Dysfunctional consequences of financial performance measures

Earnings management
• Accruals based earnings management
•Real earnings management
•Reduce costs in way which impairs future capacity
•Training
•Repairs and maintenance
•Increase stock levels in absence of demand
•Run down assets

Consistent with agency based analysis

•Agency costs – price protection by principals
•Managerial response
•Bonding
•Monitoring
•Self interested managers will seek to avoid the consequences of performance
monitoring
Benefits of the balanced scorecard:
• Involves whole organisation: holistic, coherent, goal congruent
•Tool for communication of strategy and the role of each department and
individual
•Provides a comprehensive framework for translating company’s strategic goals
into a coherent set of performance measures.
•Brings together in a single report four different perspectives on a company’s
performance that relate to many of the disparate elements of a company’s
competitive agenda.
• Helps managers to consider all important operational measures together –
enables managers to see whether improvement in one area may have been at the
expense of the other.
• Promotes the active formulation of organizational strategy by making it highly
visible through the linkage of performance measures to business unit strategy.

Limitations/criticisms
•Oversimplification
–Analogies such as flying a plane (Kaplan and Norton, 1996)
•Balance?
–Perspectives
–Priorities/incentives
•Cause and effect –
-Difficult to establish in complex organisations
-lacks theoretical underpinning
-logical vs causal relationship
-Eg customer loyalty. –What we may claim is that customers which are
not loyal are expensive,but it does not follow that loyal customers are
inexpensive. (Norreklit 2000)
- Too ambiguous
-empirical evidence weak.
•Timing issues –Time lag between leading indicators and financial performance
poses challenges for empirical testing of BSC propositions
•Top down
–Doesn’t necessarily access the knowledge and skills of those in
operational roles
–Targets can be gamed and incentivise non goal congruent behaviour
•Baggage handlers
•Car repair and maintenance workshops
•Too prescriptive?
-Omission of other important perspectives
• environmental impact on society
•employee perspectives
•Supplier perspectives

•Proliferation of measures – what are the priorities?

-Too few measures = lack of coverage

•Potential conflict between measures/ prioritisation/weighting

-Eg research vs teaching with constrained resources

•Assumption that financial performance is the ultimate objective problematic for

NFP sector
•Interpretation of results – the problem of aggregation
-Cognitive theory – aggregation good
-Aids comprehension
-And comparability
-But lose information
•Performance evaluation vs strategy management: common v unique measures
•Measurement issues

The performance Pyramid

This derives from the idea that an organisation operates at different levels, each
of which has different concerns, which should nevertheless support each other in
achieving business objectives. The pyramid therefore links the overall strategic
view of management with day to day operations. It includes a range of objectives
for both external effectiveness (such as related to customer satisfaction) and
internal efficiency (such as related to productivity), which are achieved through
measures at the various levels

At corporate level, financial and market objectives are set

At strategic business unit level, strategies are developed to achieve these
financial and market objectives
Customer satisfaction is defined as meeting customer expectations
Flexibility indicates responsiveness of the business operating system overall
Productivity refers to the management of resources such as labour and time
The above are supported by more specific operational criteria
Quality of the product or service, consistency of product and fitness for purpose
Delivery of the product or service (method of distribution, speed and ease of
management)
Process time of all activities from cash collection to order processing to
recruitment
Cost, meaning the elimination of all non value added activities

Tableau de Bord
–Dashboard rather than scorecard
–No cause and effect
–Useful measures for monitoring and control
Fitzgerald and Moon
–Dimensions
•Aspects of performance that need to be measured
–Standards
•Benchmarks, targets
–Rewards
•incentives