Revision of performance measurement tools and methods

Elmgasbi, Alladyn Article Revision of performance measurement tools and methods e-Finanse: Financial Internet Quarterly Provided in Cooperation with: University of Information Technology and Management, Rzeszów Suggested Citation: Elmgasbi, Alladyn (2019) : Revision of performance measurement tools and methods, e-Finanse: Financial Internet Quarterly, ISSN 1734-039X, Sciendo, Warsaw, Vol. 15, Iss. 2, pp. 20-35, https://doi.org/10.2478/fiqf-2019-0009 This Version is available at: https://hdl.handle.net/10419/266809 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/ REVISION OF PERFORMANCE MEASUREMENT TOOLS AND METHODS A llAdyn e lmgAsbi 1 Abstract JEL classification: G32 Keywords: Performance measurement, Balanced Scorecard, Tableau de bord de gestion, Skandia Navigator, Business Excellence Model, Performance Prism, EFQM Received: 13.07.2018 Accepted: 10.05.2019 www.e-finanse.com University of Information Technology and Management in Rzeszów 20 Financial internet Quarterly „e-Finanse” 2019, vol. 15 / no. 2, p. 20-35 DOI: 10.2478/fiqf-2019-0009 A changing economic environment and growing requirements of stakeholders have made it necessary to develop new achievement measurement methods. The article discusses and compares several performance measurement tools and methods, such as: theBalanced Scorecard, Tableau de bord, Skandia Navigator, Intangible Assets Monitor, German Scorecard, Business Excellence Model, Dutch system of performance management, Performance Prism and the EFQM Excellence Model. They are the most popular among both theoreticians and practitioners in this field. 1 Uniwersytet Łódzki, Wydział Ekonomiczno-Socjologiczny, Instytut Finansów, e-mail: a.elmg[email protected], ORCID: https://orcid.org/0000-00026413-2163. introduction www.e-finanse.com University of Information Technology and Management in Rzeszów 21 Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods The evolution of performance measurement is to a large extent related to the development of management accounting (Nita, 2008, p. 63).Management accounting development is widely described in literature. It can be split into three phases (Michalak, p. 77): 1) first phase - in which single financial indicators were applied, 2) second phase - in which financial indicators systems have been used, 3) third phase - multi-criteria performance measurements have been made using diversi-fied indices. Companies which applied later concepts of performance measurement did not abandon the previous tools. On the contrary, these concepts began to co-exist. This dependence was no-ticed by N. Klingebiel and has been defined as a „deposition” of new concepts on the founda-tions of the earlier ones (as cited in Ibidem, p. 78). The essence of „deposition” is shown in Figure 1. B. Nita also made an extensive analysis of achievements measuring stages. He distinguished three phases based on the intensity of shaping different methods and concepts of management accounting. In the first phase, which lasted until 1950, management accounting methods which are still used to this day were Figure 1: Deposition of new performance measurement concepts Source: Michalak, 2008, p. 79 created, including: turnover ratios, margins, total and unit cost calculations, and budgeting. The next phase proposed by the author lasted until the mid-1980s, in which development of new concepts stopped. Despite this stagnation, new methods based on information systems, market measures and non-financial indicators were created. The last phase is characterized by the dynamic development of value measurement methods. New concepts such as shareholder value, stakeholder value, and intellectual capital were also developed. During this phase new tools grew in popularity, such as multidimensional per-formance cards, value creation indicators and models of intellectual capital valuation. The development of management accounting and a changing environment forced managers to implement new control mechanisms and resource management systems. In order to maintain a competitive position, they started to pay more attention to customer needs and expectations. All these factors together with the progressing process of globalization contributed to the growth of importance of measuring performance and managing it appropriately. From my own observations, I would also take into account the progress in computer science. Progress in this field also had a huge impact on the modern possibilities of measuring achievements. The aim of this article is to present and discuss the most important concepts of performance measurement, which are: Balanced Scorecard, Tableau de bord de www.e-finanse.com University of Information Technology and Management in Rzeszów 22 gestion, Intangible Assets Monitor, Skandia Navigator, H.R. Friedag & W. Schmidt Scorecard, Kanji’s Business Excellence Model, Dutch system of performance management, Performance Prism and the EFQM excellence model. The purpose of the article, however, is not to present new concepts of measuring performance, but to draw attention to the existing ways. The summary of the article compares all the discussed concepts according to specific criteria, which are: balanced performance measurement, inclusion of key success factors, orientation on all stakeholders, link to strategy, focus on learning and continuous improvement, future orientation, Feedback and feed forward. This may, in some way, help organizations to choose the right measurement system for them, which should be translated into increased control and better understanding of their results. perFormAnce meAsurement concepts balanced scorecard The Balanced Scorecard (BSC) is a strategic management system developed by R. Kaplan and D. Norton. The authors clearly stressed that all measures, both financial and non-financial, should be a part of the information system for employees at all organizational levels in the company. Lower-level employees would be aware of the measurable impact of their work and their activities on the company’s financial performance. On the other hand, managers would have the knowledge of what exactly affects the long-term financial success (Kaplan & Norton, 2001, p. 29).R. Kaplan and D. Norton defined four perspectives answering specific strategic questions, which are important as far as effective management is concerned: 1) financial perspective - presents what the shareholders’ expectations are and what the financial success of the company should look like, 2) customer perspective - shows what the customers’ expectations are and how to satisfy them, 3) internal processes perspective - which internal processes should be perfected, so that both shareholders and customers are satisfied, 4) development and growth perspective - considers what improvements should be made in order to fulfill the company’s vision. The perspectives presented above are the foundations of BSC (Ibidem, p. 27). For each area the authors formulated strategic goals that are necessary for the mission and Source: Kaplan & Norton, 2001, p. 28 Figure 2: The perspectives of the Balanced Scorecard Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 23 business strategy implementation, as well as indicators to measure the degree of the implementation of these objectives. The construction of the Balanced Scorecard is shown in Figure 2. The financial perspective specifies whether the implementation of the strategy adopted by the company will contribute to the improvement of its financial results. Indicators should be directly related to the shareholders’ expectations (Kotłowska & Kowalak, 2016, p. 90). In the customer perspective, it is crucial to determine who the target recipients are. The company should also define the segment in which it is going to compete, and it should also determine the form of competition, whether it will be the price or quality(Ibidem, p. 95). The internal processes perspective should include the main activities that will be undertaken in order to achieve goals adopted in the financial and customer perspectives. It is recommend-ed to determine a full value stream, starting from the product design process, up to the aftersales service (Kaplan & Norton, 2001, p. 99). The last perspective of BSC includes factors conditioning further development of the compa-ny. Goals in the development and growth perspective are the basis for implementation of the objectives included in the other perspectives. This perspective allows us to identify all resources that give the possibility of further development of the company. These resources will not only be traditional assets. The authors of the BSC have stressed the importance of investing in employee training, new technologies and IT systems (Ibidem, p. 122). tableau de bord de gestion The Tableau de Bord de Gestion (TBG) is the oldest instrument for measuring company per-formance. It was introduced in 1932and by many authors is considered to be the foundation for creation of the BSC by R. Kaplan and D. Norton (Chiapello & Lebas, 1996). TBG stands for a dashboard, which refers to an automobile’s dashboard, Source: Epstein & Manzoni, 1997, p. 29 Figure 3: Cause and effect dependence in TBG which points out the most im-portant measures, enabling a comprehensive assessment of the company’s performance (Kotłowska & Kowalak, 2016, p. 134). TBG was created for French companies that needed a tool to observe and evaluate the implementation of specific solutions. Initially, all measures were taken from engineering terminology. They were used to help understand the cause-and-effect relationship between individual activities and the results of processes (Epstein & Manzoni, 1997, p. 29). Accounting at that time was a secondary source of information (Lebas, 1994, p. 473). Three stages are required to build a TBG. In the first stage, mission and vision are defined. Expectations regarding the company’s future and its position on the market are also estab-lished. Based on these assumptions the company formulates its strategic goals, upon which management will be accountable. Then, action plans are defined, bearing in mind that various actions will affect achievement of these goals. This form is to facilitate decision making and focus on key aspects of the company’s operations (Bourguignion et al., 2004). The next step requires the identification of factors which may have a negative impact on achieving success. Factors that are non-significant and non-influencing are eliminated. At this stage, people who will be responsible for the implementation are given specific roles and tasks (Kotłowska & Kowalak, 2016, p. 136). In the last stage, measures are determined. Key indicators are selected to allow management effective supervision over implementation of the adopted strategy. It is advisable to incorpo-rate indicators in a situation where the company has a multi-level structure (Ibidem). The discussed stages of TBG creation show the existence of a cause-and-effect relationship, which starts from mission formulation, indication of strategic goals and ends with defining specific critical success factors (CSF) and key performance indicators (KPI).The scheme of this dependence is presented in Figure 3. Main goals of the TBG are (Ibidem, p. 139): 1) supporting management in controlling areas that Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 24 they are responsible for, 2) controlling critical performance indicators and their reporting, 3) delegating duties that will support the management process, 4) creating a common information base for both management and lower-level employees. Using TBG is rather intuitive. There is no structure specifying a properly prepared dashboard. This is due to the period in which the Tableau de bord was introduced. The creation of the TBG structure is a result of negotiations between particular levels in the company’s employee structure. This is the basic difference between TBG and BSC. The BSC authors proposed a developed management tool which supports a bonus system based on the achieved results. In the case of TBG, several people may be responsible for the same strategic goal, hence there are no such goals that would be controlled only by one person. Such division is not aimed at relieving responsibility for deviations from the objectives but is intended to provide relevant information to all people involved in a given process (Ibidem). intangible Assets monitor To keep up with the changing business environment, some companies have evolved into knowledge-based organizations. K. Sveiby, in response to these changes, Source: Sveiby, 1998 Figure 4: Intangible Assets Monitor proposed a new in-tellectual capital management model - Intangible Assets Monitor or Intellectual Assets Monitor (IAM). IAM was created to enable measurement of all intangible assets owned by the company using ratios which differ from the financial. Financial indicators show only a view of past events, while IAM allows us to see a full picture of the current situation. The essence of the IAM model is that with the proper management of employees, customers and investments, it is possible to significantly influence the financial success of the company (Marcinkowska, 2003, p. 372). In addition, this model recognizes the superiority of intangible assets (company’s reputation, knowledge) over material resources, because tangible resources are consumed andneed to be stored, unlikethe intangibles. IAM assumes that the market value of the company consists of (Sveiby, 1998): 1) net book value of tangible assets (difference between all tangible assets and liabilities), 2) value of intangible assets (intellectual capital). Intangible assets are further divided into three subgroups: an external structure, an internal structure and individual competencies of employees. Within all subgroups, a number of measures were developed, which were divided into four types: growth, renewal, efficiency, stability and risk. The structure of the intangible asset monitor is shown in Figure 4. The external structure includes relations with customers and suppliers, logos, trademarks, and reputation of the company. The internal structure consists of patents, Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 25 concepts, models, com-puter and administrative systems together with support ensuring proper functioning. The composition of the internal structure depends, to a small extent, on migrations of employees, because the company is the owner of intangible assets, not employees. Individual competences include knowledge, education, skills and experience of the company’s employees. In exchange for their skills, employees receive remuneration. In contrast to the external and internal structure assets, individual competences are the exclusive property of employees. Employees with key competences and knowledge should be skillfully managed to keep them in the business (Sveiby, 1998). skandia navigator The Navigator is a comprehensive tool for managing intellectual capital developed at Skandia. Its beginnings date back to 1991, when Skandia created a new department of intellectual capi-tal whose task was to separate the intellectual capital of the company and further development of it. By creating a new department, the company wanted to connect its development with human resources and information technology. The end result was to be the creation of a new tool that would help in transferring knowledge within the organization (Edvinsson & Malone, 2001, p. 39). The first step was to determine exactly what the company’s intellectual capital is. According to L. Edvinsson and M. Malone: „intellectual capital means Figure 5: Skandia Navigator construction Source: Edvinsson & Malone, 2001, p. 56 having knowledge, experience, organizational technology, relations with customers and professional skills that give Skandia a competitive advantage in the market”. Skandia’s Navigator is a tool that collects information about the overall situation of the com-pany. E. Edvinsson and M. Malone have distinguished five important areas in business man-agement: financial, customers, processes, people and development, and have created some-thing in shape similar to a „home” (see Figure 5). The roof is the finance area which contains information about the company’s past performance. The walls are customers and processes areas that form a part of the structural capital and present the actual performance. The Navigator’s foundation is the area of development. It presents the future of the company, which can be achieved through employees’ training and creation of new products. The area constituting the „heart” represents people. This area consists of skills and abilities of the employees hired by the company together with external support. The intention of L. Edvinsson and M. Mallone was to develop a tool that would indicate the relationship between the company’s intellectual capital and its financial results. According to the authors, the process of intellectual capital management consists of four stages. The first stage indicates understanding how value is created and which part of the Navigator includes it. Then the previously recognized unused resources are exploited. In the next stage, a tool should be created, thanks to which all interested parties will be able to share knowledge that is needed to increase their efficiency. The last step assumes checking the process and if possible, correcting Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 26 or replacing elements until success is achieved (Edvinsson & Malone, 2001, p. 50). Skandia Navigator, just like the BSC, presents an idea for value managing of a company. The central element of Navigator are the abilities and skills of employees that connect all other areas. H.r. Friedag & W. schmidt scorecard The H.R. Friedag and W. Schmidt Scorecard, also Source: Friedag & Schmidt, 2004, p. 21 Figure 6: Construction of the German Scorecard known as the German Scorecard, is a con-cept whose basis for creation was the BSC presented by R. Kaplan and D. Norton. The most important differences between the BSC and German Scorecard are: 1) the H. R. Friedag and W. Schmidt card doesn’t stress the balancing of goals and indi-cators, as opposed to the BSC, 2) two main areas are distinguished in the German Scorecard: management and reporting, 3) the H. R. Friedag and W. Schmidt card and BSC Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 27 differ in the number of perspectives, 4) implementation of the BSC and the German Scorecard differs, 5) in the H. R. Friedag and W. Schmidt concept cause-and-effect relation is not presented by strategic maps. In their proposal the authors did not see a need to balance the number of measures and indica-tors. They suggested that the card should assume the role of a strategic tool and goals included therein should also have strategic significance. The German Scorecard does not assume balancing goals at all levels of the company’s operation. It recommends considering objectives in two dimensions: strategic and operational. Strategic goals are to result in achieving and maintaining an advantage over competition in a long-term horizon. Operational goals are limited to the current operations of the company (Nita, 2008, p. 469). H. R. Friedag and W. Schmidt were the first to notice the necessity of using an individual approach in the card construction and also selecting a number of its perspectives. Each com-pany should adapt this tool considering the specificity of its operations. They suggested in-cluding additional perspectives if needed, for example (Friedag & Schmidt, 2004, p. 21): 1) public - including e.g. country, city, etc., 2) organic, 3) capital group, Kanji’s business excellence model Kanji’s Business Excellence Model, also called the British Scorecard, was developed by G.K. Kanji. It is an Figure 7: Kanji’s Business Excellence Model structure Source: Kanji, 1998, p. 260 4) external and internal communication, 5) lenders’, 6) competition, 7) organization. H. R. Friedag and W. Schmidt also saw the possibility of considering prospects in terms of their specificity. That way they have included four views: humanistic, processes-oriented, external and internal. Construction of the German Scorecard is shown in Figure 6. The implementation of the German Scorecard differs from BSC. The first step is the same - strategy, vision and goals need to be formulated. In the second phase, perspectives and “stra-tegic paths” are defined. The “strategic path” in this sense will be an approach that a company will undertake in order to achieve its goals. It is crucial to determine by what means the com-pany will be able to realize its goals. At this stage, the difference between the BSC and Ger-man Scorecard is noticeable. Strategic maps are used in the BSC to show the existence of the cause-and-effect relationship between indicators and the company’s goals. The German Scorecard authors suggested a different approach that will show all factors that can affect the achievement of success. Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods www.e-finanse.com University of Information Technology and Management in Rzeszów 34 Alladyn Elmgasbi „e-Finanse” 2019, vol. 15 / no. 2 Revision of performance measurement tools and methods authors suggested a separate evaluation of achievements at particular levels of organization. This concept does not include all stakeholders and feedback management. The Performance Prism of C. Adams and A. Neely is the most advanced concept of perfor-mance management in terms of orientation on all stakeholders. The authors emphasized that the first step is to identify the expectations and needs of stakeholders, and then formulate the company’s strategy. This concept also assumes adjusting the strategy to the current situation. The EFQM excellence model underlines the key success factors and balanced achievement measurement. It is strongly focused on identifying and taking into account the needs of all stakeholders and continuous improvement of processes. This model does not include feed-back, but with the current shape, nothing prevents it from successfully implementing this cri-terion. Summing up the considerations of this paper, it can be concluded that there are many concepts related to the measurement and management of a company’s performance. The presented division does not fulfill the subject. I have presented each concept in an objective manner with an indication of the most important aspects. In comparison, I have made an assessment of the described concepts from a frequently occurring assessment criteria point of view. The most consistent approach in measuring achievements was presented by Harvard’s scientists R. Kaplan and D. Norton. The authors of the BSC are constantly developing their tool, to consti-tute a model system of measuring and managing achievements. It should be noted that according to the adopted evaluation criteria, there is no ideal performance measurement system. None of the concepts meets all the required criteria. reFerences Bhimani, A. (1993). Performance Measures in UK Manufacturing Companies: The State of Play. Management Accounting, 71(11). Bititci, U.S., Neely, A., Turner, T. (2006). Integrated Performance Systems: Structure and Dynamics. In A. Neely (Ed.), Business Performance Measurement. Theory and Practice, Cambridge: Cambridge University Press. Bourguignion, A. Malleret, V. Norreklit, H. (2004). 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