Performance measurement system is defined as a set of measurable criteria and methodology to enable performance to be measured objectively. It comprises of financial and non-financial manners to establish and monitor the progress of organization towards its vision.
In the past, organization used the financial measures to assess the performance of senior managements while non-financial measures were used to evaluate the performance of lower level of management. It is inappropriate to use the financial measure to examine the outcomes and not well-suited for predicting future prospect as the outcomes are the consequences of past performance. Thus, performance measurement systems were developed to merge the financial and non-financial measures at all level of the organization in order to improve the efficiency and effectiveness of the management. The best known performance measurement framework is balanced scorecard introduced by Kaplan and Norton in early 1990s.
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The balanced scorecard approach retained measures of financial performance on past performance and supplemented them with the assessment on the strategic planning in order to drive the organization towards its vision. It maps an organization’s strategic objectives into performance metrics in four perspectives: financial, internal processes, customers, and learning and growth. The term “balanced” signifies that the system is balanced between internal measures of business processes, innovation and learning and growth and external performance perspectives measures for customers and shareholders. It is then followed by the term “scorecard” which signifies quantified performance measures.
In a nutshell, balanced scorecard contains four main processes. The process of balanced scorecard is begin with clarify and translate the organization’s vision into strategy. Then, the strategic management will communicate and link strategic objectives and measures. Next process is planning, setting targets and aligning strategic initiatives. Lastly, balanced scorecard enhances strategic feedback and learning. Organization quantifies its current performance to identify where it is on its strategic capability building journey and predict possible changing business environment in future. This information provides relevant feedback as to how well the strategic plan is executing so that adjustments can be made as necessary. This article is primarily discussed on the growing importance of balanced scorecard performance systems and exploring the issues faced by the organization in building and implementing balance scorecard systems.
Challenges in Performance Measurement System
The used of balanced scorecard is very helpful in monitoring the management of the organization but it is very challenging as the implementation is very costly. It requires some cost in setting up this system such as software licenses expense and installation cost. This will results in large sum of money being expense before profit is generated. Besides, the needs of expertise to implement a comprehensive and proper system will consequently increases the cost of management as well.
Different business unit using the different balanced scorecard measures to achieve its goal. In general, balanced scorecard consists of two types of measure. There are common measure (measures across all subsidiaries or units) and unique measure (measure each business unit). The use of unique measures in order to carry out the system is tough because unique measures are significant in capturing the unit’s business strategy. If the manager does not actively participating in evaluating one unit’s performance, thus significance of the unique measures may not be appreciated.
The four perspectives in a well-designed balanced scorecard form a chain of cause-and-effect relationships that determine the effectiveness of the strategy implementation. Proper implementation will results in excellent performance. However, it is not easy to identify and establish the cause and effect relationship. Inappropriate measure will result in negative outcomes. Managers realize and understand that there are strong linkages between customer satisfactions, employees’ satisfactions, financial performance, internal business process and company’s learning and growth activities. Nevertheless, the balanced scorecard system does not provide the detail guidelines on to how to improve performance to achieve organization’s goals.
In addition, balanced scorecard system need to be updated constantly. This update is useful as it requires repositioning with changing of strategies or company structure in order to keep in pace with the complex business environment. However, constant updating of balance scorecard may be tedious and time consuming.
Lastly, lack of integration and communication of the objectives of the organization at difference level of management would cause the lower level of employees can’t see the big picture of the system. Implementation of the balanced scorecard requires commitment from all management levels, especially company’s top organizational structure. Most of them refuse to coordinate in the system because they may view the system as a threat that implies they have underperformed in the past.
Advantages of Performance Measurement System
First of all, balance scorecard is very reliable as it clearly defines financial and nonfinancial information to all parts of the organization. The traditional financial statements has failed to confine accurately the type of measurements those companies need around a profit sector. This is proven when all the intangible assets such as quality of services and skilful employees do not show on balance sheet compared with the balance scorecard that shows all those intangible assets in the balance sheet. The value of a company will be invisible to the workers, shareholders, customers and the society due to the unwritten intangible assets in the balance sheet.
Secondly, balanced scorecard is useful in evaluating and planning for long-term strategy. In a traditional method, organizations only focus on short-term financial measures while balanced scorecard include customer, internal processes and the growth in society’s needs. It is useful in a longer term strategic dimension as managers can measure performance in building key capabilities and examining on the overall strategic workability.
Thirdly, balance scorecard enhances strategic feedback and learning. In this process of monitoring the system, the management evaluates the present performance of the company, how the strategies are going on in the company and identify the potential changes in the unpredictable surroundings. This information is useful for the purpose of decision making to ensure the organization is achieving towards its goal.
Fourthly, balanced scorecard could be used as a measure of employees reward performance. When the individual exceeds the particular threshold levels, they will be rewarded for the excellent financial performance. It is proven that balanced scorecard makes some improvements if compared with the past performance measurements systems that did not often measure the employees’ performance which link to corporate strategy.
Lastly, the balanced scorecard attempts to evaluate both the internal and external aspects of the organization. It is important to focus on the customers’ views and the contacts that have been established in the market-place on order to build long-term relationship with the potential customers. The learning and growth perspective encourage creativity and advance in information system in order to response quickly to the rapid changing in the global market.
Central issue of the articles
The first issue is the implementation of balanced scorecard in an organization. Each company should have its own version of the scorecard as different companies require different measurements, which are essential in achieving the company strategy. The most commonly used measurement categories are financial goals, customer satisfaction, employee satisfaction, productivity, and growth and innovation. A well-defined balanced scorecard should result in improved internal management system, greater customers’ satisfaction, educated employees and increased in financial usage. Identification, definition and integration of organization’s capabilities with its objectives in all levels of the organization from top to down are essential to sustain long-term superior return in the competitive environment. Interaction within the organization is important to avoid optimizing the results of one business unit at the expense of others. In this stage of planning, setting targets and aligning strategic initiatives, management will set ambitious but achievable targets for each perspective and initiatives are developed to align efforts to reach the targets. Lastly, the executives receive feedback on whether the strategy implementation is proceeding according to plan and evaluate whether the strategy itself is successful or control and corrective action is necessary to reflect real time learning. These four functions have made the Balanced Scorecard an effective management system for the implementation of short-term and long-term strategic planning.
Besides, the four perspectives in the balanced scorecard are inter-dependent. It is not just a balance of measures in essential areas of the business, but also a balance of goals versus accountability. The reluctant of the people in the organization to accept accountability for achievement of the balanced measures and goals of the balanced scorecard will result in failure in balanced scorecard system. In the case study of Big W, has not only built competencies into each step of its performance management system but has now incorporated competencies in all position descriptions for store managers and buyers to extend their experience in areas other than that in which they are presently employed. Therefore, the human capital of the organization is the key to the success of the balanced scorecard system.
The second issue is balanced scorecard will evolve as the culture change. Once the balanced scorecard is developed, it should immediately implement into the organizational system. It assists to link groups and individuals to the strategy by understanding the linkage of cause-and-effect relationship. This linkage enables them to understand the overall performance of the organization. For example, advanced in information system will leads to efficiency in information management and eventually save the cost of handling bulky information. Thus, the organizational culture is a one of the key factors of success or failure of implementation of balanced scorecard.
Besides, organizational culture has also interceded entity learning. Entity learning is a driving force behind the successful implementation of balanced scorecard. The article mentions that there must be an understanding, commitment and support from the top levels of the company down to the lowest ranks. If there is any change in culture in any level of the organization, balanced scorecard performance will be affected. Therefore, new approach, new tings and new goals have to be developed and be adopted to make the balanced scorecard more balanced and effective. Management need to be alert with the changes in organization culture so that balanced scorecard system is designed in accordance with the culture.
The next issue is customers play a significant role in determining the prospect of an organization. The customer perspectives in the balanced scorecard measure on how should the organization present itself to its customers in order to achieve its vision. The four perspectives that introduced by the balanced scorecard are useful to evaluate the overall performance of the business. In conjunction with this, customers are able to see the time dimension of the business that going from the bottom to top and the profitability of the past, present and future. Moreover, balanced scorecard includes the measurement of customers’ perspective aim to increase customer satisfaction to ensure the ultimate wants of customers are fulfilled. Thus, the objective of the organization must be always being designed according to the current market demand.
As we embark on the twenty-first century, managers are challenged by sweeping changes in the global arena. The implementation of balanced scorecard is essential to assists in the execution of corporate strategy in order to sustain in the competitive environment. Balanced scorecard encourages employees to act in accordance with desired goals of the company by reward them accordingly to their performance. Management has to be aware of the potential limitations of balanced scorecard and overcome the problems by designing the system that well-suited the organization. In a nutshell, balanced scorecard should be tailored for each part of the organization driven by the objective of the organization to make the balanced scorecard even more balanced and effective in supporting a living, growing, feasible organization in the competitive environment.
Telekom Malaysia is the largest integrated communications solutions provider in Malaysia and one of Asia’s leading Communications companies. Telekom Malaysia has officially changed its global brand from Telekom Malaysia to TM in 2005. The vision is to become Malaysia’s leading new generation communications by providing customers with innovative and excellent service environment.
TM has a monopoly on the fixed line network, data, mobile, internet and multimedia. It combines satellite, terrestrial and submarine fibred-optic cable systems to facilitate the regional and international telecommunications. TM’s core businesses are focused in Retail, Wholesale and Global Business. Besides, TM acquired Celcom and TMTouch to raise industry standards, provided product and service benchmarks in the country. Apart from that, TM Net is now the sole DSL broadband provider in the country. It offers a comprehensive range of services and solutions in broadband, data and fixed line. In addition, TM’s investment philosophy is to play an active role in its international operations as well as to provide opportunities for wealth creation among the local population for social welfare’s purposes.
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Discussion of the Performance Measurement System used in the company.
TM is using BSC to translate their visions and company’s strategies into a set of measureable objectives that can be interpreted into some meaningful form as a check list to monitor the performance of the company. Basically, the BSC used by TM is an e-BSC where it uses an online system called MAPS (appendix) to allow employees to key in their performance according to different areas concerned in the scorecard and monitor by each division managers. The main concern of financial perspective will be to grow revenue profitably and to manage cost effectively, customer perspective is to delight the customers while creating the synergy with partners, internal business process is on execution of projects and plans on whether they are done effectively and the organizational learning and growth is to boost human capital execution capacity.
The implementation of BSC in TM consists of three stages, which are business planning, performance cycle and then finally lead to a performance-based rewards system. In business planning, BSC and individual Key Performance Indicator (KPI) are developed in this stage where the KPI is used to measure the key performance in a specific division of the company. BSC is developed through a process of six steps which include:
Firstly is to understand and develop the business strategic direction of TM and for example the vision of TM is “to be Malaysia’s leading new generation communications provider, embracing customer needs through innovation and execution excellence” and the mission is “to strive towards customer service excellence, enrich consumer lifestyle and experience, deliver value to stakeholders and improve the performance of our business customers.” From these two statements it is clear that TM is stressing highly on customers’ satisfaction and so its direction is clearly stated in its vision and mission statement (TM Annual Report, 2008).
Next is to decompose those TM’s visions and missions into smaller components called objectives that can drive the performance and measurable. With those components, TM Group top management now will be able to create a strategy map using cause-effect linkages for example, how an objective is dependent on another objective. A strategy map (appendix) is important in BSC as it is the fundamental part of it to achieve towards the objectives of the company and drive it towards the vision.
In step 5 is to develop KPI (appendix) to measure and target to track strategic and operational progress of the company to see if it has achieved the desired outcomes of the objectives. Lastly is to identify the key strategic initiatives as a way to ensure the achievement of strategic objectives for example funding of resource and implementation mechanisms.
In MAPS System, an individual employee will log into the system and key in their personal information and then the division scorecard will be displayed. This is the part where employees are required to submit their performance into the online system MAPS for the company to track their performance into a KPI template (appendix) provided in the system. Then, employees are required to choose the areas that are relevant to his/her field for each perspective. In the individual scorecard, the employee has to key in the target that is challenging but achievable. In performance cycle phase, he/she will then be required to key in the actual result and comment on the target. This performance scorecard will then linked to the reward system to reward the employees accordingly.
Issues, Challenges and Advantages of BSC
The e-BSC used by TM is emphasizing a lot on the performance of its employees driving towards the vision and missions of the company which are mainly customers’ satisfaction and growth of the business. The biggest issue of BSC in TM is that it emphasizes too much on the internal business and performance rather than the quality of services provided to the customers. Each of the perspective emphasized by the BSC is not really focusing on the quality services. This is very important particularly for a service company like TM who provides telecommunication services to the public. For example does BSC implement by TM actually concern on the quality of its networks for the broadband services of TM Net, a division of TM? Measuring the quality of the services of TM’s products is significantly important to be able to achieve the objectives of the company.
A challenge faced by the BSC is where it could not answer some of the important question that a telecommunication company needs to know. For example, a manager can developed a set of measures for the scorecard, but it can never answer the question of what the competitors are doing out there (Andy Neely, 1995). This means that BSC has missed out one of the most important perspective which is the competitor perspective. In Malaysia, telecommunication industry is very competitive and TM is no longer the monopoly in the industry since the presence of other telecommunication companies such as Maxis and Digi. Thus, TM might risk itself if depend solely on the scorecard of not knowing what is happening with other competitors and might lose their market shares to them due to this reason.
The BSC of TM has successfully provide a complete measurement on the four perspective which comprises of financial, customers, internal business control and organization and learning growth. Through the implementation using MAPS system, BSC in TM is done over the online system and electronically (e-BSC). The MAPS system provides a good way for the employees to set their own target, track their performance and finally evaluate their performance and give comments on whether is it hard to achieve the target. This is an advantage to TM as the managers from each division will be able to get direct feedback from the employees on their performance and able to report them to the top management to evaluate further on what can be done to improve and identify problems. This also enables long-term organizational learning at the same time to achieve continuous improvement on performance of the company.
Since the issue faced by TM is the quality of service, Total Quality Management (TQM) is able complement the shortcoming of BSC. A quality service is vital for a telecommunication company especially in such a competitive market in Malaysia. TQM is a type of performance system that is used as a long-term measure to reduce errors in a service or manufacturing process and focusing on customers’ satisfaction by ensuring workers have the highest level of training and modernization of equipment and limit errors to 1 per 1 million units produced. ISO 9000, the international standard defined that TQM as a management approach of an organization that centered on quality with participation of all members aiming at long term success through customers’ satisfaction and benefits to the members of the organization and society (Subburaj, 2005).
TQM definitely benefits TM in many ways. It can apply this to the engineering of its telecommunication networks such as its fixed line division, cellular services division as well as the broadband division to improve the quality of services. Say for example, an uninterrupted broadband service for the customers that only allows 0.0001% of down time, same applies to the cellular networks and fixed line services. This definitely provides benefits and robust solutions to the company to enhance customers’ satisfactions on quality services.
To achieve the TQM, TM must always from time to time send its engineers and other employees for training and make sure that they are experts in their field. Also, TM must spend more resources on its R&D division, known as TMRND, to provide the latest equipment for the engineers to ensure that they have the best equipment to maintain the network to provide uninterrupted services. This is a long-term implementation for TM and it requires continuous improvement over time not only by the top management but also all the members of the organization working together. Also, TM will be benefited in the long run and enhanced its branding through attaining the TQM certification of ISO 9000.
In order for TM to remain dynamic in the globalization market, should always review its performance measurement system and constantly seek for improvement to better achieve its objectives and remain competitive. Performing well financially, increase in customers’ satisfaction, constantly improving the internal business process and improve in organizational learning and growth are equally important and TM has been doing well with its e-BSC and MAPS system. TM is also an innovative player in introducing new products and services such as the latest on the news, Unifi, a fiber optic solution for home and business which provide 5 to 20 Mbps of internet speed to the consumers and Internet Protocol Television (IPTV) (TheStar Online, 2010).
However, innovative products and services are nothing if the service quality is not good enough. Now is the time for TM to embark on a new challenge in providing quality service through the implementation of TQM in its organization to achieve long-term success and customers’ satisfaction.
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