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Performance measurement is essential for organisations everywhere. Having in place the correct framework and resulting models to measure performance is paramount to organisations, as it will give them the ability to assess there internal processes correctly and judge their performance in a fair manner. In addition, having a strong performance measurement framework in place will allow these organisations to give a true reflection of their performance to external investors. In the current economic crisis, organisations around the world face a challenge of adapting to these conditions and adjusting their internal processes to cater for the challenge. This proposal looks at how performance measurement in organisations is affected by the recession in the UK. The proposal gives a background of the problem, which is followed by the aims and objectives of carrying out a research topic in this field. The literature around this field is reviewed to provide an insight into the situation. Finally, the research methods to be adopted in gaining data are outlined.
Performance measurement has been a subject of discussion in organisations for decades. Finding the correct or appropriate method of performance has always been a challenge to organisations, especially with dynamic states of markets and industries that these organisations operate in. In this environment, organisations and governmental bodies have considered many ways to strike the correct balance of performance measurement. Getting the balance right, involves looking at both financial and non financial methods of performance. The British government has set a few guidelines for organisations to use when assessing their performance measurement methods. This frame work is named FABRIC (developed jointly by 4 British Governmental Organisations) (http://www.hm-treasury.gov.uk/psp_choosing_the_right_fabric.htm). According to this framework, a performance measurement system should be:
Focused - on strategic objectives. Long term objectives
Appropriate - to users. Provide relevant information
Balanced - Covering all significant activities of the organisation.
Robust - in order to withstand changes within the organisation and industry sector.
Integrated - into the organisation's management processes. To ensure regular flow of information
Cost Effective - balancing the benefits against the costs of organisations needs.
This is a good example of a framework, and the discussion through this proposal will refer to these criteria as the criteria of a successful performance measure. This is because it is comprehensive and is a product of the British Government, and since the author is looking at organisations in the UK, this would be an appropriate starting point. The robustness of the measure is the point onto which this work will focus more attention as the discussion will ultimately be geared around the durability of a performance measure through differing economical conditions.
In the later part of the 1980s, there had been a shift in performance measurement, so that it not only includes financial aspects (e.g. budgets, variances, ratio analysis, return on investment, residual value and so on), but also non-financial aspects (Drury, 2008). This was embodied by the work of Norton and Kaplan, and their creation of the balanced scorecard (Drury 2008). The Balanced scorecard is a strategic approach looking at organisational strategic goals. There are four organisational perspectives to be kept in balance - Customer perspective, internal-business perspective, learning and innovation perspective and financial perspective (Upchurch, 1998). The balanced scorecard translates the organisation's strategy into a framework of objectives, measures, targets and initiatives relating to each perspective (Drury, 2008). The scorecard was designed so that the four perspectives work in synergy. That is, learning and innovation is a driver for internal business perspective. Internal business measures are cause for customer perspective. Customer measures are cause of financial perspective (Drury, 2008). This is referred to as lagging and leading measures. The lagging measures are the financial ones and the leading measures are the non financial ones (Drury. 2008).
Organisations, thus have various methods of measuring their performance, however, the author wants to have a clearer understanding of how these methods have been (or the case may be that they have not) adapted to work under the current economic conditions of recession.
Over the past year and a few months, the world economy has suffered a global recession. The majority of big economies, such as the US and UK has experienced a credit crunch, which has had an accumulative adverse affect on the state of these economies leading to the occurrence of the recession. Briefly, the main causes of the credit crunch are down to sub-prime lending. This is where banks are sanctioning loans and mortgages to individuals who are not capable of paying them back (http://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2.html). This has caused an increase in the number of defaulted loans, and since these originally came from investment banks, these banks were affected. Sub prime lending occurred most in America, however investment banks from all over the world were selling mortgages to American mortgage banks. Investment banks such as Lehman Brothers collapsed due to their large mortgage and loan books that have gone bad (http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4761892.ece). With all of this happening, banks stopped lending to each other, which has caused a shortage of credit. This meant that consumers stopped buying goods, due to the fact that they cannot get any borrowing to buy them, and in relation to particular goods (where cost-push inflation comes to play) the prices are too high; for example, energy (http://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2.html). Furthermore, small businesses have been affected by the lack of credit, causing a lot of them to stop, and hence the increase in unemployment. This in no doubt will have had an effect on how organisations carry out their internal processes and practices. This will involve performance measurement.
Aims and Objectives
In the previous section, the author has given a brief background on both performance measurement and the recession. In this section, the author will make a connection between the two, and thus generate some aims and objectives of carrying out a research dissertation on this topic.
With the recession in mind, it is important to consider how organisations across the world have adapted their internal processes, cost control and business activities to cope with the recession. Within those internal processes, are the organisations methods of measuring performance. Therefore, assessing any changes in how some organisations at this present time measure performance may be attributed to the recession. The author wants to explore these changes, and measure the extent to which the recession has changed performance measurement. For example, which organisations were affected the most, what strategic decisions were made to facilitate the survival of organisations in that period and have organisations thus changed their performance considerations to help achieve their strategies?
The aims and objectives form the reason why the author wants to carry out research into this topic. These will also help structure the research question. The aims and objectives are as follows:
Understand the different types of performance measurement
In carrying out this work it is paramount to understanding what different methods of performance measurement (both financial and non-financial) are in use. This will help the user assess their effectiveness under differing economic conditions
Identify advantages and limitations of these performance measures
Whilst exploring those methods, it is important to take a critical point of view towards them, by assessing their effectiveness and the areas where they lack in providing the organisation with strategic performance indications
Assess the durability of these measures and their ability to survive in a global recession
This is can be achieved by looking at previous economic booms and busts and see what organisations undertook to measure performance
Suggest any changes to the current performance measures to account for economic busts and booms.
This will afford the author the opportunity to suggest changes that can be carried out to current performance measurement models to make them more adaptable should it be proven that organisations struggle to find a consistent framework for measuring performance at different times.
The reason behind the author choosing this particular topic for research is that the subject of recession is a timely one. Also, the author has a great interest in this subject. Furthermore, there are many articles and news headlines about the effects of the recession on the growth of economies and on the individual citizens living under these economies, as well as the fate of many organisations that operate. However, the author feels that there is bigger scope for discussing how internal processes in organisations (and particularly performance measurement) are affected by this. Therefore, the research question that the author is proposing is "Has the economic recession affected the way organisations in the UK measurer performance?"
The previous section has pointed out some of the aims and objectives that the author is trying to ascertain. In order to achieve them, it is important to review the wide array of literature around this subject. In this section, the author will provide an overview of the different models for performance measurement and control.
Performance measurement is widely divided into purely financial means and ones that include non-financial factors. The financial methods of performance measurement include budgets. This method involves comparing the budget with the actual costs and addressing any deviations between them (Upchurch, 1998). This will allow management to take corrective actions to resolve these variations if they are of an adverse nature. The assumptions in budgets are usually based on historic cost data, and thus they are not entirely accurate. However, if an organisation adopts activity based budgeting, where the budget used is based on actual activity volume (i.e. it should be a flexible budget) this will bring about more benefit (Upchurch 1998). This allows the organisation to make more accurate reflections on its business activities (Drury, 2008). This will give a better indication of performance to management.
Other advantages of using budgets include:
Planning and forecasting - companies' activities anticipating any future problems
Coordination - Good for a big company like, which has a wide spectrum of activities
Clarification of authority and responsibility
Communication - communication of top management across the organisation
Allocation of resources - Organisations have a diversity of resources (monetary, human, etc) and the budget is a good means to allocating them to various uses
Targets and motivation - Will motivate employees to do well.
Goal congruence - alignment of goals across the organisation to achieve one share objective
The above advantages mean that in a typical organisation, the main value driving activities can be identified, and their encompassing activities can be planned. Budgets will also allow the correct people to be assigned the correct tasks, and will set clear goals and objectives this may help the organisation achieve those. Furthermore having those goals effectively communicated will help the overall situations. In theory, budgets can be identified as a good means of measuring performance; however, there are limitations. Drury (2008) has identified some of these limitations, and they include the fact that they heavy monetary goal orientation may apply great pressures on employees of a firm to achieve them, which may affect the moral and general acceptance of them. Furthermore, budgets are purely financial, and in a day and age where the environment is a concern, budgets do not cater for measuring the performance of such factors (Friedlob, et al, 2002). For example, oil companies may be very profitable, but there is also an ethical duty towards the environment that they must display. With this in mind, and with the current economic conditions, will organisations still take those considerations into account, or will they be more compelled to concentrating on financial performance and use budgets and other financial techniques to achieve their goals?
Another limitation with budgets is the fact that there is room for creative accounting, where the organisation may exploit them to show to their shareholders that they are performing well, when in fact the organisation may be struggling (Drury, 2008)
Standard costing and variance analysis are other financial performance measurement techniques. These include predetermining costs and then comparing them with actual cost, and analysing variances between them in detail (Upchurch, 1998). Cost elements include labour material and other expenses (Upchurch, 1998). The variances that can be calculated include price and quantity variances. As with budgets, this technique is very much geared towards achieving financial goals, and thus the organisations performance will be measured against whether or not the correct amount of money is spent in the correct areas and so on. This will allow the organisation to identify what costs can be controlled which ones cannot (Drury, 2008); however, there is still a gap left for taking into account other factors that may be of bigger concern for the organisation.
As mentioned above, in the late 1980's/early 1990's Norton and Kaplan went about proposing a model that takes into account not only financial aspects of performance (as is limited to Budgets) but also other non-financial ones. As mentioned previously, the balanced scorecard dictates that there are four organisational perspectives to be kept in balance - Customer perspective, internal-business perspective, learning and innovation perspective and financial perspective. Each of these works in synergy, and would help the organisation take a broader view when measuring performance. Some of the strengths of the balanced scorecard include:
Four perspectives span key areas of organisational activity, important for achieving strategic goals
Translating the strategy into objectives, measures, targets and initiatives relating to the four perspectives facilitates the achievement of the strategy. Relates monitoring performance to strategy
Gains a holistic view of the organisation and its performance, as it looks at a number of perspectives of the organisation
Link and balance between financial and non-financial indicators, short term and long term objectives, internal and external issues, lagging and leading measures. Eliminate short-termism (Drury, 2008).
Use of non-financial measures to predict future financial performance (due to cause-effect interlinked measures). (Upchurch, 1998)
Reduction of sub-optimal decision making. Because performance is looked at from a number of different areas so able to see which areas need more attention and improvement than others (Upchurch, 1998).
Limited number of measures of value creating activities allowing the organisation to Look toward future performance, which is something not found in financial methods of control and performance
Inclusion of measurement intangible/intellectual assets not well recognised in traditional financial approaches (Upchurch, 1998).
Facilitate communication of organisations mission statement to all levels of organisation.
There are clearly many advantages to using such a system. For example, using a financial measure in a time of economic recession will compel organisations to take a short term view on reducing costs and avoiding losses, however with the scorecard, there is an opportunity to identify some of the non-financial issues that may be causing a slow down in the organisations activity, and addressing them so that in the long run, the organisation may be profitable. There are however some limitations to the scorecard, and they include:
Identifying and weighting of measures to choose which is most appropriate to a particular organisation may be difficult (Upchurch, 1998)
Quantification of some non-financial measures may be difficult, e.g. customer perspective (satisfaction) may be assessed using figures such as number of goods returned to a company but these figures are indirect indications.
Interpretation of cause-effect relationship between measures maybe difficult (Drury, 2008), that is how can it be known for sure that improving internal processes will drive excellent overall performance, when there may be a slow down in global financial activity.
Omission of important perspectives such as environmental perspective. (Drury, 2008).
The scorecard is thus may require re-work, however it is the most comprehensive performance measure. The scorecard provides a good starting point for looking at measures that can be adaptable to differing economic conditions. Fitzgerald et al (1991) proposed a performance measurement framework that can be used when looking at service organisations. The state that performance should not only be financial, but it should also measure the competitiveness of the organisation, quality of service, flexibility to adapt, its ability to allocate resources correctly and its innovative ability. This is a good framework for assessing the effectiveness of a performance measure and one the author will be keen to referring to when looking at cases in this current economic downfall.
In order to answer the research question outlined above, the author will have to generate a strategy to collating data and generating information around the subject. For the topic chosen, the majority of this data will be of qualitative data, as the author will go about collecting opinions and realities around performance measurement, and the way employees in an organisation feel about changes that are occurring in the internal processes as a result of the economic recession.
The author will carry out both primary and secondary research. The primary research will involve carrying out semi-structured interviews, which are a good method for gaining an in-depth grasp of the issues around the subject in question (Saunders, et al, 2003). Here, the author will research one organisation in the UK that has been affected significantly by the economic downturn. Ideally this will be an organisation in the banking sector, or in the construction industry, as those are two of the main sectors that have been identified as ones that have been worst affected by the global recession.
The author will carry out interviews with as many employees from various different departments within this organisation as is possible. The questions will be aimed at trying to understand how these employees perceive performance measurement practices in the organisation before the downturn, and whether or not this has changed after. In doing so the author will be able to recognise the main pillars of performance measurement and how they are communicated to the employees. In addition, the author will try to find out if the organisation adopts any of the frameworks identified previously, and see to what extent the organisation has changed them. In doing so, the author will try to get a feel for how employees are coping with pressures of achieving organisational targets and whether or not the performance measures in place could be improved.
In addition, the author will carry out secondary research, which will involve looking at books, journals and news articles surrounding the subject. Many authors have carried out analysis on organisations as a result of changes in the economic climate. Market analysts have produced research notes on organisations to measure the extent of their performance. Although this view of performance is an external one, it will help the author carry out a comparison between how an organisation manages its performance internally and how external stakeholders perceive this performance. This will give the author an idea about the effectiveness of the organisation's performance measures. Finally, the author will utilise company annual reports to see the organisation's financial performance, as well as discover non-financial methods organisations measure performance by. For example, an organisation may have an ethical obligation, and one of its performance measures will be whether or not this obligation has been fulfilled. Given the current economic conditions, the author will be keen to noticing if there is more or less emphasis on such non-financial factors, and how the organisation is perceived in that light.