What is Performance Measurement (PM)?
Historically, PM systems was developed as a means of monitoring and maintaining organisationalcontrol, which is the process of ensuring that an organisation pursues strategies that lead to theachievement of overall goals and objectives.PM plays a vital role in every organisation as it is often viewed as a forward-looking system of measurements that assist managers to predict the company's economic performance and spot the needfor changes in operations. In addition, PM can provide managers, supervisors and operators withinformation required for making daily judgements and decisions. PM is increasingly used byorganisations, as it enables them to ensure that they are achieving continuous improvements in their operations in order to sustain a competitive edge, increase market share and increase profits.Reasons for adapting performance measurements
To evaluate the performance of firm/department/individual.
To control different activities so that it leads to achieve organizational goal.
To budget according to the future requirement.
To motivate by giving people significant goals to achieve and then use performance measuresto provide periodic sense of accomplishment.
Traditional PM has mainly been financial measuring ratios such as ROI (Return on Investment), RI(Residual Income), and EPS (Earnings per share). These metrics accounts for the costs associatedwith capital and help firms spot areas in which capital is being invested unprofitably. Although thesefinancial data have the advantage of being precise and objective, the limitations are far greater,making them less applicable in today's competitive market. Organisations, that have adopted thetraditional PM, have experienced great difficulty in trying to fit the measures with increasing new business environment and current competitive realities.While the traditional financial metrics are value-based, they are nonetheless lagging indicators. Theyoffer little help for forward-looking investments, where future earnings and capital requirements arelargely unknown investments such as new product introductions and capital or new market entry.
Fail to measure and monitor multiple dimensions of performance, by concentrating almostexclusively on financial measure.
They solely concentrate on minimising costs and increasing labour efficiency while neglectingother operational performance measures such as quality, responsiveness and flexibility.
Allowing managers to use slow-reacting and tactical management control system such as'budgets'. These budgeting measures mainly focus on short-term value creation as it only attemptsto control and improve existing operations.
Moreover, most companies motivate their worker through reward system. Traditionally,employees are rewarded with bonuses at the end of the year once a specific target has been