Strategic Performance Measurement: Benefits, Limitations and Paradoxes[1]
Pietro Micheli and Jean-Francois Manzoni
Extended abstract
Strategic Performance Measurement (SPM) can be both functional and dysfunctional for organisations. SPM can help organisations define and achieve their strategic objectives, align behaviours and attitudes and, ultimately, have a positive impact on organisational performance. However, SPM has also been criticised for several reasons, such as encouraging perverse behaviours, stifling innovation and learning, and having little effect on decision-making processes. If both perspectives are valid, how can organisations make SPM more of an asset and less of a liability?
In this article, we argue that the design of an SPM system (SPMS) and the definition of its roles are fundamental factors determining its success and impact on business performance. Indeed, only by carefully considering characteristics and roles will managers reap the full benefits, and SPMSs make a substantial contribution to the achievement of organisations’ strategic goals.
Our conclusions are relevant for both the theory and the practice of SPM. First, the benefits and limits of SPM depend on the very definition of what SPM should be, and on whether the measurement of performance is linked to both formulation and implementation of strategy. Secondly, the types of behaviour promoted by the SPMS are determined primarily by the uses of the system, particularly whether it is adopted for control or learning purposes. Thirdly, organisations should regard their SPMS as a means of fostering alignment to an existing strategy, but also of supporting empowerment and the continuous adaptation of strategy and tactics. Finally, in order for SPM to support decision-making processes and positively impact on organisational performance, targets and indicators have to be linked to strategy and considered in strategic reviews.
Following an introductory section on the theme of SPM, we examine the benefits, limits and paradoxes of SPM. We conclude by arguing for intelligent and purposeful designs of performance measurement systems, and for research that breaks the barriers of academic silos and puts an end to sterile contrapositions between advocates and critics of SPM.
Introduction
Since the early 1990s, organisations have invested increasing amounts of money and resources in measuring their performance. Recent reports suggest that an average company with $1 billion sales spends over 25,000 person-days per year planning and measuring performance [1]. In the public sector, following the recent introduction of ‘New Public Management’ reforms in a number of OECD countries, considerable attention has been paid to strategic performance measurement by governments. UK government departments recently estimated they spend over £150 million per year solely to monitor progress on national targets. This excludes the cost of front-line organisations gathering, analysing and providing data [2].
A number of studies have found SPM generally productive and helpful in improving organisational performance [3]. Specifically, research has shown that, through appropriate measurement and management of performance, organisations can benefit in the following areas:
● Formulation, implementation and review of organisational strategy [4]
● Communication of results achieved to stakeholders, thus strengthening corporate brand and reputation [5]
● Motivation of employees at all levels, promotion of a performance improvement culture, and fostering of organisational learning [6].
Other studies, however, show that despite the substantial resources invested by organisations, SPM related initiatives such as the implementation of scorecards can often fail to bring the intended benefits. Worse, if done poorly, they can be very expensive, and not only ineffective but harmful and indeed destructive [7]. Therefore, if organisations are to realise value and become more sustainable in the longer term, it is crucial to understand how appropriate SPM practices deliver improved performance.
In spite of decades of research in this area, evidence on the benefits and limits of SPM is still inconclusive. Indeed, authors from areas as diverse as strategy management, human resources, management accounting and control, operations management, public administration, organisational behaviour, information systems and marketing have paid considerable attention to strategic performance measurement. However, lack of cross-disciplinary studies has resulted in the fragmentation of this field - as well as the polarisation of the debate - among advocates of specific tools and techniques, and critical investigators of behavioural and cultural implications.
Review of relevant studies
The relationship between performance measurement and strategy has been the subject of several research projects. However, the vast majority of scholars have looked at performance measurement systems purely as a means for strategy implementation. In doing so, they have not addressed a fundamental question: are performance measurement systems mere tools to implement strategy, or could they play an active role also in strategy reviews? In other words, is strategy driving the design and use of measurement systems, or is there a mutual relationship between the two? Gimbert, Bisbe and Mendoza [8] considered the role of performance measurement systems in strategy re-formulation processes. To do so, the authors differentiated between performance measurement systems (PMSs) and strategic performance measurement systems (SPMSs), the latter being a subset of the former and characterised by four main attributes: integration of long-term strategy and operational goals, presence of multi-perspective indicators, inclusion of cause-effect linkages, and presence of a sequence of goals-targets-action plans. Building on a survey of 349 CEOs of medium and large Spanish companies, the authors found a positive association between the use of SPMSs and both the number and variety of decisions taken in each strategic review. While this result confirms the potential impact of performance measurement on reviews of strategy, it also highlights the fundamental difference between PMSs and SPMSs. Indeed, no difference was found between firms that use measurement systems which do not qualify as strategic, and firms that do not have any PMS at all. This finding is fundamental for both the theory and practice of strategic performance measurement: while many organizations have invested considerable resources to implement strategy and inform strategic reviews by means of measuring performance, they have effectively failed to do so, because of the inappropriate design of their measurement systems. Unless specific attributes are included, these systems will remain merely operational and will fail to inform strategic decisions.
A research project conducted by Dossi and Patelli [9] examined the inclusion of non-financial indicators in PMSs used in relationships between headquarters and subsidiaries. The distinction - and, often, contraposition - between financial and non-financial indicators has already been studied by a number of scholars. However, the authors considered performance measurement as a means of establishing a dialogue between headquarters and subsidiaries, looking at the changes in emphasis placed by headquarters on financial indicators to control subsidiaries, depending on subsidiaries’ performance. After analysing the results of a survey conducted among the Italian subsidiaries of foreign companies, Dossi and Patelli concluded that, for headquarters, non-financial indicators have incremental but not superior information content to financial indicators.
Nevertheless, the inclusion of non-financial indicators was positively associated with subsidiary profitability, subsidiary participation in the design of PMSs and their interactive use. Importantly, the authors found that headquarters emphasise the financial indicators of performance in negative financial situations. The rationale provided by the study’s respondents is not unreasonable, as the priority for failing subsidiaries is indeed to turn the situation around. At the same time this is potentially dangerous, as that turnaround could be achieved through actions that will significantly hurt the subsidiary’s long-term success. In that sense, using a more diverse set of indicators could help headquarters and subsidiaries to understand better the causes of poor performance and identify appropriate courses of action, while not focusing solely on short-term results.
Finally, the authors argued that, through an enhanced use of non-financial indicators, PMSs could contribute more effectively to strategic alignment, organisational learning and diffusion of knowledge throughout organisations. The implications of these findings are substantial: while decisions over the inclusion of financial and non-financial indicators in the design of PMSs are certainly important, changes in emphasis with regard to specific indicators are equally relevant. If measurement systems are to be an effective means of communication between headquarters and subsidiaries, or between different functions, organisations must resist the temptation of focussing on purely financial aspects when they are faced with negative financial results. This would be detrimental, as it would make information flows less effective, stifle learning and encourage dysfunctional behaviours.
Another relevant study [10] conducted in a large Finnish company discusses how dynamism can be built into SPMSs and how such systems can be used for strategy development/revision and implementation. While building on and contributing to the literature on SPMSs as a means of promoting strategy alignment, the author stresses the importance of locating focal responsibility for performance indicators at the individual manager’s level. She concludes that it is possible to develop flexible SPMSs suitable, and often necessary, for multinational companies and organisations that operate in dynamic environments. These systems can allow the organisation simultaneously to achieve high empowerment (necessary to adapt to rapidly changing circumstances) and high alignment (necessary to make sure the various parts of the complex organisation work effectively together).
These findings have important implications for both the design and the use of SPMSs. Although scholars have put increasing emphasis on organisational alignment, it is important to recognize that, especially in dynamic environments, measurement systems have to be flexible, as they might otherwise hinder change and inhibit organisational transformations. Systems which combine alignment and empowerment, and make appropriate use of performance targets and indicators over time, could prove an effective means of implementing changes in strategy and promoting intended behaviours.
Finally, in their study of a large multinational home supplies firm, Melnyk, Hanson and Calantone [11], investigated the links between SPM, process management and innovation. The firm considered was trying, like many others, to change its strategic focus from cost leadership to market differentiation through radical innovation initiatives. Although the firm had achieved operational excellence through process management and the use of an SPMS in the past, these very aspects inhibited it from making a profound shift in its strategy. Effectively, the SPMS served to operationalise and crystallise a specific paradigm, and to create capabilities needed for incremental innovation. However, such capabilities turned out to be unsuitable for radical innovation. In agreement with the literature on organisational ambidexterity, the organisation’s SPMS was found to play an important role in encouraging a culture of process improvement, but, at the same time, helped create a core rigidity. This, in turn, made the organisation incapable of moving from a culture that promoted operational excellence and incremental innovation to one that rewarded creativity and radical innovation. This paper is particularly interesting, as it shows how measurement systems can promote and sustain the adoption of a particular paradigm. Clearly, this is advantageous when an SPMS is introduced in line with the specific culture the organisation is aiming to create. However, during processes of strategic change, if the existing measurement system is not radically modified and its role rethought, it will work as a spring, pulling the organisation back to where it started.
The themes examined in these papers give us the opportunity to discuss several benefits, limits and paradoxes in the field of SPM. In particular, a number of questions emerge as fundamental if we want to advance the theory and practice of SPM: what are the roles of SPM in organisations? Which factors should be considered while designing and using SPMSs? Is SPM necessarily wedded to a specific paradigm and, thus, a potential inhibitor of changes in strategy? Moreover, can SPM only be aimed at promoting strategic alignment, or could it play an active role in shaping strategy and supporting empowerment and continuous adaptation?
Discussion
Strategic performance measurement
Our understanding of the benefits and limitations of SPM depends on the very definition of what SPM is. The results of the study conducted by Gimbert et al., and their operational definitions of strategic performance measurement systems (SPMS) and PMS, are in line with recent contributions in this area [12], showing how crucial it is to differentiate between strategic and operational PMSs. Far from being solely a difference in terminology, the strategic connotation of certain PMSs has fundamental implications for their use at different organisational levels and their impact on strategy. In particular, the inclusion of multi-perspective indicators and cause-effect linkages in the design of the SPMS are factors of primary importance, if we focus on the links between performance measurement and strategy reviews. This conclusion also has relevant implications on future studies in the field of SPM. In order to have comparability and generalisability of research findings, authors will have to clarify what type of PMS they are considering, rather than examining ‘generic’ performance measurement systems.
The different roles of SPM
Authors of the papers mentioned above considered SPM as a means to: implement and reformulate strategy; communicate key objectives and corporate priorities; provide strategic alignment; support process improvement; and encourage incremental innovation. Previous studies have looked at other roles of SPM, such as: promoting specific behaviours and attitudes at different organisational levels; responding to rules and regulations; providing greater accountability within and between organisations; communicating financial and non-financial results to key stakeholders, etc. Building on Simons’ work on control systems [13] it is possible to define four key roles of SPM. The ‘diagnostic’ use of SPMS relates mainly to the implementation of strategy; the ‘interactive’ role is linked to the concept of organisational alignment and regards the SPMS as a means of communication within the organisation and between the organisation and its external stakeholders, and as support to the emergence of new strategies. Additionally, performance indicators can be seen as communication tools when they are introduced to communicate core values such as mission statements, credos and vision statements, or to drive desired behaviours. In this sense SPM is linked to the firm’s ‘belief system’. Finally, indicators can be used to set ‘boundary systems’ designed to restrain employee behaviour and define limits of freedom within the organisational context.
Currently, organisations introduce performance indicators for ‘diagnostic’ reasons, in order to monitor performance; however, SPMSs should be considered also as effective means of establishing common rules and boundaries for action. Furthermore, SPM can contribute to the identification of new opportunities and to stimulate organisational learning [14]. For instance, as the authors of the reviewed papers emphasise, balancing financial and non-financial indicators - or lagging and leading indicators - can generate both feedback and feedforward loops. In so doing, SPM can be used to gather data about past performance, but also to implement strategic objectives. This plurality of roles is not necessarily positive or negative, but rather emphasises how different SPMSs fulfil different needs and how there is no ‘one-size-fits-all’ measurement system. As a consequence, the drivers and purposes of every performance indicator and of the whole SPMS should be explicitly defined in the process of design, and communicated during implementation. This is particularly important, as the benefits of the measurement system strongly depend on both its characteristics and its intended roles.