Role of performance management

Executive Summary

The purpose of this report is to examine the important role a performance management system plays in the success of a company. Therefore this report discusses the role of a performance management system in today's information age. It highlights the fact that such performance management systems have moved away from only focusing on financial measures to a greater focus on intangible assets and a more balanced approach in order to achieve sustainable competitive advantage.

Furthermore, the report identifies the Balanced Scorecard as an effective performance management system as it does not solely rely on financial measures but has four key perspectives (learning and growth, internal business processes, customer and financial) that are all linked to the organizational strategy and vision of a company in order to achieve long-term success. Important findings of the report include the advantage of the Balanced Scorecard to break down the organisational strategy and vision into those four key perspectives and therefore transform such statements into action. The discussion of the four perspectives also reveals that the leading key performance indicators of the Balanced Scorecard have to be carefully designed to realise the benefits to its full extend since they drive and impact each other.

In addition, the report illustrates the pitfalls of the Balanced Scorecard in that effective communication of what is expected from all employees is needed in order to successfully implement a Balanced Scorecard. The use of individual scorecards for each employee to clarify these expectations and create a sense of "ownership" turned out to be very useful not only in terms of company performance but also in terms of employee motivation and appraisal.

Introduction

This report was written because the management of performance within companies is an essential aspect in today's highly competitive markets in order to thrive and be successful. Therefore, this report will firstly explore the topic of performance management in general in order to come up with reasons that support the implementation of such a performance management system in the current business environment. This report will then have a closer look at the Balanced Scorecard approach as a performance management system and its four different perspectives to identify the advantages for this performance management system. In this process the report will analyse how a company's performance and its employees can benefit from such potential advantages. Finally, the report will make important recommendations with regards to the successful implementation of the Balanced Scorecard approach so that a company and its employees can fully benefit from the Balanced Scorecard as a performance management system.

Performance management

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 (Atkinson, 2006). 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 (Atkinson, 2006). 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, 1992). 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 a firm's performance. It is essential to the success of any organisation 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 (Bose & Thomas, 2007). 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 (DeBusk & Crabtree, 2006). Therefore, in order to change the temperature (financial picture) 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 Balanced Scorecard approaches performance management from four different key perspectives to increase firm value in such a business environment. According to this approach companies have to be willing to make investments in areas of employees (learning and growth), customers and internal business processes in terms of innovation (see table 1).

It is important to address these four perspectives not separately form each other since they are all linked and can influence each other (Niven, 2006). Improving one area might therefore positively impact another one. Innovation and learning for example is a driving force to bring success to 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 (Kaplan & Norton, 1992) suggests that 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 (Kaplan & Norton 1996). 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

Thelearning 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 (Kaplan & Norton, 2004). 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 these 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 and effectively communicate the organisation's strategies to all employees (Chen & Jones, 2009).

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 (Kaplan & Norton 1996). 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 Scorecard it is important that they are created by people who really know how they will 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 (Niven, 2006). 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 is 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. This perspective is important as it gives managers lagging indicators (profitability, revenue growth etc) of the effect the other three perspectives have on financial returns (Niven, 2006). 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.

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 successfully implement the Balanced Scorecard (Chen & Jones, 2009). Employees need to know how they can contribute to the success of this approach in the best possible way. 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 since a very important part of this approach is to develop and train human capital, it is very important that they in fact "buy into" the Balanced Scorecard approach. Every employee has his or her own goals and a perception of how to achieve them in the workplace. If these individual 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 if they 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 (Chen & Jones, 2009).

Some organizations for example communicate the Balanced Scorecard to each employee by developing personal scorecards (Niven, 2006). Although these personal scorecards usually include just a small number of measures, 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 in the case where 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 part of the company and that realise that their contributions can really make a difference (Niven, 2006). Therefore employees can also benefit from the use of a balanced scorecard if implemented correctly.

Conclusion

This report has analysed the importance of performance management for companies to achieve sustainable competitive advantage in today's fast paced business environment. The report has shown that in today's knowledge age organisations have to focus on effective performance management and embrace the growing value of intangible assets to increase firm value. The Balanced Scorecard approach assists companies to do so and can help to break down corporate strategy into action, engage employees and bring better depth to corporate performance management away from solely relying on financial indicators. The Balanced Scorecard approach with its four perspectives underlines this move away from just focusing on financial measures. A well formulated Balanced Scorecard that links all four components together plays an important role in transforming strategic long-term planning into action throughout the whole company.

The report also argued that the balanced scorecard can provide the crucial link between strategic long-term objectives and day-to-day operational activities, by designing understandable and achievable performance targets throughout an organisation. The approach also engages - if implemented correctly - all employees of a firm in the discussion of these strategic targets.

A key issue that was identified in this report in order to successfully implement the Balanced Scorecard is the need for effective communication throughout the organisation that leads to a clear understanding of key roles and responsibilities. Moreover, individual scorecards were discovered to be very helpful for staff to further enhance this understanding and to create 'ownership' on the part of employees.

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