UNIT 9 PERFORMANCE MEASUREMENT

Performance Measurement

Objectives
The objectives of this unit are:

to familiarise you with performance measurement principle;

to make you aware of measurement metrics system;

to familiarise you with key success factors; and

to familiarise you with performance measurement process.

Structure
9.1

Introduction

9.2

Paradigm about Measurement

9.3

Framework for Performance Measurement System

9.4

Type of Metrics

9.5

Requirement for a Performance Measurement

System

9.6

Single vs. Multiple Performance Indicators

9.6.1

The G.E. Measurement Project

9.6.2

Balance Score Card

9.7

Key Success Factors

9.8

Summary

9.9

Self Assessment Questions

9.10

Further Readings

9.1

INTRODUCTION

Leading-edge organization whether public or private use performance measurement

to gain insight into, and make judgments about the effectiveness and efficiency of
their programs, processes and people. The best in class organizations decide on
what indicators will be used to measure the progress in meeting strategic goals and
objectives, gather and analyse performance data and then use these data to drive
improvement in the organization and successfully translate strategy into action.
The concept of performance measurement took birth in the USA when Hoover
Commission of 1949 proposed Performance Budgeting. Latter on President Johnson
implemented a Program Planning Budgeting system and the Carter administration
advocated a Zero Based Budgeting System. The concept of performance budgeting
was recognized as a formal management process in the late 1960's when the
Department of Defense (USA), as part of an effort to reduce time and cost overruns,
issued a set of criteria defining standards for management control systems. These
criteria define the capabilities that effective management control system must posses.
The main focus of there criteria was performance management system that is capable
of providing timely information for management decisions. Even today several US
legislations require that government agencies specifically measure their program's
performance in meeting these commitments.

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Management Control
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Kennerly and Neely (2000) state that a performance measurement system has
three constituent parts.

Individual measures that quantify the efficiency and effectiveness of

actions.

A set of measures that combine to assess the performance of an

organization as a whole.

A supporting infrastructure that enables data to be acquired, collated,

sorted, analysed, interpreted and disseminated.

Performance measurement is a, tool to help managers control the results

of their organizations.

9.2

PARADIGM ABOUT MEASUREMENT

Measurement is bone of contention in many companies. These disputes are often

caused by difference in paradigms. Traditional paradigms about measurement could
be serious roadblocks to effective performance measurement and improvement (Sink
and Tuffle, 1989), Some of the traditional paradigms about measurement are listed
below:

Measurement is threatening

Precision is essential to useful measurement

Single indicator focus

Subjective measures are sloppy

Standards acts as ceilling on performance

9.3

FRAMEWORK FOR PERFORMANCE

MEASUREMENT SYSTEM

Purpose of measurement: Performance measurement is a value adding process which

has a direct impact on the competitiveness and improvement, but at the same time
cost/ benefit has to be evaluated when developing a metrics to measure performance.
A clear, unambiguous and well defined purpose make it easier to :
Choose the right metrics: Metrics are the methods to quantify the
measured information. A clear purpose helps to choose the right kind of
metrics.
Prioritize Indicators: Measurements are expensive and time consuming, a clear
purpose helps to prioritize the indicators to identify the most important ones.
Choose appropriate measurement methods
Achieve understanding and acceptance: A clear purpose adds to the process of
understanding and acceptance, lack of which makes the measurement system prone
to manipulations.
Other important purpose of performance measurement are :

58

a)

Decision support

b)

Monitor effect of strategic plan

c)

Performance evaluation

d)

Diagnosis

e)

Manage a continuous improvement process

f)

Motivation

g)

Comparison

h)

Record development

9.4

Performance Measurement

TYPE OF METRICS

Metrics are the building blocks in a measurement system. A metrics is the

specific method to quantity the information regarding the variable which is
intended to be measured.
a)

Hard versus soft metrics: Hard metrics are pure facts that are possible to
measure directly eg. Input, production, net profit etc. where as soft metrics
are used to measure the intangible eg. Customer satisfaction, brand loyalty,
employees satisfaction etc. Both hard and soft metrics have their strength
and weakness - and should be used according to the purpose of
measurement, important thing being that whether the use of a particular
metric has been able to provide an understanding or insight about the
process and results. The differences between hard and soft metrics are
summarized in Table 9.1
Table 9.1: Differences between hard and soft metrics
Hard Metrics

Soft Metrics

Objective references

Observer bias

Accurately known

Surrogate indicator

Hierarchical

Multi Variable Situation

Source: Herald Bredrup "Performance Management" Performance Management: A business

process benchmarking approach ed. Asbjorn Rolbtadas, Chapman & Hall (1995) P.
177

b)

Financial versus Non Financial Metrics : Financial and non financial metrics
are a subset of hard metrics. Traditionally the indicators of performance are
translated into financial terms and for those indicators which can't be
translated into financial terms they were all together omitted from framework
of performance management. Integration of financial and non financial
metrics is essential for executing meaningful performance measurement.
Tables 9.2 provide examples of traditional financial and non financial
metrics.
Table 9.2: Examples of traditional financial and non financial
performance metrics

Financial Performance Metrics

Budget Vs. Actual Variance

Non financial Performance metrics

Inventory turnover

Product/product group

Labour efficiency

Profitability

Capacity utilization

Cash flow

Defect ratio

Return on total capital

Lead time

Overhead absorption

Delivery precision

Customer profitability

Market share

Bad debts

Market penetration

EBIT

New product sales

Source: Herald Bredrup "Performance Management" Performance Management: A

business process benchmarking approach ed. Asbjorn Rolbtadas, Chapman
& Hall (1995) P. 178
Financial performance targets which are set as a part of organization planning and

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budgeting process are an important part of financial result control system. They form
a basis for performance evaluation and are critical for motivation. Three basic types
of Financial performance targets are:
1)

Model based versus Historical versus Negotiated targets.

2)

Internal versus externally derived targets

3)

Fixed versus flexible targets

1)

Model Based versus Historical versus Negotiated Targets

Model based targets are used in the situation where there exists a stable deterministic
casual relationship between outputs and inputs. These type of targets are also known
as engineered targets.
There are other model based targets but they are not engineered clue to the fact that
one or more variables impacting -the performance are not known and are required to
be forecasted.
Historical targets are derived from the previous year performance and the
management's view of the future market conditions.
Negotiated targets are those targets which are set after the mutual agreement between
superiors and subordinates. These type of targets are common in situations, where
there exists a significant amount of an information asymmetry between superiors and
subordinates. This information asymmetry arises due to the fact that the superiors, are
more knowledgeable about organization's preferences and resource constraints, where
as the subordinates have a fair deal of idea about the links between output and input,
opportunities and constraints at the operational level.
2)

Internally versus externally derived targets

Internally derived performance targets are totally internally focused on what is

possible within the organization.
In recent years two type of externally focused target setting have become common,
they are
i)

Target costing

ii)

Benchmarking

.In target costing cost targets are price driven e.g. Tata Motors is planning to
introduce a family car costing less than Rs. one Lakh. The price and the cost are set
in such a fashion that on selling of product or service the company will earn a pre set
profit margin. "Companies use target costing to motivate employees to act in a way
that will make the companies profitable in the competitive global markets."
"Benchmarking is a process in which an organization studies other organization best
practices and implement process and systems to enhance it's own performance."
Benchmarking can be of two forms:

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i)

Unilateral

ii)

Co-operative.

3)

Fixed versus flexible targets

Fixed targets do not vary over a given period of time while flexible targets are
changed according to the business conditions prevailing.

c)
Achievement versus process metrics: Achievement metrics lays emphasis on
achievement where as in the process metrics emphasis is on the important
characteristics of the process that has an impact on the output. An example could be
the functioning of the cross functional teams, if achievement metrics is used to
evaluate the performance of cross functional teams the focus would be on the number
of changes implemented by the team whereas if process metrics is being used the
emphasis would be on the process underlying the change in the existing methods.

Performance Measurement

Business Performance model based on three performance dimensions: Harald

Bredrup (1995) has developed a model based on three dimension of performance;
efficiency, effectiveness and adaptability. This particular model covers all
dimensions of business achievement.
-

Achievement metrics - direct metrics for business achievement

Diagnostic metrics - indirect metrics for business achievement

Competence metrics -capability of future business achievement

Achievement metrics :These are hard facts and can be measured directly and require
little or no interpretation, e.g. net profit, return of investment (ROI) market share,
export share etc.
One school of thought argues that these metric should be used predominantly to
measure performance since the net profit is to be the concern of every company, but
facts which are often overlooked while advancing these arguments are:
1)

These are lagging metrics (indicator).

2)

These metric are heavily influenced by the external factors.

3)

These metrics fail to given direction for future action.

These metrics represents only a part of the measurement system.

Diagnostic metrics: Diagnostic metrics are, indirect metrics for business
achievement.. They are critical success factors for competitiveness without a direct
bearing on traditional financial achievements. A diagnostic measure has two fold
function.
1)

Explain the trends in achievement.

2)

Based on trends provide an early warning based on which remedial action

can be designed.

Examples of diagnostic metrics are delivery precision, delivery flexibility product

quality, product reliability, lead time, customer satisfaction, outstanding claims etc.
Most diagnostic metrics are non financial but at the same time they have potential
impact on financial achievements. Diagnostic metric has an impact on marketing too,
in the sense that the lacunas identified are corrected and the improved performance
communicated to the market will result in increased sales.
Competence metrics: These metrics described how well the company is prepared for
the future. Examples of these type of metrics are:
-

Investment level in product and service development (e.g. investment by

telecom companies in Broad band services)

Time to market new product (e.g. advance mobile phones with internet, email and camera features

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Stage in the life cycle of the product portfolio

Investment in manufacturing technology development (e.g. computer

processors, high capacity supersonic aircrafts).

Attitude towards change (adoption of computers in banking industry,

computer aided manufacturing.

Flexibility to manufacture completely new products (Tata motors

manufacturing passenger cars, Reliance industries moving from textiles to
petrochemicals to refining to oil and gas exploration.

Level of training of workforce.

Competence metrics basically measures the preparedness of the organization towards

facing future threats and opportunities.
These metrics also measures the probability of survival of organization in the future.
Relationship between achievement, diagnostic and competence metrics: A good
measurement system should contain a balance mix of the above three metrics. The
weightage of each metrics would depend upon the fact that for what purpose the
measurement is being done. If the purpose of the performance management is to
gauge the short term performance achievement metric would have a higher weightage
where as if the purpose of performance measurement is to gauge the potential for
growth in the medium term than along with the achievement metrics the diagnostic
metrics have to be used. A diagnostic metrics along with the achievement metrics
helps to understand the underlying current of the trend. While measuring
performance at the macro level and time span extending towards several accounting
periods the competence metrics along with the above two mentioned metrics has to
be used. Achievement metrics have limited predictive validity for future
performance, whereas the diagnostics metrics are most valid at the time of
measurement due to the fact that the underlying variables are prone to change with
passage of time and change in the business environment. Competence metrics are
strategic in nature. Efforts to improve competence metrics have a negative impact on
achievements in the short run due to diversion 'of resources and efforts.
Activity I
Specify the conditions under which achievement metrics and diagnostic metric can be
used.

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9.5

REQUIREMENT FOR A PERFORMANCE

MEASUREMENT SYSTEM

Performance Measurement

A typical performance measurement system consist of the following four steps.

1)

Establishing and updating performance measures

2)

Establishing accountability for performance

3)

Gathering and analyzing performance data

4)

Reporting and using performance information

Each of the above stated step consists of various sub steps which we are going to
discuss briefly
1)

Establishing and updating performance measures

a) Ensure a narrow strategic focus: Out of the various variables impacting an
organizations strategic and operational planning; only few have the intensity
to alter the course already chartered. A performance measurement system
should focus to these few critical variables
b) Measure the right thing: An organization should identify and thoroughly
understand the process to be measured and a measure critical to the success
of the process has to be measured.
c) Be a means not an end: Focus on goal achievement not on performance
measure.
d) What to measure: There are some universal aspects of performance such as
Financial measures, customer satisfaction, internal business operations,
employee satisfaction, community and stake holders satisfaction etc.
Attention to and establishment of measures in these areas are a significant
part of successful performance management systems
e) Determining a base line and goals : Once the performance measures have
been decided the next step is to determine a base line for each of the
measures selected. When the data about the performance measure variable is
collected for the first time it becomes the base line data. Based on the
baseline data the goals are set. In this regard it is important to note that goals
should not be unrealistic as the same has potential to demotivate the
employees resulting into lower organizational morale. It is also important
that proper information about goals and results is communicated to the
employees.
f) Reviewing measures: In dynamic business environment the traditional
performance measures may become redundant, therefore there is a constant
need to review measure and weed out the obsolete ones

2)

Establishing Accountability for Performance

Once the performance measurement are established and performance measurement

system is created the next step is to implement it within the organization, this imply
that each of the employee identify himself with a part of the process and takes
responsibility for that part of the process. Generally upper management act as
enablers, senior managers are responsible for developing strategic plans and resource
allocation and middle and junior level executives for maintaining and coordinating
the performance management system. Some of the techniques used for establishing
accountability for performance are:

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a) Empowerment
b) Owner identification
c) Reward and incentives
d) Open culture and communication
e) Institutionalize problem solving approaches
3)

Gathering and analyzing performance data

In order to ascertain the level of achievement with reference to the goals data has to
be collected and analyzed to find the answer. Most of the organizations collect data
from number of sources at regular intervals and in an ongoing process, the main
focus is on, to zero on the data which measures the strategic alignment of the
organization. In order to gather data which throws light on the strategic objectives of
the organization the following principles of data gathering should be followed:
a) Keep it focused
b) Keep it flexible
c) Keep it meaningful
d) Keep it consistent
Data Gathering Responsibilities
Line supervisors and employees: They are responsible for data generation related to
daily operations and customer services. The operational performance data generated
is accessible to anyone in the company and to the company's business partners.
Business unit managers: Business unit managers generate data regarding customer
interface. Since business unit managers are regularly interacting with the field staff,
they are also in a position to gather external data regarding the market condition,
market share of competitors etc. Another data set for which the business unit
managers are responsible is the program cost. These data set is concerned with the
program expense and revenues. The business unit managers are the first line
reporting authority due to which they also measure the organization health in terms of
employees morale, safety, motivation etc:
Executive management: At this level the managers are interested. in aggregate data.
They are interested to know that whether the organization is meeting the strategic
plan or not.
Transforming data into information
Data analysis in performance measurement is the process of converting raw data into
performance information and knowledge.
4)

Reporting and using performance information

Organizations do not measure things just for the sake of measurement rather they
report, evaluate and use performance information as integral part of their
performance measurement systems to

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a)

Inform various levels of management about performance information

b)

Determine if corrective actions are required

c)
Determine whether changes are necessary in the performance
measurement system for the measure themselves or to the organizations
goals.

Performance Measurement

High performance organizations use performance information as empirical

information about operations of their organization and their customers or
stakeholders requirement and preferences. Performance information is reported,
evaluated and used for continuous improvement of overall management and strategic
planning process in the following manner.
a) Report information : Performance information should be disseminated
quickly to the organization's decision makers
b) Determines whether corrective actions or changes are required in the
performance measurement system, the measures themselves or the
organization goals
Apart from the above stated micro level applications the performance information
should be used for managing the following:

Feed it into resource allocation decision

Use it in employee/Management evaluation

Use it to determine gaps between goal and reality

Use it to drive reengineering

Use it in benchmarking

Use it to improve organization process

Use it to adjust goals

Use it to improve measures

9.6

SINGLE VS MULTIPLE PERFORMANCE

INDICATORS

For any good measurement system it is necessary to identify the variables that
influence success at any level of organisation so that one can predict and monitor
these critical factors. The question which arises is how to identify these variables, the
answer is fairly complex. Before answering this question, let us have a look at
another aspect of performance measurement which is whether single performance
indicators or multiple performance indicators should be used for performance
evaluation.
One school of thought argues that depending upon the purpose of performance
measurement; a single indicator should be used for evaluation, e.g. sales, return on
capital or net profit. The main drawbacks of this argument are:
i)

Single indicators are good measure of macro situation but fail to assess other
micro situation.

ii)

The underlying processes are ignored

iii)

Single performances indicators fails to link with strategic plans.

iv)

Single performance indicators are able to measure only one aspect of

business performance.

Now let us answer the question which we had raised in the beginning how to identify
the performance indicator variables. The variables which we want to measure and
monitor are those that are related to the goals and objective of the firm and are also

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Linked to the strategic objectives of the firm. They must be identified at each level
and for each responsibility centre of the organisation. Now here lies the catch 22
situation. The decision which one has to take is about inclusion and exclusion of
variables from the measurement framework. The common mistake which managers
do is to include the variables which are highly visible (stressed upon) and exclude
those variables which are not visible but nevertheless important in meeting
organizations strategic goals Managers in general tend to include those variables
which are measurable and exclude those variables which are difficult to measure, An
example of this type of measurement is where firms lay a lot of emphasis on short
run profitability which leads manager to cut on expenses related to market
development, research and development, maintenance, employee training and
development. In the short run this will result in higher profitability but in the long run
it will result in non fulfillment of strategic objectives.
This leads us to use number of precautions with regard to the measurement used in
any responsibility centre. Firstly the measured variable should be in alignment of the
strategy used in pursuit of goals and objectives. Secondly only those variables which
are crucial should be measured and measured they should be even if they are
qualitative. Qualitative measurements may have quantitative surrogates and even if
they do not have the manager should form an opinion about these variables. Any key
success factor should not be omitted from the control system just because they are
not amenable to measurement. Lastly the measurement system should be designed in
a way that measurement taken in the short term relates both to short term goals and
long term strategic objectives.
In order to understand the measurement process let us have a look at the detailed
procedure used by General Electric Company which is a; comprehensive measure of
key success factors at the departmental level.

9.6.1 The GE. Measurement Project

General Electric sub divided the measurement project into three projects:
1) Those designed to measure overall performance of the department as an
economic entity
2) Those designed to measure performance of the functional organizations such as
engineering, finance, marketing, production, human resource etc.
3) Those designed to measure the performance of the management of the
department.
The core principles on which the measurement project was based were
1) Measures were designed to provide factual knowledge to support judgement in
performance appraisal of departments.
2) Measures were designed in a way to provide information regarding both short run
objectives and long term goals.
3) A minimum number of measures were to be used at each level of the
organization.
In order to select key success factors the following test was used:
"Will continued failure in this area prevent the attainment of management's
responsibility for advancing General Electric as a leader in a strong, competitive
economy, even though results in all other key result areas are good?"

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This G.E. Measurement model uses the concept of goal criterion for the
determination of key success factors. The long term endless goal of the company was
stated to be leader in the market it served.

As a result of this analysis G.E. developed the following key success factors for each
of its departments:
1.

Short term profitability

2.

Market share

3.

Productivity

4.

Product leadership

5.

Personnel development

6.

Employee attitude

7.

Public responsibility

8.

Balance between short range objectives and long range goals.

Performance Measurement

These key success factors of the department level form the basis for the development
of key success factors at the functional and management levels. Now let us discuss
the methods G.E. used to operationalize each of the measures.
Short Term Profitability: G.E. considered many measures for short term
profitability which included return on investment (ROI), profit as percentage of sales
and many other measures but ultimately G.E. adopted the concept of residual in come
as a indicator of short term profitability. The residual income is simply net income as
computed from departmental income statement minus a capital charge. Capital
charge is the opportunity cost associated with the capital that corporation has
invested in the assets of the department, thus the profitability of each department is
based upon full cost of doing business.
Market Share: This measure is concerned with measuring the degree to which G.E.
is attaining its leadership goal in various markets. The first step in computing market
share is to define the market which involves deciding about the nature and scope of
the market to be served and a view about customer's need. Based on this the market
share index is then computed as the ratio of departmental sales to total sales in the
market served by the product.
Productivity: Productivity is a key measure of the relative competitiveness of the
department Trends in productivity indicates the-effectiveness of process in utilizing
labour and capital resources. Productivity referred to as total factor productivity
index is computed as follows:
Value added
Departmental Productivity =

Labour inputs + Capital inputs

Where value added is the difference between departmental sales and input cost of
material and services. Labour input is the sum of all wages and salary paid by the
department and capital inputs are equal to depreciation expense as computed from
departmental income statement.
Product Leadership: This indicator measures to the extent the products of a given
department where originated by G.E.: This measure also include the effort and,
enterprise of the department in Origination of the research and development activities
which led to development of the product. This indicator also consider the
comparative analysis of G.E.'s product with. That of the competitors. This measure
also includes a product review done by internal experts, from marketing engineering
and production. This measure is an indicator of long run goal of G E, which is
product leadership.

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Personnel Development: This measure is concerned with the effictiveness of the

personnel development program in the department. The process for measuring this
index is as follows. First of all an assessment of demand for human resources by type
and then forecasting the supply of talent by type. An assessment of the contribution
of .the employee development programme to promotions is done to assess the
effectiveness of the training programmes. Personnel development measures are few
of the most important tools of control and indicator of the future development of the
organisation.
Employee Attitudes: Lewis (1955) defines employee attitudes as the disposition of
the employees to discharge their duties voluntarily to the full extent of their ability
and in the best interest of the business." In G.E. employees attitude is measured by
traditional indicator such as turnover, absenteeism, tardiness and punctuality etc.
Occasional surveys are also undertaken to gauge the attitude of employees toward
their work and the company. This measure attempts to assess the extent to which the
needs of employees that can be met on the job are being met.
Public Responsibility: G.E. aims to be a good corporate citizen and towards this end
it is quite sensitive to the well being of all stakeholders which include employees,
vendors, local community and local business community. In order to measure the
degree of public responsibility, fulfilled by G.E. it uses various indicators such as; for
employees these indicators are stability of employment and standard of living. For
vendor's the relative attractiveness of doing business with G.E., for local community
it assess the impact in terms of economic, social and environmental factors.
Balance between long range and short range objectives: The measures outlined
above are combination of short term objective of profit and growth and long term
goals of business leadership. Each of these factors should be given adequate
weightage.
9.6.2

Balance Score Card

The traditional performance reporting system focuses entirely on cost control. In today's
worldwide, competitive environment companies are competing in terms of product quality,
delivery, reliability, after sales service and customer satisfaction. None of these variables is
directly measured by the traditional reporting system. Consider a situation where a
purchasing department regularly achieved the budget for all expense items. The
responsibility performance reporting system therefore suggests that the department was well
managed. However, the department provides a poor service to the production departments.
Traditional Accounting system report only on details regarding the costs incurred by a
department. They do not give information to quality of service it provides. The traditional
reporting system therefore needs to be broadened to incorporate non-financial measures
besides costs and revenues. These non-financial measure focus on such factors as quality,
reliability, flexibility, modernity etc. Since traditional performance measurement, focuses on
past accounting data, which is obsolete for planning purposes, therefore what is needed is to
provide the information age enterprises with efficient planning tools. Further it is often not
clear to managers how the non-financial measure on which their performance is evaluated
can contribute to the whole picture of achieving success in financial terms. The need to link
financial and non-financial measures of performance and to identify key performance
measures provided the impetus for Kaplan & Norton (1992) to devise Balanced Score Card.

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Meaning of Balanced Score Card : Balanced Score Card is a set of financial and
non-financial measure relating to a company's critical success factors. It is approach,
which provides information to management to assist in strategic policy formulation
and achievement. It emphasizes the need to provide the user with a set of
information, which addresses all relevant areas of performance in an objective and
unbiased manner. As a management tool it helps companies to assess overall
performance, improve operational processes and enable management to develop
better plans for improvements. It offers managers a balanced view of their
organization upon which they can further add-on.

Objectives of Balanced Score Card: The main objectives of Balanced Score Card is
to provide a comprehensive framework for translating a firm's strategic objectives
into a coherent set of performance measures. Kaplan and Norton recommended that
organization should articulate the major goals for each of the four perspectives and
then translate these goals into specific performance measures. Generally three to five
performance measures are set for each goals.

Performance Measurement

Advantages of Balance Score Card

1)

It brings strategy and vision as the center of management focus.

2)

It brings together in a single management report, many of the seemingly

desperate elements like customer oriented, shortening response time,
improving quality etc. on a competitive agenda.

3)

Balanced Score Card provides management with a comprehensive picture of

business operations

4)

The methodology of balanced score card facilitates communication and

understanding of business goals and strategies at all levels of an organization

5)

The Balanced Score Card provides strategic feedback and learning. The
Balanced Score card guards against subordination. It emphasis an integrated
combination of traditional and non-traditional performance measures. It helps
senior managers to consider all-important performance measures together
and let them to see whether an improvement in one area may have been
achieved at the expense of another.

Major components of a balanced score card

The components of Balanced score card vary from business to business. A well
designed balanced score card combines financial measures of past performance with
measures of firm's drivers of future performance. The specific objectives and
measures of an organization-balanced score card are derived from the firm's vision
and strategy. Generally, balanced score card has following four perspectives from
which a company's activity can be evaluated.. These are:
1)

Customer perspective i.e. how do customers see us.

2)

Internal perspective i.e. what must we excel at.

3)

Innovation and learning perspective i.e. can we continue to improve and

create value.

4)

Financial perspective i.e. how do we look to our shareholders.

Thus, the scorecard provides a view of an organization's overall performance by

integrating financial measures with other key performance indicators.
The Learning & Growth perspective is a measure of potential future performance-it
directs attention to the basics of all future success-the organization's people and
infrastructure. Adequate investment is these areas is critical for long term success.
The internal perspective focuses attention on the performance of the key internal
processes which drive the business. Obviously, the nature of the processes are
dependent on the nature of the organization-the score card is not a `full-cooked'
solution, it must be tempered and tailored to meet the specific circumstances of each
organization.
In order to translate effective internal processes into organizational success,
customers' clients must be happy with the service they receive. The Customer
perspective

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considers the business through the eyes of the customers, measuring and reflecting
upon customer satisfaction.
Finally, the Financial perspective measures the results that the organization delivers
to its stakeholders. All these four perspectives provide a balanced view of the present
and future performance of the business.
Process of creating a Balanced Score Card
The diagram given below shows a process to create a balanced scorecard. This
diagram also depicts various steps involved to create a balanced score card :

70

1)

To identify a vision i.e. where an organization is going.

2)

To identify organization's strategies i.e. how an organization is planning to

go there.

3)

Define critical success factors and perspectives i.e. what we have to do well
in each perspective.

4)

Identify measures which will ensure that everything is going in the expected
way.

5)

Evaluation of Balanced Score Card i.e. ensuring what we are measuring is

right.

6)

Create action plans and plan reporting of the Balanced Score Card.

9.7

KEY SUCCESS FACTORS

The hierarchical structure of an organisation is a response to the limited information

processing ability of the decision makers. The firm uses responsibility centre in an
attempt to coordinate and control each subunit in pursuance of overall goals.
Responsibility centres are designed upon key success factors of a business. Each
responsibility centre derives it's goals from overall organisation's goals and the
degree of goal congruence will depend upon the control structure and the efficiency
of responsibility centres manager.

Individuals (managers) are cognitively limited which limits the data processing
ability; This limitation gives rise to the process of selective perception of data; which
implies that manager focuses upon those data that seems to be important to meet the
objectives. The measures so selected becomes the basis for reports (sensors), which
are in turn the basis upon which the manager interprets the environment facing the
responsibility centre. These identified variables then become the basis for decision
making and are referred to as key variables or key success factors. It is necessary to
establish key variables for responsibility centre because they in turn become the basis
for the establishment of performance measures, responsibility centre designation,
reward structures and resource allocation procedures.

Performance Measurement

Identification of key variables : The key variables of the business are those
variables in external and internal environment to which the goals and objectives of
the firm are most sensitive.
Nature of key variables: Some of the key variables are completely outside a firm's
control e.g, macroeconomic variables, behaviour of competitors (price, product,
quality), inbound logistics, government policies and regulations. Some of the key
variables are partially under the firms control e.g. product quality, cost and demand
variables. For the key variables which are completely outside the firms control the
task of the manager is to monitor and predict the future values of these variables and
adapt to the predicted future value of these variables.
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Key Variables has the following characteristics:

it is important in explaining the success or failure of business units operation

it is volatile and unpredictable. It can change quickly often for reasons not
controlled by managers

any change in these variables require prompt action

these variables can be measured either directly or via a surrogate indicator.

Examples of key variables are sales, sales return, bookings, back orders, market
share, capacity utilization etc.
Exception Variables: Key variables are needed to be reported on ;a regular basis,
but there are certain other variables which needs to be reported only when their value
is outside acceptable or planned limits, e.g. are cost elements such as direct material
and labour.
Activity 2
Try to find out key performance variables from seven different industries.
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9.8

SUMMARY

Business process and operations are dynamic in nature where underlying variables
are prone to change with macro economic factors. This gives rise to the problem of
control over operations. One of the principle components of control system is
performance management. There are number of parameters on which performance
can be measured and when these parameters are collected under a single head they
are known as metrics. A good performance measurement system should aim at
establishing and updating

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Management Control
Process

Performance indicators as well as establishing accountability for performance. It

should be dynamic in nature. In Performance measurement single or multiple
indicators of performance could be used. There are certain key performance
indicators which gives a macro picture of the performance of the company.

SELF ASSESSMENT QUESTIONS

1)

Elaborate on the three constituent parts of performance measurement system.

2)

Explain the necessity to have a clear, unambuguous and well defined purpose
for performance measurement.

3)

List and explain the various purpose of performance management.

4)

List the various type of metrics used for performance measurement and
identify the purpose for which they are being used.

5)

Explain in detail; for what purpose and under which conditions the following
metrics can be used.
a)

Achievement Metrics

b)

Diagnostic Metrics

c)

Competency Metrics

6)

Construct a roadmap for designing a performance measurement system.

7)

List and elaborate the purposes for which performance information is used.

8)

What are the main drawbacks of using single performance indicators for
performance management?

9)

Explain in detail the G.E. performance measurment framework.

10)

What are the main features of Balance Score Card which distinguises it from
traditional performance measurement system?

11)

List and elaborate the key success factors for the companies operating in the
following industries.
a)

Textile

b)

Automobiles (Two wheelers and Four wheelers)

c)

Publication

d)

Software

e)

Entertainment

9.10 FURTHER READINGS

Greenwood Ronald G. Managerial Decentralization, A study of General Electric
Philosophy. Lexington, Mass: D.C. heath 1974.
Kennerley, M., Neely, A.D. (2000) Performance Measurement Framework -A
review. In: Performance Measurement- Past, Present, Future, Conference
Proceedings, edited by A.D. Neely, July 2000, Cambridge.
Lewis, Robert W. "Measuring Reporting, and Appraising Results of Operations with
Reference to Goals, Plkans and Budget." In planning, Managing and Measuring: A
Case Study of Management Planning and Control at General Electric Company. New
Yori: The Controllership Foundation 1955.
Sink, D.S. and Tuttle, T.C. (196' 9) "Planning and Measurement in Your Organisation
of The Future" Industrial Engineering and Management Press, Norcross.

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