Performance measurement is a tool that an organization uses to find out the effects of its strategic decisions on the desired patterns and behaviors. Performance measurement and performance management are social phenomena because there is a dyadic relationship between performance measurement and organizational behavior. The outcomes depend on individual, organization, community, and societal feelings, values, and fundamental beliefs (Bititci, Garengo, and Dörfler 311).
Lee (384) indicates that performance measurement in organizations is similar to life because, in both cases, there are many ways to move towards an objective. Therefore, it is necessary to identify the perspective taken and be clear on the object or behavior being measured. Performance measurement can happen from the perspective of business owners, shareholders, stakeholders, management, governments, and any other entity interested in a particular aspect of an organization. Over the years, performance measurement has moved beyond a rigid framework of measurable aspects of a firm to appreciate and include human behavior (Lee 389).
Subjective performance measurement happens when people decide to measure an object or behavior that does not have readily auditable information. Performance measurements can be informative. In this case, the informative performance measures are sensitive to the actions of a person or the group being measured. They are precise and offer incremental information about the individual’s or group’s action. Informativeness of a performance measurement depends on relevancy and faithfulness in representation. The certification of faithfulness is usually done by an independent party, such as an auditor. Besides, the informativeness of one measure relies on the informativeness of another measure. It implies that the performance measures should also be considered as significant when performance measures are used in jobs that are precise and sensitive about managerial actions, just as the observed actions (O’Connor, Deng, and Fei 211).
There has been a growing need for social enterprises to measure their performance in a systematic way, similar to business enterprises. The systematic approach leads to better decision-making and improved accountability to stakeholders (Arena, Azzone, and Bengo 649). In its original format, performance measurement focused on the metrics used for quantifying efficacy and effectiveness of actions. However, the definition changed over the years to accommodate business interests and business environmental variables. In the 1960s, performance measurement was concerned most with divisional and departmental budgets, while attention was on economic and financial performance (Arena, Azzone, and Bengo 653). Afterward, improvements in performance measurements in the organization led to the adoption of quality, time, flexibility, and customer satisfaction as performance dimensions. Today, performance measurement links performance indicators and company strategies.
The reliance on indicators has led to the adoption of various tools and concepts of measurement, such as the balanced scorecard, dashboard of indicators, and key performance indicators (KPIs). A typical performance measurement system now integrates environmental and social performances into corporate reporting. Different organizations can adapt the systems to fit their business and non-business needs (Arena, Azzone, and Bengo 653).
Taking a balanced scorecard approach helps organizations only to measure the aspects of their enterprises that they want and get results that are relevant. The approach allows the measurement of finance, customer satisfaction, internal business process, and learning and innovation. Three of the indicators above serve financial performance measurement. The importance of measuring financial performance in any organization comes from the realization that the enterprise can only survive when it has sound financial performance, irrespective of its profit orientation. As organizations differ in their strategies and operating environment, they also vary in their adjustment to the four aspects of enterprise performance measurement (Cheng 156).
The definition of performance measurement is changing due to rapidly developing technologies, increased globalization, and the removal of trade barriers (Yadav and Sagar 951). These changes affect the management of organizations and their objectives. In the past, the emphasis was on what to measure and how to measure, and that is how the various performance measurement models were developed (Bititci, Garengo, and Dörfler 309). The development ensured that the field of performance management matured, which has now branched into sub-fields.
For example, after several studies showing that performance measurement works, but failed to adapt to the needs of the small and medium enterprise as much as they do for corporations, there was a need to differentiate performance measurement tools and their application according to the nature of business. Also, sub-fields have emerged in regard to the scope of measurement. In the traditional aspect, only the organizational scope was used. Now, performance management also encompasses operational and information aspects, which are useful for process-based approaches to measuring the performance of supply chains (Bititci, Garengo, and Dörfler 309).
In summing up, performance management and measurement continue to evolve. Today, performance measurement includes the use of indicators to improve preciseness and offer incremental information about an organizational aspect. Four critical elements constitute performance measurement in organizations. They are finance, customer satisfaction, internal business process, and learning and innovation. Among the four, finance is the most important because it determines the survival of an organization.
Comparison of four articles definition of performance measurement
Two articles are looking at the historical trend in definitions and the use of performance measurement. They show that over the years, practitioners have incorporated non-financial measures. Arena, Azzone, and Bengo note that performance measurement originates from the business world as a set of metrics used to quantify the efficiency and effectiveness of actions (649-672). The range of metrics and other performance dimensions has been increasing throughout the years. Similarly, Yadav and Sagar look at the trend in the performance measurement in the last three decades to develop their definition (947-971).
It then introduces non-financial aspects and builds on Arena, Azzone, and Bengo (649-672) to encompass factors beyond the firm. The other two articles by O’Connor, Deng, and Fei (208-237) and Lee (383-406) present specific attributes of performance measurement that support the definitions highlighted by the previous two articles, cited above. However, there is a contrast in the focus areas, which goes on to show that performance measurement takes different definitions when considered from different stakeholder perspectives. All articles rely on historical data to offer a definition, but only two apply to the general business sense, while the other two apply to social enterprises and publicly listed companies.
|Comparison of four articles definition of performance measures|
|Article||Basis of definition||Focus||Relevance & Insights|
|(Arena, Azzone and Bengo 649-672)||Performance measurements evolved in four main phases since inception. |
The first phase – limited to decision making.
The second phase – encompasses divisional and departmental budgets (still concentrating on economic and financial attributes).
The third phase – covers the inclusion of quality, time, flexibility, and customer satisfaction. The third phase incorporated key performance indicators into performance measurement.
The fourth phase (current phase) – performance measurement goes beyond a company’s boundaries and includes the impact of the company’s activities on stakeholders in and out of the company.
|Historical definition trend||For Social Enterprises |
– The definition of performance measurement comes from an adaptation of the contingency model and focuses on input, output, and outcome. It also includes the sub-dimensions of fairness, involvement, and communication, and transparency. Besides, it covers resource value, products value, and results value.
|(Yadav and Sagar 947-971)||In the 90s decade, performance measurement was a cost management practice but did not trace the cost of quality, activities, products, and processes. It was about returns on investment and earnings per share of listed companies. The marriage of financial and non-financial attributes of performance measurement took place in the late 90s. It also included the use of the triple bottom line and activity-based costing. Also, in the 90s, the balanced scorecard was introduced. |
By the 2000s, the Sarbanes-Oxley Act was passed, and it shifted the focus of performance measurement.
Presently, the article defines performance measurement as an integrative perspective and a complementary strategy that also covers quality and excellence while still maintaining its focus on the traditional financial perspective.
|Historical definition trend||For all businesses |
– The article agrees that the business environment is changing, and the changes are the reason for the dynamic definition of performance measurement. For example, performance measurement in the traditional sense of having cost schedules, variance reports, profit, and loss statements, and other measures is not applicable to service provider companies and product manufacturers today. Thus, a new definition of performance measurement is an improvement that takes care of criticism of the past definition. Past definitions only considered financial perspectives. The new definition incorporates non-financial perspectives like strategy, operations, and quality.
|(O’Connor, Deng and Fei 208-237)||The article shows that the accounting field has always focused on the benefits and costs of using a performance measurement system over another. It defines these concerns as objective financial measures. Meanwhile, subjective measures are those that happen as people use their discretion to do something that has less verifiable information. |
Subjective measurements become useful when they look at qualitative aspects of management’s behavior. This is an extension of the information scope that would be covered by an objective performance measure. The informativeness of performance measurement depends partially on the scale of direct observation by the evaluator and the person or group evaluated.
Financial measures are reliable, but they contain less information because they use less comprehensive indicators. Non-financial measures are less reliable but include a myriad of lead indicator properties.
|Financial vs. Non-financial performance measurement||For general application |
-Performance measurement of a subjective non-financial nature gains relevance only when there is a corresponding provision of direct observation. For entities that have an enormous gap between the evaluator and the subject observed, the use of financial performance measurements makes more sense than the incorporation of non-financial measures.
|(Lee 383-406)||Performance measurements depend on the perspective of the evaluator. The intentions of debt collectors, revenue authorities, shareholders, management, are different, and they will, therefore, entail the use of different parameters when conducting performance measurement. |
Financial reporting is about reporting the history of a firm in economic terms, and financial performance measures look at past exchanges. However, from an investor’s perspective, the need for performance measurement is to determine the performance of a firm in the future to enable the investor to make decisions today. Therefore, investors experience information uncertainty when doing performance measures, and they focus on the reliability of the information.
|Financial, investors perspective||For investors |
– The definition of performance measurement as an accounting principle provides room for comparison of a firm’s performance in two or more distinct periods. As a result, accounting-based performance measures are tools used for forecasting the future value of a firm based on its expenses and revenues.
Arena, Marika, Giovani Azzone, and Irene Bengo. “Performance Measurement for Social Enterprises.” VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations 26.2 (2015): 649 – 672. Web.
Bititci, Umit, Patrizia Garengo, Viktor Dorfler, and Sai Nudurupati. “Performance Measurement Changes for Tomorrow.” International Journal of Management Reviews 14.3 (2012): 305-327. Web.
Cheng, Yong. “The Construction of Indicator System for Performance Measurement of Chinese Enterprises Based on Balanced Scorecard.” Asian Social Science 8.8 (2012): 155-159. Web.
Lee, Charles. “Performance Measurement: An Investor’s Perspective.” Accounting and Business Research 44.4 (2014): 383-406. Web.
O’Connor, Neale G, Johny Deng, and Pan Fei. “Observability and Subjective Performance Measurement.” ABACUS 51.2 (2015): 208-237. Web.
Yadav, Neetu, and Mahim Sagar. “Performance Measurement and Management Frameworks.” Business Process Management Journal, 19.6 (2013): 947 – 971. Web.