Performance Management Tools and Their Benefits for Organizations - Essay Example

?Introduction Performance measurement has become one of the most important functions of any business today. Performance measurement and performance management allows businesses to analyze how the department, individuals, processes, or the whole organization is operating. Performance measurement tools are also used by organizations to compare the desired performances with the actual performances and then actions can be taken to achieve the desired results by eliminating any kind of discrepancies. Performance management tools are very beneficial for organizations as it allows the management to forecast how the organization has performed and how the organization needs to go in future (Chavan, 2009). Moreover, the organization uses performance measurement tools to motivate the employees and identify the best performers within the organization as well. Performance measurement tools are not only restricted to these functions, but these tools can be helpful in analyzing where the organization has incurred high costs and to identify areas where productivity can be enhanced so that the profitability of the organization can be increased. Therefore performance measurement tools are beneficial for the organization in increasing their financial performances as well as their operational performances (Cardinaels, Paula, and Veen-Dirks. 2010). There are different performance measurement tools and one of the most widely used performance measurement tools is the balance scorecard that has been discussed in this report. Ridgway in the year 1956 came up with the concept of performance measurement and from that time, different organizations have used different types and concepts of measuring their performances. During the mid 1980s and 1990s the idea of measuring and managing performance was one of the most debatable and researched topics and different researchers came up with different ideas (Neely, 2005). During this particular time, it was revealed that performance measurement is not only about managing financial performances of the company, but it is about managing the overall performances of the organization as described by Kaplan and Norton using Balance Scorecard. According to Kaplan and Norton, performance of the organization is linked with different measures and not only the financial measures and therefore it is important to consider other aspects as well in order to improve the performances of the organization. This report discusses about this important and widely used performance measurement tools, balance scorecard as well as the report discusses about how balance scorecard is used as a performance measurement tool. Moreover, the report highlights the progress that has been made since the 1990s in balance scorecard as well as in managing performances and then the effectiveness and usefulness of balance scorecard today as a performance measurement tool has been analyzed. Balance Scorecard Balance scorecard is one of the most used performance management and performance measurement tools around the world. Balance scorecard has been developed by Robert Kaplan and David Norton in the year 1993 and since then it has been continuously refined. Previously, organizations have been relating performance management and performance measurement as the financial indicators, however balance scorecard shows that an organization has to consider different aspects and these aspects are linked with each other and by improving all these aspects an organization can improve its performance, otherwise only financial indicators cannot be improved if other factors are not improved (Geuser, Mooraj, and Oyon. 2009). Balance scorecard allows the organization to analyze and formulate strategies. According to balance scorecard, an organization has to consider four perspectives in order to formulate a strategy and these four perspectives are; financial performance, customer knowledge, internal business processes, and learning and growth. Kaplan and Norton have described balance scorecard as the tool that not only retains the traditional financial measures but at the same time analyses the long term capabilities of the organization as well as relationships with the customers that are critical for the success of the organization. An organization cannot measure its performances by only financial indicators and therefore it has to consider other perspectives as well like the processes it has adapted, relationships with the customers and its long term capabilities and growth. The following diagram shows a typical balance scorecard with vision and strategy of the organization at the center and other four perspectives are linked with each other as well as the vision and strategy. (Kalpan, 2010) Four Perspectives Of Balance Scorecard: Learning and Growth Perspective In organization, human resource is considered as the most important asset of the organization. An organization can gain competitive advantage if it has highly skilled human resource and it is able to use them appropriately, then it can help the organization in gaining competitive advantage. According to Kaplan and Norton, learning and training are important for the success of the organization. This perspective includes training and development of the employees and building a culture where employees are motivated to learn and build capabilities. In order to improve the performances, and for the organization to sustain in the long run, an organization has to build its performances. Therefore learning and growth is an important perspective that needs to be considered. Internal Business Processes Perspective Business processes can help the organization in improving their productivity. An organization can do well against the competitors if it has employed better and more efficient business processes. Moreover, by having well-organized and productive business processes, organization can reduce its cost of production and at the same time prepare goods and services that are more likely to be accepted by the customers, therefore it is an important perspective in the success of the organization as well as in performance measurement. Customer Perspective The utmost objective of the organization is to satisfy its customers with the products and services it is offering. If the customers are not satisfied, then they will not be buying the products and services that the company is offering and thus, the sales of the company will decline. It is critical for the success of the organization to understand the needs and demands of the customers and come up with products and services that could meet their needs and demands of the customers. If the organization is not able to fulfill their needs and demands, then the organization cannot survive in the long run as the sales will decline and thus company will not be able to survive. Financial Perspective Previously, performance measurement tools were aimed to analyze and measure the financial performances of the company. Kaplan and Norton in preparing the balance scorecard have not disregarded the importance of this perspective however they have focused on other perspectives as well. Financial perspective is important as they are a kind of performance measurement indicator in quantitative terms. Higher profitability would indicate, better internal business processes, more satisfied customers and more learning by the employees of the organization. Balance Scorecard As A Performance Measurement Tool The major benefit of using balance scorecard as defined by Bhagwat and Sharma (2007) is that it incorporates both the financial as well as nonfinancial goals of the organisation. Bhagwat and Sharma have further said that the distinctive advantage that the balance scorecard has is that considers the outcomes from different performance drivers and these are linked with each other and thus an effect on one can be related with the other. Cardinaels, Paula, and Veen-Dirks, (2010) have said that balance scorecard considers different business activities and thus it helps the organisations in analysing its performances in a better way and thus it facilitates in achievement of its business goals. Banker, Chang, and Pizzini, (2011) have further added balance scorecard because of this reason has been increasingly used by organisations as a performance measurement tool. The name balance scorecard refers to how an organization balances all four important perspective that influence its performances and organization cannot improve its performances without considering these four perspective. If an organization wants to improve its financial performances, then it has to consider other three perspectives as well. Similarly, if an organization analyses or measures its performances and it has been found that the financial performances of the company has been influenced, then other three perspectives have played their role in impacting the financial performances. For instance, lower productivity (internal business processes) would influence the financial performances and it would result in lower profits for the organization. Similarly, if the customers are not satisfied, then it will lead to lower sales and thus the company will not be able to achieve high profits. Therefore the balance scorecard states that the each of these four perspectives needs to be linked with each other as one affects others and thus the overall performance of the organization can be influenced. Progress Made Since The Nineties Over the years organizations have been focusing on improving how they are evaluating and measuring their performances. Different methods and techniques have been used by organizations around to world to measure their performances however almost all the methods have previously been focusing on the financial performances of the company and were measuring Return on Investment, Return on Equity, Net Profit, Return on capital employed, net Cash flows and other financial indicators. The problem has been that these methods were not analyzing how an organization could improve the profits or financial indicators, but were just emphasizing on the end product i.e. how financials can be improved. However with the introduction of balance scorecard, the balance scorecard shows how the management can analyze and improve their performances by influencing different perspectives and factors that could lead towards improvements in the financial performance (Davis and Albright, 2004). After the introduction of balance scorecard, many organizations have realized that it is one of the better performance measurement tools available and therefore a lot of them started using this technique to measure the performances. Kaplan and Norton although came up with a balance scorecard that focuses on four perspectives that have been already discussed however some organizations have modified it to meet their needs in a better way. However the main theme of performance measurement have remained the same and organizations have comprehended that there are different perspectives linked with each other and improvements in financials of the company can be achieved if other linked perspectives are improved. There have been several improvements over the years in how organizations have started analyzing the performances however the main objective of using balance scorecard has remained the same i.e. organizations have used this tool to successfully implement strategies and to analyze their performances with what they have planned. Gonzalez-Padron, Chabowski, Hult, and Ketchen (2010), Tseng, (2010), Northcott, and Taulapapa, (2012) and several others have claimed that organizations need to have customized and more tailor made balance scorecard as each organization has a different method, operations, structure and values therefore they need to make their own customized balance scorecard. There are several organizations that have modified balance scorecard and used it how they wanted to. One of the prime examples is of Tesco that has used balance scorecard after modifying it to their needs. Tesco has used a steering wheel after modifying the balance scorecard (Witcher, and Chau, 2008). The following image shows the steering wheel that has been used by Tesco in measuring performances. (Witcher, and Chau, 2008) Tesco has added another important perspective which is the community and according to the management of the company, the community also has a major role in how the firm operates and therefore in analyzing and measuring the performances of the company, community should also be involved. The management of Tesco annually reviews how the organization has performed throughout the year and then objectives can be modified according to the changes in circumstances and to make sure that the company is consistent with the needs of the stakeholders of the company (Witcher, and Chau, 2008). There are several other firms that have modified balance scorecard to meet their needs in a better way. Another firm is French-owned EDF Group. The group offers electricity to more than 1/5th of EU electricity. EDF group uses balance scorecard approach to analyze and measure the performance of the company and to take actions to further improve their performances. The company uses some symbols to show how they have performed on each particular factor. For instance, the management uses star symbol to represent performance above expectations, diamond to show performance that are near to expectations, circle for below expectations and squares to show performances that are well below the expectations (Witcher, and Chau, 2008). (Witcher, and Chau, 2008) The above image shows how EDF Group prepares and measures its performances and analyzes how they have performed against their forecasted performances or targets (Witcher, and Chau, 2008) . This is very much similar in concept of what the balance scorecard is and as said by several researchers including Gonzalez-Padron, Chabowski, Hult, and Ketchen (2010), Tseng, (2010), Northcott, and Taulapapa, (2012) that organisations are modifying balance scorecard to meet their needs, but with the same idea and concept. This shows that there has been several changes and modifications over the years in balance scorecard and how organisations have used this as a performance management but the overall concept and idea as initiated by Kaplan and Norton of analyzing performances from different perspective has remained the same. How Useful Balance Scorecard Is Today Performance management has become an important function of every organization. Organizations that are able to measure and manage their performances are able to identify loopholes in their performances and then take actions to improve it. After the introduction of balance scorecard, organizations have realized that in order to manage performance, management not only has to consider the financial indicators but non-financial indicators as well. Balance scorecard has given the idea to measure all these key performance indicators as they are linked with each other (Tseng, 2010). Balance scorecard has been the widely used performance management and performance measurement tool around the world it has been very useful and effective. Although, balance scorecard has been modified by different organisations from time to time in order to meet their needs, but still balance scorecard provides them a general outline and a pathway that could guide them to the success. The importance of balance scorecard can be identified from organizations that do not implement such performance measurement tools. It has been found by a research conducted by Tapinos, Dyson, and Meadows, (2011) that almost 90% of the private companies fail because they do not implant strategic objectives into their routine operations and therefore this shows how important it has become for organizations to formulate strategic objectives and implant them into their routine operations. Different organizations have been using balance scorecard for years and it is currently being employed in many organizations around the world. Unilever, the third largest consumer goods company, also uses balance scorecard to measure its performances. The company used balance scorecard with the financial objective of increasing the revenue growth to 5% to 6% every year and to do so, the strategic objectives were to reduce 1200 food, household and other personal care products within 3 years. As balance scorecard was used by the management, therefore they strategize not only from the qualitative terms but consider the quantitative figures as well. With the help of balance scorecard, the company was able to achieve its objectives within the time (Kotler and Armstrong, 2008). This also shows that balance scorecard is still being used by many organisations and it is yielding positive results. Conclusion Balance scorecard is the most widely used performance measurement tools. Balance scorecard has been a revolution as it has showed organizations how to measure and manage performances. Balance scorecard shows how important it is to consider both the financial as well as non-financial indicators and all these indicators are linked with each other. There have been changes in how balance scorecard has been used by organizations however the basic idea has remained the same i.e. to consider both financial and non-financial indicators. Balance scorecard has been used by many organizations and organizations in future would also continue to measure performances using balance scorecard though models used by organizations can be modified to meet their needs. List of References Banker, R., Chang, H., and Pizzini. M. (2011). ‘The judgmental effects of strategy maps in balanced scorecard performance evaluations.’ International Journal of Accounting Information Systems, vol. 12, no. 4, pp. 259-279. Bhagwat, R., and Sharma, M. 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