Performance measurement

The old adage “What you measure is what you get” or the other way around, “You can’t manage, what you can’t measure”, contains an important message. It is believed that the performance measurement strongly affects the behaviour of the managers and employees. People in the organisations respond to the measures (Kaplan & Norton 1992, 71; Neely & Adams 2001).

Marshall, Wray, Epstein and Grifel (1999, 13) define performance measurement as the development of indicators and the collection of data to describe, to report on and to analyse the performance. Neely, Gregory and Platts (1995, 80 – 81) define performance measurement as the process of quantifying the efficiency and the effectiveness of the action. Effectiveness refers to the extent to which the customer requirements are met and efficiency is the measure of how economically the organisation’s resources are utilised, while providing a given level of customer satisfaction. The performance measure is a metric used to quantify the efficiency and/or the effectiveness of the action. The performance measurement system is a set of metrics used to quantify both the efficiency and the effectiveness. Thus the performance measurement system consists of a number of individual performance measures. Lockamy III and Smith (1997, 143 - 144) define the performance measurement system as a systematic way of evaluating the inputs, outputs, transformation, and productivity. The system includes the performance criteria, standards and measures. The criterion is a relative element to evaluate the performance. The performance standard is an accepted satisfactory level of measurement and the performance measure is an actual value of the performance criterion.

Neely et al. (1995, 81) summarise that the performance measurement system can be examined at three different levels: individual performance measures, performance measurement system as an entity and relationship between the performance measurement system and the environment within which it operates (Figure 4.3).

Individual measures

Individual measures Individual

measures

Individual measures Performance

measurement system The environment

Figure 4.3 Levels able to examine the performance measurement system (Neely et al.

1995, 81)

Grünberg (2004, 57) emphasises that measuring the performance has two main aims, first to connect the company goals and objectives to the improvements, and secondly to set the targets for the improvement activity. A linkage between the performance objectives and the improvement objectives can raise the impact of the improvement work, which in turn helps fulfil the performance objectives (Figure 4.4). This also helps to clarify the development work and to ensure that all the participants are working in the same direction. To support the improvement work, it is vital to find the performance factors that support the performance strategy set by the company.

Performance objectives

Improvement objectives

Figure 4.4 The linkage between performance objectives and improvement objectives (Grünberg 2004, 57)

Lockamy III and Smith (1997, 143 - 144) have recognised that an integrated performance measurement systems provides a mechanism for improved organisational coordination. They highlight the importance of linking the performance measurement system to the firm’s strategy. Also Kennerley and Neely (2003, 218) emphasise that to be effective, the performance measurement systems must be managed to reflect the organisation’s context and strategies. The main

task of performance measurement and analysis is to support the decision-making by producing information of the desired estimation and measuring the targets (Kennerly & Neely 2003, 227). Neely, Adams and Kennerley (2002, 14) state that the organisation needs to develop an intelligence gathering systems allowing the managers to answer quickly to the critical questions they have to answer in order to successfully manage a business in the 21^st century. The measurement of the performance may focus not only on verifying the past, but it has to direct the firm to better performance in the future (Rantanen et al. 2001).

The use of performance measurement systems usually occurs in one or several of the following areas or subsystems (Hvolby & Thorstenson 2000, 324):

Planning and control of current operations / production Financial and management accounting

Business process benchmarking and improvement programs Establishment and maintenance of incentive schemes

There are a large number of performance measurement systems and frameworks available for companies - such as Balanced Scorecard, Business Excellence Model, Activity Based Costing, Quick Response Manufacturing, etc. Maybe the best known is the Balanced Scorecard -concept (BSC) presented by Kaplan and Norton (1992, 1996). The BSC is a set of measures that gives a comprehensive view of the business and introduces the strategy of the company. The BSC allows the managers to look at the business from four perspectives:

Financial perspective Customer perspective

Internal business perspective Innovation and learning perspective

According to Kaplan and Norton (1996, 8 – 10), the BSC emphasises the idea that financial and non-financial measures must be a part of the information system for the employees at all levels of the organisation. The objectives and measures are derived from a top-down process driven by the mission and the strategy. The measures represent a balance between external measures for the shareholders and customers, and internal measures of the critical business processes, innovation, learning and growth. The measures are balanced between outcome measures – results of the past effort – and measures that drive the future performance. The scorecard is balanced between the objectives, easily quantified outcome measures,

and the subjective, somewhat judgmental, performance drivers of the outcome measures (Kaplan & Norton 1996, 10).

One set of measurement methodologies is the self-assessment models, such as the Business Excellence Model and the Baldrige Award. The EFQM Excellence Model is a well-known framework in European organisations and has become the basis for a majority of national quality awards, and is also used in Finland as well. The EFQM is based on nine key criteria, five of which are enablers and four results. The enabler-criteria cover what the organisation does, and the result-enabler-criteria cover what the organisation achieves. The results are caused by the enablers. The feedback from the results helps to improve the enablers. Innovation and learning help to improve the enablers, which will lead to improved results. The results with respect to performance, people, customers and society are achieved through leadership driving policy and strategy, that is delivered through people, partnerships, resources and processes (Kontio 2001).