396
Int. J. Business Performance Management, Vol. 12, No. 4, 2011
How does business performance measurement
perform? An empirical study with reference to
leading companies in India
Keyur Thaker
Indian Institute of Management Indore,
Rau Pithampur Road, Pigdember,
Indore, M P 453 331, India
E-mail: thakerkeyur@yahoo.com
E-mail: keyurt@iimidr.ac.in
Abstract: With increased adoption and resource spent for business
performance management, it is interesting to inquire about its practice and
performance. Based on the response from CFO’s of the 38 leading Indian
companies, we found that BPM is satisfying tactical purposes well, but lagged
in strategic, top management and learning and development needs. The results
compare well with Tonge et al. (2000), Malcolm (2006), Wiersma (2009), etc.
When compared with Simmons (1995b) levers of control, we observe better
performance on diagnosis and belief control system, while lagged as interactive
control tool. Despite increasing use and importance of various non-financial
measures, we observed lower satisfaction with its measurement quality and
fewer linked those measures to compensation, comparable with Lingle and
Schiemann (1996). Our findings are symptomatic of evolution of BPM
to overcome the inadequacies of reliance on accounting-based performance
measurement (RAPM) to strategic management system and more recently
management learning and development tool.
Keywords: business performance measurement; BPM; functions; purpose;
performance; CFO; leading companies; India; practice; strategic management
systems; management learning and development; Simmons levers of control;
management control research framework.
Reference to this paper should be made as follows: Thaker, K. (2011)
‘How does business performance measurement perform? An empirical study
with reference to leading companies in India’, Int. J. Business Performance
Management, Vol. 12, No. 4, pp.396–416.
Biographical notes: Keyur Thaker is an Assistant Professor and the Area
Chair of Finance and Accounting at Indian Institute of Management Indore. His
research, teaching and consulting interest includes corporate finance, cost and
management accounting, management control systems, corporate performance
management, project finance and structuring, investments and valuation.
He has been active in conducting corporate training and consulting in
the area of his interest. He has several publication and presentations in
international conferences and refereed international and national journals. Of
late, he is inquisitive about and propagating consciousness in business for
competitiveness and making the world better place to live. He aspires to work
on implementing consciousness in business organisation and its implication on
performance management and control system.
Copyright © 2011 Inderscience Enterprises Ltd.
How does business performance measurement perform?
1
397
Introduction
Business performance measurement (BPM) is an organisational approach to assess
and monitor performance in relation to set of goals and objectives. It encompasses
methodologies, frameworks and indicators that are used to help organisation in
the formulation and assessment of strategy, motivate people and to communicate or
report performance (Marr, 2009). Performance measurement systems play key role in
developing strategic plans, evaluating the achievement of organisational objectives, and
compensating managers (Jean-Francois, 2006). Yet, many managers feel that traditional
accounting-based measurement systems no longer adequately fulfil these functions
(Ittner and Larcker, 1998). The perceived inadequacies of the control systems
reliance on accounting-based performance measures (RAPM) have motivated a variety of
performance measurement innovations ranging from ‘improved’ financial metrics such
as ‘economic value’ measures to ‘balanced scorecards’ of integrated financial and
non-financial measures to measures of intellectual capital and measures for discloser and
reporting (Ittner and Larcker, 1998; Verbeeten, 2005; Thaker, 2005, 2010; Chenhall and
Langfield-Smith, 2007; Meyer, 2007). Moreover, with great interest in performance
measurement with many companies attempting to implement the balanced scorecard,
there is also evidence that many of these implementations are not successful (Bourne
et al., 2003a, 2003b). However, despite increasing adoption of these performance
measurement innovations, very few studies have examined the new measures’ economic
relevance, the implementation issues arising from their adoption, or the performance,
their use and its efficacy in satisfying intended purposes (Kellen, 2003). A major research
motivated to study the practices and state of affairs to address many such issues with
reference to companies in India was conducted, part of which is discussed in the paper.
2
Literature review
“The fields of performance measurement and management control have changed
dramatically in recent years to adopt to the changing paradigms and environment of
business” (Neely, 2002). Industry has recognised the importance of the implementation
and coordination of strategy with organisational structure, management systems, and
managerial behaviour. There has been increased adoption and almost 2/3rd of the
large corporate have adopted a formal performance measurement system like balance
scorecard (Kaplan and Norton, 1992). Surveys indicate that 85% of the organisation
will have performance measurement initiatives underway (Rigby, 2001). Performance
measurement and the balanced scorecard are widely used in Europe and US but limited
in Asia. However, there is growing anecdotal evidence that the topic is taking of there
(in Asia) as well (Neely et al., 1995; Neely, 2005). Bourne et al. (1999) iterate the need
for further research into the issues related to implementation of performance measures.
He further states that performance measurement literature is at the stage of identifying
difficulties and pitfalls to be avoided based on practitioner experience with few published
research studies (Bourne et al., 2003a, 2003b). Nevertheless, managers and researchers
alike are attempting to find better ways to link performance metric to strategy through
systems like balanced scorecard and shareholder value analysis to drive improved
corporate performance (Epstein and Manzoni, 2003).
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K. Thaker
The early studies on performance measurement stated the purposes as to facilitate
management control and strategy implementation (Koontz, 1959; Anthony, 1965).
According to Thakur et al. (2001), it is the managerial process for measuring progress
towards planned performance and when required taking corrective action. He further
stated that control fulfils a number of organisational purposes. First, control helps to
merge short range and long range plans into a state of greater consistency, second, control
helps bring consistency to the activities and accomplishment throughout the organisation
in ends-means manner, i.e., the final outcome of one work unit becomes the means or
inputs by which the next work unit begins. Third, control can help bring individual
behaviours in one with organisational goals by monitoring absenteeism, work hours and
performance. As suggested by Bititci et al. (2002), the BPM has a variety uses and lists
the following reasons:
1
to monitor and control
2
to drive improvement
3
to maximise the effective ness of the improvement effort
4
to achieve alignment with organisational goals and objectives
5
to reward and to discipline.
Simons (2000) stated that performance measurement is the tool for balancing five
major tensions within a firm. Balancing those tensions leads to effective strategy
implementation and achievement of planned performance: balancing profit, growth
and control; balancing short-term results against long-term capabilities and growth
opportunities; balancing performance expectation of different constituencies; balancing
opportunities and attention; and balancing the motive of human behaviour. Thus, the core
idea for the control framework is to balance needs for innovation and constraints through
levers of control. In his earlier seminal work, Simmons (1995a, 1995b) uses the metaphor
of four levers of control. Namely, diagnostic, interactive, belief and boundary control
systems. These four control levers are nested as they are working simultaneously even
through for different purpose. Beliefs systems are used to enhance core values related to
business strategy and to inspire search for new opportunities while boundary systems
reduce risk by setting limits to strategically undesirable behaviours. Through diagnostic
control system critical success factors are communicated and motivated and finally
interactive control systems are used to discuss strategic uncertainties to learn novel
strategic response to changing environment. Reilly and Rambhala’s (2001) thesis brought
out benefits of possessing a state-of-the-art performance measurement system in a
business organisation such as, the availability of timely performance feedback and
alignment of business activities toward common goals. Insights into the big-picture
relevance of each person’s job, etc. are just a few of the obvious benefits of using an
effective performance measurement system. Similarly, Campbell et al. (2002) report that
performance measurement data can be used to test the effectiveness of organisational
strategies. The benefits as suggested by Reilly and Rambhala (2001), to the managers
were listed further as value-based thinking; focus on stakeholder deliverables, value
paths, i.e., linking processes and activities to value creation, shared corporate strategy,
process improvement opportunities, individual management development, etc. Of course
the expectation from new set of performance measurement system at early stage of its
How does business performance measurement perform?
399
introduction was to over come the limitations of traditional financial measures, but
recently performance measures are increasingly recognised to support managers and the
organisation as they seek and clarify strategy, communicate strategy and challenge the
assumption (Neely et al., 2000; Kaplan and Norton, 1996, 2001; Neely and Al Najjar,
2006; Meyer, 2007). Marr and Schiuma (2003) identified three primary drivers for
organisation to measure performance, namely implementation of strategy, influencing
people’s behaviour and external validation of performance. Otley (2002) stated that BPM
have three main purposes from finance functional perspective. Namely:
1
financial measures of performance as tools of financial management (as tool for
functional manager for management of the finance function)
2
financial performance as major objective of business organisation and finance
function as well
3
financial measures of performance as mechanism for motivation and control within
the organisation.
Malcolm (2006) views performance measures from two perspectives. The first
perspective on resource focus deals with the four principal resource areas, namely
physical, human, information and financial. Second, level focus, relates to three levels,
operational (task specific), organisational (functional, business units, and responsibility
centre wise) and strategic control. The control process has following steps:
1
establishing performance standards
2
measuring the performance
3
comparing performance
4
evaluating performance and taking action.
The action taken can be altering standards, continuing operations and/or correcting
deviations. Attempts are also made to explore the functions and benefits such measures
could provide and how well are those functions fulfilled. Franco-Santos et al. (2007)
reviewed 17 different definitions of BPM and argued that only necessary role is the use
of BPM systems it to measure performance. Further, they propose five different
categories of BPM systems role:
1
measure performance
2
strategy management
3
communication
4
influencing behaviour
5
learning and improvement.
A seminal study by Neely and Al Najjar (2006) brought long awaited support to the
thesis that management learning and not management control is the true role of
performance measurement by longitudinal study of British Airway. They further
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K. Thaker
proposed that performance measures can be used to challenge the assumptions that
manager’s hold about how the business operates. It is a powerful technique to facilitate
strategy mapping. A stream of research recognised the importance of resources
perspective (Malcolm, 2006) in form of intangibles and focused on its measurement.
Through systematic literature review, Marr et al. (2003) explored the motives for which
firms measure their intellectual capital. They identified the following reasons:
1
to help organisations formulate their strategy
2
assess strategy execution
3
assist in diversification and expansion decisions
4
use these as a basis for compensation
5
to communicate measures to external stakeholders.
Comparably, a more recent argument as an out come of a survey by Marr (2009) states
that the performance measures are used as a tool to measure the readiness of intangible
value drivers. The primary purpose of performance measurement as found by
Marr are, controlling, strategy planning, everyday decision-making, strategy validation,
communication, motivation and reward, managing relationship with stakeholders,
regulatory reporting and compliance. Wiersma (2009) found that management uses BSC
for decision-making and decision-rationalising, coordination and self-monitoring with
reference to 19 Dutch firms. Based on 17 case studies in Finnish firms, Malmi (2001)
found two different types of BPM (BSC) usage. Some firms use the scorecard as
management by objective systems while other firms used the BSC as information system
to provide mangers a tool to improve performance. Speckbacher et al. (2003) survey of
42 firms using performance measures (BSC) in three different ways/types. Type 1 as a
specific approach to measure intangibles, where intangibles are identified and measured
by non-financial strategic measures rather then by their financial value. Type 2 as a
multidimensional performance measurement system and describe strategy by using a
cause and effect logic to link tangible and intangible assets. And type 3, which is type 2,
plus implementing the strategy by defining objectives, action plans and results and
linking incentives to business performance measures. This classification is analogous to
the successive evolution of balanced scorecard from a basic tool to balance the financial
and non-financial measures to a strategic management system and more recent advocacy
as learning and development tool. Thus, the purpose of BPM have evolved and morphed
from inadequacy of reliance on accounting-based performance measurement to
measurement tool that balanced various perspectives to strategic change framework and
more recently for management learning and development tool.
Performance measures and its management come as a handy tool in achieving
planned performance and the views on use of BPM converge across various studies. We
propose to build on Otley’s (2002) argument to suitably adopt following functions to
apply to a border perspective, i.e., the entire organisational or business performance.
1
Performance measures as tools for management of business: Here, the focus is on
how efficient and effective use of recourses the management does to achieve the
wider aims of the organisation. As per Malcolm (2006) here, the focus is on resource
and performance thereof in managing the resources at the disposal of management.
How does business performance measurement perform?
401
2
Performance measures as a major objective of a business organisation: In empirical
studies and literature, it is argued that the most organisation have a financial goal as
a major objective. Finance literature for long supported wealth maximisation as
organisational objective, and evolved in defining the measure from net profit, cash
profit to market value added or economic profit, etc. The objectives can be
non-financial as well. Like customer satisfaction, market share, innovation and
product leadership, social responsibility and so on. The performance measures are
manifestation of goals, objectives, targets and KRAs and are used as diagnostic
control (Simons, 2000) tools.
3
Performance measures as a mechanism for motivation and control within the
organisation. Performance measures as management control tool (Malcolm, 2006;
Simons, 2000). Here, the performance measures can be used in various management
control activities like planning, budgeting, performance evaluation, reward and
compensations with aim to induce goal congruent behaviour amongst the managers.
Simons’ (2000) belief control systems closely relates to this.
4
Performance measure as tool for strategy formulation and implementation. The
chosen strategy defines critical success factors and performances (measures),
which become focal points for design and operation of the control system (Kaplan
and Norton, 2006) or say Malcolm (2006) level focus. Thus, aids the strategy
implementation (Campbell et al., 2002) by providing the performance information
provides as the basis for thinking about new strategies and management learning as
argued by Neely and Al Najjar (2006), which is called interactive control (Simmons,
1995a, 1995b).1
The above purpose category was extensively communicated to CFO’s during the in
person interviews with the researcher and found to have good acceptance. At the same
time, the above categorisation manifests substantial convergence and overlap amongst the
views about purpose of performance across the stream of literature.
Wm. Schiemann and Associates surveyed 203 executives in 1996 on the quality, uses
and perceived importance of various financial and non-financial performance measures
(Lingle and Schiemann, 1996). Their results are presented in Table 1. While 82% of the
respondents valued financial information highly, more than 90% clearly defined financial
measures in each performance area, included these measures in regular management
reviews, and linked compensation to financial performance. In contrast, 85% valued
customer satisfaction information highly, but only 76% included satisfaction measures
in management reviews, just 48% clearly defined customer satisfaction for each
performance area or used these measures for driving organisational change, and only
37% linked compensation to customer satisfaction. Similar disparities exist for measures
of operating efficiency, employee performance, community and environment, and
innovation and change. More importantly, most executives had little confidence in any of
their measures, with only 61% willing to bet their jobs on the quality of their financial
performance information only 41% on the quality of operating efficiency indicators, the
highest rated non-financial measure. This clearly poses obvious question. How are BPM
performing? A replica of this study was performed in India and the results are produced
in the later part of this paper.
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K. Thaker
Table 1
Companies’ use and opinion about measurement practice
Percentage of respondents’ practices using/favourable
Measure of
Highly
valued
information
Quality of
information
Clear
measures
Measures
regularly
updated
Linked to
compensation
Financial
performance
82%
61%
92%
88%
94%
Operating efficiency
79
41
68
69
54
Customer satisfaction
85
29
48
48
37
Employee
performance
67
16
17
27
20
Innovation/change
52
16
13
23
12
Source: Lingle and Scheimann (1996)
One can observe wide comparability and agreement on use or purpose of performance
measurement across various contributions. On a more philosophical note I would propose
the role of BPM is to illuminate mangers thinking and understanding about business
strategy and performance so that right decision are made, inspire and charge them to
strive to further strategic goals and integrate people and parts of the organisation
(coordinate and unite efforts) towards strategy so the organisations thrives and sustains.
Thus, BPM have three roles, to illuminate, inspire and integrate, people and parts of the
organisation to the rightful goals and purposes.
However, the larger question is, are the performance measurement systems truly
performing? The key questions as described by Jean-Francois (2006) are: Does the
organisation maximise the potential of its performance measurement system? How can
one improve the system? Does exploiting the full potential of the system make
difference? Jean deployed a national survey of manufacturing firms with an objective to
provide a better understanding of how the top management teams of manufacturing firms
could use performance systems to improve strategic management and organisational
performance. He further stated that if PMS is periodically reviewed, it could contribute to
the improvement of organisational performance. Implementing systems is only the first
step – having them reach the full potential (performing to the best) is the real challenge.
And therefore as iterated by Neely (2005) that one of dominant themes for future set of
research in BPM would to know performance of BPM and barriers to it is
Implementation. Similarly, Tuomela (2005), states that several field studies imply that in
examining the relationship between strategy and management accounting system
(including PMS), it might be more relevant to investigate how those systems are used
rather then whether these systems are used. Therefore, it makes sense to investigate
empirically how well BPM is performing across various functions and sort out difference
in the performance of BPM across various purposes groups or objectives it is being used.
2.1 Objective and rational
For crystallising and conceptualising for this research, purpose of BPM can be
summarised under following major categories.
How does business performance measurement perform?
403
1
BPM as measurement tool for management
2
BPM as measurement tool
3
BPM manifests major objective of a business
4
BPM as a mechanism for motivation and control
5
BPM as tool for decision-making and strategy formulation
6
BPM as tool to communicate and implement strategy (strategic management system)
7
BPM as a management learning and development tool.
The above classification built on various contributions discussed in literature can be
related with the Simmons (1995b) levers of control. For instance, the items # 2 and 4 to a
great extent reflects what Simmons calls the diagnostic control, items 3, 4 and 6 relates
well belief and boundary control, items 5 and 7 reflects the interactive control. The
linkages across those function categories with the four levers should not be interpreted in
watertight and strict manner but they surely to a higher extent on the continuum reflects
the linkage discussed.
The theoretical work leads to formation of following hypothesis.
•
First: There is no significant difference in performance across different functions of
BPM.
•
Second: There is no significant difference in performance across various groups
(function category) of BPM.
The second hypothesis can be further elaborated by restating that the objective is to
explore and support or refute the theory about weather difference in performance of BPM
across various purpose category exist and to extrapolate on the state of affairs in terms of
extent of the maturity in the use of BPM.
3
Methodology
A structured survey instrument was developed based on the inferences from Otley
(1999), Chenhall (2003) and Ferreira and Otley’s (2009) analysis framework for study
of performance measurement system and management control systems. The first of the
instrument contained set of questions that solicited response for objectives, strategies,
organisation structure and KRA and was useful to set the context and relevant thinking
for respondent CFO. The later part contained various items on Likert scale on different
aspects of BPM purpose and practice. Final part solicited the details of responded and
key financials of the company. Tonge et al. (2000) have used similar scale for BPM
practice study in the UK was used. A pilot survey drew response from three CFO to
check the validity of the questions, after which the instrument was suitably revised and
finalised. Initially telephonic contact was made to the CFO or his deputy to brief about
research and solicit the response. A questionnaire was e-mailed with a covering note
requesting response to CFO’s of companies from BS 2002 list. The list contained the
largest 200 companies in India. The companies in financial sector were excluded. Follow
up through e-mails; referrals and phone calls were done. As the response rate was low, it
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K. Thaker
was decided to seek appointment for in person interaction with CFOs. Referrals of CFO’s
who responded earlier proved to be a good means to increase the response rate. The
response to personal interview was very encouraging with CFO’s spending about 90
minutes to as much as 210 minutes for response. Valuable insights were drawn during the
extended discussion beyond merely filling the questionnaire. As a consequence, we had
usable response through personal visits to CFO’s of 38 leading companies in India. The
earlier studies by Tonge et al. (2000) had 41 responses, Malmi (2001) study had response
from 17 firms, Speckbacher (2003) 42 firms and more recent study by Wiersma (2009)
19 firms. The companies responded for this study included leading and large companies
in information technology consulting, consumer goods (durable and non-durable), metal,
healthcare and pharmaceutical, automobiles, petrochemicals, hotels and hospitality, etc.
Nine of those companies were part of the Benchmark stock market index BSE 30 and
constituted over 46% weightage of the index (2005). Given their size and diversity of the
sample as suggested by Govindrajan and Gupta (1985) there is no prima-facie reason to
expect systematic bias in the findings. Moreover, the respondents were CFO’s themselves
who would be largely involved in championing the performance management and control
in the organisations they work for. In the main, studies that have examined relatively
large organisations, usually justifying this, as it is large firms that tend to adopt the type
of practices incorporated within more formal management control systems (Chenhall,
2003). Moreover, Khandwalla (1972, 1977) found that large firms were more diversified
in product lines, employed mass production techniques, were more divisionalised and
made greater use of sophisticated controls and therefore provide a good opportunity and
is relevant (Merchant, 1981) for the management control research. Consequently,
empirical studies like Govindrajan and Gupta (1985), Tonge et al. (2000) have studied
large (Fortune 100, FTSE 100) companies.
Descriptive statistics were applied for analysis. To find the averages, the weights for
all the scales were given in the order of 1 to 5. For example, strongly satisfied was
assigned weight of 1 while strongly dissatisfied was assigned weight of 5. Kruskal Wallis
ANOVA test was performed. The KW test is a non-parametric version of one-way
ANOVA. The assumption behind this test is that the measurements come from a
continuous distribution, but not necessarily a normal distribution (Hollander and Wolfe,
1973). The test is based on an analysis of variance using the ranks of the data values, not
the data values. Output includes a table similar to an ANOVA table, and a box plot.
The subsequent section of the paper contains the descriptive statistics and the Kruskal
Wallis test mean scores on performance satisfaction on 24 different items and discussion
based on findings. Kruskal Wallis ANOVA test was run with help of MATLAB 7.1 to
derive mean rank. Further analysis was performed through multicompare (stats) tool in
KW statistics (this function is not available in SPSS 15). The objective was to identify
and attempt to label the homogeneous group extracted out of 24 different items derived
based on significant difference in CFO’s opinion on performance. Moreover, it was
thought to identify and relate homogenous categories or groups with significant
difference in score with the categories suggested by Otley (2002), Simmons (1995a),
Malcolm (2006), Franco-Santos et al. (2007) and discussed by us. Finally, the survey
results on use, and opinion about on the prevalent measurement practices from CFO’s
point of view is presented.
How does business performance measurement perform?
405
3.1 Findings and analysis
Table 2 depicts the Kruskal Wallis ANOVA table output from MATLAB 7.1, while the
Table 3 contains the Kruskal Wallis test mean score and descriptive statistics with the
ranks based on responses of CFO on how well those purposes or functions are satisfied. It
is observed that operational/tactical functions of the performance measures are well
satisfied compared to the function that represents strategic and intangible aspects.
Operational efficiency is rated highest in terms of satisfaction, followed by business unit
and divisions performance and so on. Comparably, Tonge et al. (2000) observed that the
main benefit of BPM (balanced scorecard) was that departmental goals were now
communicated well and being aligned with the overall business strategy. This indicates
that performance measurement is more focused on communicating and measuring
performance from short-term and operational perspective rather then on strategic and
behavioural one. Thus, reflects the use of BPM from the Simmons diagnosis and belief
control levers. Measuring performance of top management function (strategic and control
items or interactive control as argued by Simmons) falls amongst the list of lower
satisfied purposes, along with other stakeholder satisfaction, internal learning and growth,
employee satisfaction and social and environmental responsibility. Comparably, Tonge
et al. (2000) observed that balanced scorecard as a learning and feedback system was
seen as of least benefit in FTSE 100 companies. We find our results are mixed in
comparison with the longitudinal case by Tuomela (2005), which found that the company
they studied was in the development process and the main objective of the BPMs was
strict strategic control (i.e., diagnostic control) and at lower priority on to making sense
of strategy and learning about strategic interdependences (i.e., interactive control).
Table 2 on KW ANOVA Met Lab output depicts that at the significance of
0.05 levels there exist enough evidence to conclude that there is difference amongst the
performance across different purpose/function. High Chi Sq statistics reflects the strength
of our results.
A further attempt was made to find the difference in the average performance score
across the function/purpose category we proposed. Our proposed categorisation discussed
earlier in literature review sections builds on Otley’s (2002), to apply to a border
perspective, i.e., the entire organisational or business performance was discussed in the
literature section. Table 4 depicts the four function category wise scores. The MATLAB
mean comparison chart across various functions based on post hoc analysis using
multicompare (stats) in KW test can be seen in Figure 1.
Table 2
Source
Kruskal Wallis ANOVA table
SS
df
MS
Chi-sq
Prob > Chi-sq
Columns
4.74663e+006
23
206,375.3
84.79
5.22572e–009
Error
4.62496e+007
888
52,082.9
Total
5.09963e+007
911
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K. Thaker
Table 3
Kruskal Wallis output mean score across different functions or purpose
Purpose
Mean
SD
KW mean
score
KW
rank
1
Information for developing strategy
2.18
0.83
457.82
13
2
Implementing strategy
2.13
0.78
445.70
11
3
Validating assumptions (strategy formulation premises)
2.39
0.89
517.87
19
4
Coordinating activities of several parts of the
organisation
2.08
0.67
433.43
10
Assigning responsibility to managers
Informing managers of the Performance pthat is
expected of them
7 Obtaining bases for evaluating Manager’s actual
performance
8 Compensating managers
9 Measuring business unit/division performance
10 To know the efficiency of management function
2.00
1.95
0.52
0.70
418.22
394.82
8
5
2.00
0.74
406.79
7
2.34
1.74
2.45
0.81
0.79
0.89
511.68
317.68
533.57
18
1
20
5
6
11 To know the effectiveness of management function
2.34
0.91
506.04
17
12 Meeting overall organisational long-term objective
2.24
0.82
481.80
14
13 Meeting overall organisational short-term objective
1.87
0.66
373.96
4
14 Product competitiveness
1.97
0.79
398.05
6
15 Customer satisfaction
2.05
0.73
424.70
9
16 Competitive position of company
2.13
0.81
451.92
12
17
18
19
20
21
22
23
24
2.47
2.45
2.61
2.42
2.26
1.71
1.84
2.24
0.92
0.80
0.89
0.83
0.72
0.52
0.72
0.63
545.09
541.57
587.72
538.76
496.47
319.95
359.14
493.24
23
22
24
21
16
2
3
15
Average score
Average expression
Rank
2.16
Tend to satisfy
2
2.19
Tend to satisfy
3
3.33
Tend to dissatisfy
4
1.99
Satisfy
1
Environmental sustainability
Social responsibility
Internal learning and growth
Employee satisfaction
Major pitfalls/risks of business
Operational efficiency
Share holders returns
Other stakeholders satisfaction
Table 4
Category
I
II
III
IV
Function category wise satisfaction score
Purpose/function category
Performance measures
(manifests) as major objective
of a business organisation
Performance measure as tool
for strategy formulation and
implementation.
Performance measures tool
to measure performance of
management function
management of business
Tool to manage and control
functional and divisional
performance
How does business performance measurement perform?
Figure 1
407
Multiple comparison of mean rank column Met Lab output (see online version
for colours)
The function Category III, in the Table 4, i.e., to know the performance on management
function appeared to be least satisfied. Respondent on average were not sure, and
generally rated low on how well the purpose is satisfied. A few companies like Mphasis,
Infosys and Wipro all from IT consulting and BPO industry have expressed satisfaction
in case of function Category III. A leading consumer electronic company CFO argued
that the present state of affairs in company is partly due to failure of BPM to adequately
fulfil functions given in Category III. Companies are most comfortable in terms of
satisfaction in Category IV function, i.e., measurement of functional performance,
Followed by the function Category I, i.e., to know how well overall objective of firm are
satisfied. Special attention needs to be given to the management functions category to
gear up the performance management of the management function. This reflects the need
to strengthen the interactive lever of control. Within the function categories there exist
heterogeneous response in terms of satisfaction. If we take individual functions and the
level of satisfaction then:
a
learning and growth
b
other stakeholder are least satisfied amongst all the function.
Employee satisfaction, social responsibility, the efficacy of management function and
sustainability are the ones with the satisfaction score on lower side. Say the respondent
CFO’s are of the view that their organisations are yet to recognise those items as one of
the important benefits they can derive from BPM.
Figure 1 in form of MATLAB 7.1 output on multiple comparison of mean rank chart
depicts a typical comparison of item 9 (measuring business unit/divisional performance)
with eight different functions. It shows that eight function mean scores and ranks are
significantly different from item 9. One can observe that measuring business unit and
408
K. Thaker
divisional performance have significantly better performance (satisfaction) compared to
the eight functions namely item 2, Validating assumption for strategy formulation
(interactive control), items 10 and 11 on effectiveness and efficiency of management
function, item 17 to 20, respectively on environmental, social, internal learning and
growth (illumination) and employee satisfaction. This clearly substantiates our earlier
inference that BPM performance on measuring business unit performance (tactical
issues) is significantly better then on the strategic, development and sustainability
aspects/category consisting of strategic validation, management learning and
development and environmental, social and employee stakeholder performance. The
Figure 1 only depicts comparison of item 9 with other groups, however, one can try
clicking on each function (group) one by one to observe that that function items 9, 13, 22
and 23 representing mainly the category groups 2 and 3 (given in objective and rational
section earlier), namely performance measures as measurement tool and performance
measures manifests major objective of a business (diagnosis lever of control) are
significantly better in terms of performance compared to the items 3, 10, 11, 17, 18, 19
and 20 representing the categories 1, 2 and 7 (given in objective and rational section) that
represents strategic, management development and learning and sustainability.
Comparably, Tuomela (2005) findings based on case-based research observed that the
use of strategic PMS was more prevalent for diagnosis and belief levers of controls
(Simmons, 1995a, 1995b), which relates well with the function categories 1, 2 and 4
given in the Table 4 above. While the use of PMS for interactive control is not much
prevalent as found by Tuomela relates well with our findings of low satisfaction score in
functional Category III in Table 4. Our study revealed that the performance management
systems are better performing in terms of aiding operational and organisation control, say
the level focus perspective suggested by Malcolm (2006), as it lags at strategic level.
Hence, the Simmons diagnosis and belief control function is better satisfied while
companies still lag in term of its BPM performance in terms of interactive control.
Figure 2 depicts the items that are significantly different.
Figure 2
MATLAB output on Kruskal Wallis test (see online version for colours)
How does business performance measurement perform?
409
The companies in our sample are amongst the most successful and leaders in respective
industry. Most of the companies are amongst the better performer in the industry. Such
success in performance is the result of good strategy and its implementation. This might
indicate the role of performance measurement system in success of those companies.
Hence, we could expect that higher performance satisfaction form BPM in those sampled
companies and our findings reflect this. However, should the sample would have
contained mid sized and other then leading companies the results may be different.
Further individual function specific inquiry on case-to-case basis can offer some useful
insights. We sum up by saying that we reject both hypothesis and conclude that.
•
First: There is significant difference in performance across different functions of
BPM.
•
Second: There is significant difference in performance across various groups
(function category) of BPM and it can be classified accordingly the various function
category and groups identified in the theory. This draws practitioner’s attention on
which lever of control or function category of BPM to work on to optimise benefits
from BPM implementation.
Table 5
Companies’ use and opinion about measurement practice (India)
% of respondents’ practices using/favourable
Measure of
Highly
valued
information
Financial
performance
87%
74%
92%
82%
63%
0%
Operating
efficiency
89
66
68
76
44
16
Customer
satisfaction
71
58
47
58
21
24
Employee
performance
45
45
58
53
53
16
Employee
satisfaction
47
29
37
37
18
37
Innovation/change
55
37
36
39
18
32
Internal business
process
71
60
53
53
34
13
Learning and
growth
47
42
32
53
16
42
4
Measures
Difficult
Quality of
Clear
Linked to
regularly
to
information measures
compensation
updated
measure
Quality, use and perceived importance of various financial and
non-financial measures
The replica of Wm. Schiemann and Associates 1996 survey on the quality, uses and
perceived importance of various financial and non-financial performance measures
(Lingle and Scheimann, 1996) included in the questionnaire has dome interesting
comparison. Table 5 depicts the disparities. Certain measures are highly valued but they
410
K. Thaker
are difficult to measure; not regularly updated, and are not institutionalised by linking
them to compensation. For instance, customer satisfaction, measures of operating
efficiency, employee performance, community and environment, and innovation and
change. Mostly, financial measures are linked to compensation. On the other hand,
non-financial measures are highly valued and offers quality information but only in very
few cases linked to compensation. The disparities across importance, use and clarity of
measures are comparable across the study in the USA and India.
5
Conclusions
This study explores and discusses BPM practice of top-notch companies in India. The
study is motivated to theoretically identify the purpose for which performance measures
are used and empirically research how well performance measures perform on the
purpose for which they are deployed and have some view of state of affairs on BPM in
select companies in India. In the literature, we found general agreement over the views on
the use-purpose of performance measurement in place and categorisation of purpose of
BPM. We have suggested four functional categories to describe use and purpose of BPM.
At a philosophical level, the purpose of BPM is to illuminate, inspire and integrated the
people and parts of the organisation towards the rightful purpose and organisational
objectives. Empirical studies we reviewed were found in western context and had
response ranging from 17 to 42 companies and contained wide variety of industry.
Overall, our survey results based on 38 leading companies in India preempts to conclude
that performance measures are better at satisfying tactical and operational purposes rather
then strategic and management function or say type 3 BS as suggested by Speckbacher
et al. (2003) purposes. This also draws us to say that users yet to realise full potential
benefits from the prevailing performance measurement systems in place. Overall, our
results concur with Tonge et al. (2000), that the use of BPM is seen primarily as a
performance measurement system – not as a strategic management system and also not as
management learning and development tool. Relating with Simmons levers of control,
the BPM performs better in terms of diagnosis and belief levers of control compared
to interactive lever of control. Performance measures are rather used as a tool
for management by objective and operational control (Malmi, 2001) rather then a
full-fledged strategic management system and a system that leads to management
learning and development (Neely and Al Najjar, 2006). This findings strengthen the
argument of earlier studies and results (Langfield-Smith, 1997; Abernethy and Brownell,
1999; Tonge et al., 2000; Vaivio, 2001; Bisbe and Otley, 2004) that it not only the
specific control tools such as BPM that are used but also that way they are applied and
used performance of those should be taken in to account. Moreover, it is found that
performance measurement has implications on four levers of control and that the users do
not realise benefits equally well across all of them. Users while implementing BPM must
think of its utility form border perspective, and explore its role as management learning
and development and strategic management system.
The survey on quality, use and perceived importance of various financial and
non-financial measures unveils disparities on use, quality of measurement. More
importantly, most executives had little confidence in any of their measures, with less then
50% willing to bet their jobs on the quality of their non-financial performance
How does business performance measurement perform?
411
information. Despite increasing importance of measures on customer satisfaction, internal
business process less then 40% of them are willing to bet their job and as low of in 16%
sample such measures are linked to compensation. Only in case of financial performance
related information none of the responded had difficulty in measurement. The results are
comparable with Lingle and Scheimann (1996).
The survey results are symptomatic of the maturity cycle in terms of usage,
understanding and potential for further realisation of benefits of BPM with reference to
companies in India. The sample appears fairly representative but the industry and sector
specific study results would differ. The sample represents large and leading companies in
respective sector, as it was believed that those companies would be suitable for
responding on BPM as are more likely to have higher maturity level of adoption. The
results could not be generalised for medium and small size companies and would be
difficult to study and replicate as such companies may not have such observably and well
developed of BPM in place. Nevertheless, the study points out the state of affairs and
some of the research issues and practical challenges with reference to BPM in India.
Acknowledgements
The author gratefully acknowledges the encouragement and helpful advice of the
reviewers of the journal, Professor Manish Thaker for valuable advice on usage of
statistical tools and Mr. Ankit Sharma for valuable assistance in revising the paper.
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1
2
Interactive control is term used, based on the research of Robert Simons, Levers of Control
(Harvard Business Press, Boston, 1995b)
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How does business performance measurement perform?
415
Appendix
Sample companies and respondents
Company
Respondent
Designation
1
ABB Ltd.
K. Rajagopal
Sr. VP and Chief Financial
Officer
2
Alembic Ltd.
R.K. Baheti
Director and President
Finance
3
Arvind Mills Ltd.
Jayesh Shah
Director Finance
4
Biocon Ltd.
Murali Krishnan KN
Chinappa MB
President Group Finance,
VP Finance
5
BPL Limited
P.V.K. Sundaram
Vice President Finance
6
Cadbury India Ltd.
Girish M. Bhatt
Finance Director (SE Asia
and Indian Sub Continent)
7
Denial Measurement and
Control India Ltd.
Lalit Chhaya
Finance Controller
8
Dr. Reddys Laboratories
V.S. Vasudevan
Chief Financial Officer
9
Essar Steel Ltd.
V. Raghwan Biju Mathew
Chief Financial Officer,
General Manager Finance
10
FAG Precession Bearings
Ltd.
N. Ram Mohan
Chief Financial Officer
11
General Motors India Ltd.
Pranay Mehta
General Manager Finance
12
GCMMF
J.M. Soni
General Manager Finance
13
GACL
K.P. Buch
General Manager Finance
14
GNFC
Deepak S. Taunk
Executive Director
15
Godrej Sara lee Ltd.
Ravi Venkateswar
Chief Financial Officer and
Director Finance
16
Gujarat Gas Ltd.
Harbinder Singh
Ahluwalia
Finance Director
17
GlaxoSmithKline
Pharmaceuticals Ltd.
Mehernosh Kapadia
Director and Chief Financial
Officer
18
Grasim Industries Ltd.
Sanjeev Bafna
Sr. VP Corporate Finance
19
Hewlett Packard India Ltd.
(Digital Global soft Ltd.)
Chandrasekar Sundaram
Manager Corporate Affairs
20
Hero Honda Motors Ltd.
Ravi Sud
Chief Financial Officer
21
Hindustan Lever Ltd.
S.P. Mustafa
Vice President M&A,
Treasury, Investor Relations
22
Hindalco Industries Ltd.
R.K. Kasliwal
Group Executive President
and Chief Financial Officer
23
Infosys Technologies Ltd.
T.V. Mohandas Pai
Member of Board and Chief
Financial Officer
24
I flex Solutions Ltd.
Deepak Ghasisas
Chief Executive Officer –
India Operation and Chief
Financial Officer
25
Indian Hotels Ltd.
L. Krishna Kumar
Sr. Vice President – Finance
416
K. Thaker
Sample companies and respondents (continued)
Company
Respondent
Designation
26
Mastek Software Ltd.
Jamshed B. Jussawalla
and Hitesh Danak
General Manager Finance,
Investor Relation Manager
27
Mphasis BFL Ltd.
Ravi Ramu
Chief Financial Officer
28
Nirma Ltd.
R.L. Joshipara
General manager Finance
and Accounts
29
Reliance Industries Ltd.
Alok Agarwal
President Finance
30
Sonata Software Ltd.
Thomas K. Joseph
Sr. VP and Chief Financial
Officer
31
Tata Telecom (Avaya) Ltd.
Amal Thakor
Chief Financial Officer
32
Tata Steel Ltd.
R.C. Nandrajog
Vice President Finance
33
Tata Motors Ltd.
Praveen Kadle and
R.S. Thakur
Chief Financial Officer,
General Manager Corporate
Finance
34
Tata Chemicals Ltd.
P.K. Ghose and
Rajveev Lodha
Chief Financial Officer and
Sr. Manager Accounts
35
Torrent Pharmaceuticals
Ltd.
Sanjay Dalal, Samir Shah
Executive Director Finance,
Vice President Finance
36
Transpek Silox Ltd.
P. Sreekumar
Vice President Finance and
Accounts
37
Wipro Ltd.
Suresh C. Senapaty
Corporate Executive and
Vice President Finance
38
ZydusCadila Cadila
Healthcare Ltd.
M.K. Patel
Sr. VP finance