Performance Measurement Systems: Designing and Updating

Introduction

Performance measurement is incredibly important in the public and private sector organizations. Indeed, performance measurement in the public sector has been playing a vital role in different governments around the globe since the early 1980s. For example, the American government developed the American Government and Performance Results Act in 1993. The Act required all federal governments, coupled with agencies to create 5-year strategic plans based on measurable outcomes. Such outcomes needed to be consistent with various performance plans. In 1982, the US government developed the Job Training and Partnership Act, which was the biggest ever government-sponsored program that sought to enforce the use of performance measures in various local and state plans.

Jarrar and Schiuma assert that these programs have been introduced in “welfare to work programs, child welfare agencies, child support enforcement programs, and other programs partly or wholly funded by the government” (5). Under many of the plans, public sector organizations are required to publish their performance measures while linking payment systems to them. In the private sector, consistency of performance with remuneration and payment packages is important. It ensures that an organization can relate its output potential to the inputs such as direct labor, including how such inputs correspond to its competitive advantage. Considering the importance and the necessity of performance measurement in the private and public sector organizations, this paper presents a report on an article titled ‘Designing, Implementing, and Updating Performance Measurement Systems’ by Bourne and colleagues.

Performance measurement

The article ‘Designing, Implementing, and Updating Performance Measurement Systems’ by Bourne et al. begins by identifying an immense interest in performance measurement extending from the 1970s to the1980s. Consistent with the opening remarks of the article, in the current global economy, organizations strive to achieve an excellent status. Realizing this concern, they endeavor to look for various mechanisms for modeling their performance results. To this extent, the various performance measurement models become integral to their operations.

For example, in the private sector, the balanced scorecard has been deployed in many organizations to achieve their performance goals and objectives (Bourne et al. 756). Any performance model is established to measure the level of business production. Dixit defines performance measurement as any process of quantifying the effectiveness and efficiency of an organization (687). Effectiveness implies compliance with various customers’ requirements, while efficiency implies the manner of utilizing organizational resources to realize client satisfaction. In the public sector, customers are users of public service and goods.

Bourne et al assert that conventional performance measurement frameworks were established from costing and accounting tools that offered temporary help to organizations while lacking strategic focus (755). Such tools promoted local optimism. Quantifying efficiency and effectiveness requires the selection of a measurement instrument of performance, its implementation, and monitoring. For example, the performance of public organizations that provide essential services such as telecommunication services may be measured from operational parameters, for instance, throughput, error rates, user rates, and response times. Thus, consistent with Bourne et al.’s findings, performance measurement in such an organization becomes ineffective using traditional costs and accounting-based systems (762).

Various performance parameters need to be considered in the unremitting formulation and implementation of performance measurement instruments. Bourne et al. suggest the need for adopting an integrated approach to performance measurement and monitoring (755). Indeed, performance measurement entails a wide research area that draws contents from accounting, operations management, and information systems (Neely 1265). Performance measurement models have different merits and underlying demerits depending on the assumptions made during their implementation, monitoring, and/or whether they are applied in the public or private sector settings. For example, the emerging business environment creates new challenges in the operations of organizations. This situation also influences the existing performance measurement systems. Bourne et al.’s arguments concerning the wide variety of business performance model suggest the need to adopt a particular model in any business that suits its performance measurement needs in the most pragmatic way (756). In fact, performance measurement models that are deployed in organizations depend on business frameworks that guide the organizations’ operations. Some of these models are identified in Table 1.

Table 1: Organizations’ business models.

Excellence models ISO standard Models
  1. Most famous BEM used as global reference models:
  • EFQM Excellence Model in Europe
  • Malcolm Baldrige National Quality Award in USA
  • Deming Prize in Japan
  1. National Quality Awards (NQAs), e.g.:
  • Polish Quality Award
  • Requirements of standard ISO 9001
  • Self-assessment according to ISO 9004
  • Self-assessment according to ISO 10014

Source: (Neely 1269).

From Table 1, the first group constitutes the national and international performance measures. Organizations are required to complete various comprehensive assessments as an important requirement of their application process. The second group is comprised of models that have been developed with respect to the ISO standards. In addition to the models shown in Table 1, various other organizational management scholars and practitioners have also developed performance models that address organizational operations. The models include the balanced scorecard, ROI, and ROE among others.

Over 1970 and 1980, performance measurement literature advanced by authors such as Taticchi and Tonelli claims that performance measures developed in this period are dissatisfactory (143). This claim supports an earlier assertion by Bourne et al. (756). The authors asserted that the available accounting-oriented measures, for instance, ROI, ROCE, and ROE, are incomplete and inconsistent with all performance-monitoring needs of organizations. ROI seeks to measure organizational profitability. This function indicates that it only focuses on measuring the performance of an organization from a financial-based approach. To this extent, it becomes difficult to apply it in public organizations considering that they provide public goods and services without the objective of making profits. Even in profit-based organizations, the approaches are incomplete since performance cannot be completely and satisfactory determined in financial terms (Taticchi and Tonelli 144).

All organizations endeavor to measure performance for different reasons. Propper and Wilson identify performance improvement by ascertaining the best practices, the provision of information to quasi-markets, and accountability as the main four principal purposes of measuring performance in the public sector (253). To improve performance, its measurement is necessary and hence the need to link it to various indicators, incentives, and targets (Bourne et al. 757). Hence, organizations measure it based on the next period’s incentives and targets. Resources are then mobilized to ensure that the targets are met. This goal can be achieved through linking organizational targets to financial reward systems such as compensation based on results or through non-financial measures, for instance, ‘name to shame.’

Ascertaining the best practices in a given sector involves collecting data in a professional manner for internal use to ensure that the public sector acquires information that can facilitate self-analysis while improving its performance. Providing quasi-markets with information constitutes a bazaar-oriented approach to measuring performance. Such information facilitates the allocation of resources via consumer choices. Although it is important in the UK, through the new labor law, the citizens utilize such information sparingly. To enhance efficiency, organizations link measurement to finance. The approach ensures that measurement systems are accurate to eliminate or reduce chances of distorting resource allocations. Irrespective of the performance measurement approach deployed by any organization, Bourne et al. indicate that such approaches are developed using three main phases as discussed in the next section (757).

Phases of implementing performance measurement system

The first phase, namely, performance measurement system design, consists of the definition of what should be measured by any performance measurement system. Bourne et al. argue that it can be subdivided into “identifying the key objectives to be measured and designing the measures themselves” (757). Measures are designed in the effort to determine the consistency of the adopted measurement strategy with the behaviors that the approach seeks to support. Arguably, it is impossible to measure anything without a clear recognition of what is being measured. Hence, in the first phase, the necessary object of measurement is defined.

The design of performance measurement systems needs to consider various architectural characteristics of the system. For example, at the design phase, there is a need to recognize the fact that any performance measurement process must possess a mechanism for providing feedback to the developed success strategies. This position stems from the assertion, “organizational performance encompasses the most important criteria for evaluating organizations, their actions, and environments” (Devinney and Yip 828). Performance feedback can be provided by evaluating the financial performance of an organization after implementing a performance improvement strategy. The evaluation includes the return on organizational investments, changes in organizational assets, and the changes in the profitability of an organization. Feedback on the performance management approaches can also be evaluated from the context of the increment of an organization’s market share, changes in sales level, and even changes in the shareholder returns in terms of the magnitude of dividends.

According to Bourne et al., a balanced scorecard can capture all the above indicators of the organizational performance success (756). An important measure of performance of an organization entangles the determination of success strategies that are deployed to enhance performance by altering the extant managerial approaches. The goal is to promote employee engagement by ensuring that their cross-cultural differences are managed to enhance the global growth of an organization. To this extent, the scorecard provides the required feedback of a performance measurement model. However, irrespective of the issues to be captured by any performance measurement instrument, Bourne et al. emphasize that the first phase identifies the key objectives and measurement design as the two essential requirements (757).

The second phase, implementation, involves putting into work the performance measures designed and described in the first phase. Bourne et al. define it as “the phases in which systems and procedures are put in place to collect and process the data that enables the measurements to be made regularly” (757). Major activities in this phase may entail developing an application of data collection computer programs coupled with its (data) organization and interpretation to derive meaning or information. Such information is important in making decision or indicating the performance of an organization.

The implementation process involves initiating some new approaches that can facilitate the recording of new information (Bourne et al. 758). The approaches may include establishing regular customer and/or employees’ survey. From the work of Bourne et al., a response to the implementation phase of the performance measurement systems is perhaps clear upon considering the practical experiences in the execution of performance determinants by an organization such as McDonald’s (758).

McDonald’s measures its performance in terms of customer satisfaction based on creativity and innovation of new products. The actual measure of performance from in terms of the capacity to address customer needs entails the determination of whether the company will always have an alternative product on offer in case customers’ tastes and preferences change due to the intensive campaigns on the need for healthy foods. Based on this performance measurement, McDonald’s has established that Chinese prefer chicken to beef. Consequently, the company has designed hamburgers made from chicken as opposed to beef. This current strategy has led to a high performance for McDonald’s products in all markets based on the need to proactively address the emerging customers’ tastes and preferences.

McDonald’s also measures its performance by determining its ability to maintain its market share while at the same time attracting new customers. In fact, increasing an organization’s market share is impossible without attracting new potential customers (Herman and Renz 109). In the effort to boost its performance in terms of increasing its market share, McDonald’s invests in studying clients’ motive to eat at fast-food outlets, including the service and products to be found at the fast-food stores. McDonald’s corporate philosophy encourages sales and communications personnel to handle clients in a manner that would satisfy their desires. For this reason, McDonald’s regards its customers and employees as the most crucial elements for success in the highly competitive fast-food industry.

In line with Bourne et al.’s findings, customer service satisfaction is qualitatively measured by determining whether those who have a first-time experience with McDonald’s products perceive the products as the most favorable ones in comparison with a range of similar items that are offered in the market (767). In fact, “getting and keeping customers that are loyal to a particular brand is most useful when they are gross users of the products” (Hill and Ettenson 87).

For McDonald’s, depending on the various perceptions of brand loyalties for the company’s products, the business employs varied strategies to enhance uniqueness, favorability, and awareness of its products and services. In this quest, a major effort entails ensuring high performance in terms of customer service in the restaurants. This performance is measured based on the customer service levels that depend on the arrival and departures rates. Where customers are kept waiting for long before being served, probability exists that an organization would lose some of its loyal clientele to competitors who have quicker service rates. This realization makes McDonald’s to consider low customer service rates as an indicator of low organizational performance in line with Bourne et al.’s findings concerning the various issues that hinder a company’s performance (760).

The third phase during the implementation of performance measurement system entails the use of performance measurement system. Bourne et al. subdivide this phase into two (758). The authors assert, “As the measures are derived from strategy, the initial use to which they should be put is that of measuring the success of the implementation of that strategy” (Bourne et al. 758). Hence, when using measurement systems, there is a need to recognize the fact that the measurement systems should facilitate the realization of positive outcomes in terms of measuring the intended performance indicators to help in adhering to the developed strategy. The second use of performance measures involves challenging any prevailing assumption coupled with testing the validity of a strategy. Hence, the main use of performance measures entails assessing strategy execution and challenging various strategic suppositions.

The description of the three phases of the implementation of performance measurement systems suggests a sequential approach to performance determination. However, Bourne et al. insist that the approach is only a conceptual framework of how the process should proceed (756). The phases often overlap since different performance measurements are implemented at disparate capacities. Hence, some measures are implemented fully while the others are yet to be completed. Overlaps occur, especially between the use and implementation phases.

The overlap is also created by the need to conduct reviews of the measurement system design, execution, and use phases. The review information prompts the need to make new considerations. Hence, each phase yields important information that is fed to the other phase in a bid to increase the effectiveness of the entire performance measurement systems. Consequently, the linear model cannot be deployed to explain the process of performance measurement system development for any organization. This difficulty compels Bourne et al. to consider describing three longitudinal studies on the implementation of performance measurement systems to establish a practical description of the how the process is conducted in the real organizational environment (757).

Bourne et al. present the need for the continuous reviewing and updating of performance measurement systems (758). Hence, performance measures change with the changing situations. The authors insist, “The performance measurement system should include a process for periodically reviewing and revising the complete set of measures in use” (Bourne et al. 758). Hence, no performance measurement system remains accurate under all circumstances. For example, there is a need for challenging strategic assumptions through performance measurement systems.

Since such assertions keep on changing, the measurement systems also change. In the discussion of the literature review concerning performance measurement system, Bourne et al. question whether the differentiation of various phases of design, implementation, and use of performance measurement systems are vital (758). They also question whether the updating processes are significant in any manner with reference to the validity of performance measurement systems. Responding to these two issues, the researchers demonstrate the phases of performance measurement system design, implementation, and use. They progress to demonstrate the updating process of performance measurement systems using one isolated case study.

Organizational experiences in the implementation of performance measurement systems

In the three longitudinal case studies, Bourne et al. assert that the companies (A, B, and C) utilized a lengthened period to progress from the design stage to the ‘use phase’ of performance measurement systems (760). The design phase took four months to complete. However, “it then took another 9 to 13 months before the performance measures reached the stage of being regularly measured, reviewed, and displayed” (Bourne et al. 760). Hence, the implementation of performance measurement systems in an organization is a challenging process that managers and leaders have to handle in their respective lines of duty. Hence, utilizing a lot of time was expected in the implementation of the performance measurement systems in the three companies studied by the authors.

After identifying an appropriate solution to the performance measurement needs of an organization, the next challenge involves minimizing any potential hindrances to its (solution) implementation (Bourne et al. 759). The solution may call for change management since it may involve altering the processes that employees deploy in executing their work. Consequently, workers need to be coached on how to use the new performance system. Such exposure is critical when it comes to sharing common practices coupled with data that is necessary for rating performance. When decision has to be made at any particular time, appropriate data and information should be mined to facilitate the decision-making process.

The extensive amount of data that is required in the implementation of performance measurement systems coupled with inevitable organizational resistance to change may explain the quantity of time that organizations, A, B, and C utilize to execute their frameworks. In fact, Bourne et al. support this hypothetical position by identifying various hindrances to the implementation process of the systems that companies adopt in their operations (762). The researchers revealed issues such as resistance to the proposed measurements, computer issues in the implementation phase, and the distraction of top management as the major challenges encountered by the companies in their experience with the design, implementation, and the use of performance measurement systems (Bourne et al. 762). The process of designing and implementing performance measurement systems involves translating stakeholders coupled with customers’ views into some business objectives that can be concisely measured. Since such needs keep on changing with the emerging circumstances, a periodic review and updating of performance measures cannot be negated. This process requires the participation of IT specialists, the deployment of mechanisms for data retrieval and manipulation.

Conclusion

Performance measurement is an essential tool for evaluating the ability of an organization to remain in business in the short and long-term. Profit-making organizations deploy productivity levels as measures of their performance. To this extent, profitability encompasses a desired organizational output. In non-profit-making and public sector organizations, performance measurement is necessary since it helps to determine the extent to which operational objectives are met. While it is indispensable for an organization to design, implement, use, and/or continuously update a performance measurement system as Bourne et al. reveal, challenges are inevitable (759). Performance measurement systems introduce new perspectives of executing organizational duties.

Therefore, employees and managers feel threatened by the change introduced by such systems. This situation explains the long time that is witnessed in the implementation phase. Although the design, implementation, and use stages of performances measurement systems interact, breaking down the entire process is necessary. This strategy permits the visualization of the process as consisting of parts, rather than a whole, hence making it possible to address the merits and challenges of each distinct stage. Therefore, based on the expositions made by Bourne et al. concerning the role that the various performance measurement tools play in enhancing an organization’s productivity, the report confirms that it is indeed crucial for managers to be aware of the issues that arise in the various phases that have been discussed in the paper.

Works Cited

Bourne, Mike, et al. “Designing, Implementing and Updating Performance Measurement Systems.” International Journal of Operations and Production Management, vol. 20, no. 7, 2000, pp. 754-771.

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Dixit, Avinash. “Incentives and Organizations in the Public Sector: An Interpretive Review.” Journal of Human Resources, vol. 37, no. 4, 2002, pp. 696-772.

Herman, Raymond, and Dickson Renz. “Advancing Organizational Effectiveness Research and Theory.” Management & Leadership, vol. 18, no. 4, 2008, pp. 399-415.

Hill, Stephen, and Tyson Ettenson. “Achieving the Ideal Brand Portfolio.” Sloan Management Review, vol. 2, no. 1, 2005, pp. 85-90.

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Neely, Andy. “The Evolution of Performance Measurement Research: Developments in the Last Decade and a Research Agenda for the Next.” International Journal of Operations & Production Management, vol. 25, no. 12, 2005, pp. 1264-1277.

Propper, Carol, and Deborah Wilson. “The Use and Usefulness of Performance Measures in the Public Sector.” Oxford Review of Economic Policy, vol. 19, no. 2, 2003, pp. 251-265.

Taticchi, Paolo, and Flavio Tonelli. “Performance Measurement and Management Systems: State of the Art, Guidelines for Design and Challenges.” Measuring Business Performance, vol. 16, no. 2, 2012, pp. 140-154.