The performance measurement revolution: why now and

The performance
measurement revolution: why
now and what next?
Andy Neely
The performance
measurement
revolution
205
University of Cambridge, Cambridge, UK
Keywords Performance management, Performance measurement, Research
Abstract Asks why business performance measurement has become so topical, so recently. Argues
that there are seven main reasons: the changing nature of work; increasing competition; specific
improvement initiatives; national and international quality awards; changing organisational roles;
changing external demands; and the power of information technology. Evidence to support this
assertion is drawn from the academic and practitioner literatures, interviews and discussions with
people specialising in the field and a broad review of the current state-of-the-art in business
performance measurement. Presents a framework onto which current research in business
performance measurement can be mapped and identifies areas which require further work.
Introduction
Business performance measurement is on the management agenda.
Professional conference organisers such as Business Intelligence and IIR
recognise this. Hence the plethora of conferences on “Business Performance
Measurement”. The RSA (Royal Society of Arts, Manufacturers and Commerce)
recognise this, as demonstrated by the findings of their inquiry into the role of
tomorrow’s company:
To achieve sustainable business success in the demanding world marketplace, a company
must ... use relevant performance measures (RSA, 1994).
Politicians recognise this, as can be seen by the current and previous UK
Government’s obsession with league tables, and the fact that the above quote
appeared in one of the UK’s White Papers on competitiveness.
What is not immediately obvious is why business performance
measurement is on the agenda. What is it that makes the topic so relevant to
management today? After all, it has long been recognised that performance
measures are an integral part of the planning and control cycle (Barnard, 1962)
and managers must have been planning and controlling the deployment of
resources since the first organisation was established. Indeed, Chandler (1977)
argues that most of the basic methods used to manage big businesses today
were in place by 1910:
In 1903, three Du Pont cousins consolidated their small enterprises with many other small
single-unit family firms. They then completely reorganised the American explosives industry
and installed an organisational structure that incorporated the “best practice” of the day. The
highly rational managers at Du Pont continued to perfect these techniques, so that by 1910
that company was employing nearly all the basic methods that are currently used in
managing big business (Chandler, 1977, p. 417).
International Journal of Operations
& Production Management,
Vol. 19 No. 2, 1999, pp. 205-228,
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Given that the “basic management techniques” have been used for so long and
that business performance measurement is undoubtedly one of these
techniques, then surely most organisations should have had well developed
performance measurement systems in place for many years by now.
Even the most cursory examination of the academic and practitioner
literatures would confirm that this is not the case (Ashton, 1997; Geanuracos
and Meiklejohn, 1993; Kaplan, 1984; Neely, 1998; Neely et al., 1995). Numerous
authors discuss the problems with the performance measures used by
organisations today. Traditional financial measures are criticised because they:
• Encourage short-termism, for example the delay of capital investment
(Banks and Wheelwright, 1979; Hayes and Abernathy, 1980).
• Lack strategic focus and fail to provide data on quality, responsiveness
and flexibility (Skinner, 1974).
• Encourage local optimisation, for example “manufacturing” inventory to
keep people and machines busy (Goldratt and Cox, 1986; Hall, 1983).
• Encourage managers to minimise the variances from standard rather
than seek to improve continually (Schmenner, 1988; Turney and
Andersen, 1989).
• Fail to provide information on what customers want and how
competitors are performing (Camp, 1989; Kaplan and Norton, 1992).
The same measures are criticised for being historically focused (Dixon et al.,
1990). Sales turnover, for example, simply reports what happened last week,
last month or last year, whereas most managers want predictive measures that
indicate what will happen next week, next month, or next year.
Numerous managers suffer from data overload. Most firms have information
systems which generate at least some redundant performance reports.
Comments such as “we measure everything that walks and moves, but nothing
that matters”[1] are common. Indeed, the author recently witnessed the
production manager of a small manufacturing business throw a freshlydelivered 200-page performance report straight into the bin, without even
glancing at it. When asked why, the production manager replied – “what use is
the report to me? All it contains is last month’s labour absenteeism figures. I
need up-to-date information to manage production, not spurious figures from
the accounting department.”
Yet another problem with the performance measures used in many
organisations is that they are rarely integrated with one another or aligned to
the business processes (Lynch and Cross, 1991). Performance measures are also
often poorly defined. It is not unusual to observe two people heatedly arguing
over some dimension of performance and later find that the root cause of their
disagreement was the imprecise definition of a measure.
Somewhat surprisingly, few of these problems are new. In 1908, for example,
A. Hamilton Church wrote:
Shop charges (overhead) frequently amount to 100 percent, 125 percent, and even much more
of the direct wages. It is therefore actually more important that they should be correct than
that the actual wage costs should be correct (quoted in Kaplan, 1984, p. 395).
The performance
measurement
revolution
In 1951, GE established a “Measurement Project” which “was intended to
develop performance metrics that could be applied on a decentralised basis”
(Meyer and Gupta, 1994, p. 348). Johnson (1992) argues that “management by
remote” control – i.e. managing by the financials – only became popular after
the 1950s, before which time senior managers used the financial figures for
planning, rather than control.
By the mid-1980s there were many vocal and well-respected critics of
traditional measures (Berliner and Brimson, 1988; Goldratt and Cox, 1986;
Hiromoto, 1988; Hopwood, 1984; Johnson and Kaplan, 1987; Miller and
Vollmann, 1985; Richardson and Gordon, 1980; Schmenner, 1988; Turney and
Anderson, 1989). The question this raises, however, is why now? What is it
about managers in the late 1980s and early 1990s that has made them so
receptive to the message that their performance measurement systems are
obsolete? Why have these problems come to the fore today? Why have they
captured management’s attention? What sparked the performance
measurement revolution? What has been the impact of this revolution? Where
and when will it end?
The remainder of this paper seeks to address these questions. The paper
begins by presenting evidence that supports the assertion that we are in the
midst of a performance measurement revolution. Next, the reasons why this has
happened are explored. Finally, the current state-of-the-art in business
performance measurement is described and the question – where next? – is
posed.
The performance measurement revolution – fact or fiction?
Between 1994 and 1996, some 3,615[2] articles on performance measurement
were published. This is equivalent to one new article on business performance
measurement appearing every five hours of every working day. In 1996, new
books on the subject appeared at a rate of one every two weeks in the USA
alone[3]. Between 1950 and 1991, the membership of AIA (American Institute of
Accountants) and AICPA (American Institute of Certified Public Accountants)
grew from 16,062 to 301,410 – an increase of 1,877 per cent (Meyer and Gupta,
1994):
Chartered financial analysts did not exist before 1963. Through 1971, about 3,000 financial
analysts were chartered. From 1972 through 1981, some 3,800 more analysts were chartered,
but from 1982 through 1992 more than 8,200 new chartered financial analysts were added
(Meyer and Gupta, 1994, p. 318).
Business Intelligence, a professional conference-organising company, based in
the UK, have hosted 23 conferences on performance measurement since January
1994. Over 2,500 delegates from some 800 different firms have attended these.
Worldwide there are now more than 50 different Web sites devoted to business
performance measurement.
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Customer satisfaction questionnaires are ubiquitous. It is almost impossible
to stay in a hotel and not be presented with at least one of them. Indeed some
hotels have become so obsessed with measurement that they have different
customer satisfaction questionnaires in the bedroom, the health club, the bar
and each of the restaurants!
A novel variation on this theme is the tendency for some organisations to
automate the data collection process. While in Finland recently the author
noticed an open access computer terminal in the lobby of his hotel. The sign
above the terminal read “your views count – please share them with us”. Upon
closer inspection it emerged that the computer was running a piece of software
designed to elicit customers’ views. Basically the program was an automated
customer satisfaction questionnaire. Capturing the data in this way offers three
substantial benefits. First, the customer enters the data online. Hence the hotel
does not have to arrange (and pay for) data entry. Second, the risk of secondary
keying errors is eliminated. Third, the hotel has real time access to clients’
views. At any time of the day or night the latest data can be reviewed, and acted
upon if necessary.
Of course, the use of IT is not limited to data capture and analysis.
Organisations such as BT[4] publish their customer service report (and the
associated data) on the Internet. While others, such as Cognos[5], Metapraxis[6]
and Valstar[7], have built businesses supplying IT support tools for
performance measurement applications.
Further evidence that a revolution in business performance measurement is
taking place is provided by the language used in annual reports. Ten years ago
little mention of non-financial performance would have been made in the
Chairman and Chief Executive’s statements. Recently, however, some
organisations have been far more explicit about the link between financial and
non-financial dimensions of performance. Legal and General’s 1996 annual
report, for example, places considerable emphasis on non-financial
performance measures. In his statement, the Chief Executive Officer, David
Prosser, highlights the importance of the virtuous circle: “competitive products
= more sales = greater shareholder value”.
It appears then, that the language of business performance measurement is
taking hold. The notion of balance, perhaps most neatly encapsulated by
Kaplan and Norton’s balanced scorecard, is widely accepted. Indeed the phrase
the “balanced business scorecard” appears to have entered the management
vernacular. A recent MORI survey, for example, found that “72 per cent of
business leaders agree that a successful business will better serve its
shareholders by focusing on the needs of its customers, employees, suppliers
and the wider community” (MORI, 1996).
And there is even some, albeit limited, evidence that this is a good thing. For
example, Alan Meekings, a consultant with Gemini, claims that “in the early
1990s, British Rail’s Network SouthEast used performance indicators to help
grow off-peak income by 28 per cent, reduce controllable costs by 30 per cent,
and improve both service delivery and customer satisfaction from worst ever to
best ever on record” (Meekings, 1995). Similarly, a survey conducted by Lingle The performance
and Schiemann (1996) found that:
measurement
Organisations which are tops in their industry, stellar financial performers and adept change
leaders, distinguish themselves by the following characteristics: having agreed-upon
measures that managers understand; balancing financial and non-financial measurement;
linking strategic measures to operational ones; updating their strategic scorecard regularly;
and clearly communicating measures and progress to all employees.
Further evidence of the value of business performance measurement is
provided by work carried out by researchers at the University of Michigan and
the Stockholm School of Economics, on the Swedish Customer Satisfaction
Barometer. They have identified a significant positive correlation between
customer satisfaction and financial performance (Anderson et al., 1994; Fornell,
1992). In the summary of their empirical findings, Anderson et al. (1994) report
that an annual one-point increase in customer satisfaction has a net present
value of $7.48 million over five years for a typical firm in Sweden. Given their
sample’s average net income of $65 million, this represents a cumulative
increase of 11.5 per cent. If the impact of customer satisfaction on profitability
is similar for firms in the Business Week 1000, then an annual one-point
increase in the average firm’s satisfaction index would be worth $94 million or
11.4 per cent of current ROI.
Perhaps the most exciting development, however, is the establishment of two
new investment funds in late 1996, by Kleinwort Benson. These two funds are
based on portfolios of companies which deliver and sustain returns. The
investment model assumes a strong correlation between inclusive-type
companies and better investor returns through three stages: evaluating
management; assessing business processes; and the interaction of the above to
build shareholder value. Kleinwort Benson constructed their portfolios using a
scorecard which built upon the EFQM’s Business Excellence Model and
Investors In People, along with inclusive and corporate governance approaches
to business. A Fundamental Evaluation Assessment, which analyses cash flow,
sustainability of growth, sensitivities of financial performance and
improvements in individual measurement targets, was conducted to decide
which companies should be included in the portfolio. Other key parameters:
price/earnings ratio; dividend yield; discounted cash flow; and net asset
valuations were also examined. Aggregated, all these parameters helped
determine the most undervalued and, therefore, attractive, Tomorrow’s
Company-type, or inclusive, portfolio:
Prior to launch, the model was tested against a sample of 350 UK companies based on market
capitalisation: it outperformed them for the measures above by 16 per cent in the short term
and 38 per cent in the longer term. Also, Kleinwort Benson calculations have revealed that a 1
per cent change in each of sales growth, employee and supplier value added for portfolio
companies, would give a 24 per cent improvement in operating profit, a 5.3 per cent lift to
return on capital, and a 43 per cent improvement in economic value added (Ashton, 1997,
p. 289).
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The message from this is clear. If the Kleinwort Benson funds are successful
and if they deliver better returns, then institutional investors will undoubtedly
become much more vocal in demanding that businesses release information on
their non-financial performance.
The performance measurement revolution – why now?
In 1991, Bob Eccles wrote a paper for the Harvard Business Review entitled –
“The performance measurement manifesto”. In it he predicted that “within the
next five years, every company will have to redesign how it measures its
business performance”. Given the current levels of activity in the field, it
appears that Bob Eccles’ assertion was fair, even if his time scale was
compressed. The question that this raises, however, is why now? If the
limitations of traditional financial measures have been known for some time,
then why have so many people become so interested in business performance
measurement so recently?
It is impossible to answer this question definitively, but evidence suggests
that there are seven main reasons:
(1) the changing nature of work;
(2) increasing competition;
(3) specific improvement initiatives;
(4) national and international awards;
(5) changing organisational roles;
(6) changing external demands; and
(7) the power of information technology.
The changing nature of work
Traditional accounting systems allocate overheads on the basis of direct labour.
In the 1950s and 1960s this was appropriate because direct labour often
constituted in excess of 50 per cent of the cost of goods sold. By the 1980s,
however, direct labour rarely constituted more than 5 or 10 per cent of the cost
of goods sold, because of the massive investments that had been made in
process automation. The net effect of this was that allocating overheads on the
basis of direct labour resulted in wildly erroneous product costs, which in turn
meant that managers made the wrong decisions (Kaplan, 1983; Schmenner,
1988).
These arguments were so widely and vocally publicised that they resulted in
the development of alternative methods of product costing – most notably
activity-based costing and through-put accounting (Cooper, 1987a,b; Galloway
and Waldron, 1988a,b; 1989a,b). During the late 1980s and early 1990s, most of
the major consultancies were selling services based on these new methods of
costing. The associated marketing programmes – and the popularity of books
such as Johnson and Kaplan’s Relevance Lost – meant that few in business
could avoid being exposed to the message that, given today’s operating The performance
environment, the assumptions underpinning the traditional methods of cost
measurement
accounting were fundamentally flawed.
revolution
Increasing competition
There can be little doubt that the level of competition that firms face is
increasing on a global basis. Businesses all around the world are under
continual pressure to reduce costs and enhance the value they deliver to their
customers. BT, for example, has shed 120,000 jobs since 1989. Most of the
resultant cost savings have been passed on to customers in the form of price
cuts, which have been made necessary by the deregulation of the UK
telecommunications market. The European Commission’s open skies policy
means that for the first time, cut-price carriers, such as Easyjet and Virgin
Direct, will soon be able to offer flights between any two destinations they
choose (assuming they can negotiate the necessary take-off and landing slots).
Manufacturing businesses, such as Toyota, have revolutionised the way people
think about operations through their search for greater efficiency and
effectiveness (Monden, 1993). The widespread acceptance of so-called “Japanese
manufacturing practices” demonstrates how successful they have been, but the
net effect is a continual rise in global performance standards and customer
expectations, which in turn lead to ever greater levels of competition (Womack
et al., 1990).
In terms of performance measurement, these changes have had three
impacts. First, many organisations now seek actively to differentiate
themselves from their competitors in terms of quality of service, flexibility,
customisation, innovation and rapid response. They have been forced to do so
because they now find themselves competing in markets where value rather
than cost is the primary driver. Competing on the basis of non-financial factors
means that these organisations need information on how well they are
performing across a broad spectrum of dimensions. If a business bases its
strategy around its ability to customise products, then knowing whether it
really is customising products, and whether it is customising them rapidly and
cheaply enough, is essential. The traditional measures used to assess business
performance simply do not provide this insight. Hence businesses have been
forced to change their measures because they have changed their strategies.
In doing so, many organisations have realised one of the hidden benefits of
matching measures and strategies – namely that measures can encourage the
implementation of strategy (Neely et al., 1994). It is widely accepted that
performance measures influence behaviour. One only has to look at the
academic obsession with refereed journal papers to see evidence of this. Indeed
the UK’s Research Assessment Exercise provides an excellent example of how
performance measures can modify behaviours on a mass scale. In 1992, the first
Research Assessment Exercise was conducted. The performance of all higher
education institutes was assessed along various dimensions. One of the key
criteria used was “research excellence”, which in turn was measured in terms of
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the number of publications per research-active member of staff. Different
institutions adopted different strategies to boost their scores. Some recruited
prolific publishers. Others chose only to register a small proportion of their
faculty as research-active. The exercise was scheduled to be repeated in 1996. In
the intervening years, the number of publication outlets appears to have grown
exponentially. Whether by accident or design, the 1992 Research Assessment
Exercise had the desired effect. It encouraged the academic community to
disseminate their work.
For the 1996 Research Assessment Exercise the criteria were changed and
the emphasis was put on quality, rather than quantity, of publications. Hence
everyone was asked to submit details of their best three publications. The
message that this changed performance measure sent was – “you have shown
us that you can disseminate your work, now prove that you can disseminate
high quality work”.
The link to strategy is subtle, but powerful. Measures that are aligned with
strategy not only provide information on whether the strategy is being
implemented, but also encourage behaviours consistent with the strategy.
Accepting Mintzberg’s (1978) thesis that when an organisation realises that the
strategy is a function of the “pattern of decisions and actions” it takes, then it
becomes clear that appropriately designed performance measures can
encourage the implementation of strategy.
The third way in which the changing basis of competition has affected
business performance measurement is in the tendency for organisations to
downsize. Most organisations have achieved their downsizing goals by
eliminating middle management and “empowering” the remaining employees.
Anecdotal evidence suggests that empowering people can be very powerful, but
only if those people know the overall direction in which the business is heading.
Middle managers used to ensure that this was the case by translating strategic
plans into operational targets, monitoring progress and generally co-ordinating
the efforts and activities of their subordinates. Today, few organisations find
themselves with sufficient human capacity to operate in this way. Hence they
need new ways of communicating to their employees where the business is
heading. Business performance measures provide one such means of
communication. Just as with the Research Assessment Exercise described
earlier, leading organisations are using their measurement systems as a means
of communicating to their employees what is important.
Specific improvement initiatives
In response to increased competition, numerous organisations have embarked
upon specific improvement initiatives. Some of these have come and gone,
although most have been swept up into generic themes, such as total quality
management (TQM), lean production, world class manufacturing (WCM). Few
would dispute that, of these, total quality management has been one of the most
pervasive. Open any undergraduate text on this topic and you will find
discussions of continuous improvement, Deming (plan-do-check-act) cycles,
statistical process control, Taguchi methods, quality costing. All of these tools The performance
and techniques have one thing in common. They rely on performance
measurement
measurement. The essence of continuous improvement, for example, is to seek
revolution
constantly ways in which products and processes can be improved, so that
greater value can be delivered to customers at ever greater levels of efficiency.
Before any organisation can determine what it needs to improve, however, it has
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to establish where and why its current performance falls short. Hence the need
for performance measures.
Similar arguments apply to statistical process control. Control charts provide
a means of checking whether processes, generally repetitive manufacturing
processes, are under control – i.e. whether the outputs they are producing vary
only as much as would be expected, given the norms of statistical variation.
Answering this question requires performance data to be collected. Without
these data statistical process control quite simply cannot be introduced.
Of course, TQM is not the only specific improvement initiative that has put
performance measurement on the agenda. The widespread business interest in
benchmarking has been another important driver. Xerox, largely through the
efforts of Bob Camp, has been particularly vocal on this topic (Camp, 1989). The
rapid emergence of benchmarking clubs and a number of high profile research
studies (Andersen Consulting, 1993, 1994; IBM Consulting and London
Business School, 1993, 1994; Womack et al., 1990) have also heightened
industrial interest. In essence, however, benchmarking studies – especially
those which compare performance rather than practice – are effectively
structured applications of business performance measurement. Data, which
summarise the performance of different businesses, are gathered and
compared. Performance gaps, performance shortfalls, even performance
advantages are identified. Such studies are valuable precisely because they
provide rich performance insights.
Often these performance insights result in organisations realising that they
need to achieve radical performance improvements merely to survive, let alone
prosper. One method for achieving these is business process re-engineering
(Hammer and Champy, 1993). Instead of seeking to optimise the efficiency of
each operation within each function, business process re-engineering calls for
the horizontal flows of information and materials to be considered holistically
when seeking performance improvements. This relies on a clear understanding
of how the outputs of one micro process impact upon the next micro process,
which in turn requires data to be fed back from the receiving process to the
supplying process (Slack et al., 1995). Few organisations have measurement
systems which allow this to happen, and rarely are the traditional measures of
business performance appropriate. Measures such as labour utilisation, for
example, might provide some insight into how efficiently a process is running,
but provide no indication of the impact the outputs of one process have on the
next process in terms of quality and time. One of the first things organisations
realise, when they begin to re-engineer their processes, is that once they have
done so they will have to re-engineer their measurement systems.
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The theme which underlies all of the comments made in this section is that a
fundamental shift is taking place in business. Organisations have transcended
their cost phase and entered a value phase. Businesses today operate in an
environment where value is paramount. They have to strive continuously to
deliver products and services which are of ever greater value to their customers,
at ever lower costs. To do so, they have been forced to adopt a variety of
performance improvement programmes, the vast majority of which demand
that they upgrade their business performance measurement systems.
National and international quality awards.
In recognition of the substantial improvements in business performance that
many organisations have achieved, a number of national and international
quality awards have been established. One of the first of these was the Deming
Prize, which was introduced in Japan in 1950. Given W. Edwards Deming’s preeminence in the field of quality management, it is little wonder that this award
is made by the Japanese Union of Scientists and Engineers (JUSE) for
“contribution to quality and dependability of products” (Deming, 1986).
Numerous other quality awards have since been introduced, although the
two with the highest profile are the Baldrige Award, which is available in the
USA, and the European Foundation for Quality Management (EFQM) Award.
The popularity of these awards is evidenced by the fact that there are over
385,000 references to the EFQM award on the World Wide Web. Each of these
three awards requires firms to complete a comprehensive self-assessment as
part of the application process. To apply for the Deming Prize, for example,
firms have to submit detailed data on:
Policies
(1) quality and quality control policies and their place in overall business
management;
(2) clarity of policies (targets and priority measures);
(3) methods and processes for establishing policies;
(4) relationship of policies to long- and short-term plans;
(5) communication (deployment) of policies, and grasp and management of
achieving policies; and
(6) executives’ and managers’ leadership.
Organization
(1) appropriateness of the organisational structure for quality control and
status of employee involvement;
(2) clarity of authority and responsibility;
(3) status of interdepartmental co-ordination;
The performance
measurement
(5) status of staff activities;
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(6) relationships with associated companies (group companies, vendors,
(4) status of committee and project team activities;
contractors, sales companies, etc.)
Information
(1) appropriateness of collecting and communicating external information;
(2) appropriateness of collecting and communicating internal information;
(3) status of applying statistical techniques to data analysis;
(4) appropriateness of information retention;
(5) status of utilising information;
(6) status of utilising computers for dataprocessing.
Standardisation
(1) appropriateness of the system of standards;
(2) procedures for establishing, revising and abolishing standards;
(3) actual performance in establishing, revising and abolishing standards;
(4) contents of standards;
(5) status of utilising and adhering to standards;
(6) status of systematically developing, accumulating, handing down and
utilising technologies.
Human resources
(1) education and training plans and their development and results;
(2) status of quality consciousness, consciousness of managing jobs, and
understanding of quality control;
(3) status of supporting and motivating self-development and selfrealisation;
(4) status of understanding and utilising statistical concepts and methods;
(5) status of QC circle development and improvement suggestions;
(6) status of supporting the development of human resources in associated
companies.
Quality assurance
(1) status of managing the quality assurance activities system;
(2) status of quality control diagnosis;
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(3) status of new product and technology development (including quality
analysis, quality deployment and design review activities);
(4) status of process control;
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(5) status of process analysis and process improvement (including process
capability studies);
(6) status of inspection, quality evaluation and quality audit;
(7) status of managing production equipment, measuring instruments and
vendors;
(8) status of packaging, storage, transportation, sales and service activities;
(9) grasping and responding to product usage, disposal, recovery and
recycling;
(10) status of quality assurance;
(11) grasping of the status of customer satisfaction;
(12) status of assuring reliability, safety, product liability and environmental
protection.
Maintenance
(1) rotation of management (PDCA) cycle control activities;
(2) methods for determining control items and their levels;
(3) in-control situations (status of utilising control charts and other tools);
(4) status of taking temporary and permanent measures;
(5) status of operating management systems for cost, quantity, delivery,
etc.;
(6) relationship of quality assurance system to other operating
management systems.
Improvement
(1) methods of selecting themes (important activities problems and priority
issues);
(2) linkage of analytical methods and intrinsic technology;
(3) status of utilising statistical methods for analysis;
(4) status of analysis results;
(5) status of confirming improvement results and transferring them to
maintenance/control activities;
(6) contribution of QC circle activities.
Effects
The performance
measurement
(1) tangible effects (such as quality, delivery, cost, profit, safety and
environment);
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(2) intangible effects;
(3) methods for measuring and grasping effects;
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(4) customer satisfaction and employee satisfaction;
(5) influence on associated companies;
(6) influence on local and international communities.
Future plans
(1) status of grasping current situations;
(2) future plans for improving problems;
(3) projection of changes in social environment and customer requirements
and future plans based on these projected changes;
(4) relationships among management philosophy, vision and long-term
plans;
(5) continuity of quality control activities;
(6) concreteness of future plans[8].
The implication for business performance measurement is clear. As an ever
increasing number of organisations explore the frameworks underpinning
these awards, the fact that their traditional performance measurement systems
are woefully inadequate will become painfully clear. Firms will either decide to
ignore this message, or act upon it. All the evidence to date suggests that most
firms adopt the latter course of action – i.e. they change their performance
measurement systems.
Critics of these awards comment that the application process makes them
unsuitable for smaller companies or organisations with limited slack resource
(Garvin, 1991). In response to this, simplified versions of the awards have been
established at the national and regional levels. In the UK, for example, the
British Quality Foundation (BQF) offers a national award, while groups such as
Midlands Excellence offer regional awards, with a much simpler application
procedure. Whichever level of award businesses apply for, however, they are
still expected to complete a self-assessment. Hence the spread of these awards is
simply introducing more and more firms to self-assessment, which in essence is
another form of business performance measurement. Quite simply, the
philosophy underpinning the hierarchy of awards is that firms can be
introduced to the process by a regional award. Once they realise the benefits of
self-assessment, it is assumed that they will apply for a national and then an
international award, each of which requires yet greater commitment and more
comprehensive self-assessment.
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Changing organisational roles
The 1980s and 1990s have seen subtle changes in organisational roles. Many of
the most vocal critics of traditional performance measurement systems have
come from the academic accounting community. As the force of their arguments
has gathered strength, the professional accounting associations have reacted. In
the UK, both the Chartered Institute of Management Accountants (CIMA) and
the Institute of Chartered Accountants of Scotland (ICAS) regularly organise
conferences and workshops on non-financial performance measurement. Both
of these bodies encourage their members to take a more active role in the
development of balanced measurement systems, arguing that the role of the
management accountant is to provide the management information necessary
for running a business, rather than merely the financial information required
for external reporting.
There is growing evidence that this theme has been picked up by several
businesses. In the mid-1990s, for example, Cable and Wireless renamed their
Corporate Management Accounting Group, “Group Performance Analysis and
Development”, when asking them to play a more active role in the analysis of
performance data.
Human resource managers and personnel managers are another group of
business professionals who are now taking a more active role in business
performance measurement. There appear to be three reasons for this. First,
performance measures tend to be integral to performance management
systems – goal setting, measurement, feedback and reward (IPM, 1992) and
these generally fall within the remit of the human resource function. Second,
there is considerable debate as to whether performance measures should be
linked to reward – again an issue which concerns human resources. Finally,
many organisations have been through substantial downsizing programmes in
recent years. One of the challenges these organisations face is motivating the
people who remain once the downsizing programme has been completed. There
are several examples of firms using performance measures to achieve this on
the grounds that performance measures help clarify performance expectations,
which in turn allow more discretion to be given to individuals as the boundaries
within which they have to work become more obvious.
Changing external demands
Organisations today are subject to a wide variety of external demands, each of
which has implications for business performance measurement. Deregulation
in the UK’s power generation, telecommunications and water industries, for
example, has resulted in the establishment of various regulators. These
regulators demand that the firms which fall under their jurisdiction achieve
certain performance standards and have the power to fine those which fail to do
so. To enable the regulators to assess whether the required standards are being
met, firms in each of these industries have to submit detailed performance
statistics on a regular basis. BT, for example, has to release performance data
on its quality of service and pricing policies to Oftel – the telecommunications
industry regulator, while Thames Water has to release performance data on, The performance
among other things, the volume of water lost through leaks to the water
measurement
industry regulator.
revolution
As these data are public domain and of general interest, the national press
monitors them closely. Thames Water, for example, has been severely criticised
in recent months for failing to reduce the amount of water lost in the Greater
219
London area due to leaks, at the rate the regulator wishes. To counter the
negative publicity that has resulted, Thames Water has started to advertise its
achievements on billboards in the London underground. In terms of business
performance measurement, the impact of these changes is twofold. First, the
demands of the regulator can result in firms introducing new measures of
performance so that the necessary data can be collected. Second, the scrutiny of
the regulator forces firms to take certain measures very seriously, thereby
ensuring a strong emphasis on business performance measurement in the firm.
Legally-constituted bodies, such as regulators, are not the only groups to put
pressure on firms. Consumer magazines, such as Which?, regularly conduct and
publish performance evaluations of different products and services. Even
groups with very limited resources can have a massive impact on a company’s
reputation. Take, for example, the recent libel case involving McDonald’s.
Supporters of the protesters established a Web page listing McDonald’s alleged
misdemeanours. During the trial, which lasted in the region of two years, press
reports regularly referred to this Web page and the popularity of it. These two
examples highlight the fact that information is very easy to collate and
disseminate – especially through the Internet. Given this, monitoring and
managing public opinion becomes critical for high-profile businesses.
Of course, public opinion is not the only thing that firms have to monitor. As
already discussed, most businesses are now competing in an environment
where value, not price is the key driver. Given these circumstances, then
ensuring that value is delivered to customers becomes key. Which is one of the
main reasons why the use of customer opinion surveys has become so
widespread.
Some customers today not only expect high levels of service, but also expect
firms to operate in specific ways. The extent to which a customer can influence
the way in which their supplier works is a function of many factors, a key one
being power. Ford, for example, used their power as a major purchaser of
automotive components, to demand that their accredited suppliers introduce a
scheme known as QOS (quality operating system). Basically QOS is a
performance measurement process. Suppliers to Ford are expected to identify
six key business parameters, record the relevant data in a format approved by
Ford and submit the information to Ford on a monthly basis. When they
introduced the scheme, Ford declared that they expected all accredited
suppliers to show improvement in the majority of these parameters on an
annual basis if they wished to remain accredited.
In many ways, QOS is simply an extension of the various supplier
accreditation schemes that came into being through the 1980s and beyond. In
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the automotive industry, moves have been made to rationalise these schemes as
suppliers were being forced to achieve accreditation to slightly different
standards by each of their major customers. These accreditation schemes were
introduced for two reasons. First, to enable cost in the customer-supplier
relationship, especially that associated with multiple inspection, to be reduced.
Second, to help customers decide with which suppliers they should concentrate
their business, as they sought to rationalise their supply base. As more and
more organisations moved down this route, more and more suppliers are being
asked to submit themselves for audit (again a form of business performance
measurement). So once again external demands – i.e. those external to the
business – come into play, as organisations are forced to improve their
performance data in preparation for these audits.
There is one final group that is also putting pressure on firms to think about
what they measure and how they measure it – the investment community. At
first sight this statement seems incredible, as it is widely accepted that
institutional investors are interested only in short-term financial performance:
The perception within companies is that their discussions with investors lead them to neglect
long-term strategies in the interests of immediate financial returns. Investors are perceived as
placing a relatively low priority on the business fundamentals – such as customer loyalty,
investment in people and supplier relationship – which will determine long-term success
(RSA, 1995, p. 18).
The above quote is based on data collected during the RSA’s Tomorrow’s
Company Inquiry. This study is particularly interesting because
representatives of the investment community were also asked what information
they would like, and they replied:
The perception within the investment community is that companies are preoccupied with
immediate returns and are reluctant to volunteer information about the fundamentals (RSA,
1995, p. 18).
The RSA’s interim report describes this situation as a “dialogue of the deaf”,
because neither group really understands the other’s interests and needs.
Recently, however, there has been some evidence to suggest that this situation is
changing. Traidcraft and Prototype Plc, for example, release alternative annual
reports which summarise employee and customer satisfaction, as well as
financial performance. Skandia, a Swedish insurance company, publishes an
addendum to its annual report which identifies the value of Skandia’s
intellectual capital. As mentioned earlier, David Prosser, the Group Chief
Executive of Legal and General, talks explicitly about the virtuous circle
between competitive products, sales and shareholder value in his statement in
the 1996 annual report.
The power of information technology
The final driver in the performance measurement revolution is undoubtedly the
power of information technology. Not only has this made the capture and
analysis of data far easier, but it has also opened up new opportunities for data
review and subsequent action. Indeed the considerable effort that is being The performance
exerted by supermarkets on data mining is a case in point. The electronic pointmeasurement
of-sale systems used in most supermarkets provide an opportunity to monitor
revolution
individual buying patterns and tailor discount offers to them to encourage them
to shop in particular stores.
Of course, IT plays a role not only in data capture, but also in data analysis
221
and presentation. There has been a rapid growth in demand for management
information systems and executive information systems in recent years. Indeed
many vendors of these software packages are now proactively linking their
product offerings to balanced measurement frameworks, such as Kaplan and
Norton’s balanced scorecard.
Business performance measurement: state-of-the-art and where
next?
The arguments put forward so far in this paper have concentrated on the
reasons why business performance measurement is on the agenda. To complete
the paper, two further questions have to be addressed: what is the current stateof-the-art in the field and what are the issues that remain unresolved – i.e. where
next?
Research in the field has been, and is being, undertaken by a diverse group of
people from a wide variety of disciplines, including accounting (Bromwich
and Bhimani, 1989; Chandler, 1977; Cooper, 1987a,b; Johnson, 1983; Kaplan
and Norton, 1996), business strategy (Chakravarthy, 1986; Simons, 1995),
human resource management (IPM, 1992), manufacturing and operations
management (Dixon et al., 1990; Fitzgerald et al., 1991; Neely et al., 1996),
marketing (Fornell, 1992) and organisational behaviour (Meyer and Gupta,
1994). As one would expect, the research stance adopted by these individuals
differs in terms of the questions being addressed and the methodology adopted.
In essence, however, they are all seeking to address one of the two fundamental
questions associated with business performance measurement, namely: what
are the determinants of business performance; and how can business
performance be measured?
What are the determinants of business performance?
Identifying the determinants of business performance is a topic in which
progress, if not interest, seems to wax and wane over the years. Prominent
authors, such as Lawrence and Lorsch (1967), for example, have explored issues
such as the relationship between the match between the business and the
environment, and the effect of this on performance. Books, such as In Search of
Excellence, which purport to have “found the answer”, appear from time to time
(Peters and Waterman, 1982). In many ways, identifying the determinants of
business performance is the “holy grail” for the field. Unfortunately, or
fortunately for those who wish to continue working in the field, progress on this
question has been limited to date.
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In recent years an interesting development has been the notion of using
performance measures as a means of testing one’s theory of business (Drucker,
1990; Eccles and Pyburn, 1992) or to facilitate strategic learning (Kaplan and
Norton, 1996; Simons, 1995). Basically the suggestion is that if the appropriate
measures can be identified, and the right data captured, then it should be
possible to identify causal relationships between different dimensions of
performance. To date, little evidence that this is possible has been presented.
Indeed, the only published evidence, of which the author is aware, is: the claim
by BT that they have been able to identify a correlation between customer
satisfaction and customer loyalty (Johnson and Jakeman, 1997) and the claim by
Milliken that they have been able to identify a correlation between customer
satisfaction and financial performance (Jeanes, 1996). Given the importance of
this question, however, the implication, in terms of further research, is clear –
namely the need to explore if, and how, the relationship between different
dimensions of business performance can be mapped. Assuming this proves
possible, then the benefits will be substantial – not least because this would
begin to solve the taxing issue of how predictive performance measures, or
leading indicators can be identified.
How can business performance be measured?
It is widely accepted that business performance is a multi-faceted concept and
hence it is not surprising that once again the question of how business
performance can best be measured has been tackled by a variety of people from
different disciplines. Accountants, such as Bromwich and Bhimani (1989) and
Cooper (1987a, b), have concerned themselves with questions such as: what are
the flaws with traditional accounting systems and how can these flaws be best
overcome? Business strategists, such as Chakravarthy (1986), on the other hand,
have sought to address issues such as what are the most appropriate methods
of measuring strategic performance?
There are also substantial bodies of literature which explore how key
constructs such as customer satisfaction (Parasuraman et al., 1990); employee
satisfaction (Beer et al., 1978); innovation (House and Price, 1991); and
productivity (Sumanth, 1985) can be measured. Indeed one of the difficulties
facing people as they enter this area is which of the thousands of possible
measures they could adopt, should they adopt? Work to rationalise the
alternatives and summarise their strengths and weaknesses, taking into
account different country and cultural settings, would undoubtedly be
beneficial, as would further academic studies to establish the rigour of the
various measures that are available – given that many of them are proposed in
the practitioner literature (Chakravarthy, 1986).
Despite its apparent simplicity, the question of how business performance
can be measured is complicated by two factors:
(1) it is not always obvious which measures a firm should adopt; and
(2) the measures that will be most relevant to the firm will change over time.
These two factors give rise to two sub-streams of work. The first of these seeks The performance
to answer the question – “how to decide which performance measures to adopt”,
measurement
while the second, which is much less well-developed, addresses the topic of –
revolution
“how to manage the evolution of the measurement system”.
How to decide which performance measures to adopt
As already suggested, the issue of which performance measures a given
business should adopt is a topical and complex one. Various authors offer
prescriptions such as that measures should be derived from strategy (Keegan et
al., 1989). Numerous authors have proposed performance measurement
frameworks which prescribe which dimensions of performance organisations
should consider monitoring (Fitzgerald et al., 1991; Kaplan and Norton, 1996).
Others have adopted a different stance and developed audits which help
organisations identify the strengths and weaknesses of their measurement
systems in terms of “gaps” and “false alarms” (Dixon et al., 1990). While still
others have accepted the argument that measures have to be derived from
strategy and hence sought to document processes designed to help
management teams decide which measures are appropriate for their
organisation (Neely et al., 1996).
Much of this work focuses on the issue of designing measures and
measurement systems. Once the systems have been designed, however, they
have to be implemented, and then they have to be used to manage the business
on an ongoing basis. These two topics – the implementation of measurement
systems and using them to manage business performance – both appear to be
areas in which further research effort is required.
How can the performance measurement system be managed?
To date, much of the work on business performance measurement has been
static in orientation. Various authors comment in passing that measurement
systems need to be changed in the light of evolving circumstances – i.e.
changing markets and strategies. Yet when one looks at the measurement
systems used by businesses they are usually a mess! Organisations, or rather
people in organisations, appear happy to introduce new measures of
performance, but rarely do they delete obsolete ones. Few businesses have
processes for managing the evolution of their measurement systems. Authors
such as Chandler (1977) and Johnson (1983) discuss the evolution of accounting
systems, while Meyer and Gupta (1994) explore the performance paradox and
seek to explain why organisations end up with seemingly disconnected
performance measures in their measurement systems. Waggoner et al. (1997)
propose a framework which encapsulates some of the factors that appear to
influence the evolution of business performance measurement systems. Such
studies, however, are the exception rather than the rule and indeed, one of the
greatest weaknesses in the field of business performance measurement today is
that few people are actively exploring the issue of how the evolution of
measurement systems can be managed over the long term.
223
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Conclusion
This paper sought to address two questions: why is business performance
measurement on the agenda; and second, what further research is required in
the field? In answer to the first question it was argued that there were seven
main reasons why business performance measurement is on the agenda: the
changing nature of work; increasing competition; specific improvement
initiatives; national and international quality awards; changing organisational
roles; changing external demands; and the power of information technology. In
answer to the second question, nine main topics were identified:
(1) What are the determinants of business performance?
(2) Can the relationship between different dimensions of business
performance be mapped?
(3) Can predictive performance measures, or leading indicators, be
identified?
(4) What are the strengths and weaknesses of the various performance
measures proposed in the academic and practitioner literatures?
(5) How valid is each of these measures?
(6) Does the appropriateness and validity of the measures vary according to
the country and cultural setting?
(7) How can measurement systems be implemented?
(8) How can measurement systems be used to manage business
performance?
(9) How can the evolution of measurement systems be managed over the
long term?
Business performance is an important and wide-ranging topic. Indeed one of
the problems in writing this paper was deciding where to draw the boundaries.
Valuable work on benchmarking (Andersen Consulting, 1993, 1994; IBM
Consulting and London Business School, 1993, 1994; Womack et al., 1990);
strategic control (Goold and Quinn, 1990; Horovitz, 1979; Simons, 1995); and
performance management (Beer et al., 1978) has been deliberately, if somewhat
unfairly, excluded. In essence, this paper has argued that there are four
fundamental questions that research in business performance seeks to address:
(1) What are the determinants of business performance?
(2) How can business performance be measured?
(3) How to decide which performance measures to adopt? and
(4) How can the performance measurement system be managed?
This agenda, however, is essentially a personal one. It represents a necessarily
limited and narrow view of the field.
In many ways this admission is indicative of a deeper problem. Research in
the field of business performance is being undertaken by academics from a
wide variety of disciplines. The topic does not belong to accountants, operations The performance
managers, business strategists, human resource managers or marketeers. The
measurement
biggest hurdle facing the field is that few academics cross these functional
revolution
boundaries. Review the work in accounting and you will find references mainly
to the work of other accountants. Review the work in operations and you find
references to the work of other experts in operations. Several factors compound
225
this problem, but probably the main one is language. Academics in different
disciplines talk different languages. They have different mental models of what
constitutes good research. While excellent progress has been made in the field
in recent years, substantive breakthroughs are likely to arise when these
academics learn to talk and work with one another. One of the fundamental
challenges facing the field today is how to achieve this? How can a common
language and shared research agenda be developed?
Notes
1. Comment made by manager of service business based in the UK during a discussion on
business performance measurement.
2. Number of articles published and listed on the ABI Inform Database.
3. Number of books with performance measurement in their title published in the USA
according to the “Books in Print” database maintained by Reed Elsevier. NB: this estimate
is a conservative one, as several well-respected books on the subject, e.g. Kaplan and
Norton (1996), do not contain the words performance measurement in their title and hence
are excluded from the list.
4. See http://www.bt.com/quality_of_service/index.htm
5. See http://www.cognos.com
6. See http://www.fpm.com
7. See http://www.valstar.co.uk
8. Extract from the 1996 Deming Prize Guide for Overseas Companies.
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