Reviewing Performance management in construction a conceptual framework

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The authors firstly describe an emerging trend in the past two decades - a variety of industries primarily manufacturing have introduced new methods and techniques to improve performance in order to succeed within its respective marketplace. This has led to the creation of new thinking of performance management system through effective performance measurement.

The authors subsequently explain the distinction between performance management and performance measurement by referring Bititci et al. (1997) that the former being 'a closed loop control system' whereas the later being the information system 'at the heart of the performance management process and is of critical importance to the effective and efficient functioning of the performance management system'. The authors quoted Evangelidisz (1992) to argue how successful organizations or individuals have been in attaining their objectives and strategies through the performance measurement system. The authors further describe this relationship in a wider context from a process view, which is, visions and strategies of organisations or individuals are entered as inputs to the deployment process of performance management and measurement, and the outputs of the process will be the improved business performance.

In the introduction part, the authors clearly distinguish performance management from performance measurement and illustrate their relationship from an input-process-output process view. This clear definition is of particular use for industrial practitioners with insufficient performance management knowledge who tend to misuse the two concepts in practice.

However, the main objective and the organisation of this paper are not well stated in the introduction. Despite the aim to transfer best performance management practice into construction, the authors fail to 1) present the current performance management practice in the construction industry and 2) explain why the authors choose to investigate performance management in construction. In addition, the organisation of the paper as in the flow between different parts is also not stated though this normally constitutes an important part of introduction of research papers.

Background to Performance Measurement

Following introduction, the authors move to review the background to performance measurement. As the measurement result of an organization's performance is recognized to attract further future investment, increase share value and attract high calibre employees, the authors believe it is important to formulate performance measurement indicators and communicate them to the wider range of stakeholders. However, through reviewing research literature in an attempt to identify the traditional financial measures, the authors found the shortcomings of simply focusing on financial outcomes through reviewing research literature by Neely (1999): encourage short-termism; lack strategic focus and fail to provide data on quality, responsiveness and flexibility; encourage local optimization, and discourage continuous improvement. The authors further point out main reasons for these failing as financial measures are lagging metrics which tend to measure the past and are of little use in improving current performance. Based on this argument, the authors emphasize that how the performance was achieved should be identified on an on-going basis, along with an understanding of the performance measurement outcome. Designing proactive or leading metrics to measure how an organization arrives at a particular performance is important for improving the organization's performance and market share. The authors mention that identifying the right number and type of performance metrics to measure the performance of organizations has been the focus of research since the late 1980s. Balanced scorecard is one of the tools that have been developed to measure the performance with multifaceted perspectives.

In this part, the authors objectively reviewed some principle conclusions drawn by previous studies on the inadequacy of traditional financial controls. In particular, the authors cited with favour the argument which emphasized financial measures being 'lagging' metrics rather than 'proactive' or 'leading' metrics. This is a novel approach which explains the need to adopt multi-dimensional performance measurement perspectives and the importance of implementing these perspectives on an on-going basis.

Balanced Scorecard

Subsequently the authors start describing balanced scorecard as a popular performance management system. Different from traditional performance management approaches, BSC incorporates a range of both leading and lagging indicators, e.g. customer perspective, internal business processes, learning and growth, and financial to evaluate if a business is moving towards its strategic goals. The financial measures are recognized as lagging indicator while the other three are leading ones. Customer perspective, internal business processes and learning and growth are dealing with issues that will eventually influence financial performance, and significantly provide the proactive information before the issues have had time to generate any effect. The authors further explain approach to achieve the above which is to set goals for each of the perspectives and developing respective measures or performance indicators. A figure on lagging and leading indicators in the balanced scorecard is further presented to illustrate this approach. Though indicators, goals and measures are presented in the figure in a simple and clear manner, the interaction between different elements is not sufficiently shown. There is also a missing of word 'customer' in the title of the first leading indicator.

A range of merits of BSC is cited by the authors to explain why it has received widely support by academia and industry: guarding against sub-optimisation by forcing senior managers to consider all the important operational issues (Letza,1996); communicating objectives and visions to the organization (Roest,1997) and if implemented properly, focusing the organisation's effort on a relatively small number of measures with relatively low costs (Roest,1997). However, the authors also noted that BSC has been criticised for over simplicity, for not providing a complete performance measurement system, for potentially measuring the wrong things even if they are measured in the right way, and for yielding to conflict between managers along functional lines, etc. In particular, the authors disclosed two omissions that BSC may be inherited with when implementing within an organization. First, the relationship between the measures developed for certain goals was not attempted to be identified in the BSC, seeming to assume that all measures will be specific only to a particular goal; Second, organizations undertaking projects with a number of collaborators and suppliers may have different performance indicators for different business or different business environments. An example in construction industry is given by the authors to demonstrate the important impact of these two omissions' on joint ventures between companies operating under a project environment. The authors therefore encourage industrial practitioners to consider additional perspectives to suit their specific business environment when applying the BSC. It is worth noting that the authors present BSC omissions and consider their applicability in different business environment with particular reference to construction industry. However, there is a lack of more specific explanation as in how the perspectives would vary and how that would fit into the generic BSC perspectives.

Performance Metrics

The authors then move to performance metrics which are used to define the performance of an organization from a number of perspectives. It is acknowledged that designing appropriate metrics related directly to the various perspectives and organisational strategic goals is critical to ensuring the effectiveness of the performance management system. The authors find several interesting studies having explored the benefits and potential pitfalls of performance metrics, such as Letza (1996)'s point of measuring the 'wrong things right' when a large number of performance metrics are presented, as these metrics might not necessarily relate to the organisation's strategy. The authors agree with Neely et al., (1997) in terms of the use of a performance measure record sheet which aims to provide a structure to support the design of a performance measure. The elements of this sheet include information for 'title', 'purpose', 'formula', 'frequency of measurement', 'source of data', 'who owns the measure', etc. The authors point out while this sheet offers a solid framework for designing performance measures, it does not necessarily provide a framework by which performance measures can be evaluated in terms of the extent to which they relate to strategy and to other performance measures.

Performance Measurement in the Construction Industry

The authors start reviewing performance measurement in the construction industry by outlining two traditional ways, primarily in relation to the product as a facility, or in relation to the creation of the product as a process. It is noted by the authors that a common approach to assess the performance of construction projects, is to evaluate it on the extent to which client objectives have been met. Cost, time and quality are the traditional objectives/indicators of performance in the UK construction industry. As the authors agree that these three measures can provide an indication as to the level of success of a project, they also oppose any measurement in isolation which may jeopardise a balanced view of the project performance. Also, these three measures are lagging indicators which are evaluated at the end of a project. The authors further explain this by quoting Ward et al.(1991) that "looking back on the conduct of a project, what sticks in the mind is often not so much financial success or early completion, but memories of other people involved and abiding impressions of harmony, goodwill and trust or, conversely, of arguments, distrust and conflict'. The authors argue that the methods used to measure performance in construction projects fall into three main categories of the BSC, i.e., financial perspective, internal business process perspective and customer perspective. While financial perspective is a lagging indicator generally used, the other two measures have tended to concentrate on construction productivity and those factors that influence it, with the aim to achieve continuous improvement.

Interestingly, the innovation and learning perspective which was previously recognized as one important leading indicator for performance measurement, is not proposed by the authors for measuring a construction project performance in this part of the paper. The authors later acknowledge that although learning and innovation in recent years have been emerging and becoming important, using it to measure the performance of construction projects can be problematic. It is because participants in construction projects are joined temporarily until the completion of the project, where the aim is to find methods for measuring and managing performance that can be consistently applied to the set of project participants. However, learning and innovation perspective should not be ignored totally in spite of the temporary nature of construction projects; more focus should be put on how this perspective can be measured in each project which will eventually improve long term sustainable strength in learning and innovation through accumulation.

The authors further reviewed a few key performance indicators (KPIs) used in UK construction industry, including client satisfaction on product and service, defects, predictability on cost and time, profitability, productivity, safety and construction cost and time. The authors argue that these indicators are specific to projects and offer very little indication as to the performance of the organizations themselves from a business point of view, apart perhaps from the 'customer perspective' of the BSC. The authors then use an example to illustrate the incompetence of these KPIs in measuring organizational performance. In addition, the performance of the suppliers in projects is also disclosed to be poorly covered in the construction industry. The authors pinpoint that none of the KPIs could identify the performance of suppliers in a project environment.

Performance Measurement Process Conceptual Framework

Grounded on the above literature review and arguments, the authors move to the development of a performance measurement framework with the aid of the BSC. The main aim of the framework is to present a holistic performance management/measurement process framework which satisfies the need to represent the input, process and output.

Strategy development for an organisation provides a vision of where the organisation wants to be in the short and long term future. The authors think the inputs used in the framework are an organization's strategies, so that any results coming out of the system could be used to evaluate the extent to which the organization has met its strategic goals.

The performance process framework take strategy as an input and derive a number of organisational goals/objectives, develop measures directly related to strategy, add value to the strategy by examining its validity and implementation, and deliver the performance results to the organisation or its shareholders and customers. Based on the above, the authors adopt a relationship matrix measuring performance in the process framework. Given the nature of construction industry which is undertaking project and involving a complex supply chain, the authors add the perspectives of 'project' and 'supplier' into the BSC framework and aim to ensure the prime function of all construction stakeholders can be considered in detail and as an integral part of the project. In the matrix, the authors propose to use a simple measurement scale, with 1 representing low importance and with 5 representing high importance.

The authors present the merits of this performance measurement framework from two aspects. First, the matrix allows accumulating the results of each performance measure to derive a result which indicates the metric's importance in terms of goal interdependence. Second, the matrix also allows accumulating the results for each perspective goal to derive the goal dependence on different measures. The authors think that the rationalization of performance measures embedded in the matrix in the process framework is simple and straightforward in design. The authors also indicate that the process matrix not only illustrates all the different goals and performance measures at the same time, but also considers performance management (i.e. strategy and goals) and performance measurement (i.e. metrics and methods) at the same time.

The output of the process performance framework is accumulated figures or descriptive words indicating the extent to which an organisation achieved its goals and strategy. The authors emphasize, with such supportive information, an organization can compare itself against what is perceived to be best practice in the industry. This benchmarking can be achieved both for a performance metric and for a particular goal or perspective.

Concept Tests

In order to test the concept of the above performance measurement process framework, the authors carry out two empirical case studies. Two companies were invited to use it in their strategic review process for determining key performance indicators. This enabled the authors to examine the managers understanding of the framework concept, the process by which it was completed and the results that may be achieved.

The first case investigated the performance management of a large global telecommunications company whose vice-president of performance measurement was interviewed. The authors analyse the interview results and find that the key performance metrics from a number of perspectives are project requirement and product defects. The authors also find that culture change is perceived to be relevant from the people perspective although its overall metric importance is the lowest among all the performance metrics. Furthermore, the authors also reveal that the goal dependence on different measures is highest for the infrastructure/process perspective, suggesting that in order to get a realistic picture of process, performance measurement needs to use greater number of measurement methods.

To further demonstrate the application of the performance measurement process framework, the authors choose to explore a medium size construction contractor. A total of 12 performance metrics and 27 measurement methods were employed to measure totally five goals/perspectives, i.e., financial, customer, infrastructure /processes, people and supplier. It is found that the most important metric to all perspectives is customer satisfaction, suing both customer questionnaires and a customer satisfaction project, along side compensation events and the total-claims-total-recouped measurement. Again, infrastructure/process demanded most measurement variables. The authors indicate that both respondent companies agree with the user-friendly of the performance measurement matrix framework.

The major concerns with the research methodology described in the paper comprise three aspects. First, the suitability of the research design is questionable. The authors review general knowledge of performance management/measurement and draw on findings of three research papers on performance measurement in the construction industry, then the authors conclude six perspectives/goals and include them in the development of the process performance measurement framework. The suitability of the six perspectives/goals has not gone through any test or validation.

Second, the effectiveness of the data collection process is in doubt. To test the appropriateness of the process performance measurement framework, the authors invite two companies to use it in their strategic review process. Simply relying on two tests to validate the workability of the framework is ineffective. Bias can be anticipated in the tests as only limited numbers of companies are involved to give it a try with the framework application.

Third, the appropriateness of the chosen research methodology can be challenged. As mentioned previously, the authors adopted six perspectives/goals which are key to the development of the matrix used in the process framework. The selection of the six perspectives/goals has not been decided on a scientific basis. The authors should take additional efforts to support this argument. For example, interviews or focus groups with experts in the construction industry, particularly with performance management experience, will help substantiate the appropriateness of using the six goals. Once the framework developed, the authors choose to get one manager from each company to use it. However, the effectiveness of the framework need further testing across a large cohort within an organisation to determine a more reliable score for each measure.