How Corporate Performance Measurement has evolved

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The concept of Corporate Performance Measurement (CPM) has been evolving steadily over the last two decades.

Corporate performance has historically been measured mainly through the use of different indicators of financial performance and health (Ghalayini & Noble, 1996, p 63). Companies are however increasingly realising that financial figures do not constitute the foundation of performance management and should in fact be considered as only one element of a broad set of performance measures (Ghalayini & Noble, 1996, p 63).

At the core of such thinking is the realisation that sole consideration of financial measures can often result in undercutting of corporate strategy. The worth of strict financial analysis and reporting for purposes of performance management is steadily diminishing on account of various reasons (De Haas & Kleingeld, 1999, p 233). The most obvious of such reasons is the essentially short term nature of such measures, which often preclude investments in areas that could benefit achievement of long term business objectives (De Haas & Kleingeld, 1999, p 233). The accelerated pace of business in the last two decades has also made it impractical to rely on historical financial data. With international organisations undergoing process reengineering and reducing their headquarters staff, local decision making, which calls for different types of performance information is gaining importance in organisational strategy (De Waal, 2001, p 17). Companies are thus looking for meaningful ways for incorporation of non-financial and intangible measures like customer satisfaction, human resources, quality, innovation, learning and market share into their performance measurement metrics and are searching for ways to make such metrics meaningful across the organisation and at different performance levels (De Waal, 2001, p 17).

This working paper aims to provide an overview of past, present and planned performance measurement tools, with particular regard to the measurement of intangibles. The paper is structured into different relevant sections, makes liberal use of previous works on performance measurement and contains some personal proposals of the author on the issue.

Corporate Performance Measurement

Corporate performance measurement represents the various methods, processes, measures and systems used for monitoring the performance of business firms (De Busk, et al, 2005, p 61). Extant management literature divides corporate performance measurement (CPM) into two specific approaches, namely the shareholder oriented approach and the stakeholder oriented approach. With the main purpose of shareholder oriented CPM systems being the maximisation of shareholder value, all control and measurement metrics in such measurement processes focus on issues that are directly related to such valuations (De Busk, et al, 2005, p 61). Examples of such performance measurement measures are Earnings per Share (EPS), Return on Investment (ROI), Economic Value Added (EVA), Return on Equity (ROE) and Cash Value Added (CVA) (Davila, et al, 2004, p 28). Stakeholder oriented CPM approaches however realise that the strategies of business firms need to satisfy the aspirations, not just of shareholders but also other stakeholders like customers, suppliers, financiers and bankers, employees and members of the local community and larger society (Davila, et al, 2004, p 28). CPM systems for such approaches are required to report about performances for various nonfinancial measures and key performance indicators (KPIs) for such exercise thus need to be formulated accordingly (Davila, et al, 2004, p 28).

The growing irrelevance of traditional finance oriented performance measures has already been taken up in the introductory chapter. Ghalayini and Noble (1996, p 64) identified 8 shortcomings of traditional performance measures, i.e. they (a) use traditional cost management systems, (b) employ lagging metrics, (c) do not mesh with organisational strategy, (d) become difficult to practically implement and tend to be fragmented and inflexible, (e) contradict constant improvement thinking, and (f) neglect customer needs (Ghalayini & Noble, 1996, p 64).

Such limitations have overtime led to CPM strategies that make use of a number of nonfinancial measures (Ghalayini & Noble, 1996, p 66). These systems can further be grouped into two specific categories, (a) those which focus on self assessment, like the Deming Prize, Baldridge Award, and the EFQM Excellence Model, and those designed to assist managers in measuring and improving business processes like the Balanced Score Card (BSC) framework and the Performance Pyramid (Ghalayini & Noble, 1996, p 66).

These newer performance models attempt to look at organisational performance comprehensively and attempt to connect performance metrics with organisational strategy and vision. This working paper takes up the discussion of two such important CPM systems, one from each group, namely the EFQM Excellence model and the BSC framework, for more detailed discussion.

EFQM Excellence Model

The European Foundation for Quality Management (EFQM) was established in 1988, by 14 important European companies, with the support of the European commission (Ghalayini & Noble, 1996, p 69). The EFQM established the European Quality Award (EQA) in 1992 for companies that visibly demonstrate excellence in quality management to be their fundamental process for continuous improvement. The EQA criteria arise from the EFQM Excellence model, which focuses on improvement planning and self assessment. The model is now widely used by business corporations, including companies like Rank Xerox, TMT Express and Glaxo (Ghalayini & Noble, 1996, p 69).

The figure provided below details the scoring guidelines for assessment for the model.

(Source: Wongrassamee, et al, 2003, p 16)

The EFQM Excellence model aims to provide a systems perspective for the understanding and realisation of performance management. It is a non-prescriptive framework that is rooted in 9 distinct criteria, more specifically (a) leadership, (b) people management, (c) policy and strategy, (d) resources, (e) processes, (f) people satisfaction, (g) customer satisfaction, (h) impact on society, and (i) business results (Ghalayini & Noble, 1996, p 66). The first 5 of these criteria consist of factors that can be manipulated by organisations, called Enablers, whilst the latter 4 represent what organisations can achieve and are thus termed Results (Wongrassamee, et al, 2003, p 18). With the model being non-prescriptive in its approach, companies are allowed to adopt different ways of conducting quality management and self assessment. The model does not contain detailed instructions for its utilisation, even as all 9 criteria are required to be considered for the process of award assessment (Wongrassamee, et al, 2003, p 18).

The leadership criterion concerns the behaviour of managers, with specific regard to the ways in which leaders formulate and articulate statements of vision for achievement of total quality and continuous improvement by the organisation and its people (Wongrassamee, et al, 2003, p 21). People management concerns the ways in which organisations handle their employees and how they develop the knowledge and potential of their people to continuously enhance their business processes and services (Wongrassamee, et al, 2003, p 21). Policy and strategy concerns the mission, vision, values and strategic direction of organisations, as well as the ways in which organisations implement their mission and vision through the use of total quality and continuous improvement (Wongrassamee, et al, 2003, p 22). Resources refer to the ways in which organisations manage and utilise their internal resources and external partnerships in order to achieve effective business performance, with regard to their articulated mission and strategic plans. Processes refer to the ways in which organisations design, manage and improve their processes and activities in order to meet the needs of their customers and other stakeholders (Wongrassamee, et al, 2003, p 22).

With regard to the criteria for results, people satisfaction concerns the investigation of organisational achievement with regard to employees. Customer Satisfaction on the other hand measures the extent to which organisations are fulfilling the needs of their targeted customers (Wongrassamee, et al, 2003, p 23). The criterion for Impact on Society concerns organisational achievement, with regard to meeting the expectations and needs of society; local, national and international. Business results finally concerns the measurement of organisational achievement in areas of business performance and satisfaction of shareholder needs (Wongrassamee, et al, 2003, p 23).

The percentages detailed in specific boxes identify the weight age given to each criterion for assessment of the EQA award.

Balanced Score Card Approach

The Balanced Score Card approach was conceived by Robert Kaplan and Nolan Norton in the early 1990s (Frost, 2000, p 7). It aims to provide organisational managers with comprehensive perspectives of their businesses, thus allowing them to focus on critical areas and drive organisational strategy forward. Kaplan 1992 The BSC approach has been adopted by organisations like ABB, British Airways, Tesco and Coca-Cola (Frost, 2000, p 7).

It helps in communicating and implementing organisational strategy and consists of a framework that contains specifically chosen financial and non-financial sets of measures, which help companies in implementing their key success factors, in terms of their strategic vision (Kaplan & Norton, 1996, p 75). Whilst Kaplan and Norton gave strong emphasis to profit as a key performance measure, they added three other measurement categories for non-financial aspects like customer satisfaction, learning and growth and internal business processes in order to counter the stress on financial measures (Kaplan & Norton, 1996, p 75).

The BSC framework thus incorporates four major perspectives, namely (a) financial, (b) customer, (c) internal business processes, and (d) learning and growth (De Waal, 2001, p 29). Kaplan and Norton however clarify that such perspectives need to be considered as guidelines and that all organisations need to develop their own performance score cards and formulate appropriate KPIs for measurement and improvement of business performance for the satisfaction of their stakeholders (De Waal, 2001, p 29). The BSC approach places emphasis on the incorporation of both financial and nonfinancial measures in the information system for all levels of organisational employees. The score card helps in converting organisational mission and strategy into specific measures and objectives (De Waal, 2001, p 29). Such measures should be balanced not just between external and internal measures but also between outcomes and drivers. The score card utilises measures to inform and communicate employees regarding the drivers of present and future success and gains strength from its emphasis on linking business strategy with performance measures (De Waal, 2001, p 29).

Comparison between Balanced Score Card and EFQM Excellence Model

Otley (1999, p 363), states that CPM Measures should be assessed with regard to five specific issues, namely (a) the objectives that are important for future overall organisational success and the ways in which organisations evaluate their achievements against such objectives, (b) the strategies and plans adopted by organisations, and the processes and activities required for their successful implementation, as well as for the assessment and measurement of such activities, (c) the level of performance needed by organisations to achieve in the detailed areas and the ways and means in which organisations set appropriate performance targets for them, (d) the rewards gained by managers for achieving such performance targets as well as the penalties likely to be levied for failure to achieve them, and (e) the information flows necessary for organisations to learn from their experiences and adapt their behaviour in light of such experience (Ghalayini & Noble, 1996, p 70).

A comparative assessment of the BSC system and the EFQM Excellence model reveals approaches to be similar in some aspects and divergent in others (Wongrassamee, et al, 2003, p 25). Whilst both systems have multiple objectives, the objectives of the EFQM excellence model are based on TQM principles and emphasise 9 specific areas, even as the BSC objectives are based on strategy and focus on 4 generic areas with regard to strategies and plans. The BSC method assigns strategic measures and uses strategy maps for connecting measures to strategy (Wongrassamee, et al, 2003, p 25). Whilst the EFQM model does not particularly address strategy, its weighted criteria can certainly be used for strategic guidance. Both systems provide for appropriate rewards and recognition, even though the EFQM model does not provide explicit guidance. Both systems are again clear on the need to provide feedback for future improvement (Wongrassamee, et al, 2003, p 25).

Choosing of Appropriate CPM Methods

Interest in CPM methods has dramatically improved during the last few years, especially after the introduction of various frameworks and methodologies like the Balanced Score Card and EFQM Excellence Model. Apart from the impact of these two models on CPM, interest in the process has been enhanced by the emergence of other CPM tools like Shareholder Value Added, Competitive Benchmarking and Activity Based Costing (Euske & Malina, 2005, p 167).

Whilst all these methods have been applied to some degree by different organisations, which in turn claim to have benefited from such application, there is as yet no clear indicator of the clearly defined superiority of any particular model. With the supporters of these different models claiming them to be comprehensive and unique, it is difficult for practicing managers to choose appropriate models for their organisations (Euske & Malina, 2005, p 167).

It is however interesting to realise that each of these methods provide different perspectives on performance. The BSC approach focuses on customers, financials, internal processes and learning and innovation, even as it, whilst doing so, reduces the importance of stakeholders like employees and suppliers (Euske & Malina, 2005, p 167). The EFQM model combines measurable results with enablers, some of which cannot be measured. Shareholder value frameworks include the cost of capital into measurement methods but ignore other factors. ABC methods focus on identification of cost drivers and their control but ignore other performance perspectives like shareholder, customer and employee opinion (Euske & Malina, 2005, p 169). Benchmarking on the other hand takes a largely external perspective, comparing organisational performance with those of best practitioners or competitors. The method is used more as a solitary exercise for generation of ideas rather than for the design of formalised CPM systems (Euske & Malina, 2005, p 169).

It must however be realised that these multiple measurement frameworks, which conflict with each other in some aspects do provide unique performance perspectives and are useful because they add value. They provide managers with different lenses for assessment of organisational performance. It is thus obvious that business performance is a multifaceted concept and there is no one best way for viewing it. Organisational managements thus have to carefully assess the activities of their organisations, look at the different interests of their stakeholders and customise appropriate performance management systems.

Author’s Proposals

The author feels that the various CPM measures discussed in the course of this working paper represent significant advances in performance measurement theory and practice and empower managers to view their organisations from entirely different perspectives that were simply not available even a couple of decades ago. The fast changing contemporary business environment is however expected to continuously develop new challenges, which in turn will call for new performance metrics.

It is thus important for organisations, in such circumstances, to draw upon all available theories and thereafter customise their CPM process to best reflect the concerns, anxieties and expectations of their stakeholders. Tesco’s Steering Wheel, which has been enlarged significantly after it was first developed in the mid 1990s, provides an excellent example of the customisation and expansion of the BSC method to reflect its changing organisational needs.

Conclusion

The concept of Corporate Performance Measurement has been progressively transforming over recent years. Whilst corporate performance has traditionally been measured with the use of different financial indices, modern day firms are realising that financial figures constitute only one element of a broad set of performance measures. This working paper aimed to provide an overview of extant performance measurement tools, with particular regard to the measurement of intangibles.

The growing inappropriateness of traditional finance oriented performance measures has over time led to the development of CPM strategies that use a range of non-financial measures. These systems can further be grouped into two specific categories, those which focus on self assessment and those designed to assist managers in measuring and improving business processes. This working paper takes up the EFQM Excellence model and the BSC framework for discussion and comparison.

The EFQM Excellence model is a non-prescriptive framework that is rooted in 9 distinct criteria and provides a systems perspective for understanding performance management. The Balanced Score Card approach aims to provide organisational managers with holistic perspectives of their businesses, thus allowing them to focus on critical areas and drive organisational strategy. A comparative assessment of the BSC and EFQM approaches reveal them to be similar in some aspects and divergent in others. Apart from these two models, modern day interest in CPM is informed by other CPM tools like Competitive Benchmarking and Activity Based Costing.

Whilst all these methods have been applied with benefit by different organisations, there is no clear indicator of the clearly defined superiority of a particular model. It is thus important in such circumstances for organisations to draw upon all available theories and customise their CPM process to best reflect the expectations of their stakeholders.

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