further argue that, traditionally, performance measurement systems have all too often, narrowly focussed on financial figures and functional level performance. In contrast, the balanced scorecard was built around the premise that companies can no longer gain sustainable competitive advantage solely by developing these tangible assets.

Therefore, the ability of a company to build its “intangible assets” or “intellectual capital”

has become a critical success factor in creating and sustaining competitive advantage.

These scorecards in turn, serve as dials on a dashboard and guide businesses into greater profitability.

Scorecards typically contain between 12 and 28 different measures grouped into four to six categories. Kaplan and Norton (1993,1996) content that scorecards improve performance by translating strategy into tangible objectives linked by a causal chain of leading and lagging indicators covering the different scorecard perspective.

Kaplan and Norton (1992; 1996a; 1996b) defined BSC as:

“Â multidimensional framework fo r describing, implementing and managing strategy at all levels o f an enterprise by linking, through a logical structure, the objectives, initiatives, and measures to an organisation’s strategy”.

Therefore, the balanced scorecard provides an enterprise view of an organisation’s overall performance: it complements the traditional financial performance measures with key performance indicators (KPIs) in three non-financial areas. The four building blocks of the BSC are:

• Financial Perspective. This perspective answers the question: “To succeed financially, how should we appear to our shareholders?” and is typically

related to profitability. It is measured, for example, by the Return on Investment (ROI), Return on Capital Employed (ROCE), and Return on Equity (ROE).

• Customer Perspective. This perspective answers the question: “To achieve our vision, how should we appear to our customers? ” It includes several core or generic measures of successful outcomes fi*om the company, like, customer satisfaction, service quality and market share in targeted segments.

• Internal Processes. In this perspective, the following question is answered: “To satisfy our shareholders and customers, what business processes must we excel at?”. This perspective focuses on the internal processes that will have the greatest impact on customer satisfaction and on achieving the organisation’s financial perspectives such as the speed of innovation, efficiency of distribution and supplier relations.

• Learning and Growth. The question: “To achieve our vision, how will we sustain our ability to change and improve?” is answered in this perspective.

The infrastructure the organisation has to build and manage to create long-term growth and improvement through people, systems and organisational procedures, is identified in this perspective. Examples include measures such as product innovation, investment in new technology and information exchange.

According to Kaplan and Norton (1996), the scorecard translates the vision and strategy of a business unit into objectives and measures in the four different areas. The execution of this strategy is then monitored through an internal performance measurement framework with a set of goals, drivers and indicators grouped into each of the four perspectives (Abran and Buglione, 2003). This is also depicted in Figure 4.3

Sharif (2002) argues that the reason for naming such a set of scored measures, as a balanced scorecard, is that factors which may not be non-financial in nature can be compared to purely figurative, quantitative data in order to assess the impact of an organisation’s strategic planning initiatives. This view is being shared by Sim and Koh (2001) who stated that the balanced scorecards calls on managers to first make a commitment to introduce an array of measures or scorecards that will guide their decisions away from the narrowly focused financial measures.

To this end, Sharif (2002) stated four ways in which the BSC can be used.

1. An Operational control took To view and act upon historic, and usually financial, factors

2. A strategic planning took for monitoring the strategic intent across all departments and divisions within an organisation

3. A management reporting tool (M S): providing access to organisation wide information in addition to quantitative financial reporting; providing additional context and visibility to non-quantitative, qualitative measures such as employee empowerment (i.e. linking knowledge to performance metrics). This can even to a hill knowledge measurement system, if the context of the reporting is required to be more in-depth or is required across multiple facets/roles of the organisation

4. A change management facilitation tool: By leveraging organisation-wide knowledge and information, using aspects of the previous three methods, strategic, tactical and operational issues on the management agenda can be made accessible and visible, and be open to discussion and implementation.

ViSiODi

and Strategy

Figure 4.3: The fo u r perspectives o f the BSC (Kaplan and Norton, 1996a).