What is the Value of Using Performance Management Systems?

What is the Value of Using Performance Management Systems? Dr. Veronica Martinez Centre for Business Performance, Cranfield School of Management, UK

Do modern performance measurement and management systems deliver superior results or would firms be better off sticking to traditional financials? If the former, then how is that benefit realised? This study and case example tries to find the answers. Today, many organisations place strong emphasis on the adoption and usage of broadspectrum performance management systems (PMS) – as opposed to traditional financially focused systems. Partially, this has been driven by the popularity of “balanced scorecards”, a management fad developed by Kaplan & Norton over a decade ago. Evidence suggests, for example, that in 2001, the balanced scorecard has a utilisation rate of 44% worldwide: 57% in the UK, 46% in the US and 26% in Germany and Austria1. However, few of these adoptions are strictly what Kaplan & Norton advocate and a balanced scorecard has become a generic term for a PMS that extends beyond regular financial measurement systems. Recent research carried out by the Centre for Business Performance at Cranfield School of Management2 shows that organisations generally implement performance management systems to: (1) monitor productivity, (2) communicate strategy, (3) reduce costs, (4) review their business strategy, (5) support their compensation systems and (6) control operations. The Benefits A number of survey studies indicate that organisations with integrated and balanced performance management systems perform better than others3. A US survey’s results shows that PMS, used as a management control tool, increases both organisational sales and profits, and reduces overhead costs by 25%; while another found that PMS improves the return on assets4. Other researchers found less tangible benefits, such as customer or employee satisfaction5. Indeed, some also show that PMS increases employee communication and collaboration while facilitating buy-in of the implementation of strategic objectives. These studies suggested to us that the effects of performance management systems need to be better understood in order to maximise their benefits. In general, organisations should pay more attention to the ‘internal effects’ of performance management because they directly affect the way organisations operate. These internal effects are the engines

that drive an organisation’s results (e.g. profitability, reputation, productivity, etc.). The case study which follows, based on a series of interviews, illustrates this phenomenon. The Effects of Performance Management Systems: A Case Example In 2002, Energy (a fictitious name for a major European electricity supplier) was born from a merger of local companies with different operating systems and cultural backgrounds. Energy became a strategic business unit of a large multinational enterprise with a turnover greater than £3.6 billion (€5.22 billion). Operating in a highly controlled marketplace, Energy found it difficult to differentiate itself from other energy suppliers. Since regulators set Energy’s incomes and prices, it can only create value from optimising the way it operates. Energy decided to implement its present PMS particularly because it faced strong pressures6, 2 to: (1) integrate as one company, (2) establish the necessary focus, (3) attain the common enterprise goals, and (4) meet customer service standards drawn from regulatory stipulations. This was an opportunity to re-invent the organisation. Currently, Energy has implemented its PMS at the executive, business unit, team, and individual levels. Each level has standardised processes, tools and practices to design, implement and review their scorecards and strategy maps. The strategy map at the executive level captures the firm’s ambitions, corporate objectives, and government [regulatory] objectives. This executive strategy map is then the reference point for the development of further strategy maps and scorecards at lower levels. Energy has five main performance reviews based on the scorecard7, which are used to manage the firm’s performance. These are: (i) strategy meetings, (ii) quarterly meetings, (iii) regional meetings, (iv) team briefings and (v) coaching meetings. Its integrated performance measurement and management process is called ‘Energy Performance Management Systems’. Pros and Cons Energy’s experience in PMS shows a mix of positive as well as negative effects from performance management systems2. Table 1 highlights perceptions of the biggest benefits and Table 2 shows the biggest drawbacks in Energy’s experience. Eight main positive effects (from a list of thirty-four) were regarded by Energy as the most important contributions from its PMS. The top one is the fact that performance management systems “focus employees’ attention on important issues to the company”, by linking key objectives to employees’ jobs and continuous reviews. Furthermore, as a result of its performance management systems, Energy’s customer satisfaction improved. In this kind of business, customers seldom ring to say thank you for today’s light, they usually contact the company when they have problems with their power supply. Nevertheless, after the implementation of performance management in Energy, commendation letters increased and customer complaints decreased. The results of its most recent survey show that customers have indeed perceived a better service delivery.

TABLE 1. TOP EIGHT POSITIVE EFFECTS OF PMS 1. 2. 3. 4. 5. 6. 7. 8.

Focus people’s attention on what is important to the company Get business improvement Improve customer satisfaction Increase productivity Align operational performance with strategic objectives Improve people satisfaction Align people behaviors towards continuous improvement Improve company reputation TABLE 2. TOP SEVEN NEGATIVE EFFECTS OF PMS

1. 2. 3. 4. 5.

Time consuming Demands considerable financial investment Bureaucratic – too many measures make PMS bureaucratic Over-complicated measures – difficult to understand and manage. Misleading prioritization – ‘red’ measures can divert attention from most critical measures 6. Mechanistic – can discourage entrepreneurial intuition. 7. Monotonous. Managers have to continuously refresh the way in which performance is reviewed.

One of the less visible but powerful benefits at Energy has been the change in employees’ behaviour. PMS has improved the tolerance to failure, improved the transparency of information, improved vertical and horizontal cooperation, and encouraged friendly competition between teams. As a result, the culture has moved from a reactive and command-and-control culture to an open and proactive one. Currently, the company is focused on continuously improving performance in company productivity and customer satisfaction. However, Energy has also identified a few negative impacts too. The most significant of these is that some of Energy’s employees found PMS too time-consuming, especially at the initial implementation stage because the benefits were then uncertain. They did not know the process and therefore everything was new, difficult to remember and implied more work to be done. At the strategic level, some of Energy’s senior managers found that PMS can be mechanistic – thereby limiting the freedom for intuitive management. At the tactical level too, the performance review process of PMS can be quite monotonous. This means that managers have to continuously refresh the way in which performance is reviewed to keep it interesting and attractive. Hence the leadership of local managers plays a key role on

the success of the performance management systems; moreover, they are crucial to moderating the outcomes of PMS implementation too. A Retrospective View of PMS Implementation Lastly, Energy’s managers were asked a retrospective question to assess the overall effects of their performance management systems: If you had the opportunity to implement PMS again, would you implement it again? Interestingly, nobody said no – every one of the thirty-six interviewees would implement PMS again without hesitation. Why? Generally, they pointed out that PMS has provided focus and a different way to operate their business. The over-riding perception was that the effort and resources that Energy invested in enhanced performance measurement and management systems provided a real and substantial payback over time. For more information about this project and its outcomes contact Dr. Veronica Martinez [[email protected]].

Acknowledgement The author would like to thank Chris Adams from Cranfield School of Management for his input and support in this research article. In addition, the author would like to acknowledge the support of the EPSRC under grant number [GR/S28846], which supported this research. References 1

Rigby, D. (2001), “Management tools and techniques: a survey”, California Mgmt Review 43(2), pp.139160. Marr, B., Neely, A., Franco, M., Wilcox, M., Adams, Ch. and Manson, S. 2004. Business Performance Measurements - What is the state of the art? Conference proceedings Performance Measurement Association, 28-30 July, Edinburgh, UK :627-.634. Speckbacher, G., Bischof, J. and Pfeiffer, T. (2003), “A descriptive analysis on the implementation of balanced scorecards in Germanspeaking countries”, Management Accounting Research, 14, pp. 361-387. Franco, M. , Bourne, M., and Neely, A. Understanding strategic performance measurement systems and their impact on organizational outcomes: a systematic review. (Working paper 2004). 2 Martinez and Kennerley (2005); ‘Performance Measurement Systems: Mix Effects’ EURAM Conference, online proceedings; 4-7 May; Munich, Germany [http://euram2005.wi.tum.de/proceedings/trackdetail.php?trackid=22] 3 Lingle, J. H. and Schiemann, W. A. (1996), “From the balanced scorecard to strategic gauges: Is measurement worth it?”, Management Review, 85(3), pp. 56-61. Gates, S. (1999), “Aligning strategic performance measures and results” New York, US. 4 Lawson, R., Stratton, W. and Hatch, T. (2003), “The benefits of a scorecard system”. CMA Management June/July, pp. 24-26 5 de Waal, A. A. (2003), “Behavioural factors important for the successful implementation and use of performance management systems” Management Decisions 41(8), pp. 688-697 6 Martinez and Kennerley (2005); ‘How Do Performance Measurement and Management Systems Impact Business Performance? A UK Cross-Regional Comparison’, forthcoming in the Strategic Management Society Conference Proceedings, October; Orlando, Florida, US. 7 Martinez and Kennerley (2005); ‘Impact of Performance Management Reviews: Evidence from an Energy Supplier’; EurOMA Conference proceedings; 19-21 June; Budapest, Hungary