TOPIC

PERFORMANCE
MANAGEMENT

Lecture outline:
1.
2.
3.
4.

5.
6.

Understand what is performance

management
Understand limitation of traditional PMS
Explain the BSC
Understand performance evaluation for
service organisations and non-profit
organisation
Explain reward systems
Understand critical success factors and
key performance indicator

What is Performance Measurement

and Management?
Performance

measurement - A process of
assessing progress toward achieving
predetermined goals.

Performance

management - The use of

performance measurement information to
create positive change in organisational culture,
systems and processes.
helping to set agreed-upon performance goals
allocating and prioritizing resources
informing managers to either confirm or change
current policy or program directions to meet those
goals
sharing results of performance in pursuing those
goals.

The Building Blocks of Performance

Management
Source: Fitzgerald & Moon, 1996
STRATEGY

DIMENSIONS
Financial
Or
Financial and non-financial

TARGETS
Ownership
Achievability
Equity

REWARDS
Clarity
Motivation
Controllability

Performance Measurement Systems

What is wrong with the present measurement
systems?
Measurements

are not in tune with strategic

objectives.
Measurements are not customer driven.
Financial measures are too late for any corrective
action and encourage a short term focus.
Many key non-financial performance indicators
are ignored.
Measures are often used for punishment rather
than for learning.

Financial vs Non-financial
Measures

Financial Indicators
Example: ROI, RI, EVA, NPV, Sales, profit
Problems with reliance on traditional financial
indicators
Tendency to rely on short term views.
Distorted perception due to use of historical
data to make future plans and decision
making and controlling.
Time lag from preparation to use.
Management Accounting needs timely data.
Qualitative information cannot be obtained
therefore unbalanced perceptions.

Financial vs Non-financial
Measures
Non-financial indicators
Example: customer satisfaction, on-time
delivery, quality.
Benefits of non-financial indicators:
Able to view firms as having many dimensions
needed for survival.
Able to assess potentials.
More accurate to measure operations of an
organization. Less reliance on proxy financial
measures which are less accurate

The Balanced Scorecard

Designed by Kaplan and Norton

Use financial and non-financial measurements
within 4 perspectives-Financial, Customers,
Internal Business Process, Learning and Growth.

How do customers see us? (customer perspective)

What must we excel at? (internal business process
perspective)
Can we continue to improve and create value? (learning and
growth perspective)
How do we look to shareholders? (financial perspective)

Each perspectives has two to three

measurements.
Link strategy with overall performance measures.

The Balanced Scorecard

To implement the BSC the major objectives for each of the 4

perspectives should be articulated and these objectives
should be translated into specific performance measures.

A critical assumption of BSC is that each performance

measure is part of a cause-and-effect relationship.
Each measurements relate to each others e.g. profit

(financial)-customer turnover (customer)- On time deliveries

(internal business process)- training hours (learning and growth)

The BSC consists of two types of performance measures:

Lagging measures
Leading measures
Example of lag measure is increase in turnover, while order
execution time would be lead measure for it.

The Balanced Scorecard

Strategy

Map guides the organization to achieve

its objectives and translates strategy into action.

The

description of strategy maps:

All the information is contained on one page; this

enables relatively easy strategic communication.
There are four perspectives: Financial; Customer;
Internal; Learning and Growth.
The cause-and-effect relationships are described by
connecting arrows. The argument has it that succeeding
against objectives from the learning and growth
perspective (the foundation of the strategy map) has a
causal effect on success of the IBP perspective, which in
turn creates success from the CP and finally to the FP.

Figure 1: Strategy Map

Figure 2 The Balanced Scorecard (Source: Kaplan and Norton, 1996b)

2000 Colin Drury

Eg: internal business process

(IBP)
objective
Achieve fast
ground
turnaround

measures
Time at
gate
On-time
departure

target
30 minutes
90%

The Balanced Scorecard

The

BSC Management System (see

Figure 2) is a scorecard of measures,
targets and initiatives that supports
the Strategy Map.
The scorecard shows the measures
that is used by an organization to
track its progress towards achieving its
strategic objectives.

Four Perspectives in Balanced

Scorecard
Financial

perspectives

-ROI, EPS, Profit/Sales, Debt/Equity, Sales/Asset

Customer

perspectives

- No. customer complaints, Market share, Product returns/

Sales, No. new customers

Internal

Business process

- On time deliveries, Quality costs, Setup time, standard cost

variances

Learning

and growth

- Suggestions per employees, Employees turnover, Hours of

training

Advantages of Balanced
Scorecard
Link

long term strategy with short term

objectives and measures.
Encourage continual improvement.
Balanced view between needs of
financial and non-financial objectives.
Modifiable for different organisations.
Facilitate communications of companys
strategy to lower level subordinates.

Measuring Customer
Performance
Customer

profitability analysis
- the reporting and analysis of revenues
earned from customers and the costs
incurred to earn those revenues.
- attention given to customers who
make large contributions to the
operating income.

Performance Evaluation for Service

Organizations
Service

companies differ from

manufacturing companies in several ways:
Outputs for most services are intangible.
Outputs for services are heterogeneous.
The production and consumption of many
services are simultaneous.
Services are perishable.

Performance Evaluation for Service

Organizations
As

in manufacturing companies,
managers of service companies now
require accurate, timely information to
improve the quality, timeliness and
efficiency of their activities, and to make
decisions about their individual
products, services and customers.

Fitzgerald

et al (1993) proposes the

Results and Determinants Framework as
a PMS for service companies.

Performance Evaluation for Service

Organizations Results & Determinants
F/work

Performance Evaluation for NPO

NPO

are different from profit organization.

Reason for existence NPO no profit motive.

The

best performance indicators for NPO are

generally not in the financial terms. Thus, it
is more difficult to measure performance of
NPO compared to the profit companies.
Kaplan & Norton (2001) suggest that NPO
can use BSC to measure their performances.
Refer Figure 5.4 (Module, p 103).

Reward Systems: Incentives for managers

Why

would managers do not provide good

service? There are three reasons:

They may have low ability.

They may prefer not to work hard.

They may prefer to spend company

resources (privilege given to them).

The

purpose of reward is to motivate

superior performance among managers and
employees to achieve organizations goals.

Reward Systems
Frequently

managerial rewards include

incentives tied to performance.

The

objective of managerial rewards is to

encourage goal congruence, so that
managers will act in the best interests of the
company.
When controls can motivate behavior that is
organizationally desirable, they are described as
encouraging goal congruence.

Managerial

rewards can be:

Monetary and non-monetary

Examples - salary increases, bonuses based on
reported income, stock options, and recognition

Performance Measurement &

Reward Systems
How

to tie reward to performance effectively

(Atkinson et al, 2007, p369) by:
1. Ensuring that employees understand how
their jobs contribute to achieve
organizational goals;
2. Ensuring employees understand and trust
the reward system.
3. Ensuring employees believe that it
measures what they can control.

Performance Measurement &

Reward Systems

Employee must perceives the reward

system as fair and predictable.
If the reward system does not measure
performance that is under the managers
control,
they may ignore the measured performance
because it is independent of their efforts
and the reward system will be ineffective.

Performance Measurement &

Reward Systems
2. The designers of the PMS must make a careful choice
about whether it measures employees inputs or
outputs.
In general, the greatest alignment between
employees and the organisations interests is
provided when the PMS monitors and rewards
employee outputs that contribute to the
organisations success.

However, sometimes outputs are beyond the

employees control.

When outcome measurement is problematic,

organisations often choose to monitor and reward
inputs i.e. employee learning, demonstrated skill
and time worked.

3.

The elements of performance that the PMS

monitors and rewards should reflect the
organisations critical success factors.

This to ensure that the PMS is relevant and

motivates intended performance that matters
to the organisations success.

PMS must consider all facets of performance

so that employees do not sacrifice
performance on an unmeasured element for
performance for performance on an element
that the reward system measures.

Performance Measurement &

Reward Systems
4.The reward system must set clear standards
for performance that employees accept.
Standards help employees assess whether
their skills and efforts create results that
the PMS captures and reports as outcomes.
5.The measurement system must be calibrated
so that it can accurately assess performance.
PMS establishes clear relationship between
performance and outcome.

Performance Measurement &

Reward Systems
6. When it is critical that employees coordinate
decision making and other activities with
other employees, the reward system should
reward group rather than individual
performance.
Many organizations now believe that, to be
effective, employees must work well in teams.
They are replacing evaluations and rewards based
on individual performance with evaluations and
rewards based on group performance.

Critical Success Factors

Definition
A key area where satisfactory
performance is required for the
organization to achieve its goals.
A means of identifying the tasks and
requirements needed for success.
At the lowest level, CSF become
concrete requirements.
A means to prioritize requirements.

There are four basic types of critical success

factors CSFs
1.Industry critical success factors (CSFs)
resulting from specific industry characteristics;
2.Strategy critical success factors
(CSFs)resulting from the chosen competitive
strategy of the business;
3.Environmental critical success factors
(CSFs)resulting from economic or technological
changes; and
4.Temporal critical success factors
(CSFs)resulting from internal organizational
needs and changes.
Things that are measured get done more often

Critical Success Factors

CSF

for a business organization will

be:
i) Service
ii) Quality
iii) Cost
iv) Customer

Critical Success Factors-Service

The

products tangible and

intangible features promised to the
customer; service is also known as
value in use. How customers are
treated before, during and after
purchase decisions.

Critical Success Factors- Cost

Resources

used to provide the

product or service. The aim is to
produce with the least resources
hence increase competitiveness.

Critical Success Factors- Quality

The

difference between the promised

and the realized level of service;
conformance to specifications.
Example: Proton and Mercedes
manufacture cars for different market
segments and different product
specifications. As long as both
adhered to their specified standards,
they achieve quality in their market
segment.

Critical Success Factors- Customer

Taking

the value chain concept

into perspective, Customers will
be the most important
determinant of a companys
success.
Customer is always right.

Examples of Critical Success

factors
Statistical research into CSFs on
organizations has shown there to be seven
key areas. These CSFs are:
1.Training and education
2.Quality data and reporting
3.Management commitment, customer
satisfaction
4.Staff Orientation
5.Role of the quality department
6.Communication to improve quality, and
7.Continuous improvement

Examples of Critical Success

According to a 2000factors
Standish Group Report, the top
success factors for projects were as follows. The list
is in decreasing order of percentage factors
responsible for success.
% Success Factors
18% Executive support
16% User involvement
14% Experienced project manager
12% Clear business objectives
10% Minimized scope
8% Standard software infrastructure
6% Firm basic requirements
6% Formal methodology
5% Reliable estimates
5% Other criteria

Key Performance Indicators

Performance

measures used to
assess an organization's
performance on its critical success
factors.
Measurements can be nonfinancials and subjective by
nature.

CSF

KPI

Service

Time to respond to customer orders,

time taken to resolve customer
complaints.

Quality

Number of complaints, customer

satisfaction surveys, percent on-time
delivery,returns, warranty claims.

Cost

Ratio of costs to revenues, cost of

particular activity, customer profitability,
sales per hour.

Custom
er

No. of customers, no. of new customers,

no. of lost customers, market share.

End of Topic 4
what gets measured gets done
(Kaplan & Norton, 1996)