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The concept of performance management has been not new in the field of business management. But the concept of performance management has been changed in some recent years and there have been rapid and incredible progress and growth in the effective use of performance management system in different organizations. The purpose of performance management is to make sure and make certain that organization is able to meet and fulfill the goals and target effectively and efficiently. Effective performance management system enables the top management to analyze and evaluate the overall performance and to ensure that there is consistency and growth in the overall performance (Fraser, 2007).
Performance management can be about the overall performance of the organization, or of a particular department, or of a particular program or project, and even of a particular employee. Performance management is a technique to measure and manage the behaviors and results, which are two critical and important factors in overall performance. Almost every organization and company has implemented the performance management system in order to increase the effectiveness and efficiency of the organization and company by strategically integrating all important factors of the organization. It is important to integrate and amalgamate the individual goals and targets of employees with the collective goals and targets of the organization in order to effectively and efficiently meet and fulfill them (Willis, & Anderson, 2010).
The effective monitoring, control, and evaluation of performance of individual factors and components of the organization or company enables the top management to find any loop hole or any ambiguity in the performance and to come up with different strategies to overcome these loop holes and ambiguities in the overall performance. In order to effectively measure the performance one must first define the important factors and elements which are responsible for the outcomes and results, and the same time the optimal outcomes and results should also be defined which are being estimated and expected from the overall organization, department, project, or employee (Fraser, 2007).
Different people or stakeholders have different means and measure of performance. For this very reason the in order to design an effective performance management system one should first describe the performance measures. The performance management process involves planning, monitoring, developing, rating, and rewarding. This is more of an employee performance management process but can be implemented in other situations and circumstances too. As stated above it is important to do planning and defining expectations and outcomes in order to ensure that those expectations and outcomes are achieved. Next it is important to monitor and control the overall process and performance of individuals and departments in order to analyze and evaluate if they or on the right track or not. If there is anything or factor missing which is necessary and essential for achieving expected performance then the development step is about building and developing that factor within the employees and organization. No performance management system is effective without rating, rewarding, and feedback. This increases the motivation level and facilitates in the process of further improvement. The most important component of performance management system is the performance measurement (Willis, & Anderson, 2010).
The performance measurement is the main and crucial factor of any performance management system. It facilitates the process of overall management of the organization or of a particular program along with the process of accountability and reporting. The performance measurement is nothing alone but it is important to develop and improve the overall performance. The effective performance measurement techniques enable to analyze and evaluate the progress of a particular program or project which is being implemented in the organization. The performance measurement describes the direction and progress of the project that whether it is heading towards right direction and at right pace, it also identifies the ways and paths that can be followed to reach the final destination and achieve the described goals and targets, and finally and most importantly it facilitates in the process of analyzing the effective and efficient utilization of resources that is whether the resources are being used effectively, efficiently, and in cost effective manner or not (Willis, & Anderson, 2010).
The performance measurement can be qualitative and quantitative both. The data collected for performance measurement should be analyzed and interpreted in the context of the complete situation and background. Moreover for effective performance measurement one should use a combination of different performance indicators and measures and should not restrict to only one type of factor or single source of data. This increase the accuracy of the performance measurement as no single data can provide enough information about performance measures in order to reach a valid decision or conclusion (Willis, & Anderson, 2010).
Performance measurement enables and allows the top management to monitor and manage the overall performance of a particular project or program or for that matter of whole organization. But it should be also understood that performance measurement techniques only allow to identify the problems or difficulties in performance and does not provides the solutions of those problems or difficulties. In order to eradicate these problems and difficulties in the overall performance the management should devise and incorporate effective and workable strategies and implement them effectively and efficiently. So performance measurement facilitates and helps in the process of devising effective strategies in order to improve the overall performance of the organization.
One important question is why one should indulge in different performance measurement techniques and methodologies. The performance management is crucial and vital because it is the basis of the whole management and monitoring of the program and project. The performance management allows the evaluation and judgment of the different practices and activities related to business and project. The most important and crucial question in any project or program is of effective management of financial and non-financial resources. The performance measurement techniques enable and facilitate managers in the process of effective and efficient resource management and help them in devising and implementing effective short term or long term strategies and plans. With the help of evaluating and interpreting performance indicators there is a transparency in the overall process and one can measure the success and failure of the whole program or project (Fraser, 2007).
Performance measurement allows different middle level and functional managers to evaluate and analyze the performance of their individual department or function and to identify problems and issues within their domain, and devise strategies and seek resources according to their needs and requirements. On the other hand with the help of performance measurement techniques and methodologies top management is able to identify and evaluate problems and issues in different departments and in overall organization and hence facilitates top manager in the process of strategic planning.
The performance measures can be non financial or financial. It is important to effectively analyze and evaluate the both types of performance measures and integrate them together in order to come up with more practical and effective strategy for growth and for improving overall performance. Accounting management or also called other way round that is management accounting is believed to be an effective way of measuring and managing the financial factors and measures of overall performance when integrated with other factors and measures.
Management accounting is the tool to facilitate the managers in the process of taking decisions related to business activities and devising effective strategies on the basis of important information related to accounting and costs. The information developed through management accounting is for the use of managers instead of being used by external stakeholders like shareholders, creditors, etc. This information facilitates the managers to take effective decisions. Also the information and data is confidential and is only for management and no outsider or external party can see or use it. The information generated through managerial accounting is forward looking instead of historical and the focus is on future decisions, outcomes, and performance. The managerial accounting information is generated with the help of management information systems, which are used by managers to effectively and efficiently manage the organization or company, instead of using and following general principles of financial accounting (Otley, 2001).
With the passage of time management accounting is losing its importance and relevance in the process of effectively and efficiently managing the performance of the organization. It is believed that there has been no or limited development in the practices of management accounting for a long time and it has lost its relevancy and effectiveness in the new and more modern organizations and companies. It is also believed that in some case the management accounting has proven to be ineffective and has negatively affected the overall performance by providing wrong and poor data which results in ineffective and improper decisions and strategies (Otley, 2001).
According to one school of thought the accounting is completely irrelevant for the management practices and emphasize on the use of softer techniques and methods like training and development of employees. On the other hand there is one school of thought which emphasize on the development and modification in the managerial accounting practices to come up with more accurate and on time accounting data for making decisions and strategies. For example the activity based costing concept needs improvements and modifications, including activity based budgeting and other related concepts. It will be better to say that whole cost management requires improvement and modifications, as it is not possible to come up with effective strategies for controlling the cost if one will wait for the information related to cost from the managerial accounting system. The more efficient way of cost management will be if it is done at the initial planning phase where management is deciding about design of the product, process of production and other important decisions. It will be more appropriate to use the concept of strategic management accounting, a term given by Kalpan (Otley, 2008). The necessary changes and modifications that have to be implemented in the old managerial accounting practices is a shift from historical perspective to future orientation, from controlling and monitoring to planning, from internal focus to external focus that is should consider customers and competitors, from emphasizing on cost to emphasizing on value, and from shifting the focus from production to more on marketing activities (Otley, 2001).
In order to develop an effective performance management system and to come up with effective and efficient strategies it is important to integrate and incorporates all factors and measures together whether they are financials or non financials.
The effective performance management system cannot be developed for any type of organization and company by only focusing on some factors or performance measures. It is important to integrate and amalgamate different important factors and performance measures to design and develop an effective performance management system. The first step is to clearly define and describe the mission, vision, goals, and targets which have to be achieved or fulfilled by the organization. Next step is to identify important performance indicators and milestones which reflect the overall progress and performance of a particular project and of overall organization. Then the management measures the actual performance and compares them with the standards and milestones to identify any problems or issues, and take important steps and decisions to overcome these problems and issues and achieve the ultimate goal or target. Throughout the process it is important to incorporate the other financials and non financials factors and elements (Fraser, 2007). One of the important inventions in this regard is of balance scorecard.
A recent and more effective tool in this regard is of balance scorecard which was developed by Kalpan in 1990. Initially it was developed to incorporate both financial and non financial factors and elements in the overall performance measurement system. Later in 1996, it was further developed in to broader tool which amalgamate and incorporates all important factors and elements for management practices and decisions. The main focus of balance scorecard is the strategies related to business units (Otley, 2001).
The balance scorecard is a tool that enables managers to quickly look and analyze the complex information about the overall performance (Kaplan, & Norton, 1992). It links for different factors and gives information about four different perspectives which are (Kaplan, & Norton, 1992):
Customer: how customer views the company and what are their demands and needs?
Internal: what are the strong internal competencies and how the company can grow?
Innovation and learning: what is the status of continuous improvement and progress?
Financial: how the shareholders view the company or organization?
By integrating all four factors the balance scorecard provides managers with more effective and related information without any information excess or overload. Hence balance scorecard is a useful and valuable strategic planning tool which is used by managers in order to come up with effective strategies and measure and monitor the overall performance and growth of the organization or company. It is being used in almost every industry to incorporate activities of the business with the mission, vision, strategies, targets, and goals of the organization or company (Kaplan, & Norton, 1996).
It is a challenging task to develop performance management system for service type industry such as a consultancy firm as compared to the manufacturing industry. Within manufacturing industry it is relatively easier to define mission, vision, goals, targets, and outcomes. At the same time it is easier to measure the performance as there are tangible products (Willis, & Anderson, 2010).
On the other hand in services industry the services provided are intangible it is difficult to measure the performance given against the standard performance. Moreover there is a tendency of variation between the qualities of service provided so the most important factor is the consistency of the services provided.
But balance scorecard has made it relatively easier to develop an effective performance management system for the service industry. Let take an example of a consultancy firm, the management of the consultancy firm has to first develop mission, vision, and other important targets and goals, next is to define strategic objectives. After defining strategic objectives and outcomes the management has to identify critical success factors and have to define key performance indicators. These all will lead to analyzing the four factors and perspectives which are integrated in the balance scorecard.
The most crucial and difficult task in service industry is to identify and define the key performance indicators. Once defined it is difficult to measure and analyze these key performance indicators. Another difficulty in the service industry is to determine the cost involved in a particular activity and this limits the ability of manager to effectively and efficiently manage the resources and come up with cost effective strategies, as the most important resource in the service industry is human resource. It is also important to maintain the consistency and uniformity in the quality of the service provided (Fraser, 2007).
Hence the organizations and companies in the service industry have to be more careful and focused while developing and effective performance management system and managing and controlling the overall growth, progress, and performance.