Performance measures
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The world economy has evolved in the past two decades. New business drivers has come into existence and brought new factors to business development. The business can be divided into three categories; ...

The world economy has evolved in the past two decades. New business drivers has come into existence and brought new factors to business development. The business can be divided into three categories; the traditional business, the partial e-business, and the full e-business. The rapid development in information technology and communication has made a direct influence on business nature. Some companies have shifted towards the e-commerce strongly, and some preferred to have the “click and mortar” form of companies which are now taking the popularity and biggest share of the market. Performance gain importance as business evolves and has become the tool to measure success or failure of business. In the following lines we discuss the different definitions of performance measurement, performance management methodology, and performance management guideline approach.

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    Performance measures Performance measures Document Transcript

    • Performance measurement Taufiq H. Ghilan Al-Madhagy & Muhammad Azri Bin ZAinal Nafea IT Policy and Strategy STID6014, towfeeq2k5@yahoo.com School of Computing, CAS UUM, Sintok 06010 Malaysia and thus this definition is given for performance measure- I. INTRODUCTION ment as a set of metrics used to quantify both efficiency and effectiveness of actions and helps to bring more scientific The world economy has evolved in the past two decades. analysis into a decision-making process, Rezaei et al.New business drivers has come into existence and brought (2011) [6].new factors to business development. The business can bedivided into three categories; the traditional business, thepartial e-business, and the full e-business. The rapid devel- III. PERFORMANCE MANAGEMENT METHODOLOGYopment in information technology and communication hasmade a direct influence on business nature. Some compa- The behavior of managers and employees are affected bynies have shifted towards the e-commerce strongly, and the measurement system in the organization. The traditionalsome preferred to have the “click and mortar”1 form of financial accounting measures can no longer give accuratecompanies which are now taking the popularity and biggest signal for the continuous improvement and innovation inshare of the market. Performance gain importance as busi- this continuously changing business environment.ness evolves and has become the tool to measure success or The inadequate performance measurement systems thatfailure of business. In the following lines we discuss the dif- worked in the industrial era lead the managers and re-ferent definitions of performance measurement, perfor- searchers to focus either on the improvement of financialmance management methodology, and performance man- measurement or operational measures. Senior executivesagement guideline approach. realized that single measurement cannot give critical areas of business into focus so they used the both methods men- tioned above. Using balanced scorecard includes the finan- II. PERFORMANCE MEASUREMENT DEFINITION cial measures that gives the results of action already taken and complements with operational measures on internal Performance measurement has different definition as process, customer satisfaction, and innovation with im-many scholars define it. It is a determination of what a pro- proved activities.gram accomplishes and whether the desired results are be- In today’s business challenges, manager should focus oning met or not. It is ongoing monitoring and reporting different aspect of performance to give a broad view of allprocess towards pre-defined goals to measure effectiveness areas of business on focus. Balanced scorecards give thisof an organization, program, or services and enhanced ac- opportunity for managers to view the four important busi-countability. The program is defined as a project, function, ness perspectives, namely: the financial perspective, theor policy that has identifiable purpose or objective, Yost customer perspective, the internal business perspective, and(2012) [4]. Another definition for performance measure- the innovation and learning perspective.ment” is the formal, information-based routines and proce- Balanced scorecards give the answers to these questions:dures managers use to maintain or alter patterns in organi- 1) how do we look to shareholders? 2) What must we excelzational activities.” (Simons 2000) [5].This includes such at? 3) How do customers see us? 4) Can we continue to im-activities as strategic planning, data collection, institutional prove and create value? Balanced scorecards give the man-structures and incentives, resource allocation, and strategic ager the most important measures to focus on, Kaplan et.response. Another article defines the performance mea- al.[7].surement as the process by which a company “manages its This method has many advantages: Firstly, many ofperformance in line with its corporate and functional strate- companys competitive agenda like improving quality, em-gies and objectives”. In today’s competitive market and ra- phases of team work, customer oriented, short responsepidly changing technologies performance measurement is time, and others are presented in one report that is easy toconsidered a primary tool for decision taking for managers analyze and gives clues on areas that needs to be focused 11 on. Secondly, BSC forces managers to focus on all impor- Online and offline, in stores, business transactions.
    • tant operational measures and to judge if one area is or new product introduction. Some companies improveachieved on the expense of the other. their customer and internal process performance conti- nuously, and others require management to make improve- A. Customer perspective ments on specific time periods. Top management has a priority mission statement to havethe best impression of the customer that is “to be numberone value to customer". The BSC translates this mission D. Financial perspectivecustomer into specific measures that reflect factors matters In financial measures, the strategy, implementation, andthe customer. execution contribute to improve the bottom-line. Normally, The customer concerns are categorized into four catego- a financial goal deals with profitability, growth, and share-ries: Time, quality, performance and service, and cost. Lead holders’ value. There are arguments that the financial fig-time measures the time needed to meet customer’s needs. It ures are as a consequence of the operational improvementsfalls into two cases, existing products and new products. and thus people should stop relying of the financial meas-For existing products, lead time measured from the time ures but the operational ones. On the other hand, this viewcompany receives an order till it reaches the customer. And contradicts with the authors view that the well-defined fi-for new product, the lead time is the time needed from the nancial control system can enhance the organizations totaldefinition stage till it is delivered into market. Quality quality management program. Secondly, the linkage be-measures the delivery time, the level of defects of product, tween the improvement of operating performance and theand the accuracy of delivery forecasts. financial success is weak. The author summarizes this in To put BSC into action, companies should express clear- that the executives should review their mission and strategy,ly the goals of time, quality, performance and services then if the improved performance failed to be reflected in thetranslate these goals into measures. bottom-line. The improved quality, response time, productivity and B. Internal business perspective new products if they are not translated into improved mar- The three internal business operations, namely processes, ket share; improved sales, reduced expenses will not returndecisions, and actions are important elements to be focused good revenue to the company.by managers to satisfy customers’ needs. As a result of The scorecards put the strategy and vision on the corebusiness processes the internal measures developed and and create a goal that the people will reach using whateverthey have the greatest impact on customer satisfaction. behavior or action to reach that goal. By combining theThese internal operations create the balanced scorecard. customer, the financial, internal process and innovation, andThese factors affect cycle time, quality, and employee organizational learning perspectives, the balanced score-skills, and productivity. Companies should consider what cards will enable managers and gives better understandingprocesses and competencies they must excel at and specify of the interrelationship between all these elements and willmeasures for each. Managers should divide the overall of give better results in achieving the organizations goals, andthese four components into local levels, the employee’s lev- improved revenues. Balanced scorecards drives the manag-el, so the measures link top managements judgment about ers to look ahead consistently and not behind.processes and competencies to the actions taken by the em-ployees. If there is unexpected result that managers find IV. PERFORMANCE MANAGEMENT GUIDELINE APPROACHsuch as late on-time delivery, they identify it by using theinformation systems to track it and make proper decisions. Performance measure selected has present and futureInformation systems can help in avoiding constraint for fol- benefit used to identify if actions or outcome has beenlowing up operations and as a result affecting and improv- achieved, a standard is met, or desired benefits areing the performance. achieved. There are some guidelines that we are going to present in order to facilitate the collection of data and use it C. Innovation and learning perspective to accomplish performance measurement in accurate way. For competitive success, the companies focus on the cus- First of all, make decision on how your work activitiestomer-based and internal business process on BSC. On the are related to the strategic plan goal of your organizationother hand, to achieve success there should be continuous and identify the expectations of the stakeholders. Secondly,improvements for the existing products and processes and identify the accomplishments you want to achieve throughthe introduction of new ones. If the company has the ability series of questions and brainstorming till to reach the end ofto innovate and improve, that gives it the value in the mar- desired goal. Thirdly, State the desired accomplishmentket. specifically as possible is one of the factors that we should Only through launching new innovative products and be aware of. Then identify performance measure that willimproved operating efficiencies the companies can enter be used to specify and determine the desired accomplish-new markets and increase revenues, thus increasing share- ment. The performance measure that is selected should helpholder value. The percentage of sales of new products is in- to determine whether and to what extent we are achievingdicators of the success of it; if it is declining the managers our desired accomplishment.can investigate if problems occurred in the product design
    • One of the key factors that should be taken into account The data collected or reports created concerning the per-is the data. Data should be available, reliable, accurate and formance or an organization or company can be interpretedconsistently reported to be marked to develop the capacity differently by different managers. take for example the termto obtain it from different departments especially the plan- revenue which can be interpreted by some managers as cashning departments in the organization. plus account receivable. Others, on the other hand, would Fourthly, obtain baseline or trend information on your interpret revenue as cash and future receivable amountsperformance measure by collecting trend information and to subtracted returns.be a baseline for future comparison of your own collected Performance has many conceptual frameworks, i.e. theperformance data. term itself consisted of innovation, profitability, efficiency, A comparison data has to be existed in order to set a tar- productivity, effectiveness, and quality, Sink and Tuttleget or standard that we aim to reach for each performance (1989) [2].measure. You can obtain this targeted data from any source Others suggested seven areas for performance measuring,of business to be compared with if it has achieved its goals Herper (1984) [3], included the following: Productivity,and targets on the reality bases. If there are any additional price, Unit cost, factor proportion, product mix, cost pro-data needed to be gathered, we should determine if it can be portion, and input allocation. There also other practicalgathered in cost effective manner. We have to be sure concepts such as balanced scorecards that needs additionalwhether or not it is accurate and reported consistently. The information from customer, financial, internal businessdepartment concerned/relevant could be needed to make processes, and innovation and learning areas.this data available. The data gathered has to be displayed in Different views concerning the performance measure-an understandable and simple way. It, then, is compared to ment. Firstly, the private sector which describe it as a ne-the baseline and to the comparison data. In most cases, cessary tool for successful management and is an importantthere should be a comparison with the target/standard that part of ISO 9001:2008. it helps in decision-making processwe want to achieve the desired accomplishment. which is based on information and communication technol- ogy instead of experiences and judgment. Learning aspect V. PERFORMANCE MANAGEMENT ADVANTAGES can be achieved as a result of implementing performance measurements. Performance management helps to define the organiza- Public sector views are presented as follows: the gov-tion’s goals and objectives in a tangible way. It enables the ernments have many entities that represent it which are theorganization to develop activity plans to accomplish the ministries who serve the public sector. These entities havepre-defined goals and objective, monitor actual perfor- obligations towards the head of the government and themance verses plans, advise via routine performance reports public as well. They have to accomplish the obligation ofmanagers of the actual situations that require more attention the government plan in years to come whether it is a five-towards achieving the planned strategies, analyze moment- year plan or four-year plan. These entities have to be moni-ous performance deviations, and perform corrective actions tored to achieve the strategic goals of the government. Per-to fix these deviations from the actual desired plan for the formance measurement her represents a tool to measure itsorganization. compliance with the governments promised plan. So the Performance measurement gained popularity and impor- performance measure is in place here and it is a mandatetance in the past two decades. In the past, it was only ac- between these entities head and his/here superior to accom-count-based tool for managers to measure the success or plish strategic plan with annual performance goals into afailure of the organization and the functional performance. management process.Now this concept has evolved and has broader range of oth- Governments encourage improving the quality serviceser components that measures the success and failure of an delivered to public. Because of direct contact with publicorganization. It is vital to understand the benefits and im- these agencies have serious failures indication if there is nopacts of the performance measurement in business. performance measurement in place. The key role here of the Performance measurement provides feedback to manag- performance measure is to provide feedback informationers to answer the following three questions: How well the and better insight to improve management decisions in theorganization is performing? Is the organization achieving its ministries and its affiliated agencies, better planning in topobjectives? How much the organization improved from the management, and improved application of strategic goals oflast period? It is clear to say that performance measure is the current government. It improves the communication be-representing a system that should be aligned with the orga- tween the workforce and the management and provides bet-nizational objectives, polices, and missions. These three ter visibility and transparency.components are in principle the attributes for measuring the There are future expectations of the performance measurequality of performance in an organization. Performance that will lead to more transparency, accountability, andmeasure, in the past, did not have enough attention from more public participation in governmental affairs. This ismanagers who only considered taking decisions based on obvious especially in the light of the improvement of hu-their experience and paying a lot of attention to financial in- man rights and public awareness of the resources that areformation. Now it is playing an influential role in process spent by the consecutive governments. The use of extensivemanagement within a company, P.Kongkiti et.al.[1].
    • information and communication technology depends on aneffective performance measurement in the entities in ques-tion. It symbolizes good governance in the era of globaliza-tion and social responsibility. Adopting performance measurement in organizations ei-ther private or public is reflecting how this entity is willingto develop its business or service to higher level and givesindications of the correct measurement that is follow insideit. It will lead eventually to a transparency and good gover-nance. Implementing continual measures of performance gives agood indication of the commitment of the managerial leveltowards the continuous performance improvement. Thereare many beneficial results of implementing performancemeasures, e.g. it strengthens the entity’s execution capabili-ty on the way of achieving its strategies, objectives and pol-icies in the way that is planned. It facilitates the managerialdecisions of today’s decision based on the reports deliveredthrough performance measurements and helps for future de-cision taking with learned experience from previous expe-riments in implementing specific performance measures. Inaddition to that, it helps strengthening the accountability inthe organization and encourages for more development ofits methods to achieve the desired results. Effectiveness andflexibility are ways to improve complex audit on the re-sources spent on public services and enables safeguard thepublic resources. REFERENCE [1]. P.Kongkiti,A. Pornthep, H. Petri, and D. Richard (2008), Depart- ment of Industrial Engineering, Kasetsart University, Bangkok, Thailand, IMDS Vol. 109(5), pp 646-660 [2]. Sink, D. and Tuttle, T. (1989),Planning and Measurement in Your Organization of the Future, IE Press, Norcross, GA [3]. Harper, J. (1984),Measuring Business Performance, Institute of Manpower Studies, Gower, Aldershot [4]. Dave Yost Ohio Auditor of State. (n.d.). Retrieved November 11, 2012,from www.auditor.state.oh.us:www.auditor.state.oh.us/publications/gen eral/SchDistSelfAssessGuide.pdf [5]. Simons, R. 2000. Performance Measurement and Control Systems for Implementing Strategy, London: Prentice-Hall International. [6]. A.R. Rezaei, T. Çelik, Y. Baalousha (2011), Performance mea- surement in a quality management system, Department of Civil Engineering, Eastern Mediterranean University, Famagusta, Northern Cyprus, Via Mersin 10, Turkey. [7]. Kaplan, R.S., Norton, D.P. The balanced scorecard--measures that drive performance. (1992) Harvard Business Review, 70 (1), pp. 71-79