Literature Review Of Performance Management And Systems Accounting Essay
Literature reviews is theoretical and conceptual writings of the previous studies. It provides an authentic data of the previous research which will help to investigate into any findings or research or any publication or debate in the area of performance management in particular balance scorecard approach. It would help to evaluate Human resource management and critically analysing it over Balance scorecard approach.
1 PERFORMANCE MANAGEMENT OUTLINED:
1.1 Definition of Performance management:
Many organizations have now accepted performance management system for the better management and competent strategy and well organised operation. A successful implementation of performance management system requires constant participation of employees for the development and implementation of strategy. While constituting strategies and successful implementation of strategies it is very crucial to gain trust and co-operation of employees of the organization. This trust cycle helps organization to implement performance management. This trust cycle is central element while developing balance scorecard. To understand more about performance management it is important to know what performance management is so it is well defined here:
“Performance management is systematic process for improving organisational performance by developing performance of individual or a team. In wider sense getting better result from an individual or a team or from an organization by managing and understanding performance within an agreed framework of planned goals and standard and competence required for it”. (Armstrong 2006)
Moreover Moharman(2002) state that it is a process of managing the management of the organisation.
1.2 Concept of Performance management and performance management system
Performance management and performance management system both are different. It provides different tool to measure the performance and evaluate the individual performance in organisation.
“Performance management system is a systematic attempt to link organisational strategy to employee’s through the integration of activities that assess, appraise, develop and reward employees”. (Bratton & Gold 2005)
According to the research conducted by the CIPD in 2004 (11) elicited the different views from practitioners about performance management: which has been briefly explained as follows:
Centrica believes that we expect that line manger should treat performance management as useful contribution towards management tool.
According to Halifax Performance management system ensures excellent leadership and high quality of coaching and mentoring relationship among different managers and teams. Managing performance is about coaching, guiding, motivating and rewarding colleagues to help to breathe potential and improve organisational performance.
Scottish parliament further state that Performance management is planned to ensure that our action is guided by our values and is relevant to the principle of the organisation.
According to Catherine Jablonsky(2010) real time Performance management requires manager to decide which metric is effectively followed by key process also he should keep in mind that
how to adjust target by changing business or operational conditions. Further more Ketter (2010) advocated the performance management arguing that middle manager should execute the business strategies and motivate employees to attain aspired goals with the usage of performance management. To understand more about performance management it is essential to know performance management cycle and performance management matrix:
The Management cycle
Figure:1.1 The management cycle
(Source: Armstrong 2006, P.17)
According to quality expert William Deming performance management is a natural process and it consists of these activities:
Plan- To decide what to do and how to do
Act- To conduct the work needed and implement plan
Monitor- carry out continuous checks on what is being done and measure outcomes in order assess progress in implementing the plan.
Review- Consider what has been achieved and in the light of this, establish and any corrective action are required if performance is not according to plan.
It helps individual employee and especially used for the appraisal of the employees, it attempt to show the performance of individual against high level regards to it. It helps to show management performance against peers. It helps individual employee to focus on their limitations and shows where they have to improve. However it is not an appraisal rating system. Performance matrix will review two important elements – manage
Rewardment style/behaviour and organisation performance as it shows in the figure below it contributes to support full role demands rather than short term focus on present results. It can be explained by visual example – the individual is placed at the relevant position in the matrix by reference to the two dimensions. “For example, a strong people manager who is low on the deliverables would be placed somewhere in the top left-hand quadrant but the aim will be movement to a position in the top right-hand quadrant.” (Armstong, 2006)
Performance Management Sequence
Figure: 1:2 Performance management sequence
(Source: Armstrong 2006, P.17)
First is defining ‘Role’ in which proficiency requirement and main result area includes.
The Performance Agreement shows how individuals have to achieve in the form of goal and how performance will be achieved and their expectations.
Performance improvement plan focuses on improvement of individual performance.
Performance development plan demonstrate what skills and knowledge should be attained to increase their levels of competence.
For managing performance throughout the year, it is required to take action to implement the performance agreement and performance improvement and personal development plans as individuals carry on with their day to day work and their planned learning activities. It is also important to conducting performance objectives reviews and checks progress and deal with the performance problems wherever it requires.
Performance review is a formal evaluation process which shows normal review of overall progress and what achievement towards goals and objectives need to scrutinise as a next part of performance cycle *
Performance measurement is very important component for whatever strategy or change process any organization would adopt. It will give feedback about the effectiveness of plans and their implementation of strategies. It plays very important role for the organization’s planning and control system. Previously Performance measurement used for reporting on firms past performance. It is the one of the fundamental use of performance measurement system. Traditionally Performance measurement system focuses on financial measures only such as profits, investment return, growth of sales, cash flows etc. However Ittner and Larcker, (1998) mentioned that recently increasing concern amongst the business manager about the over reliance on financial measures and overshadowing the non-financial measures are in issue. In the survey report of Lingle and Schiemann (1996) clearly point out for good measurement system reliance on quality and non-financial measures are more important. Recent trend shows the traditional performance measurement system is incompetent and bias about the non-financial measures and many firms are now switching to put more emphasis on non-financial measures as well such as customer satisfaction, employee job satisfaction, training and development, etc (Chang 2004).
1.3 Evaluation of PMS(Performance Management System)
It is important to note that performance management and performance measurement system are not the same. In one big organization one department may develop highly specific operation measurement information for its operation at the same time each departmental manager will strive to optimize performance for their own department. PMS provoke strategic progression and ensure objectives equivalence.
The Institute of Management Accounts has also strongly advocated the formation of broad based performance measurement system. That it should focus on internal system process or functions and external relationship. The performance measurement system should be forward looking while considering historical aspects as well. (Institute of Management Accounts statement 4U, 1995) Thus Missroon (2000) advocates Balance scorecard, which provides a comprehensive top down view of performance focusing more on firm’s vision and strategies. The performance management will be greatly facilitated by usage of Balance scorecard.(Chang 2004)
Performance measurement system is significant tool to evaluate organisations present status in accordance with organisation strategy and its objectives. It measures organisational strategies keeping in mind the goals and objectives of the organisation. Previously organisation used to check both measures financial and non financial. Financial measures will evaluate senior managers performance while non financial measures lower level employees. Performance measurement system is blend of both measures at all level of organisation. Balance scorecard is a perfect example of Performance measurement system which involves both financial and non financial measures. It also attempts to measure employee performance in relation to corporate strategy. (Gautreau and Kleiner, 2001)
Kaplan and Norton(2006) further noted down in their book that most of the organisations are comprised of multiple businesses, and supported by their different units and their stable staff and management. To integrate business and get the success of the whole corporation it is required to use the resources effectively and set same organisational goals and strategies towards it. The head office can solve this problem by using corporate strategy and Balance scorecard which will help to create value proposition for the organisation.
2 BSC APROACH
2.1 The Balance scorecard Approach
In 1990 Kaplan and Norton introduced Balance scorecard, Earlier scholars found it as measurement technique rather than a strategy for Performance measures. Previously the reasons behind the failure of other performance measures are excessive reliance on financial measures. They are lag indicators of outcomes and show the report of past action and consequences of past strategies which is short term behaviour and does not show the long term indicators. BSC supplement with that the drivers which are the lead indicators for the future financial performance. (Brown, 2000) (Chavan, 2001)
Balance scorecard covers every aspect of strategy for performance measures and it is blend of strategy which measures both out come and drive measures also financial and non-financial measures. (Anthony, 1998)
According to Nhmenchha and Waal much of organisations adopting performance management system for better management and impel operational strategy. Although many of them still focusing on the bottom line measures even so it will not provide comprehensive result of the organisation for the management. Amalgamation of the result of internal process result and financial measures managers can obtain more precise results for the organisation (Davis and Albright 2004, Said et al 2003, Proper and Wilson 2003).
Balance scorecard also compliments other performance management strategies like Total quality management (TQM), Six Sigma, 360 degree appraisal, European foundation for quality management (EFQM), Economic value added (EVA). It serves as a back bone to manage a frame work which integrates all the above features.
The Balance Scorecard is very popular as a strategic performance measurement tools; its popularity which shows American institute of public Accounts only in USA 43% of business organizations are using Balance scorecard approach (Maisely 2001).
2.2 Development and Design of BSC
Kaplan and Norton has derived from its studies that BSC is not just a measurement system of collection of measures but it guides the managers to implement and clarify strategies. It is a tool for measuring performance with a view of organisation mission embodied with the tangible measures which is well drafted by its originators.(Kapalan and Norton 1992,1993,1996a,b) Additionally other authors and research papers helped to get into more in the balance scorecard approach and it has been later on shifted to performance measurement from alignment and implementing and managing strategy.
The main four important aspects of Balance scorecard are financial perspective, customer perspective, internal business policy perspective and learning and growth perspective.
This is well defined in the figure: 2.1
Financial perspective:- For any strategy finance is very important factor. To sustain in any business accurate and timely budgeting system and funding is playing key role to implement strategy and to pursue it further. Successful accurate and proper source of funding data is crucial for any business therefore Balance scorecard projects finance as an important aspect and consider the importance of it in any business. (Kaplan & Norton 1996)
The importance of customer interest and customer satisfaction has got remarkable importance in recent business era. It shows increasing competitive market can easily switch dissatisfied customers. To prevent an organisation from the stiff competition and to differentiate itself the organisation must choose the value propositions for the customer perspective. While developing customer strategy the organisation should keep in mind two very important things: Who are the target customers? And what are their value propositions to serve them? (Niven 2002)
The Internal (Business) Process perspective:-
This component focuses on indentifying the main role/process of the organisation in order to continue adding value to customer needs and customer satisfaction. Each process will help to know the managers how their business is running and how internal process will help to achieve their targets.
Learning and growth perspective
The learning and growth perspective constitutes the base of the Balance scorecard and creates the infrastructure, which is important for the individual objectives to accomplish the firm’s strategy. It is also getting necessary for the organisation to develop culture where in employees will constantly learn and get the knowledge to endorse the growth of the firm.
According to Kaplan and Norton these each perspective has their own multiple measures and linked to cause and effect relationship, where in Cause and effect relationship will be termed as leading and lagging indicators. If change occurs in first measure that is leading measure and this gives result in second measure which is lagging measure.
2.3 The BSC as measurement system
The very unique balance scorecard frame is well described in three aspects: Structure, implementation and use. The structure shows the design of balance scorecard, implementation shows how it going to work in organisation and the use will focus on how the scorecard will occupy to implement strategy and access the performance. This will be given more clear idea by using the following pyramid in figure 2.2.
The structure will be forming at the base implementation attributes at the middle and Use will be at the apex. They are well elaborated as below.
Structure: Unlike other performance measurement system scorecard not only considering both the measures of financial and non-financial measures it has unique features which puts it stand different from the other measurement system. Scorecard measures are derived from the strategy, the measures are indifferently correlated and there is balance among all measures. While developing performance measurement system the careful and proper thought to create strategy is very crucial for any organisation. The main characteristic of the balance scorecard is to correlate its dimensions and measures of the organisation’s strategy. According to Kaplan and Norton when you see the balance scorecard the organisational strategy should be apparent and that is the main requirement of the Balance scorecard. If you can not derive measures from the organisation’s strategy then you can not call that performance measurement system as a Balance scorecard.
“In a survey of Canadian hospitals, Chan & Ho (2000) found that hospitals which said they had implemented the balanced scorecard rated significantly higher on the linkage between strategies and measures than those that said they had not implemented a scorecard. This has supported by the same argument in an experiment conducted by Banker et al. (2004) to test the importance of the linkage between strategy and performance measures. Their results mention that “managers must understand the linkages between performance measures and business unit strategy in order to benefit from the adoption of the BSC” (p. 22). These findings ensure the significance of the linkages between organisation strategy and measures.
Balance: - The other important aspect of structure is balance. Traditionally performance measurement system only concentrating on financial measures but it has been criticised for many reasons now. Focusing only on financial measures promotes diminutive, bigoted and dogmatic decision making (Malina & Selto 2001). They also suggest that the organisations should be sensibly and carefully use varied set of performance measurement to reveal variety of manager’s decision making and efforts. The non-financial measures are more actionable and related to long strategic objectives than the financial measures. They are necessary to access the effectiveness of strategy implementation. It will help to give results that why the strategy may have failed in an organisation. Recent studies show that now many organisations have started using both non-financial and financial measures for evaluation and appraisal. (Banker et all 2001, Kalanagananam 2002)
Casual linkage:- The measures should be linked together within their individual perspective and across different perspective, at least one measure should link to one perspective to other measure in another perspective. “For example, a company could decide to measure employee satisfaction and employee retention in the Learning and Growth Perspective and employee productivity in the Internal Business Perspective. Employee satisfaction could be linked to employee retention which, in turn, could be linked to employee productivity. These linkages should be explicit and testable. For example, Sears was able to say that a five unit increase in employee attitude led to a 1.3 unit increase in customer impression which led to a 0.5% increase in revenue growth (Rucci et al. 1998).”
Moreover in their study Malina and Selto (2001) reveal the casual linkage will help to give results from lower level employee to financial results though this is the other drawback of using only financial measures so that it would not able to give any idea about their feedback and guidance as it is far removed from them. (Soderberg 2006)
In one study report it reveals that, out of 30% companies who developed casual linkages and other 23% have developed constantly varied casual links to the measures. It shows that those 23% has got 5.14% higher return on equity than rest of 30% companies in this reference Norelkit (2000) point out that there has to be some sort of relationship showing input and output relationship.
Implementation:- This is next layer after structure in BSC pyramid but in reality this process will begin only when the BSC project starts in an organisation. Input from all level of organisation required to develop organisational strategy and performance measurement. The main success factor to balance scorecard is buy in and participation from senior management.(Kaplan & Norton 1996) Unless their due support in BSC it will not sustain. It must view communication to employee as a campaign for developing BSC. Some of the companies measure their employee’s knowledge and understanding to verify the effectiveness of the BSC campaign.
USE; It is very important and pinnacle of the pyramid. It can be featured by various other activities like planning and controlling, strategic learning and compensation. BSC should use as a communication, learning and informing system and this way it becomes the foundation stone of the organisation.
Planning and control:-
It has been said that the BSC should not be used as controlling system but the data they received though BSC would help the management to take actions which help to gain positive result. This will lead to alignment of strategy which gives positive outcomes. To link with the budget is also function of planning and controlling and it shows the BSC as a central management tool. (Soderberg 2006)
BSC provides strategic resource allocation process rather than capital budgeting mechanism which is bit complex and stress on the cash flows.
Compensation: This process is mostly delayed until the Organisation is well versed with the BSC. Once the organisation’s goals and objectives connected to the compensation then the BSC will be basis for the management system in organisation.
Strategic (Double loop learning)
The strategic and double loop learning activity will help BSC to stay connected with the external factors. Generally it is questions and assumptions about BSC measures and linkages to strategy of the organisation. If any strategy lacks than it should be refine and check it and revise with other measures of the BSC.
Kaplan & Norton (1992, p. 252) state that “Management processes built around the strategy articulated in the Balanced Scorecard must provide regular opportunities for double loop learning by collecting data about the strategy, testing the strategy, reflecting on whether the strategy is still appropriate in light of recent developments, and soliciting ideas throughout the organization about new strategic opportunities and directions.”
2.3 Sketch of HRM
Emerging trends from agrarian to manufacture and product development industry since Human resource department also get importance in organisations functions. To enhance the significance of HR in organisation HR department should not only transform what they are doing but to show how to perceive it as well. A shift from service economy to knowledge economy also accelerates the value of intangibles (work force) in industries. To emerge HR as strategic business partner it needs to follow new perspective and to show how it contributes to get ultimate deliverables by playing key role in organisation. In nutshell the rule of the game means how HR attempt to score on scorecard with integrated strategies of organisations Balance scorecard. (Beatty Huselid et all 2003)
“Until 1760 ships routinely disappeared, ran a ground, or sank because seafarers could not measure longitude. The cost in life and property was immense. Today, business faces a similar challenge, as the failure to measure human resources performance is just as costly and deadly to modern organizations” (Burkholder, Golas et all 1998).
Senior managers considered HR as unavoidable cost to the organisation which includes retentions, job satisfaction, motivation etc. all employee transactions and legal issues relating to it. They have immense significance in high performance of the company. It does make difference to the profitability of any organisations. The soaring and varying operating expenses in HR, poorly performing Personnel department these are some leading factors which force the management to focus on HR Metric (Burkholder et al; Shapiro 1998).
2.4 Why HRM?
"Fewer than 50 percent of HR departments measure anything quantitatively," says Jac Fitz-enz, founder and chairman of the Saratoga Institute in Santa Clara, Calif. So if HR really wants to be a business partner, it must be judged by the same standards as everyone else in the organization.
More often it found that staff departments are treated as overhead expense or necessary expense evils. Compare to production department and sales department. HR (Staff department) always has been neglected and ignored by senior manager and in many firms. While the great irony is that these managers uses the staff or HR department for their all important tasks for their respective goals in their departments. The fact is without proper staff service no department can achieve the targets. Significantly it would not be too much to say that without staff service no department can achieve targets. And without staff there will be no production no sale. Unfortunately still at some places HR department is not treated as functional department in the organisation as it should be. In this reference the most accurate statement is “if you can’t measure you can’t communicate to business people” shows the incapacity of regular staff to get respect as a value adding function to the organization. There are certain steps that HR department can take to prove its importance and to cope with the exigencies of new market place. The HR has to take care of three things; repositioning of the function by adding some value, re-inventing effective relationship with internal customers and to evaluate their operation by developing new type of data.
Combinations of all the above factors are simple form of HR scorecard.
To learn and get conversant with this HR scorecard analysis is prudent for any hr practitioner, to demonstrate tangible data about HR to any non HR people. (Grossman 2000)
Eastman Kodak adopted BSC measures in HR department after that business performance employee satisfaction customer satisfaction and employee satisfaction in company improved and now they consider HR department strategic for middle partner in company. (Yeung 1997)
3 HR ROLE IN BSC
3.1 Role of HR
According to Bounfour & Edvinsson (2000) the errors of accounts and finance department has been widely highlighted through the breakdown of Enron and Worldcom etc. It is due to given extensive importance on finance department and usage of traditional account system. It is required to cultivate and emerge a system which can bridge the link between financial and non-financial measures to improve organisational performance. Management is taking extra care for making strategy for finance department but given less importance to HR. They have enhanced the importance customer satisfaction but will be biased for the strategies about HR. (Becker, Huselid & Ulrich 2001)
Although since past 20 years growing studies on HR shows the importance of HR in business. It shows that HR is playing significant and crucial role in subject of management. (Bounfour 2001, P.1)
However Toolson & Dewe (2004) found in their study that 74.5% of HR manager and 47.7% of senior manager thought that it’s very important for organisation to measure Human Capital. According Thite (2004) human capital is generally over invested or under invested by organisation. Further more in their study Toolson & Dewe(2004) establish two reasons why HR is essential to measure in organisation first it shows strategic and competitive importance of HR and second is to earn credibility as it should be expressed in financial terms. In his study Flamholtz (1999, P.3) describe that creating HR balance sheet by putting people on balance sheet doesn’t mean it emphasize HR. But it helps to give valuable resources and helps the management to provide an important data and decision making tool.
Many companies don’t know the effects and consequences of the wrong decisions under estimation of importance of HR, Thus it is crucial to show it very effectively by linking performance measurement with HR as a HR scorecard.
According to noble prize winner Becker “We can not manage something that we cannot describe, measurement is the language used to describe organisation’s strategy” (Becker et al; 2001). With that reference Lockwood (2006) emphasise on significance of choosing measurement for the organisation. In that view to develop HR Balance scorecard is a crucial aspect for any organisation.
Thus we can say that Role of HR is immensely powerful in today’s business management although not much recognised by management thus with the use of human capital and balance score card concept call for integrate the HR management system, it is competent to establish primitive quantitative but also qualitative performance measures. (Halachmi 2005)
4 IMPLICATION OF HR IN BSC
4.1 The learning and growth perspective
In the Balance scorecard the important perspective is learning and growth, as it has stated by Konig and Rehling (2002) that specifically the learning and growth perspective is deeply rooted with HR activities and process in BSC; Besides that other perspectives relying on the learning and growth perspective.
According to Kaplan and Norton “The objectives in the learning and growth perspective provide the infrastructure to enable ambitious objectives in the other three perspectives to be achieved”(1996 P.126) With the help of this perspective it could brought more value to intangible assets and their emphasizing in organisation or playing key role in service industry. Further more they have attributed some conditions to differentiate for achieving other perspectives. They are proficiency of employee, knowledge and information system, effective communication, and finally employee & unit drive, alignment and empowerment on business objectives (Lichtensteiner 2000, Hoffman 2007). This perspective is basis for the other perspective as it gives precondition for the target agreement for the other perspectives in BSC (Kaplan and Norton, 1996).
BSC also act as a controlling and measurement tool for the employees on companies objectives and strategies and works as a target agreement tool for all employees. (Dahmen et al. 2000)
Knowledge Management System
HR Strategic Alignment
Performance Measurement Tool (BSC)
Employee who are Strategically Focused
The Firms capacity to Implement
The Over all Performance of the Firm
A High Performance System work
er more HRM helps senior level management while developing BSC which will be shown discussed in further chapter of the thesis.
4.2 Development and growth perspective
The implementation of BSC has large scale implication on HR, by usage of tangible assets in BSC HR becomes more important and act as strategic partner of business.(Lichtenstener 2000,Hoffman 2007)
For any organisation to develop HR business case it is very important to focus on organisational strategies and given more emphasis on implementing it in organisation which depends on three key factors. They are effective information management system, alignment of HR activities and processes and balanced performance measurement system. Of which we can easily attribute from following figure.
Source: Becker et al.,2001
4.3 Quality of measures
To attain effective and successful BSC it should keep in mind the quality measures. There are certain elements which are the key measurement group. They are employee satisfaction, employee productivity, and employee retentions. In this view Kaplan and Norton signifies that employee satisfaction is condition precedent to increase in employee productivity and responsiveness also the good and quality service. Although there are some more indicator to measure it;
participation in decision making
Recognition for good performance
Access and support to adequate information to do the good job.
Emerge encouragement and creativity initiative.
Employee retention is main issue for the organisation; a loss of employee will be a loss of intellectual property of the organisation thus labour turnover rate is used as dependable marker. Employee productivity is termed as employee revenue and calculated by output of the employee per se. Although the other simple way of measuring employee evaluation is by using sales per employee or value added per employee or checking the denometer of the compensation per employee. (Kapalan and Norton 1996)
4.4 Critical evaluation
A good and healthy environment can be recognised by good employee motivation, alignment and empowerment. For this the following drivers are responsible.
What measures and suggestions implement for the employee motivation.
To implement measures that would help employee productivity and further improvement.
Develop those measures that align individual objectives and bsc goals and objectives for the organisation as a whole.
Implementing measures that asses the individual performance and team performance at the same time.
In nutshell these measures are the objectives and results of activities of the situation or specific drivers of the BSC. They are precondition for achieving individual targets in other perspective of the BSC to attain financial success of the organisation. In his work Appelbaum has mentioned the positive relationship between workers motivation, productivity and corporate results. HR does play a pivotal role to make the successful realisation of corporate strategy and financial success.(Appelbaum et al;2000)
BSC emphasised more on learning and growth perspective as the basis of other used perspective and its significance towards the workforce. This leads to the organisation profitability and success. Which is underpinned the view point of the Applbaum (2000) as a key strategic relationship between HRM and company profitability. BSC also supports the stakeholder view of governance by learning and growth perspective and long term oriented employment strategy. BSC offers a innovative management tool for the for this stakeholder-management.(Speckbacher & Bischof 2000)
According to Binge et al. (2003) “Intellectual capital is the lifeblood of the organisation.” Intellectual property like Human capital is emerging competitive in favour of and source of organisation valorisation. Even though in practice the aim of Kaplan and Norton view point of giving more emphasize on intangible assets and human capital working as a stakeholder is not observed. In one study on BSC more than 100 Germna DAX companies has qualified this approach. In their point of view majority of them did not find intangible assets advancement as a possible resort to BSC and stronger consideration of Stakeholder. In fact one third of the interviewed organisation denied using learning and growth perspective.(Speckbacher & Bischof-2000) The other important study in this reference found that BSC has no positive relation with labour turnover.( Hoverth & Partner-GMBH 2004)
However it has been found that the main reason behind this negative behaviour is the difficulties and complexity of conceptualising the cause and effect relationship with the objectifying the intangible assets! It is intricate to demonstrate the cause and effect ratios of intangibles; they are termed as “soft figures”. That includes employee satisfaction, employee retention, leadership communication etc. It is more difficult to evaluate the ratios of these measures in cause and effect chain. This problem visualise in the studies of Hovarth & Partner GMBH (2004), where in more than two third of the surveyed companies have given voice for the difficulties in measuring the intangible assets. To conclude we can say learning and growth aspect differs in theory and in practice.
5 ANALYSIS OF RELATIONSHIP OF HRM AND BSC
The relationship of HRM and BSC is developmental and shifting. It has extensive and implicit correlation. HRM is core support of BSC for the successful completion of BSC. BSC depends on the HRM for the further development and implementation in organisation.
In the various studies within the paradigm of ‘best practices’ (Arther 1994; Huselid1995) cited by Wright (1998) Graton & Trauss (2000) they established the concept of ‘best practice’ relating to high performance or high commitment work practices. In that context of ‘best fit’ studies emphasise on alignment between organisation and HRM strategies.
5.3 Contribution of HRM to BSC
To analyse what extent HR and human capital make contribution for the development and implication for the BSC in organisation following are the key factors described as below:
Assistance while creating BSC
Training for developing BSC
Development of HR scorecard
Accomplishment of targets through process of BSC
5.4 Participation to BSC to HRM
The BSC has much implication on HRM and for that reference Kaplan and Norton has given three main aspects of HR for the BSC development an implementation. They are ‘alignment of strategy on HR’, ‘agreement on objectives’ and ‘linkage with compensation and incentive system’ and they are supported by other studies (Bischof & Speckbacher 2001).
Alignment of strategy on HR
Kaplan and Norton(2006) argues that high performance organisations performing better because their all units and process are aligned with each other. As they have derived their objectives and strategies as a whole as a one unit which is called an organisation value proposition. This alignment can be brought by using strategic map and balance scorecard. Balance scorecard will help to get different value proposition for the organisation and participate for corporate synergies. While developing and aligning implementing scorecard with external environment will help to link with customers and suppliers and alliance partners it helps to develop growth and building a trust across the organisation. The alignment can be achieved my sharing common theme across the organiation. It seems similar with MBO(management by objective) in which every department in org. in short term objectives should be aligned with long term objectives. However research scholar Rishi Bhatia said that sharing one balance scorecard and same objectives doesn’t work in oraganisation of multiple industries.
More over In one study it has been found that vertical alignment it important for the organisation where it is strong there the team performance is powerful. It has been found at Chelsea and Westminister Hospital that where in there director admitted that they have benefited enormously by aligning the line manager with HR manager. Also HR practioner taking part in day to day business activity. It ha also seen in case study of Kraft food that continuity of people appear to be a crucial factor for the success. In assessing more than seven organisations it has found that the main focus is given to continuity of people and process to sustain the strategies over the time and to secure the organisational goal (Gratton and Truss 2003).
Agreement on objectives
Kaplan and Norton(2006) further noted down in their book that most of the organisations are comprised of multiple businesses, and supported by their different units and their stable staff and management. To integrate business and get the success of the whole corporation it is required to use the resources effectively and set same organisational goals and strategies towards it. The head office can solve this problem by using corporate strategy and scorecard which will help to create value proposition for the organisation.
Linkages with compensation and incentive system
Kapalan and Norton further stated that linkages with the organisation’s BSC based incentive system with the compensation variable is very important. According to Schwertner (2005) cited by Hoffmann (2007) linking incentive system and compensation variable with the organisation objectives can systematically focus performance on strategy implementation. More over Schwertner study shows that more than 90% of organisations used incentive and variable base system, and out of 94 % organisations shows positive relationship with employee motivation and source of successful mode for execution of strategy. He also point out in his study that BSC based firms shows higher level of satisfaction in incentive system rather than other standard incentive system. For this reference in his research 96% of companies who adapted BSC shows positive impact on incentive system while other incentive system shows 68% of the positive effect on incentive system. Compensation variable adapted by BSC organisation confirm the value adding behaviour of the employee a BSC not only support the monetary but non monetary aspects as well. However it is important that it has some limitations as it focuses on short term incentive variables which give results to increase the compensation and rest of the variables would remain biased although they are equally important for business strategies.
6 CRITICAL EVALUATION OF BSC AND HRM
BSC implementation and development is not only strategic pursuit of the firm but it also establishes motivation, advancement and team playing role of employees in the organisation. It repositions the HRM in organisation and empowers the personnel department work in diversified its activities and affects consequent alignment on strategy. To signify BSC as we have discussed above Koning & Rehling 2002 support that it emerges higher motivation, alignments of strategy and agreement on objectives and incentives with the usage of other variables like constant communication, unambiguous behaviour and integration. The main strength observed in management and employees motivation effect of the BSC. It has seen by the studies that if agreement on objectives or incentive based compensation system will introduce they make definitely an important contribution to motivation and sustainable business success result in high degree of satisfaction of companies using it. Schwertner 2005, Debusk & Crabtree 2006 cited by Hoffmann 2007)
In another study Hovarth and Partner GMBH(2004) analysed half of the companies to do their BSC without linked incentives or agreement on objectives. It may make constraints to evolve specific target setting strategy. Further more in another report of Debusk & Crabtree (2006 P.46) found that 88% of organisations shows positive impact on performance and out of them 66% shows increase in profitability of the organisation.
7 RECOMMENDATIONS FROM THE LITERATURE
In USA more and more companies evaluated Human Capital management on Balance scorecard approach. The main advantage of using this technique is to link the process of performance with the overall organisation performance (Bose 2004)
HR process gets more attention through BSC implementation further more a successful operation of BSC can only crop up through extensive hold of HRM. In this view the HR and HR process also get significance in the organisation. It has been empirically verified that constant use of BSC resulted to be better performance and profitability of the organisation. Various studies have point out that BSC and long term HR polices and strategies improve business no matter what orientation they confirmed before. Thus Human capital has seen as advantageous and competitive aspect than a cost cutting factor of the business. In this way BSC helps for the dispersion of HPWS (High performance work system) and makes essential contribution to the significance and value adding HR Process and HRM activities.
To sum up the BSC makes vital contribution to HRM. It supports HRM to discover hidden potential and evaluate HR performance and enhance significance of HRM. Through implementing BSC an organisation will be benefited by advancement of strategic and HR oriented aspects which lead to enhancement in business performance. Deficit and problems may arise during the developing BSC is due to partial implementation of BSC. It has also shown in the studies of Debusk & Crabtree(2006, P.46) that 70% BSC implementation failed due to irregularity and not complete use of BSC as reckoned by Kaplan and Norton(2006).
It is evident by the reviewing the contemporary literature that in this knowledge era where in intellectual property gaining interest day by day Kaplan and Norton’s Balance scorecard approach have tremendous interest in business world to gain overall performance and success.
It is important to carry out performance management in the organisation it offers wide range of benefit to the organisation and to individual as well. However its complexity of nature and fair share of problems to implement may hinder the organisations to implement it. By adopting performance measurement system organisations eradicated the primitive rigidness and complexities. There is range of different modes and methods of evaluating Performance measurement system. Organisations should carefully choose the suitable measurement system. Nevertheless it is clear out form the literature that new generation of performance measurement system of Balance scorecard, with the eye of financial and non financial measures can look beyond the complexities of traditional approach of performance measurement system.
There is broad range of consensus amongst contemporary and empirical literature that BSC is most effective tool for measuring and retain to drive organisational change. It helps to gain organisational goals and focus to uphold revitalization and fuel the sustain development.
BSC is scientific tool to measure it does not only focus on performance but planning as well, Balance scorecard in HRM interconnects staff development and financial success.
Ever since Human resource management was not valued much compare to other technical department BSC dares to reckon the ultimate usage of it and demonstrates the effective use of it can make miracles with the profitability of the organisation. It also suggest that recent trend of measurement system HRM plays pivotal role and if it disregard with other measures the company will face its unpleasant implications over the period of time.
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