Strategic Performance Management System
SITI NABIHA ABDUL KHALID GRADUATE SCHOOL OF BUSINESS
UNIVERSITI SAINS MALAYSIA
OU TLI NE
What is PMS Why PMS
Designing PMS
Contemporary trends
Example:
Group Project – 5 members per group
• 70% - lecturer's evaluation.
• 30% - peer evaluation from your group members.
Each group will receive 100 points to distribute among members.
Allocation based on performance within the group
Develop Performance Indicators:
- to evaluate each member’s contribution to the
group.
What is PMS
A holistic approach to the management and control of organizational performance.
Ferreira & Otley (2009
)Performance
Management System
l Evaluation of performance against the key objectives of the organisation.
l The measurement of the organisation’s process and activities that are implemented to achieve its plans and strategies.
l The setting of appropriate targets and level of performance required to achieve the objectives of (1) and (2) above.
l The rewards and penalties given to employees for their success or failure in meeting the set targets.
l The feedback from the system to ensure that the organisation learns and adapts to the current environment.
(Otley, 1999)
WHY PMS?
Why PMS?
• Common language
• The organizational focus
Purpose of PMS
• Communicate the strategy and plans of the business and align employees’ goals
Communicate
• Allow manager to track their own performance against targets and take corrective action
Track
• Evaluate subordinates’ performance, and provide rewards
Evaluate
• Guide senior managers in developing future strategies and operations
Guide
Why?
• Before 1980’s: Business success
evaluated based mainly on financial measures
• 1980’s 1990: reevaluation of using financial measures:
- Short-term focus
- Lack of strategic focus
Limitations of financial measures?
• Limited Guidance for future actions
• Lagging Indicators
Why?
• Decentralization.
• Control operating units:
• Control of employees
• How to ensure the managers and worker acts in organization's best interest?
Why?
Massive corporate governance failures in 2002 → intense interest in
management control
U.S. Sarbanes-Oxley Act of 2002, which established strict new standards for corporate governance and financial disclosure.
organizations to provide up-to-date disclosure of material events that may affect performance
Why
Massive corporate governance failures in 2002 → intense interest in
management control
U.S. Sarbanes-Oxley Act of 2002, which established strict new standards for corporate governance and financial disclosure.
organizations to provide up-to-date disclosure of material events that may affect performance
The advantages of non- financial measures
Non-financial measures
• Can be the drivers of future financial performance
• Understandable and easier to relate to, particularly at the operational level
Thi s Photo by Unknown Author i s l icensed under CC BY
Non-financial measures : operational control
• Customer satisfaction
• Measured by survey administered to customers
• What other way to measure customer satisfaction ?
• Defect measures
• Measurement of faults in a product that occur during the manufacturing process
• Support a high-quality strategy
• Quality: Periodic inspections or testing of products
Non-financial measures for operational control
• Stock status
• Accident report
• Safety statistics
• Multi-skilling
• Number of employees who have attained skills to allow them to undertake a range of operational tasks
• Machine downtime
• Number of hours (or percentage of total
production hours) that machines are unable to operate
• Delivery on time
• Prompt delivery to customers is an important driver of customer value
GOOD KPIs: SMART?
Specific
It has to be clear what the KPI exactly measures.
There has to be one widely-accepted definition of the KPI to make sure the different users interpret it the same way and, as a result, come to the same and right conclusions which they can act on.
Measurable
The KPI can be measured?.
Attainable
Can be achieved
GOOD KPIs: SMART?
* * Relevant
The KPI must give more insight in the performance of the organization/units in obtaining its strategy
KPIs must be essential to a department’s function and be tied to the company’s bottom line.
* Time phased
It is important to express the value of the KPI in time.
Every KPI only has a meaning if one knows the time dimension in which it is realized.
PROBLEMS WITH
NONFINANCIAL
PERFORMANCE?
The problems with non-financial performance measures
• Wide choice of non-financial measures available
• Inclusion of non-financial measures can be ad hoc
• Integrity of the measures
• Difficult to verify accuracy of measures
• Potential for measures to be inaccurate, incomplete and manipulated
• Some measures may not easily translate into financial outcomes
Why is PM difficult?
What to measure?
How to measure
I knew I should have
paid more attention to
the KPIs
STRATEGIC PMS (SPMS)
STRATEGIC PMS
l A good control system
Provide information about strategic uncertainties Focus on external markets
Signals about threats and opportunities l HOW?
l Strategically RELEVANT
Strategic performance measurement systems (SPMS)
• Translates strategy into an integrated set of financial and non-financial measures across a range of perspectives
• All are driven by the goals and strategic priorities of the organisation
The Balanced Scorecard
Translates strategy into an integrated set of
financial and non-financial measures across a range
of perspectives
HOW?
Articulate
Articulate the mission, overall goals or
objectives and strategic
priorities of the organisation
Develop
Develop specific
objectives for each
perspective and formulate a
strategy map
Choose
Choose
performance measures for each
perspective
Develop
Develop targets for each
performance measure
Cascade
Cascade the BSC down the organisation to divisions and other units
HOW
– Plan and undertake initiatives and activities to implement and achieve the strategic objectives
- Managing, monitoring and reporting performance against targets for units and the organisation as a whole;
- assign units and personal BSCs to specific managers to enhance accountability and improve performance
The Balanced Scorecard
Financial perspective How do we look to
our stakeholders?
Customer Perspective How do we look to
our customers?
Organization Learning Are we able to sustain
innovation?
Business Processes What processes are
the value drivers?
?
Connecting the Four Perspectives
Financial Perspective Return on Investment
Customer Perspective Customer Loyalty
On-Time Delivery
Internal Perspective
Learning & Growth Perspective
Process Quality Cycle Time
Employees’ Process Improvement Skills
Financial Perspective
Financial perspective
• Reflects perspective of the shareholder
• Summarises the financial
outcomes of decision and actions
• ROI, cash flow measures,
Customer Perspective
Customer perspective
• Measures the company’s success in achieving
customer value
•
customer profitability, market share, number of new customers
Thi s Photo by Unknown Author i s l icensed under CC BY-SA-NC
Internal Business Process
• Internal business processes
• specific processes that contribute to customer and financial
objectives
• product quality, time-based measures,
This PhotoThi s Photo by Unknown Author i s l icensed under CC BY-SA-NCCC BY-SA-NC
Learning & Growth
• Learning and growth
• Focus is on the capabilities of the organisation to achieve superior internal processes that create both customer and shareholder value
• Delivers long-term growth and improvement
• Measures focus on employee capabilities, capabilities of information systems and organisational climate
Issues with BSC?
• Cause and effect assumptions may be too simplistic
• Top down design may lead to limited manager buy-in
• Linkages between measures may not
have been rigorously tested and validated
• Implementation may involve major change and resistance
• Unrealistic expectations for improvement
by managers
How successful are balanced scorecards?
Design and implementation issues
• Top down design may lead to limited manager buy-in
• Linkages between measures may not have been rigorously tested and
validated
• Implementation may involve major change and resistance
• Unrealistic expectations for improvement by managers
Does non-financial performance lead to financial performance?
• Improvements in non-financial measures will not improved profits if
• Management has selected the wrong strategic priorities
• Wrong measures
• There are incentives to engage in dysfunctional behaviour, such as manipulating measures or maximising performance of some measures at the expense of others
Underlying philosophy What gets measured,…
--- gets done
--- gets managed
• “If I can’t measure it, I can’t manage it.”
• Measured the wrong things….. Managed the wrong things
Designing contemporary performance measurement systems
(cont.)
Link
Link to strategy and goals of the
organisation
Keep
Keep it simple
•Measures should be understandable, easy to communicate with employees
Recognise
Recognise controllability
• Responsibility for achieving measures
should relate to activities and processes which
employees can control
Emphasise
Emphasise the positive
Designing performance measurement systems
(
BENCHMARKED
Include benchmarking
• Against external standards
PARTICIPATION
Embrace participation and empowerment
• To promote motivation and goal congruence
KEY MEASURES
Include only a few
performance measures
• Rule of thumb is that no person should be
responsible for more than four or five measures
Remember: IMPACT of Measurement System
• As measurements are made on operations and especially on individuals and groups, their behavior changes
• People react when they are being measured, and they react to the measurements
• They focus on the variables and
behavior being measured and spend less attention on those not measured
• INCENTIVES – POWERFUL TOOL TO FOCUS ORGANIZATIONAL ATTENTION AND DRIVE CHANGE
Impact of PMS on Behavior
• Behavioral implications and consequences of a MACS
• Goal congruence may not occur
• Motivation could be low
• Massaging the numbers
• GOALS CAN BE REACHED THROUGH ACTIONS THAT ARE DETRIMENTAL FOR THE ORGANISATION
The ways in which organizations measure performance send signals to all
employees and stakeholders about what the organization considers as its priorities
→ BEHAVIOURAL CHANGES?
• THE POORLY DESIGNED INCENTIVE SYSTEM - MISBEHAVIOUR
Summary
• Purposes of performance measurement systems are to communicate strategy, track performance again targets, evaluate subordinates’
performance and reward, develop future strategies
• Conventional financial-based performance measurement systems have many limitations and can be enhanced by non-financial measures
• Non-financial measures have advantages and their own limitations
• Strategic performance measurement systems translate strategy into an integrated set of financial and non-financial performance measures
Summary
• Effective performance measurement systems should link to strategy and goals, be simple, recognise controllability, emphasise the
positive, be timely, include benchmarking, embrace participation, include only a few measures and link to rewards
Summary
• Behavioural consequences of the measurement system
