What is performance management (definition)?
Performance management is a very broad topic and it can be approached from various views. The fact that the management of performance plays an important role in areas like accounting, economics and operational management likewise shows that companies in today's information age compete differently compared to industrial times in the past. If companies want to stay competitive in this fast changing environment they have to focus on effective performance management and embrace the growing value of intangible assets (Kaplan & Norton, 2004).
To meet these new requirements of today's business environment various management frameworks appeared over the last few years. Some of these frameworks originated from the total quality management framework like the Six Sigma approach or the European Foundation for Quality Management (....). There are also other approaches to performance management that have been developed which have all something in common, the recognition that there is a need for companies to do more than "just" use accounting performance measures in order to increase firm value (Kaplan Norton....). One of these approaches which not only manage accounting measures is Kaplan's and Norton's (1992) balanced scorecard approach.
The balanced scorecard approach
The idea of the balanced scorecard created by Kaplan and Norton (1992) is that companies should not and cannot only rely on financial measures in order to successfully manage the firm's performance. It is essential to the success of any organization that the performance management system in place is linked to the organisational strategy of the company and that is not possible if financial indicators are the only thing that gains the attention of management. These financial measures are so called lagging indicators of performance. Financial measure could be seen as the clinical thermometer of a company. They can tell management if the company is in a healthy condition or if the company struggles to keep afloat. Therefore financial measures only reflect what is really going on inside a company and changing them or rather manipulate them can only lead to short-term success but not long-term success, a goal management should aspire to do so. Therefore, in order to change the temperature (financial measures) of a company, management has to manage the performance of those aspects in the company which affect the financial measures. For that reason, financial measures are not useful for organisations that want to thrive and grow in today's information and knowledge age.
As a result the Balancec Scorecard approaches performance management from four different key areas to increase firm value in such a business environment. According to the this approach companies have to be willing to make investments in areas of employees, customers, internal business processes and learning and growth in terms of innovation (table 1.1)
It is important to address these four areas not separately form each other since they are all linked and can influence each other. Improving one area might therefore positively impact another one. Innovation and learning for example a driving force to deliver success in the internal processes. This improvement in internal processes will then in turn help to better meet customer needs and consequently improve firm value and therefore shareholder needs.
Table 1 suggests that the the balanced scorecard is a performance management system that allows companies to break down their strategy and vision into those four key areas and therefore transform them into action away from complicated stand-alone strategy statements. That should result in a clearer understanding of what the strategy and vision exactly means for the company and how to achieve it. The ultimate goal of the Balanced Scorecard is to act as the center and pivotal point of a company fully transforming strategic planning into action throughout the whole company and not just an academic exercise of management staff.
The Learning & Growth Perspective
The'learning and growth' perspectiveconcerns the development of the human resources of the organisation. Learning and growth stands for the importance of a company's employees and suggests that people are one of the most priceless assets a company can have. The world economy is more and more based on knowledge, thus an investment in employee development to create knowledge will be essential in order to achieve competitive advantages in the future (Fawcett et al., 2004). High quality employee training and development is crucial in such a fast paced business world. The development of human capital is a fundamental competitive issue in an ever-changing environment and learning has to keep up with that pace (Mayo, 2001). Therefore this measures should include personnel training and improvement, the development of corporate culture, the encouragement of corporate experts, gurus, and mentors. Furthermore it is essential to set up a fast and efficient knowledge transfer communications in order to share valuable information among people.
The Business Process Perspective
This perspective deals with the firm's internal business processes and outlines the key processes needed to deliver the customer objectives. Metrics created to meet these objectives let managers know how well (efficiency, speed, quality, etc) the company's business is running, and if its products and services match customer needs. For the right implementation of the metrics for all perspectives and the overall success of the Balanced Scorecars it is important that they are created by people who really know how they'll impact the company's strategy and vision.
The Customer Perspective
This perspective consists ofcustomer objectives like customer satisfaction, market share goals but also product and service attributes. These objectives are leading indicators. Satisfied customers are loyal to a company whereas customers that are not satisfied will not have a problem in today's highly competitive markets to find another supplier that will meet their needs and come up with what they want. If that happens it an indicator of future decline of the company although the financials may not show that decline already. In terms of implementing metrics to measure customer satisfaction creativity is needed since it can be hard to measure the exact feeling of customers.
The Financial Perspective
This perspective is concerned with the shareholders view of performance. It consists of the financial objectives of a company and let managers track financial achievements and shareholder value. The gathering of financial data in order to make finance and investment decisions is probably something most companies already do, just not in terms of the balanced scorecard approach. The balanced scorecard approach makes sure that the bottom line of a company is not the only measure and that the other three perspectives are just as important when it comes to the valuation of an organisation.
Important considerations for the implementation of the Balanced Scorecard
Having outlined many potential benefits and advantages of the Balanced Scorecard it is important to mention that the Balanced Scorecard as a performance management system does not run by itself. Ineffective communication of what is expected from all employees throughout the organisation could be a barrier to successful implement the Balanced Scorecard approach. Employees need to know how best to contribute to the success of this approach. In order to successfully implement the Balanced Scorecard it is crucial not only to communicate the strategy but also find out how the staff of the firm sees the Balanced Scorecard. Eventually, employees are those affected by this new system and if a big part of it is to develop and train human capital, it is very important that they in fact "buy into" the balanced scorecard approach. Every employee has itsown goals and a perception of how to achieve them. If these goals are not aligned with the company's goals it is likely that poor results will occur.
On the other hand, if employees know what is expected from them and letting them know how executing a specific function contributes to the overall achievement of the company's goals, then employees are in a position to further improve the success of the Balanced Scorecard. That means that they have to believe that they can benefit from the balanced scorecard as well making them cooperate with this approach rather than simple cope with it.
Some organizations for example communicate the Balanced Scorecard to each employee by developing personal scorecards. Although these personal scorecards usually include just a small number of measure, they are linked to the organisation-wide scorecards. That supports the idea mentioned above that employees should know how they can contribute to wider organisational goals. That in turn makes them feel more valued when they perform better than suggested on their personal scorecard.
The incorporation of these personal scorecards into the Balanced Scorecard approach can be also favourably employed to encourage "ownership", so employees feel like they are party of the company and that their contributions really make a difference. Therefore employees can also benefit from the use of a balanced scorecard if implemented correctly.