Bourne, Mike

Franco-Santos, Monica

Kennerley, Mike

Martinez, Veronica

Measuring Business Excellence

English

Cranfield CERES

Measuring Business Excellence, Vol. 9, No. 3, pp. 36-41. (Focus on… regional views onperformance measurement.)Reflections on the role, use and benefits of corporate performancemeasurement in the UKMike Bourne, Monica Franco-Santos, Mike Kennerley and Veronica MartinezCentre for Business Performance, Cranfield School of Management, UKPurposeTo reflect on the state of the art of performance measurement in the UK from anacademic perspectiveDesign/methodology/approachReflection on practiceFindingsReports the results from a survey conducted with larger private sector organisationsalong with feedback from executive education and performance measurementinterventionsPractical implicationsIdentifies five key concerns over the general use of performance measurementsystems in the UK and contrast these with leading practiceOriginality/valueAdds a UK practitioner perspective to this editions review of performancemanagementIntroductionThe development of performance measurement in the UK private sector has beenheavily influenced by developments in the United States. Sharing a common languagehas meant that British Executives were exposed to the Balanced Scorecard as soon asthe concept appeared in Harvard Business Review in 1992. However, the UK has itsown performance measurement heritage with Fitzgerald et al’s multi-dimensionalframework preceding the Balanced Scorecard in 1991, and more recent developmentssuch as the Performance Prism (Neely et al, 2002) creating a more inclusive multiplestakeholder approach to performance measurement. These approaches have blendedwith US developments to produce a subtle bend of scorecards and key performanceindicators (KPIs) that form the basis of performance measurement and management inthe UK.The UK is home to the head offices of many international companies and soperformance measurement and management practices from the UK influencepractices in subsidiary companies throughout the world. But as a base for manyforeign owned subsidiaries, the UK is also open to many mainland European andJapanese practices.In this paper, we will reflect on performance measurement and management practicesas we see them in the UK today. We will start by highlighting the results of oursurvey of practice (Franco et al, 2004). We will follow by reflecting on moreanecdotal evidence of where practice is developing, drawing from our wide teaching,research partnership and consulting experiences. Finally, we will speculate on thefuture of performance measurement and management development in UK businesses.The picture from our surveyThe survey was conducted by Cranfield School of Management in collaboration withWatson Wyatt (the human capital consultancy) and with support from Worldatwork(the compensation organisation) between November 2003 and March 2004. Focusingon larger companies, the results were compiled from 159 respondents, the majority ofwhom were senior HR and Finance professionals.To briefly summarise the results:1. KPIs are by far the most commonly used performance measurement system inthis survey with 60% of companies using KPIs to a great extent and 90% usingthem to at least some extent. The use of the Balanced Scorecard was lower inthis survey than has been previously reported, suggesting that the BalancedScorecard is popular (18% of companies used the Balanced Scorecard to agreat extent with 55% using the Balanced Scorecard to at least some extent),but not as widely used as KPIs.2. Respondents believed that their chief executives and senior managers bothunderstood and supported the measurement system. This understanding andsupport was less marked in middle management and completely reversed inthe rest of the business.3. We found that there is a widespread linkage of performance measurement withrewards with 67% of those surveyed claiming that their companies made thisthe link. Even the companies that didn’t have a formal performancemeasurement system linked reward with a mixture of financial and non-financial objectives.4. The companies who did not have formal performance measurement systemsrelied much more heavily on personal objectives for rewarding performance.The results showed that along with the Strategic Performance MeasurementSystem and meeting Budget, Management By Objectives is still a dominantfactor in rewarding senior executives.5. Interestingly, many companies didn’t slavishly follow the four prescribedBalanced Scorecard perspectives, but adapted the measurement themes tomeet their own needs.6. Only a small percentage of companies had formally built success maps, whichexplicitly linked together their objectives.The picture that emerged from this survey was that performance measurement iswidely used in the UK at a senior level, that KPIs are much more widely used thanBalanced Scorecards and that adoption of more sophisticated techniques, such assuccess mapping, is not widespread.The picture from our experiencesMany of our observations coincide with the survey results, but it must be realised thatthey are based on poles from executive education classes and conferences, researchclub roundtable meetings and collaborations with individual companies rather thanrigorous research (although this group is just over 900 individuals). That given, whatwe have observed is that: -1. Many scorecards are financially dominated2. Many performance measurement systems are not fully cascaded throughoutthe organisation3. Many companies don’t integrate their performance improvement projects withperformance measurement.4. Only a small percentage of companies have taken the time and effort to createa strategy or success map5. Increasingly, those that do create success maps are testing their assumptionswith their performance measurement dataAs a result, many scorecards are used as a reporting tool rather than as a true driver ofperformance. We will now address these five observations in turn.Financial dominanceDespite scorecards being “Balanced” in Kaplan & Norton terms, for manyorganisations the financial measures are still the most important. This is not driven bythe number of measures in each of the perspectives, but by the weighting placed onthe financial measures compared to the non-financial measures. This is especiallyimportant when the weightings impact compensation.The difficulty with financial measures has been recognised for a long time and wasthe raison d’être for the Balanced Scorecard in the early 1990s. Financial measurestend to focus attention on short-term results, often at the expense of longer-termprofitability. Short-term objectives can result in under investment in new products,resources and capabilities essential for longer-term success.However, achieving financial returns is essential for businesses to survive. Financialreturns are the outcome of all the other activities of the business. The reason formeasuring financial performance is to ensure that all these activities are indeedcreating profit for the owners and reinvestment in the business. Hence the argumentfrom the performance measurement literature would be that we need to balance theemphasis on short-term financial performance with the need to create and sustainlonger-term competitive advantage. Over emphasis on financial measures can disruptthis balance.Lack of cascadingMany scorecards are just that, scorecards that report performance at the top level.Often they are now in traffic light format, green for on target, amber for concern andred for real performance issues. As such they give a snapshot of current performanceacross the board, but don’t show the trends or highlight the interdependenciesbetween different performance measures. Traffic lights can also be misleading. “Red”traffic lights immediately get attention. However, these may not be as important as a“green” traffic light, which has a trend going the wrong way. Missing these trends canmean that deteriorating performance is not picked up until it is too late and trafficlight systems can often give a false sense of security.What is emerging from our research is that having a top-level scorecard provides adegree of focus, but doesn’t drive performance. Real performance improvementscome when the scorecard is fully cascaded and used as a tool for discussingperformance right down to the front line staff or operator level. If this is correct andour survey reflects the level of cascading in the UK, we can only assume that mostscorecard applications are ineffective in driving improved performance!Lack of integrationPerformance doesn’t improve through simply measuring it; that is like assuming thatwe can make a car go faster by pushing on the indicator on the speedometer. Havingperformance measures does provide focus as it communicates to everyone in theorganisation what is important, but our experiences suggest that over time this benefitdecays.To really improve performance in a sustainable manner we have to change the waywe do things. This is usually achieved through process improvement or processredesign. This linkage to improvement projects was recognised in the original 1992Balanced Scorecard article (Kaplan & Norton, 1992) but has disappeared from mostof the later literature. From a performance measurement perspective, many of thefirms we come across fail to integrate measurement with their improvementinitiatives. This lack of integration appears in two ways. Firstly, most companydashboards don’t link improvement initiatives to the KPIs. Secondly, in manycompanies, the benefits of improvement projects aren’t measured or monitored. Theexception to this are companies implementing Six Sigma and there are indications thatSix Sigma is gaining popularity in some sectors in the UK, partly driven by US parentcompanies and customers.Success mapsSuccess mapping is a very simple tool that highlights the assumptions betweendifferent objectives. A simple example is shown in figure 1. Here, improvingproduction processes is expected to improve product quality. Improved productquality, in turn, is expected to reduce warranty claims. Reduced warranty claims areexpected to increase customer satisfaction, leading to greater loyalty andrepurchasing, which in turn will increase financial performance.Versions of success maps have been used in operations for many years for problemsolving and conducting root cause analysis. In 1992, Eccles & Pyburn suggested thatsenior executives should use the technique to explicitly capture their assumptionsabout how their businesses performed. Kaplan & Norton (1996) then adopted similarapproaches to creating strategy maps for the Balanced Scorecard, but although theapproach is popular as a theoretical exercise, few organisations have explicitly createdsuccess maps for their businesses.Success maps have many advantages. When used properly, they create and capturethe key assumptions and critical success factors for the business. These can then becommunicated widely and they allow managers to explain how they strategy is beingdelivered and to explain why actions and improvements within the business areimportant to overall success. But despite these advantages being recognised byexecutives, few companies have explicit success maps (from our survey, only some20% of organisation responding claimed to have some form of success map).In reality, success maps do take time and effort to create. They do require engagementand debate between senior executives over what the strategy is and how it is to beimplemented. They also require choices to be made and make these choices veryexplicit. When we ask executives why they don’t adopt success maps we don’t get aconvincing response although when we use this with senior management teams itclearly clarifies their thinking.Testing success mapsAlthough only a few companies are building success maps, those that do appear to bemore likely to test the underlying assumptions empirically with performancemeasurement data. The classic published example of an organisation doing this wasSears Roebuck and Co in Harvard Business Review (Rucci et al, 1998). The articledescribed how Sears developed and tested a link between Employee attitude (theirattitude about the job and their attitude about the company) Customer impression(perception of merchandise and service quality) and financial performance (turnover).This led to an understanding of how changes in employee attitude translated intofinancial performance.The Sears article has attracted much attention, and many organisations believe themantra that happy employees make happy customers; and that happy customers makegood financial performance. One recent group of executives explained that theirchairman had stated this at their shareholders meeting. He was then surprised by ananalyst’s question about how well the company was performing in the Times bestemployers’ list. Other companies have simply accepted the evidence from Gallup(Buckingham & Coffman, 1999) that supports basically the same premise. Amongstmost executives, there is the belief that these relationships exist, but most companiesdon’t use their own measurement data to test these assumptions.Interestingly, the companies we have met that do test their assumptions usually findthat the data doesn’t support their original success map. This is either because thecompanies haven’t really understood the nature of the relationships involved, or moreoften because there are some much larger intervening variables that totally obscurethe relationships expected by the management team. Therefore there are real benefitsfrom testing your own assumptions and not simply relying on relationships that othershave found.ConclusionLike all tools, performance measurement, and the Balanced Scorecard in particular,has been criticised for not delivering the expected performance improvements. Whatis becoming apparent from our experience is that simply having a scorecard is notenough; it is how it is used throughout the organisation that is important. Many of thescorecard initiatives we observe simply report the health of the business in a moreholistic way. They give a more balanced picture of a set of different performanceperspectives, but in many cases go no further. Our understanding from working closerwith a few exemplar companies is that performance measurement only delivers whenit is fully cascaded and used throughout the business. This requires considerableenergy to communicate, engage and involve all levels of management, something thathappens in only a few organisations.We have a concern that performance measurement, and the Balanced Scorecard inparticular, may fall into disrepute through poor execution in many companies. On theother hand, some companies are gaining significant benefit and competitive advantagefrom the use of their measurement systems. These two conflicting factors willundoubtedly lead to an interesting future for performance measurement in the UnitedKingdom.ReferencesBuckingham, M. & Coffman, C., (1999), First break all the rules: what the world’sgreatest managers do differently, Simon & Schuster, London.Eccles, R. G. & Pyburn, P. J., (1992), "Creating a Comprehensive System to MeasurePerformance", Management Accounting [US], Oct., 41 - 44.Franco, M., Bourne, M., Huntington, R. (2004) Executive pay and performancemeasurement practices in the UK, Measuring Business Excellence, Vol. 8, No. 3, pp.5-11.Fitzgerald, L., Johnston, R., Brignall T. J. Silvestro, R. & Voss, C., (1991),Performance Measurement in Service Businesses, The Chartered Institute ofManagement Accountants, London.Kaplan, R. S. & Norton, D. P., (1992), "The balanced scorecard - measures thatdrive performance ", Harvard Business Review, Jan./Feb., 71 - 79.Kaplan, R. S. & Norton, D. P., (1996), The balanced scorecard - translating strategyinto action, Harvard Business School Press, Boston, MA, USA.Neely, A. D., Adams, C. & Kennerley, M., (2002), The performance prism, thescorecard for measuring and managing business success, FT Prentice Hall, London.Rucci, A. J., Kirn, S. P. & Quinn, R. T., (1998), "The employee-customer profit chainat Sears", Harvard Business Review, Jan./Feb., 82 - 97.BiographiesDr Mike Bourne is Director of the Centre for Business Performance. He has spent thelast ten years working with companies supporting senior management teams throughthe process of designing, implementing and using their balanced scorecards andrelated performance management techniques. His research interests focus on thedesign implementation and use of corporate performance measurement andmanagement systems.Monica Franco is a research Officer at the Centre for Business Performance atCranfield School of Management. Prior to this appointment, Monica worked in Spainas a Human Capital consultant for Watson Wyatt and as an internal Consultant forEndesa. Her research interest is centred on Business Performance Measurement andHuman Resource Management, in particular around the link between PerformanceMeasurement Systems and executive compensation.Dr Mike Kennerley a Research Fellow in the Centre for Business Performance atCranfield School of Management. He has been working in the field of performancemeasurement and management for over ten years undertaking academically rigorousand practically relevant research. Prior to joining Cranfield Mike held positions at theUniversity of Cambridge and UMIST.Veronica Martinez is a Research Associate in the Centre for Business Performance.Prior she worked at the Centre for Strategic Manufacturing at the University ofStrathclyde. Veronica's major research interests revolve around the field of measuringand managing business performance. Her research and consulting interests arefocused on the impact of performance measurement systems.Figure 1. Example of linked assumptions in a Success MapGreater customersatisfactionReduced warrantyclaimsHigher productqualityImprovedmanufacturingprocessesMore repeatpurchasesBetter financialreturns

Creating a Comprehensive System to Measure Performance&quot;,

Executive pay and performance measurement practices in the UK,

First break all the rules: what the world’s greatest managers do differently, Simon

Performance Measurement in Service Businesses, The Chartered Institute of Management Accountants,

The balanced scorecard - measures that drive performance &quot;,

The balanced scorecard - translating strategy into action,

Reflections on the role, use and benefits of corporate performance measurement
in the UK

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Reflections on the role, use and benefits of corporate performance measurement in the UK

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