Performance Measurement Systems: Challenges & Solutions for Improvement - Literature review Example

Performance Measurement Systems: Challenges & Solutions for Improvement Student’s Name Course Professor’s Name Date Institutional Affiliation Introduction The underlying design of performance measurement systems deemed to be appropriate for the current operating organisations has drawn lots of attention from different quotas (Neely,1999). It is evidently clear that the system is a subject of intense shortcomings particularly so, when the attribute of traditional cost accounting principles are in play. Numerous research studies conducted to ascertain the manner for which these problems can be offset indicate that the modern firm should adopt a balanced set of measures (Neely, 1999). It is important to understand the fact that for the balance scorecard to be effective and of practical value; then the underlying processes set to populate the framework should be fairly emphasised at all costs. The aim of this paper is to present the numerous challenges faced by the modern accountants in the course of implementing an efficient performance management system and the efforts made to rectify this challenge altogether. Current Purposes of Performance Measurement Systems Ferreira and Otley (2009, p.267) notes that the modern-day organisation adopts a performance measurement system for purposes of accomplishing their goals by aligning them with vision and mission statements (Ferreira & Otley, 2009). It is clearly emphasised that the fundamental requirement for control lies in the existence of objectives that are indeed adopted for the purpose of evaluating overall performances. Modern-day businesses are expected to meet a myriad number of competing objectives and this is certainly set out by senior managements for purposes of meeting stakeholders’ expectations. In this regard, the adoption of a performance measurement framework becomes a paramount feature that is adequately used for attaining this set objective (Ferreira & Otley, 2009). It is important to note that the wider orientation and the proposed direction for which an organisation seeks to pursue are certainly prompted by their vision and mission statements. As the mission statement provides an outline for overriding the fundamental purpose of the organisation that is in line with the values or expectations of stakeholders; the vision statement seeks to define a desired future position of an organisation (Ferreira & Otley, 2009). Notably, vision and mission statements are core section of the belief systems that encompasses paramount values and purposes hence are fairly subjected under a robust performance measurement system to ensure their efficiencies in bringing about profits and positive correlations. Consequently, performance systems are used to formulate and analyse an organisation’s key successful factors in the current ever-changing business environment. It is safe to note that key success factors entail the activities, capacities and, also competencies that are perceived to be crucial in bringing about predetermined success of a given business venture (Ferreira & Otley, 2009). Key Success Factors need to be accomplished in the event that a business seeks to progress towards attaining its overall vision and identification. Thus, the process of monitoring their growth and development is indeed essential for the achievement of possible and already stipulated strategic goals and objectives. In fact, KFSs are a crucial component that represents fundamental aspects on so many different timescales hence they are a clear indication of whether the vision and mission goals have been successfully executed. Performance measurement systems further formulate and implement a successful organisational structure of any business model. The modern view of a successful business operation ascertains that it should involve activities that are conducted by markets for purposes of improving on the underlying efficiencies through possible minimisation of transaction costs (Ferreira & Otley, 2009). Distinct organisational structures ascertains the responsibilities as well as accountabilities of a given organisation participants as it defines the exact activities that the underlying personnel possessing different roles can overlook and focus on more important roles. Interestingly to note, the arrangements of an organisation structure would thus influence directly the essence of work and motivate individual personnel with the help of an effective information flow and control systems that will define the future of operations. Organisational structure is a paramount element that is usually a subject of continuous change and readjustments. It restricts the way an organisation can formulate and implement the design and application of a specific performance measurement system (Ferreira & Otley, 2009). Efficient performance measurement systems of the modern day allows for organisations to come up and implement effective strategic goals and plans. It is important to comprehend that a strategy refers to the direction for which an organisation should pursue over a long-term period as a way of accomplishing the overall goals and objectives. Intensive research analysis indicates that there is a close link between the underlying environmental strategy and the internal organisational structure that is attributed to the degree of performance in operation (Ferreira & Otley, 2009). Another purpose of performance measurement system in todays’ business environment lies in target formulation and setting. Target setting is a crucial component of performance management hence it does not beat logic that the process involved with target setting and thereafter using them for purposes of evaluating and rewarding specific performance is one key feature of efficient performance measurement systems. Such unique performance measurement system as Broadbent and Laughlin (2007) has been developed extensively in relation to notion of transactional and relational use. The transactional use of the systems defines a high degree of level that can be achieved while at the same sets out a clear path that should be adopted in order to accomplish these goals. A relational use of the system would normally be less specific in regards to how to accomplish the goals set out at the very beginning of operations. Simon’s (1995) performance measurement framework is based on the diagnostic and interactive applications. It fosters the application of single loop learning as well as a feed-forward information functionality that is deemed to be double loop element. In essence, the framework results to a strategic validity control mechanism that helps management accountants to review and replace strategies to a rather winning one. Challenges Facing Performance Measurement Systems in Modern Day The underlying processes that involves deciding the measures of business performance for adoption is indeed a valuable one given that it allows the accounting and business management as a whole to formulate proper performance priorities; enhance any misunderstandings between them and even goes further to provide an opportunity to possibly resolve the differences in their opinions. It is crucial to note that the performance measures that were conventionally in use in the 1980s by businesses were subjected to high level criticisms from numerous influential figures of the time thereby resulting to intense innovation over-time (Neely,1999). The new techniques adopted in product costing like Activity-Based Costing as well as Through-put Accounting were now developed and implemented in day-to-day operations of an organisation. Without any form of doubt, a balance scorecard remains to be one the most revered performance measurement framework of the modern times. Having been developed by Kaplan and Norton, the framework has time and again been emphasised for positive results in both management and market-related duties (Neely, 1999). It however remains to be one amongst the many frameworks proposed. In 1989, Keegan et al formulated and proposed a performance measurement matrix, which seeks to integrate different aspect of business performances that relate to financial and non-financial as well as affecting internal and external operational environment. Compared to the balance scorecard, the performance measurement matrix is not fairly packaged and fails to come up with explicit connections between different dimensions of an organisation’s underlying performance mechanism. To effectively counter this challenge, Fitzgerald et al came up with a results and determinants framework to efficiently measure performances within the service sector as whole. This performance measurement framework operates under two notable assumptions; that any given moment in time, there are two forms of performance measures in any given organisation (Neely, 1999). First, there are those that relate to the results, which for this case extend to competition and financial performance. Secondly, there are those that are based on the determinants of these results in relation to such aspects as quality, flexibility and resource utilisation. Just recently, the Institute of Chartered Accountants of Scotland (ICAS) formulated a detailed performance measurement framework that focuses on different ways for which organisations use performance measures in relation to such important activities as business planning and, also monitoring operations. (Neely, 1999) In coming up with the framework ICAS first engaged in extensive preparation of a master list that consisted both financial and non-financial performance measures that were tapped from numerous substantial reviews of literature and thereafter, imposed them on two tree diagrams. Another more widely used performance measurement system in the modern day is the European Foundation for Quality Management Business Excellence Model (Neely, 1999). This framework is made up of two distinct sub-sets of performance factors that are basically defined as being enablers and results-oriented. The fundamental theory that oversees its implementation lies in the assumption that the enablers are the immediate levers that management can manipulate to accomplish goals. However, one of the most popular challenges that this model faces rests with the fact that it is indeed difficult to operationalize. Neely (1999, p.206) agrees that managers face lots of challenges with modern-day performance measurement systems especially since they might cause lots of data workload. It is noted that most modern organisations possess information systems that produce a great deal of redundant performance measurement reports (Neely, 1999). For instance, it is very common to find managers not reading or even analysing reports for the mere fact that they are long and contain irrelevant information that is of no use and value to current operations. Notably, another significant challenge that arises with adoption of these measurement systems lies in the fact that they cannot be easily integrated or even aligned with the business processes being executed in an organisation setting. In fact, these systems are mostly poorly defined to fit in with the objectives and goals of modern-day organisation growth and development (Neely, 1999). For most cases, these measures have resulted to extensive unnecessary debates and later causing chaos amongst accountants with the root cause being that there was imprecise definition of a given measurement variable. Ways of Improving Effectiveness of Performance Measurement Systems The process of improving the effectiveness of performance measurement systems in today’s business environment involves; first, taking a closer look by way of analysing the underlying strategies in place within an organisation (Neely et al, 2000). This would definitely involve immediate definition of the numerous strategic objectives of the organisation and establishing the best way possible that could be adopted in order to translate these objectives into divisional objectives and individual management actions (Neely et al, 2000). Secondly, the accountants should focus on coming up with a proper set of measures by way of populating a performance measurement matrix. Consequently, they are encouraged to directly instil the performance measurement systems into management thinking as well as extend to the budgeting process. Of particular interest to note, the accountants should vehemently make sure to close the possible underlying management gap and thereby ensure that the measurement systems is indeed a fundamental driver in making the day-to-day decisions and, also actions thereby prompting the fact that the firm’s immediate strategy is implemented. Conclusion To sum up the discussion above, it can be noted that the accountants just like other practitioners in business field face a myriad of challenges in executing effective performance measurement systems. The paper has successfully argued that they face a set of competing objectives that are aspired to conform to the stakeholders’ immediate expectations regarding their investments; the performance measurement matrix is not fairly packaged and fails to come up with explicit connections between different dimensions of an organisation’s underlying performance mechanism; ICAS model is indeed difficult to operationalize since its complex and very hard to comprehend and, also involve lots of workloads that can be tedious to decipher an interpret. The fact that they cannot be easily integrated or even aligned with the business processes being executed in an organisation setting also poses a significant level of challenge. On the positive note though, accountants in today’s business environment are called to improve these systems through analysing the underlying strategies in place within an organisation; focus on coming up with a proper set of measures by way of populating a performance measurement matrix; and, also make sure to close the possible underlying management gap and thereby ensure that the measurement systems is indeed a fundamental driver in making the day-to-day decisions. References List Broadbent, J., Laughlin, R., 2007. Performance management systems: a conceptual model and analysis of the development and intensification of ‘new public management’ in the UK. In: APIRA Conference, Auckland Ferreira, A. & Otley, D. 2009. The design and use of performance management systems: An extended framework for analysis. Management Accounting Research vol. 20, no.4, pp.263-282 Neely, A., 1999. The performance measurement revolution: why now and what next? International journal of operations & production management, vol.19, no.2, pp.205-228 Neely, A., et al, 2000. Performance measurement system design: developing and testing a process-based approach. International journal of operations & production management, 20(10), pp.1119-1145 Simons, R., 1995. Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business School Press, Boston, MA. Read More