Corporate Performance Management (CPM) or Business Performance Management has recently become a hot topic in business research (Miranda, 2004). At a technical level, CPM refers to the performance monitoring related processes in an organization and is essentially a part of the internal Information System. On a high level, CPM can be viewed as the set of processes that help the organization develop and execute strategy (Frolick and Ariyachandra, 2006). Apart from aiding strategic management and gaining competitive advantage, CPM also allows organizations to be better accountable in the post Enron post Sarbanes-Oxley act era. Majority of firms do have some sort of CPM systems now and still, CPM is a priority investment area for organizations as viewed by 54% of responders of the Gartner research shown below:
Fig x.x Which analytical solution does your firm plan to invest in the next 12 months? (Gartner)
While, the subject of CPM implementation in organizations have been extensively studied and researched, there is a certain section of the industry where CPM systems have been relatively unexplored - Small and Medium Enterprises (SME). Stories of CPM implementation are rare and consequently, there is very few literature on the subject to analyze. According to the European Union definition, SMEs are organizations having:
Get your grade
or your money back
using our Essay Writing Service!
Less than 250 employees
Annual turnover less than 50m euros
Are independent (Sousa and Aspinwall, 2010)
Such firms are considered central to any economy and they form the majority of private sector (Rahman, 2001).
SMEs have some unique characteristics when compared to large firms and the reasons for low adoption of CPM systems in such firms can be considered as a direct result of these. A small organization, is presumably apt for ad-hoc decision making as most of the decisions are tactical and are made instinctively by the owner. However, having a formal CPM system at the heart of strategic decision making has several benefits. This research aims to explore this and establish the value of formal CPM systems to SMEs. CPM implementation in several firms (big and small) are analyzed based on theoretical frameworks to identify the unique characteristics of CPM in SMEs.
The research also explores the various models and frameworks available for the implementation of CPM systems. Since CPM implementation in large firms have been extensively studied, most of the models available have been designed specifically for the characteristics of large companies. The few models designed for SMEs have been found to be scarcely used and awaits recognition from the industry. A generic framework called the Balanced Score Card (BSC) model is the most popular among all models (Garengo et al., 2005). The organizations studied in this research had BSC as the framework for implementing CPM. The research also briefly outlines the arguments for (Gumbus and Lussier, 2006, Rickards, 2007, Andersen et al., 2001a, Sousa and Aspinwall, 2010) and against (McAdam, 2000a, Garengo et al., 2005) the suitability of BSC for CPM implementation in SMEs.
The research also aims to explore how SMEs can overcome the barriers to implementation of CPM systems (Garengo et al., 2005) using illustrations from the data collected. Most of the barriers like managerial capacity and lack of human resources are directly related to the size of the organization. The research used BSC framework and data from several organizations to examine how they overcame these barriers. One significant barrier for SMEs is the high cost of IT based CPM solutions. The report below shows the average pricing strategy among major Business Intelligence tools vendors. It is quite clear that an SME, with 30 to 40 users for a reporting system would have to pay a very heavy price indeed for a proprietary solution.
Fig x.x Pricing strategy of BI vendors (Gartner)
Meanwhile, the popularity of open source analytical tools is increasing as more and more organizations are exploring their interest in open source software. The research also aims to explore the opportunity for SMEs in using open source to negotiate the cost factor. Evidences from the research suggest that even larger organizations have started to explore the possibility of replacing their CPM systems with open source solutions. Thus the research would also try to explore reasons beyond 'cost' behind this increase in interest towards open source solutions. This is a scarcely studied area and as a result, the investigation was limited to qualitative interviews and thus it would be a modest first step towards more and more research.
Always on Time
Marked to Standard
The report is arranged in chapters and constitutes all the stages of the research conducted. The literature on the subject shall be reviewed first to gain sufficient knowledge base to proceed with the report. The research methodology would explain the empirical work done, data collected and the framework followed. This would be followed by the analysis and discussion of core research areas using the data collected. The summary of findings and further research would wind up this report.
The literature review for the research essentially would explore of CPM concepts in 2 particular directions.
The concept of Corporate Performance Management (CPM) systems and the link between CPM measures and strategy of the organization
The peculiar characteristics of SMEs and the significance of CPM for SMEs along with evidences of current market adoption
The literature review shall follow the following structure (table x.x). We shall first briefly look at the concept of CPM, its evolution and various definitions. Thus would set the stage for a deeper analysis on some of the popular models or frameworks for CPM along with certain comparative studies on the advantages and disadvantages of the models. This will provide the rationale for the use of Balanced Score Card (BSC) model in this research, which will be then discussed in detail. We shall also look at the definition and associated concepts of SME firms. There are some unique characteristics in SMEs that make CPM implementation in such firms quite different from that of large firms. Thus the discussion of CPM using BSC model would be focused on SMEs, the significance of CPM in SMEs and the applicability of BSC in SMEs. This discussion would lead us to the research opportunity for the work.
Definition of CPM and associated concepts;
Background of CPM evolution;
Significance of CPM systems;
Models and frameworks for CPM
Definition of SMEs;
Key characteristics of SMEs compared to large firms
Significance of CPM in SMEs;
Theory and practice and the gap between;
Balanced Score Card model and SMEs
Table x.x Structure of literature review
Evolution of performance measurement:
The measurement of performance has always been in the agenda of managers and management accounting researchers (Otley, 1999). The significance of performance management in strategic planning as been identified by academics very early indeed as (Venkatraman and Ramanujam, 1986) observed that performance management should be at the heart of strategic management. However, traditionally, managers of organizations have been using performance management techniques primarily associated to financial measures. These traditional methods focus too much on short term performance rather than sustained long term performance (Clarke, 1997). (Kaplan and Norton, 2001)) classify financial measures as 'lag' indicators, which report based on the results of past actions and an over reliance on these measures would sacrifice long term value creation for short term results (Porter, 1992). However, some authors have questioned whether there is a direct link between the strategy of the firm and these financial oriented performance measurement techniques (Clarke, 1997, Frigo, 2002).
The literature on the subject also states that the concurrent competitive business environment requires firms to pursue sustained performance in the long term rather than short term achievements. There is also emphasis on the link between the performance management systems and the organizational strategy. Consequently there is a trend towards broad performance measurement systems which help in delivering long term strategic objectives (Ching-Chow and Tsu-Ming, 2009). Most organizations now use balanced models and CPM systems solely dependent on financial measures have virtually disappeared (Basu, 2001).
Evolution of Decision support systems
In the previous section, we have seen that the performance management systems have evolved from finance oriented to broad, balanced models. Interestingly, some authors have analyzed the evolution of Corporate Performance Management (CPM) in a 'technical' systems perspective. This perspective looks at CPM as an IT-based 'system' consisting of data, databases and reports.
Decision Support System
A computer based support for management decision makers
Executive Information System
A computer based IS for top executives
A subject oriented, historic and non-volatile data collection to support decision making (Inmon, 2009)
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
Set of applications and technologies which help in analyzing data from a warehouse and support decision making
Business Performance Management
A series of processes and applications designed to both develop and execute business strategy
Table x.x Historic Evolution of Decision support ((Frolick and Ariyachandra, 2006);(Inmon, 2009))
The origin of CPM systems can be traced back to the introduction of decision support systems in the 1970s (Power, 2003). The decision support systems gave way to Executive Information Systems (EIS) which provided the senior executives with an information system to aid decision making. Online Analytical Processing (OLAP) and Data warehousing widened the scope of EIS with enhanced access and manipulation of huge amounts of rich data (Frolick and Ariyachandra, 2006). Business Intelligence (BI) provided firms with a technological solution to help them make sense of vast masses of data for better decision making. Corporate Performance Management (CPM) system is the latest phase in the evolution of decision support systems. CPM refers to a set of business processes and applications for developing and executing business strategy by leveraging BI (Miranda, 2004).
Corporate performance management
Definitions of CPM interestingly involve a lot of emphasis on strategy and how the CPM system allows the firm to implement the strategy. (Frolick and Ariyachandra, 2006) defines CPM as a sequence of processes designed for optimizing the development and execution of business strategy. (Iervolino, 2004) defines CPM as a set of operational and analytical processes aimed at 2 tasks:
Strategic goal creation by identifying relevant objectives and Key Performance Indicators (KPI)
Support the management towards attaining the goals by linking KPIs to operational metrics of the organization
(Golfarelli et al., 2004) observe that CPM is much more than just a technical database solution:
'CPM includes Data Warehouse but it also requires a reactive component capable of monitoring the time-critical operational processes to allow tactical and operational decision-makers to tune their actions according to the company strategy. '
For a unified view on the concepts of Business/Corporate Performance management, industry leaders in the area formed the BPM standards group in 2003. The group defines BPM as:
"a set of integrated, closed-loop management and analytic processes, supported by technology, that address financial as well as operational activities" (Group, 2003)
The group also explained the closed loop concept when they released a framework for CPM initiatives in Enterprises in 2004. The framework (shown below) recommends a technical architecture that allows and supports information flow between functions and from operational systems to planning systems within the organization (Callagan, 2004).
Take corrective action
Monitor & Analyze
Fig x.x The Official CPM framework (Frolick and Ariyachandra, 2006)
The 4 core processes in the framework are Strategize, Plan, Monitor and analyze and Take corrective action. In strategize phase, the overall business strategy of the firm and the key drivers to implement the strategy are identified. The crucial activity of determining the Key Performance Indicators (KPI) in the highlight of this stage. KPIs are the main measures that capture business value drivers (Moncla and Gregory, 2003) and identifying them is one of the biggest challenges in CPM deployment (Frolick and Ariyachandra, 2006). The rest of the phases as their names suggest, lead to the 4th phase, where corrective actions are taken based on the monitoring results. The official framework, as we can see, sets the broad characteristics of a typical CPM implementation. It provides a prescriptive step by step procedure for CPM implementation, with the business strategy determination driving the whole process. Thus the framework also considers CPM systems to be heavily connected to the business strategy. This would later help us analyze the CPM implementation in some of the organizations studied.
The generic analysis on CPM and associated models and frameworks would only initiate thought for the research. The concept of performance measurement needs to be analyzed in the perspective of smaller firms in order to create real value from the research. Thus, we shall now look at the concept of SMEs in the following sections, in order to move closer to the core area of the research.
The case of SMEs
Small Medium Enterprises (SME) and their characteristics in relation with the large firms has been the subject of several academic studies. (Garengo et al., 2005) observes that uncertainty, innovation and evolution are the 3 main aspects of difference between SMEs and large firms. SMEs experience a higher degree of uncertainty from the external environment when compared with the large firms. Integrating the works of several authors, (Sousa and Aspinwall, 2010) come up with the following advantages/disadvantage analysis for SMEs compared to bigger firms:
Ownership and management- High management visibility in SMEs help change initiatives easy; however, increased control for the leader may also result in him/her trying to stamp authority in every area of the firm, hence suppressing teamwork.
Organizational structure- The flat organizational structure in SMEs helps decision process and improves the speed of information flow.
Culture and behavior: The relatively unified culture in SMEs due to their small size is favorable for change initiatives
Systems, processes and procedures: Lesser degree of specialization in SMEs helps to form a broad view on issues compared to the specialist views in large firms. However, inadequate systems and processes in place affect efficiency.
Human resources: The ad-hoc nature of workforce training and development may hinder the change initiatives.
Customers and markets: SMEs are often dictated my bigger multinationals when they come as customers.
The above characteristics of SMEs also imply that concepts like performance management need to be addressed differently as well. The priority of SME is to measure its operational performance first while large firms measure high level strategic performance. Moreover, factors like size, managerial influence, ad-hoc nature of resource allocation, lesser standardization and low level of managerial practices would affect implementation projects like CPM systems.
SMEs are sensitive to changes in managerial changes and systems and CPM can play a significant role in the development of managerial system in these companies (Garengo et al., 2005). The following factors have led to a favorable environment for the implementation of CPM in SMEs:
The evolution of a competitive market place
The introduction of the quality concept
Increasing significance of continuous improvement
Innovation in information technology (Garengo et al., 2005)
Even though literature on the subject clearly shows the significance of CPM in SMEs, very few SMEs have actually implemented CPM, leaving a gap between theory and practice (Sousa and Aspinwall, 2010). (Garengo et al., 2005) points out 6 factors that affect CPM implementation in SMEs:
Lack of human resources - Since most of the staff don't have clear job roles and are required to do daily work; there is no extra time for implementation projects like a CPM.
Managerial capacity - Since SMEs have a flat structure with increasing influence from the owner/founder, there is less of a managerial culture and managerial activities are often neglected.
Lack of capital resources - Most of the software platforms for CPM are not affordable to SMEs.
Reactive approach - SMEs are characterized by ad-hoc decision making process and a lack of adequate strategic planning.
Tacit knowledge - In the absence of formal structures, most of the knowledge in an SME is tacit and this makes gathering of knowledge for CPM implementation difficult.
Misconception of CPM - SMEs usually don't have an idea of the benefits of CPM during implementation and is often considered as a bureaucratic tool to remove flexibility.
The above factors have been further explored in conjunction with the data collected, further in this work. The data from CPM implementation in SMEs would be then examined to figure out how these barriers were overcome in the organizations studied. We shall now review some of the models and techniques in use for CPM for both large and small firms in the perspective of academics.
Tools and Models for CPM
Review of literature on CPM models show that there are several models or tools that organizations use as a guide for implementing their Performance management systems. (Otley, 1999) uses a 5-point performance management framework to analyze 3 main CPM models. The 5 points according to the author, are key characteristics required for a good CPM system namely - Objectives, Strategies and plans, Targets, Rewards and Feedback. This comparative analysis was done on the models - Budgetary Control model, The Enterprise Value Added (EVA) model and the popular Balanced Score Card (BSC) Model.
Table x.x CPM models compared using the performance management framework (Otley, 1999)
Budgetary control is the traditional method in which performance is measured solely on profitability. As echoed in the discussions early in the literature review, the dependence on financial metrics limits the ability of the model to obtain a holistic view of the performance. The author also notes that the model fails in addressing performance based rewards systems as well as feedback based on performance results.
Enterprise Value Added (EVA) model is another purely finance oriented CPM model. However, the author argues that the model addresses several of the 5 points in his framework, namely the objective and rewards system. The sole objective of CPM according to EVA is to enhance share holder value. Also, since the creators of the model - Stern Stewart Corporation were previously compensation consultants, the rewards system is also well addressed in the model (Otley, 1999).
The 3rd model analyzed, the BSC model, is the most popular and successful of the three. The BSC, developed by Kaplan and Norton in the 1990s at the Harvard Business School is based on the concept of multi perspective reporting. The BSC model is accredited to be one among the 15 most important management concepts introduced via the magazine by The Harvard Business Review (Andersen et al., 2001a).Although (Otley, 1999) acknowledges the unique emphasis on linking business strategy to measures, the author suggests further research on some of the points that are not addressed in the BSC namely - reward structures and target setting. The model would be analyzed in detail further in the work.
(Garengo et al., 2005) analyzes 8 CPM models using their '10 dimensions of performance management system models'. The following key characteristics of CPM models introduced after the mid-80s were considered as dimensions for the comparative study:
Focus on stakeholders
Balance - The measures selected for CPM should have a good balance between financial and non-financial and/or internal or external.
Dynamic adaptability - The CPM should be capable of responding quickly to contextual changes.
Process oriented - The CPM system considers the organization as a set of processes linking together for one aim.
Depth - The level of detail for each metric or measure. An in-depth measurement system allows the management to drill down to the lowest operational level.
Breadth - A broad model provides a holistic assessment of the company's performance rather than an in-depth view (Garengo et al., 2005).
Casual relationships - A CPM system should identify the link or casual relationship between the results and determinants
Clarity and simplicity - The objectives, measures and methodology for the CPM should be simply defined and clearly communicated to all the users of the system.
Based on these dimensions, (Garengo et al., 2005) compares 8 CPM models to arrive at the following results:
The study reveals that there has been a steady evolution from bureaucratic/vertical systems to reactive/horizontal systems. The first 4 models - (Performance measurement Matrix, Performance Pyramid system, Results and determinants framework and Balanced Scorecard model) are found to be vertical or hierarchical and give little attention to the size of the company, whereas the remaining 4 are of a horizontal structure. The focus on the link between measures and strategy gives way to focus on shareholders from left to right. The last 2 models - Organizational Performance Measurement and Integrated Performance measurement for small firms are specifically defined for SMEs. The SME specific models, although much simpler and clearer than earlier models, are found to place lesser emphasis on the breadth and depth dimensions.
Table x.x Comparison of CPM models (Garengo et al., 2005)
The author also notes that since only 2 out of the 8 models in the last 20 years were designed for SMEs, further research in this area is essential. (Gumbus and Lussier, 2006) agree to this and calls for more research towards developing a framework for SMEs. While there are very less cases of SMEs implementing CPM (Garengo et al., 2005), some organizations that do implement such concepts tend to use the available models partially, ignoring some dimensions of the models. (Tenhunen et al., 2001) observe that this approach is not ideal and would not consider the specific requirements of an SME. Among all the models, the Balanced Scorecard model still remains as the most popular one in literature and in practice (Garengo et al., 2005). Even though some academics have questioned the suitability of BSC as a CPM framework for SMEs (McAdam, 2000b), the researcher has also come across some data evidence relating to successful BSC implementation in SMEs. Moreover, scarcity of proper frameworks has resulted in using BSC as frame of reference for our analysis on SMEs. This argument is further expanded in the next section.
Balanced Score Card (BSC) model and SMEs
The BSC was originally developed by Kaplan and Norton as a multidimensional performance measurement model. However, it later evolved to a framework for strategic management (Banker et al., 2004). The creators of the model argue that towards the end of 20th century, the organizations started to realize the significance of their 'intangible' assets for competitive advantage. Intangible assets like 'knowledge' often create value when coupled with other tangible and intangible assets (Kaplan and Norton, 2001). The authors cite the following example:
A new growth oriented strategy may comprise of the several components - knowledge about customers, training for employees, new Information Systems, change in organizational structure and a new compensation program. As we can see, some of them are tangible and some of them are not. Investing in any one of these would not help realizing the strategy since value is created when all of these combine. Thus value creation is multiplicative rather than additive (Kaplan and Norton, 2001). The BSC, the authors claim, provides a framework to describe value creating strategies that requires linked tangible and intangible assets.
Multi perspective reporting with BSC- The BSC framework classifies the organization's strategic objectives into 4 perspectives (Kaplan and Norton, 2001):
Financial perspective: Shareholder value is a key objective for any profit seeking enterprise. Hence this consists of the strategy for productivity, growth and risk in the shareholders' perspective.
Customer perspective: The customer value proposition is the key factor that differentiates a firm from its competitors. This perspective considers customer centric objectives like pricing, customer service, delivery time etc.
Internal process perspective: (Kaplan and Norton, 2001) observes that improving internal processes will provide cost savings in 3 high levels. Improving operational efficiency results short term benefits; improving customer relations yield medium term benefits and improved innovation yields long term returns. Thus this perspective in BSC helps an organization to obtain results from all 3 high levels of processes with a complete strategy for attaining the objectives identified in financial and customer perspectives.
Learning and growth perspective: In this perspective, the employee skills and capabilities, technology and the corporate climate is defined in view of attaining the objectives identified in the first 3 perspectives.
Fig x.x Cause-effect relationship realized using multi-perspective reporting using BSC framework(Kaplan and Norton, 2001)
The objectives identified across the 4 perspectives can be represented graphically as a strategy map. The strategy maps not only help in building a holistic strategy, but also helps in detecting flaws in balance score cards (Kaplan and Norton, 2001).
Fig x.x Balanced Score Card strategy map (Kaplan and Norton, 2001)
Research suggests that such graphical representation helps managers to better understand the relation among data (Banker et al., 2004). One such strategy map prepared by Mobil North America Marketing and Refining is shown below:
Fig x.x BSC strategy map for Mobil North America Marketing and Refining (Kaplan and Norton, 2001)
As mentioned earlier in the work, there is very less empirical work done on the subject of CPM in SMEs and quite understandably, same is the case of the applicability of BSC model in SMEs. Interestingly, the available literature is split into 2 schools of thoughts. Some academics state that the BSC is suitable only for large firms (Garengo et al., 2005). However, there is another set of authors who support BSC for use in SMEs. In a practitioner conference paper, (Andersen et al., 2001a), citing their own example of BSC implementation in 2GC limited, argues that lack of literature on the suitability of BSC on SMEs should not be taken as an indicator that BSC is not suitable for SMEs. The following points were found in literature in favor of BSC in SMEs:
BSC has increased relevance in SMEs than in large firms since the framework not only serves the performance management needs, but also brings in a formalized approach in the generally neglected areas of strategic goal setting and general management practice in SMEs(Andersen et al., 2001a).
(Sousa and Aspinwall, 2010) tip BSC as the performance management system for their framework for SMEs, mainly due to the simplicity of BSC and the recognition from larger organizations. Other models were rejected citing that they could of use only when the organization attains 'a higher maturity level'.
The implementation of BSC in small firms will be similar but quicker than the large firms (Andersen et al., 2001a) due to the smaller size and simple organizational structure.
(Rickards, 2007) on his work on e-commerce SMEs finds that BSC is feasible in SMEs as managers would welcome the multi perspective view on their businesses. The author observes that BSC includes 'soft' non-financial measures which are leading indicators of risks and opportunities, thus equipping SMEs with flexibility towards external factors.
Adopting BSC thinking is beneficial even for a startup business venture as this will help the management team obtain a clear idea about the strategy and ways of realizing that strategy (Andersen et al., 2001a)
(Gumbus and Lussier, 2006) observe in a study on some construction firms that small size construction firms can benefit from effective use of BSC model.
The lack of availability of SME specific models and the simplicity and popularity of BSC is to be considered along with the fact that the SMEs are characteristically different from the large firms. As a result, for this research, we shall use BSC as a broad guideline for a CPM, keeping in mind, the unique characteristics of SMEs.
Through this literature review, we have seen some of the literature written on the subject of performance management in organizations. Academic as well as practical evidences suggest that CPM has emerged as an important concept in organizational development. We have seen several models and frameworks for CPM and their relative strengths and weaknesses. Of these, the BSC model stands out as the most popular and successful. The process by which large organizations use a BSC generated strategy map to drive their performance management system is of great interest as far as this research is concerned. The review of those concepts thus provides a good foundation for such an analysis.
It is also noted that, while there is an abundance of academic resources for CPM on large firms, there is a scarcity in empirical work done on CPM in SMEs. The peculiar characteristics of SMEs as we have seen, makes the concept of performance measurement a slightly different scenario when compared to the large firms. Lack of proper models and frameworks specifically addressing the characteristics of an SME has forced us to adopt BSC as a broad guideline for the research. Moreover, the few models specifically designed for SMEs were recently proposed and are still awaiting industry recognition. Thus the literature review has revealed a gap in empirical studies when it comes to CPM in SMEs. Moreover, one of the main factors affecting CPM implementation in SMEs - lack of capital resources, is rarely addressed in the few literature available on the subject. Even though open source solutions could potentially address this factor, there is little or no empirical evidence on this.
Thus, there is an opportunity to contribute to the literature by analyzing the BSC driven CPM approach in a large firm in comparison with that of an SME. The research aims to explore how SMEs can overcome the barriers to implementation of CPM systems (Garengo et al., 2005) with an additional chapter on the option of using open source analytical solutions to address the financial constraints of CPM implementation in an SME.