Strategic Performance Measurement: Benefits, Limitations and

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Strategic Performance Measurement:
Benefits, Limitations and Paradoxes
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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.
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Adapted from Micheli, P. and Manzoni, J.-F. (2010), ‘Strategic performance measurement: benefits, limitations
and paradoxes’, Long Range Planning, Vol. 43, No. 4, pp. 465-476.
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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
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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 nonfinancial 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.
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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?
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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 causeeffect 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
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implementation. This is particularly important, as the benefits of the measurement system
strongly depend on both its characteristics and its intended roles.
SPMS can be used in relationships between headquarters and subsidiaries, and between
corporate and business unit levels. In their study of Italian subsidiaries of foreign multinationals,
Dossi and Patelli show how non-financial indicators are still treated as complementary and not
substitute measures of performance. Although increasing emphasis has been placed on the
importance of using non-financial indicators, this is not necessarily a negative finding. As
previous studies demonstrate, it is fundamental for organisations to decide which type of SPMS
to introduce, in line with their approach to strategic control [15]. Indeed, if the headquarters of a
multinational company wants to exert financial control over its subsidiaries and keep the learning
generated within those subsidiaries, the inclusion of predominantly financial indicators would be
appropriate. However, if headquarters want to stimulate knowledge flows and the diffusion of
good practices across subsidiaries, then mere financial control would be insufficient.
SPM is a means by which to establish a dialogue between different functions within an
organisation; between headquarters and subsidiaries; and between an organisation and its
environment. In the context of multinationals, the participation of subsidiaries in designing an
SPMS is likely to result in the inclusion of a higher number of non-financial indicators.
Therefore, headquarters seeking dialogue with local managers should design measurement
systems that are not there solely for ‘diagnostic’ purposes, but also include more ‘interactive’,
non-financial indicators. Moreover, although the ‘diagnostic’ use of SPMSs could work against
deploying certain capabilities, it would not necessarily have a negative impact on performance.
In fact, it could make a positive contribution by monitoring performance against goals, providing
boundaries for action, restricting risk-taking, and monitoring the efficiency and effectiveness of
processes and activities [16]. It is the lack of clarity over these issues and inconsistencies (e.g.,
efforts to promote communication and diffuse good practices across a group of firms using
mostly financial indicators) that create considerable problems and may eventually lead to the
failure of the whole SPMS.
Finally, it is interesting to notice the shift in emphasis over elements of the SPMS.
Surely, the importance attributed to certain performance indicators should change over time,
depending on the how the organisation is performing and where it wants to be. A typical
example would be the choice made by GE to modify its SPMS several times in a relatively short
period, depending on which type of strategy it wanted to implement [17]. However, Dossi and
Patelli find that shifts in the emphasis on specific elements of the SPMS depend on changes in
the performance of subsidiaries and the environment in which they operate. Although
headquarters often adopt multiple perspectives in order to more comprehensively assess and
evaluate performance, they tend to restrict their focus to financial indicators in the presence of
poor financial results. This is particularly dysfunctional as the noise and volatility of traditional
financial indicators can limit their use as a performance evaluation tool for the relationship
between headquarters and subsidiaries. Also, non-financial indicators would be more suitable to
identify the very reasons for those unsatisfactory results.
SPMS: static systems for dynamic environments?
Thanks to data collection automation and improvements in data analysis, organisations have
introduced increasing numbers of performance indicators. The inclusion of more performance
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indicators could be welcome. Indeed, research in cognitive and social psychology shows that an
SPMS can help frame managers’ mental representations of the business, due to the system’s
informational effects. As Gimbert et al. notice, SPMSs encourage extensive scanning behaviour
and help produce more informed assessments than mono-dimensional non-causal PMSs do.
Furthermore, comprehensive SPMSs can increase managers’ goal clarity and process clarity in
business units and subsidiaries. Performance information also affects intrinsic motivation and
empowerment, since ‘a more comprehensive PMS can make business unit managers believe their
jobs are more meaningful by helping them to determine how their work fits within the broader
scope of the organisation’ [18]. These aspects, in turn, have been found to have a positive impact
on organisational performance.
On the other hand, several studies have criticised SPM as it can promote organisational
inertia and create ‘ossification’, i.e. organisational paralysis caused by an excessively rigid
SPMS [19]. Particularly when a system is pervasive and consists of large number of indicators,
organisational inertia and ossification may arise. This may not be a major problem for
organisations competing in relatively stable markets, but it could become a serious issue for
firms operating in very dynamic environments. Authors have remarked how in dynamic
environments only a few indicators and rules should be introduced, and those mostly to set
boundaries [20] However, Kolehmainen [10], in her study of a leading telecommunications
company, also argues for the possibility of embedding dynamism in SPMSs. To do so, an
organisation has to adopt an empowering and flexible approach to the design and use of such
systems. While alignment processes are needed to ensure that performance indicators and
behaviours are in line with the organisation’s strategic priorities, empowerment at the individual
managers’ level is needed to build sufficient dynamism into the SPMS. In other words,
empowerment and HR management can promote dynamism and responsiveness, by building
flexibility into the system in order to allow for local adaptation of the indicators.
The introduction of new performance targets and indicators can kick-start the
implementation of new strategic objectives and promote different ways of working. Therefore,
the introduction of a new SPMS, or the review of an existing one, can support and enable change
management initiatives. A good example of the introduction of new performance indicators to
support a corporate turnaround within an organisation is the case of Continental Airlines in the
mid 1990s [21]. Essentially, Continental’s new management team promoted a radical change in
strategy and values through SPM, by linking a limited number of key performance indicators to
the company’s mission and making the whole organisation accountable for them.
Although SPM has been successfully used in conjunction with change management
initiatives, several studies have remarked how SPM can actually act as an obstacle to change.
Certainly, the latter happens when the SPMS is too pervasive, rarely reviewed or not subdivided
in levels of importance, and when responsibilities are not delegated. Nonetheless, even when an
SPMS is reviewed and redesigned to support a change in strategy, it can push the organisation in
a direction opposite to the one intended.
The paper by Melnyk et al. sheds light on this apparent contradiction. In the organisation
considered, the authors find that SPM supported the development of particular capabilities and
the crystallisation of a specific organisational culture, linked to process improvement driven by a
cost leadership strategy. When the organisation tried to change its strategic focus to
differentiation through radical innovation, the capabilities that SPM had contributed to create
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became core rigidities and the SPMS subverted this movement into a shift to incremental
innovation.
Other studies have also emphasised how measurement systems, particularly if used for
‘diagnostic’ purposes, could have a negative effect on innovation and the capacity of the
organisation to transform itself [16]. On the other hand, the ‘interactive’ use of SPMSs could
foster capabilities of entrepreneurship, market orientation, organisational learning and
innovation. As Dossi and Patelli suggest, they could be used as a means to generate and
disseminate new strategic objectives and knowledge across the organisation. Therefore, as
previously remarked, the different roles of SPM should be considered, especially when
organisations are involved in processes of substantial transformation.
SPMS: a powerful tool or a tool for power?
The previous discussion shows how powerful SPM systems can be as a management tool.
However, SPM could also be regarded as a ‘tool for power’. Indeed, SPM is often used as a way
to introduce a rational discourse in complex situations. According to a rational paradigm,
performance information is communicated with the aim of demonstrating results within the
organisation or to key external stakeholders. Consequently, if performance information is related
to the strategic objectives of the organisation, it is used to show that progress is being made
against these objectives. On the other hand, performance indicators are often utilised for
symbolic purposes; in this case, their aim is to increase the relative power of a business unit or
department within an organisation, or to (apparently) satisfy the demands of external
stakeholders [22].
This is evident if we consider how a number of functions within organisations have tried
to acquire greater legitimacy and power by relying on the measurement of their performance.
This is the case with R&D departments and functions involved in new product development and
marketing, for example, as they have invested substantial resources to ‘demonstrate’ their value
through the introduction of increasingly sophisticated performance indicators [23]. However,
particularly in periods of recession, budgets allocated to these functions tend to be cut first. As
the paper by Gimbert et al. shows, the reason is that it is not so much the accuracy of data that
counts, but the level at which that data is considered. If performance indicators pertinent to
product design or marketing are utilised at an operational level, they are not likely to influence
the strategy and the strategic decisions of the organisation. Therefore, in order for performance
measurement to be used as an effective ‘tool for power’, it is important that performance
indicators are linked with strategy and that they are considered in strategic reviews.
Conclusions
In spite of decades of practical experience and academic research, strategic performance
measurement is still under scrutiny and little consensus has been reached over its benefits and
limitations. In this paper we have shown how the design and purposes of an SPMS are
fundamental aspects to be considered if we want SPM to effectively contribute to organisational
performance. Also, clarity over the nature and aims of an SPMS is fundamental if we want to
resolve a number of apparent paradoxes. First, organisations should explicitly decide whether
their measurement system is strategic or solely operational. This choice is likely to determine the
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link between strategy and performance measurement, and the relevance of the PMS within the
organisation.
Second, the design of the SPMS should depend on the roles the organisation assigns to
the SPM. These roles should therefore inform decisions over the types of performance indicators
to introduce (financial and non-financial; leading and lagging) and the use of performance
information as a means to generate single and double learning loops.
Third, the balance between ‘diagnostic’ and ‘interactive’ uses of SPM has relevant
consequences on the possibility of SPM playing an active role in the introduction of change
initiatives and innovation strategies. SPM can also contribute to the creation of capabilities and
the establishment of an organisational culture. Therefore, in case of substantial transformations,
the organisation should reflect on the role played by the SPMS and not only redefine the targets
and indicators, but also rethink the balance between alignment and empowerment. Only by doing
so will the organization make the system flexible and use it as a lever for change.
Finally, although SPMSs are certainly powerful tools, in isolation they cannot guarantee
business performance. They should be seen as part of a wider whole, and be used in conjunction
with other mechanisms including, for example, rituals and routines, reward and recognition
systems, and training programmes [24].
A purposeful design
The design of an SPMS is fraught with difficulties and, to date, many measurement initiatives
can be considered outright failures [25]. This paper shows not only how performance
measurement systems can differ from each other in nature, but also how they can be developed
for different purposes. The plurality of roles of SPM indicates the importance of defining from
the outset the roles of every performance indicator and the SPMS as a whole. In this sense, we
could argue that the design of such systems should be an intelligent and purposeful creation. Key
questions managers should ask themselves include:
●
●
●
Why is the organisation introducing (or reviewing) an SPMS?
Which roles do we want it to play?
Will its characteristics be consistent with its aims?
Answers to these questions should then determine the number and kind of performance
indicators, the type of reviews that will be conducted, and the main features of the SPMS as a
whole. In particular, the organisation will have to decide the degree of flexibility it wants to
embed in the system, according to its envisaged use in both the short and the long term. The
balance between alignment and empowerment, and the frequency of reviews and audits will
determine the dynamism of the system. Also, the design of the SPMS will have to depend on the
environment in which the organisation operates, its strategy, its links with key stakeholders, and
the implications the measurement system may have in maintaining the current, or shaping the
future, organisational culture. Indeed, in a world where the pace of change has increased
markedly over the last few years, firms will increasingly need their SPMS not only to help get
alignment to an existing strategy, but also to support the empowerment and continuous
adaptation of strategy and tactics. And this will be valid not only for successful subsidiaries and
operations, but for all operations, particularly for less well performing ones.
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Author’s biography
Pietro Micheli, MSc, MRes, PhD
Senior Lecturer, Cranfield School of Management
Pietro joined the Centre for Business Performance at Cranfield School of Management in 2003.
He was awarded a PhD and a Master by Research in Management from Cranfield School of
Management, and a Master in Management and Production Engineering from the Politecnico di
Milano. Pietro is currently a Fellow of the Advanced Institute of Management (AIM) Research,
and is a founding member of the Evidence-based management collaborative, a US-based
community-of-practice whose aim is to make evidence-informed management a reality.
His current research and work focuses on three main areas: development and use of performance
measurement systems; performance improvement; and innovation management. At Cranfield
Pietro directs the Executive MSc in Managing Organizational Performance, the open executive
programme on Operational Performance Management and the Public Sector Performance
Roundtable.
In the field of performance management Pietro has worked with, and consulted to, a number of
organizations, including Amec, British American Tobacco, British Energy, KLM, Morgan
Carbon, Orange, Shell, Veolia Water, United Arab Emirates Government, Audit Commission,
Council of Europe, Department of Health, House of Lords, National Audit Office, and The
Pensions Regulator. In 2010 he worked as Director of the Italian Commission for public sector
evaluation in Rome.
Pietro has lectured in a number of European academic institutions, run executive courses and
workshops, and is a regular speaker at academic and practitioner conferences. He speaks fluent
English, Italian, French and Spanish.
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