Performance Measurement: From Philosophy to Practice
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PERFORMANCE MEASUREMENT: FROM PHILOSOPHY TO PRACTICE
For a few recent years, measurement of performance seems to be new interest topic for academics and practitioners. Though it is many performance management systems (PMSs) established to improve the traditional one, there are many company still using the traditional PMS that only focused on financial aspect. However, a financial approach of performance measurement have some limitation, such as:
Financial measures only focus on quantifying monetary aspects.
Financial report is a lagging report because its only show the past.
Financial measures have only one formats for all departments.
And also, using the financial performance measurement can cause a problem to company:
Financial measures can have a conflict with strategic objectives.
Financial aspect can only focus on short term result and decrease improvement.
Financial measures can not describe system as a whole unity.
Financial measures are not applicable to new management methods.
Financial measures cant describe cost of quality.
Because of the reasons described above, a performance management system should have several condotion to fulfill:
A PMS should support a company strategy and also it is have a flexibility to always follow the companys improvement over time.
A PMS should be balanced. Its important to keep all aspects have the same value, such as short-term and along-term result, different type of performances, various perspectives, and various organizational levels.
A PMS have to avoid a sub-optimization fro the employee who try to improve theirself by their own consideration. Company must ensure that employee behaviour is consistent with corporate goals.
A PMS should have a limitation to its number of measures. A big numbers means it is more time to analyze and also can increase data overload because of wasted data that actually unusefull.
A PMS must be designed to user friendly so they can easily accessed by people who needed the data or for those that being evaluated.
A PMS should have a clear purpose and target for each performance measure.
There are five main models of PMS usually used by people:
PMSs that are stricly hierarchical or stricly vertical.
PMSs that are balanced scorecard.
PMSs that can be called frustum.
PMSs that distinguish betweeninternal and external performances.
PMSs that are related to value chain.
A following section mention some of better-known methods that can subtitute the traditional approach that have their limitations to measure the performance.
Activity-based costing
This method developed by Johnson and Kaplan in 1987 as an attempt to solve some problem in traditional cost accounting. ABC have more accurate identification of costs because it is focused on company activities for specific products so company can analyze and discover what activities cause the costs. With this system, company can use ABC to determine product pricing, production decision making, overhead cost reduction, and continious improvement. But ABC still a method that only focus only on financial aspects, so the researcher continue to develop a method that include both cost and non-cost performance objectives that ore suitable with business environment of today.
Sink and Tuttle model
This model said that performance of the company have a complex relationship between seven aspects. Those aspects are effetiveness, efficiency, quality, produtivity, quality for worklife, innovation, profitabilty/budgetability. However, this method still have a weakness of its flexibility and also its limitation that does not consider the customer perspective.
Inaddition, the TOPP Project reseacher define the performance as a integration of efficiency, effectiveness, and adaptability. Efficiency and effectivenes are the same as in Sink and Tuttle model, and adaptability is a ability to face the change in future.
Balanced scorecard
This method is probably the most well-known method of performance measurement. Its developed by Kaplan and Norton in 1992. Balanced scorecard say that company must be balanced in all aspect, so balanced scorecard try to define the perspective into one of four fundamental questions:
How do we look to our shareholders (financial perspective)?