Conceptual Framework For Measuring Performance Accounting Essay


Performance measurement is on the radar screen of not only practitioners and academic scholars from Business Management, but also from discipline like Public health, Public services, Engineering, Economics, and Computer Science. Among practicing managers and academic scholars in business management it has found its stems in all management functions areas including general management, strategy, accounting, operations research, marketing, and human resources (Venkatraman and Ramanujam, 1986; Marr and Schiuma, 2003). Series of international conferences focusing concentrating on theme perfromance measurement, establishment of professional international associations, special issues of journals appear regularly highlight the importance of the issue (Neely, 2007). In recent past, leading publications Cambridge University Press and Harvard Business Press had published volumes on collections of articles on topic (Marr and Schiuma, 2003).

Andy Neely has commented in the introductory chapter of the second edition of his book [1] that new reports and articles on the topic have appearing at a rate of one every five hours of every working day during 1994-2000 and to one new scientific paper every seven hours of every working day during 2001-2005 (2007, pp.1,3). The Google scholar lists 238000 scientific publications on performance measurement for the time period 1992-2011. In December 2011 Amazon listed over 27,413 books on performance measurement. Add to this practitioner and popular academic literature, a Google search reveals over 57,100,000 websites dedicated to term performance measurement during December 2011. In addition, the software market for solutions and applications for measuring and managing corporate performance is constantly growing more than 100 software vendors selling performance-reporting packages (Marr and Neely, 2001; Neely, 2007).

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These academic and non-academic publications on performance measurement are just not concise from Western economies rather in recent past a notable contribution has come from other regions of the world especially Middle East and Asia (Neely, 2007). In addition to above, Governments, across the world, are requiring public services to develop and deploy more sophisticated performance measurement frameworks. At same time, adoption of performance measurement framework in just not limited to Fortune 1000 companies [2] due to increased requirements of disclosures and transparency imposed by investment community and legislators in light of corporate governance norms (Marr and Neely, 2001; Neely, 2007).

Like in many other emerging research areas, developments both in academic and practitioner world are rapid in the area of performance measurement (Marr and Schiuma, 2003). Academic community with support of practitioners has developed wide range of prescriptions of frameworks for measuring organizational performance such as Economic Value Addition (EVAâ„¢) (Stewart, 1990), balanced scorecard (BSC) (Kaplan and Norton, 1992, 1996a), European Foundation for Quality Management (EFQM) Excellence Model etc. have taken the business community in storm.

In this Chapter, I have tried to explore the field of Business Performance Measurement by looking at the past researches in this field. This literature review has helped researcher enhance conceptual understanding and identification of literature gaps. Researcher has tried to put together contributions from leading thinkers around the world and reviews recent developments in the theory and practice of performance measurement & management. Literature review includes a comprehensive review of performance measurement from the perspectives of accounting, marketing, operations, public services and supply chain management. In addition to these functional analyses we have also explored performance measurement frameworks and methodologies, levels of analysis (i.e., individual, work-unit, or organization as a whole), conceptual bases for assessment of performance, practicalities and challenges, and enduring questions and issues.

2.1 Definition and Conceptual Framework for Measuring Performance

2.1.1 What is Performance?

In the introduction of his book titled "Guidebook for Performance Measurement" Lichiello (1999) defined performance as "It is a simple concept without a simple definition." The word performance is widely used in day to day conversations, business management literature, public services, public health literature, engineering and economics literature. Several terms such as performance management, (Euske, Lebas, and McNair, 1993) measurement, evaluation, or appraisal (e.g. Bruns, 1992) have been attached with the term performance in different contexts. Most of the times, the term performance is identified or equated with effectiveness, efficiency, competitiveness, cost reduction, long-term survival of enterprises, and growth (e.g., Corvellec, 1994; Neely et al., 1995). Despite the frequent use of the term, its precise meaning is rarely explicitly defined by authors (e.g., Baird, 1986; Richard, 1989; Lichiello, 1999; Richard et al., 2009; Ford & Schellenberg, 1982). Bourguignon, (1995) describe performance as one of those "suitcase words" in which researchers, organisations, individuals, industry, economy place as suits them and letting the context take care of the meaning and definition. A review of English dictionaries including oxford, Cambridge, Word web showed a diversity of meanings for the term performance. Performance is:

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measurable by either a number or an expression that allows communication (e.g., performance in management is a multi-person concept);

the result of an action;

to accomplish something with a specific intention(value creation);

the comparison of a result with some benchmark-either internally or externally;

process or manner of functioning or operating;

the act of performing; of doing something successfully; using knowledge as distinguished from merely possessing it;

a surprising result compared to expectation;

any recognized accomplishment;

how effective something or someone is at doing a good job;

the comparison of a result with some benchmark or reference selected - or imposed - either internally or externally;

a show, in the "performing arts," The act of presenting a play or a piece of music or other entertainment, or work.

Performance is referred to in most of the references as either an action (obtaining performance) or an event (a result) or both. Researchers define the term performance similar to that given in dictionaries. Baird (1986) states, "Performance is action oriented, it must be expressed by a verb as opposed to a substantive or a noun that would refer to performance as an event". Further, Corvellec (1994, 1995) and Bourguignon (1995) referred performance, simultaneously to the action, the result of the action, and to the success of the result compared to some benchmark. Niculescu, (2005) (cited in Bordeianu and Bordeianu, 2009) described performance as "either the result of an action: in most cases, the word is associated with the positive result of an action i.e. with the good result obtained in a certain field of activity; or, success: performance is associated with success, the success in a certain field; or an action leading to success." Niculescu, (2005), further defined performance from organizational point of view as a competitive state of the enterprise, reached by a level of efficacy and productivity ensuring it a durable presence on the market. Bordeianu and Bordeianu, (2009) referred performance to a judgment on the result and on the way the result is reached, taking into account the manner this result is reached and the realization conditions.

Lebas and Euske (2002) has given a very comprehensive definition with due consideration to all above definitions of performance. According to them, "performance is the sum of all processes that will lead managers to taking appropriate actions in the present that will create a performing organization in the future (i.e., one that is effective and efficient)". Kaplan and Norton (1992, 1996a) categorized these performance measures as lead and lag indicators. Lag indicators (outcome indicators in Lebas and Euske, 2002 terminology) refer to those performance measures that represent the consequences of actions previously like return on capital employed, customer satisfaction. Whereas, the "drivers" (for example non-financial indicators like number of customer complaints, customer satisfaction rating) i.e. of these lagging indicators (performance) are called lead indicators (process indicators in Lebas and Euske, 2002 terminology).

Hence, performance is what one is doing today that has a measured value outcome tomorrow (Lebas and Euske, 2002). To conclude, performance is not just something one observes and measures; it is the result of a deliberate construction of time-based and causality based both lead and lag indicators bearing on future realizations. Performance is specific to the individual's needs and interpretation, meaningful only when used by a decision maker. The specific meaning of performance should be defined in an organization after extensive discussions between the various managers, decision makers and all relevant stakeholders of the organization.

2.1.2 What is a Performance Measure?

Similar to term performance, unfortunately, there is no exact consensus among user when it comes to use of the term "performance measure" (Lichiello, 1999). Different people have very clear but different definitions for what constitutes the "measure" part. The positive aspect is that although there are many different ideas about what a "measure" is, there is one commonality among them i.e. "A performance measure measures something...usually progress toward an objective or goal" (Lichiello, 1999). In nutshell, one can safely say that "A performance measure measures something."

Office of Financial Management of State of Washington has defined "Performance Measure" in its "Performance Measure Guide 2009" in following words:

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"A performance measure is a numeric description of an organization's work and the results of that work. Performance measures are based on data, and tell a story about whether an organization or activity is achieving its objectives and if progress is being made toward attaining policy or organizational goals".

Similarly, Perrin et al. (1999) has defined performance measure in very simple words "A Performance Measure is the specific quantitative representation of a capacity, process, or outcome deemed relevant to the assessment of performance".

Office of Financial Management of State of Washington (2009) has further given a practical purpose definition of performance measure. According to that definition, "a performance measure is a quantifiable expression of the amount, cost, or result of activities that indicate how much, how well, and at what level, products or services are provided to customers/stakeholders during a given time period."

PBM SIG (2001) has categorized performance measures into six general categories i.e. effectiveness, efficiency, quality, timeliness, productivity, and safety (Figure 2.1). Here

Effectiveness: indicates, are we doing the right things i.e. the degree to which the process output (work product) conforms to requirements. Mathematically effectiveness can be expressed as:

Efficiency: indicates, are we doing things right i.e. the degree to which the process produces the required output at minimum resource cost. Mathematically efficiency can be expressed as:

Quality: indicates, the degree to which a product or service meets customer requirements and expectations

Timeliness: measures whether a unit of work was done correctly and on time

Productivity: is the value added by the process divided by the value of the labor and capital consumed. Mathematically productivity can be expressed as:

Safety: measures the overall health of the organization and the working environment of its employees

Figure 2.1 Categories of Performance Measures, Source: Adapted from PBM SIG (2001).

In nutshell, performance measures provide necessary information to make quick decisions about what we do. A performance measure is generally composed of a number and a unit of measure. The number tells magnitude (how much) and the unit provides the number a meaning (what). Performance measures are always required to be tied to a goal or an objective (the target). Performance measures can be represented by single-dimensional units like hours, meters, nanoseconds, rupees, number of reports, number of errors, number of defects; number of professor having Ph.D. Degree, number of units produced, and length of time to design hardware, level of satisfaction on 5 point likert scale etc. These measures can show the variation in a process or deviation from design specifications. Single-dimensional units of measure generally represent basic measures of some process or product. Most of the times, multidimensional units of measure are used which are expressed as ratios of two or more fundamental units. They may be units such as kilometers per liter (a performance measure of fuel economy), revenue/profit earned per employee, or number of on-time payment received per total number of payment received. Ideally, performance measures should be expressed in units of measure that are the most meaningful to those who must use or make decisions based on those measures.

2.1.3 What is a Performance Measurement?

Most of the articles, books or papers we have read during literature review on performance measurement provide good working definitions - and each of these said essentially the same thing. The difference can be found in terminology or the perspective of viewing performance measurement from a different angle, but the underlying concept remains the same.

In Performance Measurement and Evaluation: Definitions and Relationships (GAO-11-646SP), the U.S. General Accounting Office (GAO), (2011) provides the following definition:

Performance measurement is the ongoing monitoring and reporting of program accomplishments, particularly progress toward pre-established goals. It is typically conducted by program or agency management. Performance measures may address the type or level of program activities conducted (process), the direct products and services delivered by a program (outputs), or the results of those products and services (outcomes). Here, a "program" may be any activity, project, function, or policy that has an identifiable purpose or set of objectives.

Virginia Department of Planning and Budget in Virginia's Handbook on Planning & Performance (1998) posits performance measurement is the regular collection and reporting of data to track work produced and results achieved

Perrin et al. (1999) has defined term performance measurement from public health point of view. "Performance measurement is the selection and use of quantitative measures of capacities, processes, and outcomes to develop information about critical aspects of activities, including their effect on the public".

The US National Performance Review provides a complimentary definition of performance measurement:

"A process of assessing progress toward achieving predetermined goals, including information on the efficiency with which resources are transformed into goods and services (outputs), the quality of those outputs (how well they are delivered to clients and the extent to which clients are satisfied) and outcomes (the results of a program activity compared to its intended purpose), and the effectiveness of government operations in terms of their specific contributions to program objectives."

KPMG Government Services has defined performance measurement as a system that "helps government managers: (1) set standards and outcome objectives; (2) Measure performance against goals, standards or benchmarks; and (3) communicate results. Performance measurement shifts thinking and focus, as well as a practical technique for quantifying and establishing accountability."

Business Performance Improvement Resource ( has explained performance measurement by individually defining "Performance" and "Measurement" according to the Baldrige Criteria:

"Performance refers to output results and their outcomes obtained from processes, products, and services that permit evaluation and comparison relative to goals, standards, past results, and other organizations. Performance can be expressed in non-financial and financial terms"

"Measurement refers to numerical information that quantifies input, output, and performance dimensions of processes, products, services, and the overall organization. Performance measures might be simple (derived from one measurement) or composite"

Harvard ManageMentor Web Site (2007) has defined performance measurement, "by measuring performance means assessing business results to: (1) determine how effective a company's strategies and operations are and (2) make changes to address shortfalls and other problems".

Neely et al. (2002) defined performance measurement as "the process of quantifying the efficiency and effectiveness of past action"

Shane (2003) has defined performance measurement in leadership-driven methodology (LDM) from following three points of view: "1) a philosophy of continuous learning in which feedback is used to identify achievements and to make on-going adjustments to agreed-upon strategies/initiatives to ensure continued excellence of services (in response to on-going changes arising from internal and external environment). 2) A process that begins with the development of a business plan and that includes the mission, objectives and strategies/initiatives. It is followed by the development of performance measures. This is a phased process in which one step should be completed before moving onto the next. The step-by-step approach is necessary to reduce resistance to what may be perceived as a highly threatening project and to build support for performance measurement across the organization. 3) A structure in which business and operational plans are linked through a feedback process. The performance measurement provides the feedback necessary to improve decision making in order for the organization to progress towards the attainment of its vision, mission and objectives. This is a continuous and on-going process."(pp. 52)

Moullin (2003) has defined "Performance measurement is evaluating how well organizations are managed and the value they deliver for customers and other stakeholders"

There is interesting discussions on defining the term Performance Measurement in the Performance Measurement Association Newsletter. Bocci (2004) in response to an article by Moullin (2003), preferred definition of Neely et al. (2002), and in particular preferred "quantifying" to "evaluating" because the latter referred to more than measuring. Moullin (2005a) posited that evaluating is a better term as it implied interpretation and analysis. Moullin (2005) quoted that "someone somewhere is going to ask how well an organization is doing or what is responsible for the drop in sales. We can't hide behind the numbers forever" (Moullin, 2005a). Pratt (2005) agreed with Moullin (2003) and pointed out that evaluating is much better than quantifying as it encompasses qualitative as well as quantitative measures. Neely (2005) has shown consensus with Moullin and Pratt on the usage of term evaluating and commented that "in essence I find myself agreeing with- delivering value to stakeholders is clearly essential to an organization's success…." but "the concept of stakeholder adds no clarity to the definition, because the question of which stakeholder matters is so context dependent". Moullin, (2005b) opines that an organization needs to know how it is perceived by all key stakeholders thus it explicitly encourages organizations to measure stakeholder perceptions.

Moullin, (2007) concluded that his definition offers a clear link between performance measurement and EFQM's (1999) "organizational excellence" [3] and "Balance Scorecard". Performance measurement provides the information needed to assess the extent to which an organization delivers value and achieves excellence in EFQM Excellence Model.

2.1.4 What is a Performance Measurement Framework?

The importance, shortcomings and dysfunctional consequences of performance measurement frameworks have been discussed in the academic literature for past six decades (Ridgway, 1956). There has been a flurry of literature in recent past especially after introduction of Balance Score Card (Neely et al., 2007). Throughout the 1980s and early 1990s various influential authors criticized the measurement frameworks used by many firms (Johnson and Kaplan, 1987; Hayes and Abernathy, 1980; Eccles, 1991; Neely, Gregory and Platts, 1995; Kaplan and Norton, 1992, 1996a). As a result of this, increasing numbers of firms appeared to be "re-engineering" their measurement processes. Organizations across sectors are trying different approaches towards performance measurement, which has led to numerous definitions of a business performance measurement frameworks, and little consensus regarding its main components and characteristics (Dumond, 1994).

Rogers (1990) expressed that performance measurement framework is generally characterized of "an integrated set of planning and review procedures which cascade down through the organization to provide a link between each individual and the overall strategy of the organization" (in Smith & Goddard, 2002, p. 248). McGee (1992) has expressed "Strategic performance measurement is the integrated set of management processes which link strategy to execution" (p. B6-1). Neely, Gregory & Platts (1995), "A performance measurement framework is "the set of metrics used to quantify both the efficiency and effectiveness of actions" (p. 81). Lebas (1995b) described a performance measurement framework includes performance measures that can be key success factors, measures for detection of deviations, measures to track past achievements, measures to describe the status potential, measures of output, measures of input, etc.

Kaplan & Norton (1996b) described their balance scorecard framework "A balanced scorecard is a comprehensive set of performance measures defined from four different measurement perspectives (financial, customer, internal, and learning and growth) that provides a framework for translating the business strategy into operational terms (p. 55)

Kerssens-van Drongelen & Fisscher (2003) expressed "Performance measurement and reporting takes place at 2 levels: (1) company as a whole, reporting to external stakeholders, (2) within the company, between managers and their subordinates. At both levels there are 3 types of actors: (a) evaluators (e.g. managers, external stakeholders), (b) evaluate (e.g. middle managers, company), (c) assessor, which is the person or institution assessing the effectiveness and efficiency of performance measurement and reporting process and its outputs (e.g. controllers, external accountant audits)" (p.52)

Ittner, Larcker & Randall (2003), defined "A strategic performance measurement framework: (1) provides information that allows the firm to identify the strategies offering the highest potential for achieving the firm's objectives, and (2) aligns management processes, such as target setting, decision-making, and performance evaluation, with the achievement of the chosen strategic objectives" (p.715)

Taticchi et al. (2010) elaborated the definition [4] of Neely et al. (2002) by commenting on the concept of 'balance' and 'dynamicity'. According to them 'Balance' refers to the need of using different measures and perspectives that tied together give a holistic view of the organization. The concept of 'dynamicity' refers instead to the need of developing a system that continuously monitors the internal and external context and reviews objectives and priorities.

From above key definition review reveal following key characteristics of performance measurement framework:

Performance measurement framework refers to the use of a multi-dimensional set of performance measures. These multi-dimensional set of measures does not only include both financial and non-financial measures but also both internal and external measures of performance. Further, these measures quantify what has been achieved and help to predict the future.

Performance measurement framework cannot work in isolation. To measure the performance a relevant reference framework against which the efficiency and effectiveness of action can be judged is prerequisite. To ensure the effective implementation of the performance measurement framework a participative (bottom up) approach and linkage with overall business strategy are must while formulating PMS (Bourne et al., 2003). In other words, performance measurement framework should be an integral part of the management planning and control system of the organization being measured.

As performance measurement framework is considered 'as quantifying the efficiency and effectiveness of action', hence performance measurement system should be used to assess the impact of actions on the stakeholders of the organization for example customer satisfaction, employee satisfaction or local community satisfaction (Bourne et al., 2003; Franco-Santos et al., 2007).

In short, for the purpose for this study a performance measurement framework is generally a conceptual framework that uses a set of multi-dimensional measures in order to define and demonstrate the impact of activities for fulfilling the needs of relevant stakeholders.

2.2 Why to Measure Performance?

Performance measurement is not an end in itself; it is a starting point for way forward to act (Behn, 2003). An effective performance measurement framework gives useful, credible information for assessing capacity to undertake work, quality of efforts, and the outcomes of efforts. It also generates readily understandable information that can be reported out to all concerned stakeholders (Lichiello, 1999). From overall strategic management point of view, performance measurement can be used for the purpose of evaluation, control, budgeting, motivation, promotion, celebration, learning, and improvement. It is important to note that single performance measure is not appropriate for all purposes. One has to use multiple measures to fulfill given set of measures. Performance measurement manager has to think seriously about the managerial purposes to which performance measurement might contribute and how they might deploy these measures (Behn, 2003). Many authorities around the globe have tried to answers the question (i.e. why to measure performance). Some of them are quoted below:

US National Performance Review, in their benchmarking study report, Serving the American Public: Best Practices in Performance Measurement (1997), noted that "Performance measurement yields many benefits for an organization. One benefit is that it provides a structured approach for focusing on a program's strategic plan, goals, and performance. Another benefit is that measurement provides a mechanism for reporting on program performance to upper management".

US General Services Administration's (GSA's) in its guide named "Performance-Based Management: Eight Steps to Develop and Use Information Technology Performance Measures Effectively" stated that "Performance Measurement focuses attention on what is to be accomplished and compels organizations to concentrate time, resources, and energy on achievement of objectives. Measurement provides feedback on progress toward objectives. If results differ from objectives, organizations can analyze gaps in performance and make adjustments".

U.S. Department of Energy in DOE G 120.1-5, Guidelines for Performance Measurement (1996), noted that "Performance measurement

Improves the management and delivery of products and services;

Improves communications internally among employees, as well as externally between the organization and its customers and stakeholders. The emphasis on measuring and improving performance (i.e., "results-oriented management") create a new climate, affecting all government agencies, and most private sector and nonprofit institutions as well;

Helps justify programs and their costs in an era of shrinking budgets;

Demonstrates the accountability of Federal stewardship of taxpayer resources. Federal employees and contractors want their day-to-day activities to contribute to a better society. Performance measurement can show that Government is addressing the needs of society by making progress toward national goals.

Promotes a focus on service quality and customer satisfaction, and seeks to improve executive and Congressional decision making by clarifying and stating organizational performance expectations, measures, and program costs "up-front."

Brown (1996), a renowned performance measurement expert, pointed three important reasons for performance measurement firstly, "Measurement reduces emotionalism and encourages constructive problem solving. Measurement provides concrete data on which to make sound business decisions, thus reducing the urge to manage by gut feeling or intuition". Secondly, "Measurement increases one's influence. Measurement identifies areas needing attention and enables positive influence in that area. Also, employees perform to the measurement, an example of how measurement influences employee performance" and finally "Improvement is impossible without measurement. If you don't know where you are, then you can't know where you're going and you certainly can't get to where you want to be. It's akin to traveling in unknown territory without a compass or a map. You're totally lost".

On the basis of discussion above and several other scholarly publications (like Lichiello (1999); O'Leary (1995); Richmond (1998); Pratt (1998); National Center for Public Productivity (1997); Frederickson & Frederickson (2006), we have summarized following seven reasons to implement performance measurement in any organization system linked to major functions of a manager (Daft, 1983).

Figure 2.2 Relationships between Reasons to Implement Performance Measurement in an Organization and Functions of Management

2.2.1 Setting Goals, Developing Objectives

Implementation of performance measurement compels a manger to reassess his work group's/program's/organization's goals and objectives and enable in setting sensible objectives and comply with them.

2.2.2 Taking Stock

Implementing performance measurement gives an opportunity to step back and assess organization's capacity to undertake targeted work. Performance measurement helps in identification of "holes" in organization's skills, knowledge, finances, and infrastructure. Further it helps in evaluating effectiveness of organizational structures, procedures and identifications of their strengths and weaknesses.

2.2.3 Collaborating

Implementing performance measurement gives an opportunity to create working arrangements with other groups, programs, departments and stakeholders within the organization as well as outside agencies, organizations and stakeholders. This collaborative cross-fertilization makes a stronger approach to meet goals - especially large ones and helps in filling the holes in organization's capacity to carry out work.

2.2.4 Assigning Accountability

Implementing performance measurement gives an opportunity to evaluate and define the types and levels of contribution an employee is making or can make to achieve overarching goals and thus for defining - and accepting - appropriate accountability for the big picture. In other words, implementing performance measurement provides an opportunity to assess 'pragmatic accountability' [5] issues, such as evaluating and defining roles and responsibilities, and levels and lines of authority. Assignment of these day-to-day accountability helps to reduce the "It wasn't my job" or "It wasn't up to me" responses to issues, problems, and crises. Further, clarity in pragmatic accountability, roles and responsibilities and lines of authority make people contribute, strive and accountable for meeting the large, big-picture goals (expectations) of the organization.

2.2.5 Improving Work Quality

Implementation of performance measurement gives an opportunity to assess the quality or effectiveness of work immediately. One can't measure progress if he/she hasn't got a baseline or benchmark fixed. Once scary task of baseline or fixing benchmark is completed, developing a performance measurement process offers further two opportunities. First, helps in identification of areas which one wants to improve and have ready access to the tools need to make it happen. Second, it helps in tracking changes (ideally, improvements) in quality and effectiveness in above identified areas over time.

2.2.6 Tracking Progress

Lichiello (1999) commented, "Tracing progress is one of the things that performance measurement is all about!" Improvement in the practices, processes, activities, and systems can only be feasible through tracking progress over time. Tracking through performance measures allows observing whether introduced intervention i.e. changes in things/strategies like management practices or data retrieval techniques are working positively or not. In simple words, performance measurement allows to track progress toward achieving objectives and meeting goals. Further, conducting performance measurement provides good information to help identify problem areas those need lagged/immediate attention. However, performance measure cannot tell why these areas aren't working as effectively as might like, performance measurement gives information on where the problems might be i.e. a critical first step.

2.2.7 Reporting Out

Conducting performance measurement provides necessary information for reporting progress to all of stakeholders. These stakeholders may include government agencies (i.e. central, state, regional, and local government), peers (i.e. other groups, programs, departments, divisions, agencies, and the like), other trade organizations, competitor organizations, and the community to whom an organization is serving may be defined geographically (i.e. state, region, county, city, township) or as a particular group of people. Performance measurement helps to report progress back to those in to which an organization is responsible for carrying out the work. One cannot improve unless he/she don't know what needs to improve. Positive and constructive feedback provides by a performance measurement process illustrate a pathway toward a confident, optimistic, and constantly improving working environment.

The usages of performance measurement system are not just limited to what has been cited above. US National Partnership for Reinventing Government acknowledged the diverse usages of performance measurement system with following words, "The most successful performance measurement systems are not 'gotcha' systems, but learning systems that help the organization identify what works". Organizations across world and sector are using performance measurement innovatively for various purposes. Usually organizations are using performance measures to inform resource allocation, which is just the ticket for achieving their objectives and reaching toward their goals.

2.3 How to Measure the Performance?

How an organization should assess its performance has been a challenge to management researchers and practitioners for many years (Kennerley and Neely, 2002). Business organizations and measurement experts throughout the world defined, developed and are using various performance measurement frameworks to the measures and assess their performance. The objective of this subsection is to review these performance measurement frameworks and methodologies and identify the key characteristics that they exhibit. Based on strengths and weakness of these frameworks researcher is seeking to develop a new performance measurement framework - that incorporates the best of the existing frameworks and methodologies.

2.3.1 Accounting Based Financial Performance Measurement Frameworks

The history of performance measurement, particularly financial performance measurement (in the form of accounting systems), can be traced back through the centuries (Neely et. al, 2007; Kennerley and Neely, 2002; Bourne et al., 2003; Franco-Santos et al., 2007). References for the same have been found in the writings of Venetian monks [6] (Neely et. al, 2007). Johnson (1982), p.512 quoted an excellent example of "The Medici Accounts", shows how in pre-industrial era organizations maintained a good account of external transactions and stock without recourse to higher-level techniques, such as cost accounting etc. Reference to similar issue has been quoted by Kaplan (1984), pp.395, found in the writings of W. Hamilton Church, pointed out in 1908 one of the shortcomings of the overhead allocation processes: "Shop charges (overhead) frequently amount to 100 percent, 125 percent, and even much more of the direct wages. It is therefore actually more important that they should be correct than that the actual wage costs should be correct".

With initiation of industrialization, rapid changes had been observed in development of performance measures. Johnson (1972) provided a detailed account of how current management accounting system has been developed in USA between the 1850s and 1920s i.e. from piece-work to wages (Johnson, 1981); single operation to multiple operations (Johnson, 1981; Johnson, 1975); individual production plants to vertical integrated businesses operations (Johnson, 1975) and individual business firm model to multi-divisional business firms model (Johnson, 1978).

After First World War, various companies such as du Pont, Sears Roebuck and General Motors had started using sophisticated budgeting based management accounting techniques (Chandler, 1962 cited by Bourne et al., 2003) such as standard costing, variance analysis, flexible budgets, return on investment and other key business ratios. From these modest beginnings, the use of budgetary control had been spread (Bourne et al., 2003). Holden et al. (1941) cited by Bourne et al., 2003 studied the management policies and practices of a thirty leading US industrial corporations and found that 50% of these companies were using budgetary control in one form or another. In year 1951, the General Electric Company established a "Measurement Project", intended to develop performance metrics which can be applied on a decentralized basis (Meyer and Gupta, 1994, pp.348). A survey of management planning and control done by Sord and Welsch, (1962) had shown that by year 1958, 404 out of 424 (just over 95%) companies participated in the study were using budgets for overall control of company performance. Johnson (1992) argued that after the 1950s, "management by remote control" - i.e. managing by the financials became popular and senior managers had started using the financial figures for not only for planning but also for control as well. There were no significant developments in performance measurement frameworks between 1925 and the 1980s (Johnson and Kaplan, 1987). Two important discussed and practiced frameworks have been discussed in following sub section. DuPont Pyramid of Financial Ratios

Early part of the twentieth century, DuPont Company has developed a pyramid of financial ratios popularly known as "DuPont Analysis" (Figure 2.3). This pyramid of financial ratios links a wide range of financial ratios to return on investment (Chandler, 1977). DuPont's pyramid of financial ratios is an explicit hierarchical structure that links measures at different levels of disaggregation.

The major strength of this pyramid is that "it makes explicit the 'levers' that management can pull as they seek to influence performance" (Neely et al, 2007, pp. 144-45). The pyramid of financial ratios has been criticized for overemphasizing historical financial performance and encouraging short-termism (Banks and Wheelright, 1979; Bruns, 1998), along with many other pure financial measurement systems.


Figure 2.3 DuPont Pyramid of Financial Ratios Economic Value Addition EVA®

The discussion on concept of EVA had been initiated by two eminent finance Professors Franco Modigliani and Merton H. Miller in October, 1961 with their publication titled "Dividend Policy, Growth and the Valuation of Shares", in the Journal of Business. US management consultants Bennett Stewart and Joel Stern of Stern, Stewart & Company has their extended into the full-fledged concept and successfully marketed EVA® as an tool for overall performance measurement for companies during the 1990s (Durant, 1999). Economic value added is conceptually identical to residual income concept and it provides information whether a business is creating or destroying shareholder wealth (Otley, 2007).

Economic Value Added (EVA) is basically a measurement tool that measures the firm's ability to earn more than the true cost of capital (Otley, 2007). Like residual income, EVA® is defined as net operating profit after taxes and after the cost of capital (Tully, 1993). Here, capital includes cash, inventory, and receivables (working capital), plus equipment, computers and real estate. The cost of capital is the minimum rate of return expected by the shareholders and lenders to finance the operations of the business. If total revenue earned by an organization during a period exceeds the cost of doing business and the cost of capital, the organization has created wealth for the shareholders (Durant, 1999).

EVA = Net Operating Profit - Taxes - Cost of Capital

Stern and Stewart argued that all other financial performance measures like profit, Return on investment, Earning per shares create dysfunctional motivations for managers. Whereas, EVA® encourage managers to focus on creating shareholder value rather than pursuing growth for its own sake, or because of the advantages, which growth can bring to the managers themselves (Otley, 2007).

Similar to the pyramid of financial ratios, EVA® has been criticized for overemphasizing historical financial performance and encouraging short-termism (Kaplan and Norton, 1992; Bruns, 1998). Criticisms were focused on the promoting dysfunctional behavior (Fry and Cox, 1989; Miller and Vollmann, 1985; Johnson, 1992), encouraging short-term decision making (Banks and Wheelwright, 1979; Hayes and Garvin, 1982; Kaplan, 1984a; Pearson, 1985), inapplicability of measures to modern manufacturing techniques (Turney and Anderson, 1989; Kaplan, 1984b; Kaplan, 1986), and the resulting damage caused by them to business and economic development (Hayes and Abernathy, 1980). Dearden, 1969; Hopwood, 1972; Vancil, 1979; Kaplan, 1984; Demirag, 1998 cited in Anand et al., (2005) exemplify [7] how financial measures with one small decision of depreciation policy can misguide organization long-term decision making. The root cause for such high level of criticism of these measure was inherited in basic characteristics of financial performance measures such as i.e. internally focused, backward looking and more concerned with local departmental performance than with the overall health or performance of the business (Johnson and Kaplan, 1987; Keegan et al., 1989; Neely et al., 1995; Olve et al., 1999). In nutshell, following are some of the criticisms levied against the overabundant use of financial measures:

Inconsistent with Realities of Present Business World: The business organizations in 21st century are valued on the parameters of knowledge generation and management i.e. intangible assets. The financial ratios calculated on historical data captured in the tangible, fixed assets of the firm cannot capture the value of those intangible assets in terms of patents, copyrights, quality human resources etc. (Niven, 2003).

Driving by Past Performance: Financial measures just provide a detail review of past performance and events but this detailed financial view has no predictive power for the future (Vancil, 1979; Kaplan, 1984; Demirag, 1998). A great financial results in one month, quarter, or even year are in no way indicative of future financial performance in present competitive uncertain environment (Niven 2003).

Tendency to Reinforce Functional Silos: Present cross-functional teamwork culture in organizations is not consistent with the way financial statements are made traditionally (Niven 2003). Financial reports are generally prepared by functional area i.e. individual department statements are prepared which ultimately are compiled as part of the overall organizational picture. Regardless of industry or organization type, teams comprised of many functional areas have emerged as a must-have characteristic to solve pressing problems and create value in never-imagined ways. Financial reports don't capture this cross-functional dependency.

Sacrifice Strategic Thinking: Many times, in situation of financial crisis, financial measures suggest management to look for cost-cutting measures in cost centers. These cost-cutting measures have positive impact on the organizations short-term financial position. But these cost-reduction measures often target the cost centers which has long-term value-creating activities, such as research and development, associate development, employee welfare & development activities and customer relationship management which are not focus areas of financial measures (Bassi and McMurrer, 2004). This nature of focus on short-term gains at the expense of long-term value creation may lead to sub-optimization of the organization's resources (Niven 2003).

Irrelevance of Financial Measures at All Levels of the Organization: As pointed previously, financial reports are abstracts by their very nature as they are resultant of compilation done by the way of moving from bottom to top. During this compilation process from bottom to top many important characteristics has been left out (Niven 2003), which important cause for poor decisions based on half pictures.

Despite above shortcomings one cannot deny the fact that financial yardsticks are an entirely necessary evil. Hence, in an era of limited, often decreasing, funding need has been emerged to look financial and non-financial operational measures together balance between effectiveness and efficiency.

2.3.2 Financial & Operational Performance Measurement Frameworks

After the early 1980s criticisms, in the late 1980s and early 1990s, a great interest had been evolved among researchers and practitioners to develop more balanced performance measurement systems. This resulted into creation of many new performance measurement frameworks such as Keegan et al.'s (1989) supportive performance measures matrix, the SMART pyramid (Cross and Lynch, 1988/89), and the Results/Determinants Matrix (Fitzgerald and Moon, 1996; Fitzgerald, 1991). Following are the some of the major financial and operational frameworks has been evolved and practiced in literature; Performance Measurement Matrix (PMM)

Figure 2.4: The performance measurement matrix, Source: Keegan, Eiler and Jones (1989)

PMM by Keegan, Eiler and Jones (1989) categorized performance measures as "cost" or "non-cost", and "internal" or "external" measures (see figure 2.4). PMM design stress upon the need for inherently flexible and balanced i.e. financial and non-financial measures in a measurement framework (Neely, Gregory and Platts, 1995). SMART Pyramid

Similar to PMM, Wang Laboratories (Lynch and Cross, 1991) had also supported the need to include internally and externally focused measures of performance and developed the SMART (strategic measurement and reporting technique) pyramid. The SMART added the notion of cascading measures down the organization (see figure 2.5) with an objective to reconcile the measures at departmental and work centre level with corporate vision, internal and external business unit objectives (Neely et al. 2007).

Figure 2.5: The SMART pyramid, Source: Lynch and Cross (1991) The Results-Determinants Framework

Fitzgerald et al. (1991) classified performance measures into two basic types: first, measures related to results (competitiveness, financial performance) and secondly measures focusing on the determinants of results (quality, flexibility, resource utilization and innovations) (see figure 2.6). The main strength of this framework is that it highlights the concept of process indicator. Further, it emphasizes fact that the results obtained today are a function of past business transactions (performance) in relation to specified determinants. Overall, the results- determinants framework turns the debates from designing and deploying performance measurement to a specific issue i.e. the need to identify performance drivers in order to achieve the desired performance outcomes.

Figure 2.6: The results-determinants framework, Source: Fitzgerald et al. (1991)

Figure 2.7: The input-process-output-outcome framework, Source: Brown (1996) The input-process-output-outcome framework

Brown (1996) has extended the debate initiated by Fitzgerald et al. (1991) and tried to develop linkage model between performance measures in the form of organization's inputs to outcomes with help of cause and effect relationships. The major highlight of this model is clear linkage between five stages in a business process (inputs, processing system, outputs, outcomes and goal respectively) with the respective measures of their performance (See figure 2.7). Brown's model has also shown a clear distinction between output and outcome measures.

Overall, financial and operational performance based frameworks are criticized for an oversimplification of reality as it assumes a linear set of relationships between inputs, processes, outputs, outcomes and goals, with each previous factor determining the next (Neely al el., 2007). Further, these frameworks have ignored linkage between organizational performances with strategies, competitive environment in which an organization perform and fulfilling the expectations of the stakeholders than just shareholders. Crowe (1999) quoted the comments of Teddy Wivel, senior partner in the Danish arm of Ernst and Young on need of stakeholder approach in performance measurement, "It will not be possible to create shareholder value without creating stakeholder value."

2.3.3 Performance Measurement Framework using Stakeholder Approach

Considerable attention has been paid by both academician and practitioners to the stakeholder approach to manage organizational resources since the publication of Freeman's book (1984) on stakeholder theory. The Royal Society for the Encouragement of Arts, Manufacture and Commerce reported that the competitive success of organizations in the future will depend on taking an inclusive approach to management of resources, reflecting the need for consideration of the requirements of all stakeholders in performance measurement (RSA, 1995). To address the shortcomings of financial and operational performance measurement frameworks and for incorporating of stakeholder approach Kaplan and Norton (1992) developed the Balanced Scorecard, Neely et al. (2002) developed Performance Prism; European Foundation for Quality Management developed the Business Excellence Model and MikuÅ¡ová, (2011) developed House Model. The Balanced Scorecard

Kaplan and Norton's (1992, 1996a) the balanced scorecard framework identified and integrated four different perspectives of performance i.e. financial, customer, internal business, and innovation and learning (see figure 2.8). Kaplan and Norton (1996b) have shown linkage between different performance measurement measures and stakeholders perspectives. They argued that financial performance can only possible by customer satisfaction and customer satisfaction is driven by internal operational performance, which is driven by ongoing improvement and innovations in the organization. Hence each component of the performance should be given equal weighting (see figure 2.9). The Balanced Scorecard has reflected mainly on the many of the attributes of previously discussed measurement frameworks. But the most significant contribution of Kaplan and Norton's is they have linked performance measurement with the organization's strategy more explicitly. This has been further reflected in Kaplan and Norton's later publications (for example, Kaplan and Norton, 2004, 2006). Due to these attributes, 'The Balance Scorecard' has become first preferred performance measurement framework among practitioners.

Figure 2.8: The balanced scorecard, Source: Kaplan and Norton (1992).

By the end of year 2001, more than 44 per cent of organizations worldwide (57 per cent in the United Kingdom, 46 per cent in the United States and 26 per cent in Germany and Austria) had adopted the balanced scorecard. Though it has widespread usage but at the same time numerous authors have identified various shortcomings with the balanced scorecard. Speckbacher et al. (2003) reported that 8 per cent of 174 companies from German-speaking countries decided not to implement a performance measurement system (and a balanced scorecard in particular) as they could see no advantages or "positive impact" for them due to commitment and efforts required to its implementation. Further, it has ignored a number of features of earlier frameworks such as absence of a competitiveness dimension, as included in Fitzgerald et al.'s (1991) results and determinants framework (Neely et al. 1995). Maisel, 1992; Ewing and Lundahl, 1996; Lingle and Schiemann, 1996; Brown, 1996; Taneja et al. 2011 criticized the balanced scorecard on ground of omission of factors important for other important relevant stakeholders such as perspectives on human resources and employee satisfaction, supplier performance, product/service quality and environmental/community considerations etc.

Figure 2.9: Balance Scorecard Application, Source: Garrison and Noreen (1997) European Foundation for Quality Management's Business Excellence Model

The European Foundation for Quality Management's Business Excellence Model, Indian version of CII and its US equivalent, the Malcolm Baldridge National Quality Award, are not basically designed as performance measurement frameworks, still these frameworks take a broader view of performance. These frameworks have covered many of the areas of performance not considered by the balanced scorecard (see figure 2.10). The Excellence Model is a tool to help organization to self assesses; measure their performance; understand the gaps; and stimulate solutions to achieve the pathway to Excellence (Shulver and Lawrie, 2007). The Business Excellence Model highlights the enablers of performance improvement and indicates result areas that should be measured. Neely and Adams (2001) has criticized it on the ground that is not an objective measurement framework, and the categories for measurement are very broad. Further, the some of the results areas are readily measurable, some of the enablers are not available require cost to collect data.

Figure 2.10: The European Foundation for Quality Management framework

Source The Performance Prism

The performance prism is a stakeholder-centric view of performance measurement (See figure 2.11). The performance prism assumed that all stakeholders are not equally important to every organization (Neely et al. 2002). The performance prism proposed that power and significance of a particular stakeholder in the current business environment of the organization should be the criteria for considering groups of stakeholders. Neely et al. 2007 has put forward following three basic research questions to answer to measure the performance in terms of strategies, process and capacities:

What strategies does a company need to have to put in place to satisfy the wants and needs of these key stakeholders?

What critical processes does a company need to operate and enhance these processes?

What capabilities does a company need to operate and enhance these processes? (Neely et al. 2007)

Figure 2.11: The Performance Prism, Source: Neely et al. (2002) The House Model

MikuÅ¡ová (2011) advocated the 'House Model' for small scale businesses. The 'House Model' described not only the relationship between the stakeholders and the business but also the interconnection of strategies, processes and resources (see figure 2.12). As such there is not any novelty in the model, it only reflect the effort of small business to provide reproduction of firm processes in order to survive. The advantage of the model inherited in its simplicity as it does not require applying in its whole scope. Further, the bonds of the model can be used independently for the evaluation of business's performance with the focus on a chosen stakeholder only.

Figure 2.12: House Model, Source: MikuÅ¡ová (2011)

The performance measurement frameworks discussed above by using stakeholder theory principles primarily focus on process approach to performance measurement (Atkinson, 1997). These frameworks seem incomplete because these frameworks fail to highlight the social aspects of the business, buzz word of 21st century (Taneja et al., 2011). In other words, these frameworks inadequately highlighted the social and ethical contributions that employees and suppliers make to help the company achieve its objectives (prestige/goodwill) and serving the society. They had not identified the role of the community in defining the environment within which the company works. Woods (1991), Carroll (1999); Atkinson et al. (1997) and Wartick & Mahon (2009) retrieved the researchers that performance measurement is a two-way process. Performance enables management to assess stakeholders' contributions to the company's primary and secondary goals and enables stakeholders to assess whether the organization is capable of fulfilling its obligations to them now and in the future. While measuring performance for the stakeholders, one cannot ignore the performance related to fulfillment of corporate social and ethical responsibilities of the business. Further, these frameworks just broadly defined performance measures but they have not specified detail constructs and variables for the same as asked by Neely et al. (2007) to research for.

During the last decade of 20th century unprecedented changes have been observed in corporate strategy and management thinking (Sebhatu, 2009). Sustainability has emerged not only as corporate strategy but also become an integral part of a company's business thinking in order to obtain the benefits of bottom-line (Enquist et al., 2007a; Epstein 2008). These dramatic changes asked for revision in the organizations' performance measures in the light of economic, social and environmental (triple) bottom lines (Elkington, 1997), and paying more and more attention to their values and responsibility (Enquist 2006). These changes evolved 'Corporate Social Performance' (CSP) as a distinctive concept.