Performance measurement systems, success factors of performance measurement and implementation within organizations

The validity and the comparability of the academic research results depend on the quality of the research methods applied. One of the most important methodological issues in quantitative research is the measurement of the variables used in the conceptual model. For performance management research, company performance is such a variable (see also references for performance measurement of public organizations). Although “performance” may appear to be an easy concept, a unique definition in the literature does not exist. Moreover, academics often use special definitions tailored to fit the individual research purposes (Langfield-Smith, 1997).

Several ways to categorize performance have been presented in the literature (see literature review by Kihn, 2010). One way is to distinguish the outcomes of organizational activities and the means by which these outcomes are reached (Govindarajan & Fisher, 1990). The former is often called “performance” while the latter is commonly referred to as “effectiveness” (Ukko, 2009). Interestingly enough, this distinction appeared only after 1978 (Henri, 2004). Before that time both definitions were used interchangeably.

Another way to characterize performance is to distinguish between financial and non-financial performance (Ittner, 2008). The financial performance is often measured using traditional accounting KPIs such as ROA, ROS, EBIT, EVA® or Sales growth (Ittner & Larcker, 1997; Fraquelli & Vannoni, 2000; Crabtree & DeBusk, 2008). The advantage of these measurements is their general availability, since every profit oriented organization produces these figures for the yearly financial reporting (Chenhall & Langfield-Smith, 2007). However, balance sheet manipulations and choices of accounting methods may also lead to values that allow only limited comparability of the financial strength of companies.

The non-financial performance can be measured using operational KPIs. Market share, innovation rate or customer satisfaction are prominent examples (Hyvönen, 2007). Tangen, (2003) provides an overview of frequently used performance measures. Many researchers also use self reported measures to operationalize performance (Evans, 2004; Chenhall & Morris, 1995; Henri, 2006; Ittner, Lanen, & Larcker, 2002). Others combine both, the accounted financial KPIs and self reported measures in their reports (Cadez & Guilding, 2008). Langfield-Smith, (1997) writes that there are various ways non-financial performance can be measured, however the performance can be hardly assessed without the link to corporate strategy. The consequence for the researcher is simple: it is first to decide what the research question should be, then a performance definition can be created.

Table 1: Elements of performance definition (Timur Pasch, 2010)

References

Cadez, S., & Guilding, C. (2008). An exploratory investigation of an integrated contingency model of strategic management accounting. Accounting, Organizations and Society, 33(7/8), 836–863.

Chenhall, R. H., & Morris, D. (1995). Organic decision and communication processes and management accounting systems in entrepreneurial and conservative business organizations. Omega, 23(5), 485–497.

Chenhall, R. H., & Langfield-Smith, K. (2007). Multiple perspectives of performance measures. European Management Journal, 25(4), 266–282.

Crabtree, A. D., & DeBusk, G. K. (2008). The effects of adopting the balanced scorecard on shareholder returns.Advances in Accounting, 24(1), 8–15.

Evans, J. R. (2004). An exploratory study of performance measurement systems and relationships with performance results. Journal of Operations Management, 22(3), 219–232.

Fraquelli, G., & Vannoni, D. (2000). Multidimensional performance in telecommunications, regulation and competition: Analysing the European major players. Information Economics and Policy, 12(1), 27–46.

[PDF] Govindarajan, V., & Fisher, J. (1990). Strategy, control systems and ressource sharing: Effects on business-unit performance. Academy of Management Journal, 33(2), 259–285.

[PDF] Henri, J.-F. (2004). Performance measurement and organizational effectiveness: Bridging the gap. Managerial Finance, 30(6), 93–123.

Henri, J.-F. (2006). Management control systems and strategy: A resource-based perspective. Accounting, Organizations and Society, 31(6), 529–558.

[PDF] Hyvönen, J. (2007). Strategy, performance measurement techniques and information technology of the firm and their links to organizational performance. Management Accounting Research, 18(3), 343–366.

Ittner, C. D. (2008). Does measuring intangibles for management purposes improve performance?: A review of the evidence. Accounting & Business Research, 38(3), 261–272.

Ittner, C. D., Lanen, W., & Larcker, D. (2002). The association between activity-based costing and manufacturing performance. Journal of Accounting Research, 40(3), 711–726.

Ittner, C. D., & Larcker, D. F. (1997). Quality strategy, strategic control systems, and organizational performance.Accounting, Organizations and Society, 22(3-4), 293–314.

Kihn, Lili-Anne (2010): Performance outcomes in empirical management accounting research. Recent developments and implications for future research. In International Journal of Productivity and Performance Management 59 (5), pp. 468–492.

Langfield-Smith, K. (1997). Management control systems and strategy: A critical review. Accounting, Organizations and Society, 22(2), 207–232.

Tangen, S. (2003). An overview of frequently used performance measures. Work Study, 52(7), 347–354.

[PDF] Ukko, J. (2009). Managing through measurement: A framework for successful operative level performance measurement. PhD thesis at the Lappeenranta University of Technology.