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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 International Journal of Operations
& Production Management,
that company was employing nearly all the basic methods that are currently used in Vol. 19 No. 2, 1999, pp. 205-228,
managing big business (Chandler, 1977, p. 417). © MCB University Press, 0144-3577
IJOPM Given that the “basic management techniques” have been used for so long and
19,2 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
206 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 freshly-
delivered 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
The performance
of the direct wages. It is therefore actually more important that they should be correct than
measurement
that the actual wage costs should be correct (quoted in Kaplan, 1984, p. 395).
In 1951, GE established a “Measurement Project” which “was intended to revolution
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 207
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.
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;
(4) status of committee and project team activities; The performance
(5) status of staff activities; measurement
(6) relationships with associated companies (group companies, vendors, revolution
contractors, sales companies, etc.)
Information 215
(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 self-
realisation;
(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;
IJOPM (3) status of new product and technology development (including quality
19,2 analysis, quality deployment and design review activities);
(4) status of process control;
(5) status of process analysis and process improvement (including process
capability studies);
216 (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
(1) tangible effects (such as quality, delivery, cost, profit, safety and measurement
environment); revolution
(2) intangible effects;
(3) methods for measuring and grasping effects;
(4) customer satisfaction and employee satisfaction;
217
(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.
IJOPM Changing organisational roles
19,2 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
218 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.
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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