Performance Measurement and Management Control Systems
Performance Measurement and Management Control Systems
In an organizational context, control refers to the creation and monitoring of rules and regulations that are put in place to be observed or that are regarded as the norm concerning how tasks should be executed. In practically any institution, management control functions as the central nervous system that runs all activities in its all departments. Another vital concept in organizational operations is performance measurement. It refers to the process that is followed in the development of measurable indicators that are systematically trackable to conduct an assessment of the gains that a company has made in actualizing its goals (Davila, Epstein, & Manzoni, 2012). The performance indicators are intended for use in assessing the progress that an organization while striving to achieve its set objectives. Performance measurement and management control systems are the important tools that enable an organization to monitor its level of effectiveness on the way to fulfilling its predetermined tasks.
Management Control Systems
All organizations (irrespective of size) have functions that are referred to as management control. According to Davila et al. (2012), management control functions are more formal and made to appear as some form of a routine in comparatively large organizations. Such companies have widely accepted management control systems and all the functions are submitted to the control systems regarded as vital requirements for monitoring and regulation of institutional activities. Relatively small organizations also have management control functions that are executed by the given management control systems. However, there the functions are likely to be more informal.
Davila et al. (2012) state that several approaches are used to explain the application of management control systems in organizations. One of them is called the classical approach. It is anchored on the perception that the planners at the top of the management have advanced knowledge of the interrelationship and operational features of an organization. As such, the approach asserts that the central planners in an organization are in a better position of taking a corporate view of the way a company functions and its interrelationship with the environment correctly. This approach presents an ambiguous definition of tasks, whereby the functions of an organization allow very minimal flexibility to the employees in lower ranks. It also gives precedence to power as defined by the organizational hierarchy. To ensure compliance with the demands of the top leadership, this approach focuses on the application of sanctions and rewards as a way of punishing and rewarding it respectively. This management control approach is based on the assumption that people are naturally lazy and wasteful hence the only means of attaining an appropriate behavior is by exchange for money.
Management control systems are also explained by the use of the neo-classical approach to management control. This approach focuses on social and psychological aspects of an organization such that it largely emphasizes on the diversity of individual needs. Davila et al. (2012) also argue that when using this approach, organizations have to cater to the diversity of customers’ and employees’ needs which are regarded as the distinguishing features that should be considered when analyzing organizational control. The approach looks at specialization, impersonality, and hierarchy principles as agents that can frustrate people’s desire for autonomy and self-actualization. When establishing management control systems, companies that apply this approach consider the fact that tasks made should be stimulating and rewarding to employees for effective performance to be realized. The management control systems that are anchored on this approach signal the need for job enrichment and job enlargement programs as a move towards scaling up employees’ performance (Davila et al., 2012).
Another approach is called the human relations approach. It stresses the essence of groups and the existence of an informal institution in boosting organizational functions. Companies that establish their management control systems with an accent on this approach focus on the formation of organized groups that they believe can have a positive influence on behavior. Davila et al. (2012) support the idea that the approach looks at people as having some affiliate needs like the sense of belonging and security that can be effectively satisfied when they are members of a group.
Performance Measurement Systems
As defined earlier, performance measurement is a process that involves the development of measurable indicators that an organization can track systematically for purposes of assessing its progress toward the preset goals. Performance measurement systems are used in measuring how an organization has performed about its success in fulfillment of the established objectives and stakeholder requirements. A positive result in the performance measurement process is signaled by an appreciable performance in cost, value, flexibility, quality, and other dimensions. Organizations should establish performance measurement systems that enable them to meet their demands and that facilitate the realization of informed decision-making at the strategic and operational levels (Davila et al., 2012).
Performance measurement systems serve as a tool that enables an organization to understand its developmental progress as it finds new transformative solutions to issues that are identified as socially pressing (Epstein, Verbeeten, & Widener, 2016). Companies should customize performance measurement systems that are internally driven and which can satisfy their external stakeholders’ demands while also pushing them to make strategic internal decisions and advancements.
When developing a performance measurement system, several steps must be made. First, an institution should ensure that it integrates its performance measurement system with its overall strategy. Secondly, the system should be developed in such a way that it allows for the retrieval of regular feedback and that the actual results obtained can be reviewed against the organization’s initial plan and the performance measures in place. The third requirement is to guarantee that the performance measurement is comprehensible. The meaning of this requirement is that the system should incorporate different factors that have an impact on operational success like the quality of service and adoption of modern technology (Epstein et al., 2016). Besides, the system should be implemented in a top-down pattern such that those who are responsible for strategy setting can determine the organizational objectives hence developing viable top-level measures.
Dimensions of Performance Measurement Systems
Inputs refer to the resources that an organization uses in service delivery or in producing goods as desired. These resources can include financial injections in the production process or service provision process, in addition to the human capital, equipment, and raw materials. This dimension is vital in the performance measurement system because its analysis facilitates the realization of viable cost projections and cost comparisons (Epstein et al., 2016). Personnel who are involved in the use of performance measurement systems must have a good understanding of program inputs for them to implement meaningful performance measures effectively and efficiently.
According to Epstein et al. (2016), outputs are also regarded as the products that are produced or services provided by a given organizational program. Outputs are internal dimensions as they relate solely to the activities of a given company. For example, in measuring the output of an organization’s program, performance measurement can be done to show the effectiveness with which complaints are answered and what responses are given to clients, or what number of employees are required to complete a job. Outputs are a vital dimension in performance measurement as they help in measuring the efficiency of an organization’s processes. For example, an enterprise can measure its outputs by dividing them by the number of inputs.
Performance measurement systems also involve a measure of the effectiveness of an organization’s program. When looking at the outcomes, the performance measurement systems are focused on the results obtained that indicate if a business is meeting its goals. They use their intermediate outcomes as a guide toward the desired outcome. Outcomes manifest an important dimension also determining a company’s efficiency (Epstein et al., 2016). Besides, outcome measures are used to clarify the expected results of a project. Program managers in organizations use the reports obtained from outcome measures to understand their performance concerning the attainment of the stated objectives.
The measure of efficiency makes a comparison between the cost incurred in terms of resource allocation and the creation of products and services (Epstein et al., 2016). A measure of efficiency is arrived at by dividing output by input hence enabling the performance measurement personnel to attain a unit-cost ratio. In some cases, the results received by measuring the output trigger the need for change in organizational structure or its use of resources. For instance, an institution can strive to improve efficiency by downsizing what is aimed at cost reduction and profit margin improvement.
According to Epstein et al. (2016), a company’s effectiveness relates to the success in achieving the required results without looking into the cost at which that result is obtained. Effectiveness is measured by looking at whether the right thing is being done in an organization in general terms and it is mainly focused on the quality of products produced or services delivered.
Examples of Performance Measurement Systems
There are several performance measurement systems in use today. Among the most popular systems are the balanced scorecard, graphic rating scale, 360-degree feedback, and self-assessment systems among others.
Graphic Rating Scale
The graphic Rating Scale is presently considered among the most effective performance measurement systems. It is used to measure the performance of employees in production-based functions. The measurement system applies numerical ratings with which employees are rated on their respective work processes, ability to follow the set procedures, and effectiveness in executing production functions among others (Merchant & Van der Stede, 2017).
Merchant and Van der Stede (2017) state that 360-Degree Feedback is appropriate for use in work environments that require employees to interact at different levels. The system can be applied independently as the sole measurement tool or as a supplement to other performance measurement media. The performance measurement system allows all members of an organization to study and comment on the performance of employees.
This measurement is used to measure the introspective strengths, weaknesses, and career prospects of employees. When using it, an organization should emphasize objectivity. It allows employees to take a more vocal role during their performance appraisal meetings as they play a leading role in the discussion in an attempt to justify their performance (Merchant & Van der Stede, 2017).
The Balanced Score Card
The balanced scorecard is the most popular performance measurement system that is used in the implementation and monitoring of a new organizational strategy or group. Merchant and Van der Stede (2017) also claim that the balanced scorecard has changed organizations’ perception of performance metrics. The performance measurement system is the brainchild of Kaplan and Norton who introduced it in 1992 when businesses were involved in several transformations. At that time, they focused their attention on improving their competence in the exploitation of intangible assets at the expense of considering their performance in the management of physical assets.
The application of the balanced scorecard in performance measurement has enabled organizations to track their financial results as they also monitor their performance in capacity building for growth. The tool was developed to complement financial measures rather than replace them (Merchant & Van der Stede, 2017).
Over time companies realized the significance of the balanced scorecard as a pillar of a new strategic management system since it is capable of linking a company’s long-term strategy with its short time financial goals (Merchant & Van der Stede, 2017). It enables managers to develop four processes to help their companies establish a vital link.
The first process is referred to as translating the vision. Simons (2014) asserts that it is helpful to managers as it aids them in building a consensus on the strategies to be adopted and expressing in a manner that can offer guidelines to local level actions. The second level involves the communication of linkage. At this stage, the management communicates the strategy to all levels of the organization and has it linked to employees’ individual goals. The third process is known as business planning. It presupposes the integration of a company’s business plans with its financial planning initiatives. The last process that is facilitated by the balanced scorecard is feedback and learning. While using the balanced scorecard as the performance measurement system, an organization is capable of creating opportunities for strategic learning that involves feedback gathering, hypothesis testing, and making any adjustments as required. In this way, the balanced scorecard is believed to be an important tool that reveals the efforts that a business is putting in place to achieve its goals through the implementation of strategies and the success in this process. The system looks at the measures that are balanced across different perspectives like the financial perspective, internal processes, the customer perspective as well as learning and growth.
Based on this discussion, it is evident that performance management and organizational control systems are vital operations that enable a company to assess its performance over time. The systems facilitate the assessment of an organization’s performance concerning its realization of set objectives. Performance measurement enables organizations to identify their strengths and weaknesses so that viable strategies are established. Performance measurement and management control systems are used alongside each other in organizations when monitoring the level of effectiveness as businesses strive to fulfill their predetermined goals. The balanced scorecard is among the most popular performance assessment systems. It is a short report that is presented the vital financial and non-financial performance measures of an organization.