What Are the Effects of Performance Measurement on Organizational Performance - Essay Example

What are the Effects of Performance Measurement on Organizational Performance? BY YOU YOUR SCHOOL INFO HERE HERE What are the Effects of Performance Measurement on Organizational Performance? Introduction Performance measurement involves the collection and analyses of important company data and information as a means of determining the performance levels of an organization. Performance measurement involves studying internal operational process, analyzing strategies, and examining financial numbers to determine whether outputs are aligned with the goals and objectives that were expected to be achieved. The goal of performance measurement is to quantify the productivity or effectiveness of historical business activities or the process of evaluation regarding how well an organization was able to create value for stakeholders and the business. This essay explores the dynamics of performance measurement in order to determine what effects the process maintains on organizational performance. Because high performance serves as the criteria by which a business determines its ability to succeed, it is important to fully understand the effects of performance measurement toward the goal of achieving high organizational performance. The Plethora of Performance Measurement Tools There are many different methods available to businesses as a means of measuring performance. Some of these include return on equity, revenue analyses, export growth analysis, liquidity, return on investment or even balanced scorecards (to name only a few methodologies). In most instances, statistical modeling is required to determine whether the organization has achieved performance enhancements or reductions. The problem, however, is that it is nearly impossible to achieve the ability to measure the full scope of the organization’s performance variables. Hence, in some instances, performance must be assessed through indirect observation, requiring a qualitative approach. Some organizations even include employees in setting specific performance targets which increases negative attitudes and improves motivation toward achieving those targets. This enhances both qualitative and quantitative performance measurement activity in such areas as total quality management or just-in-time manufacturing evaluations. It is dependent on the organization, its culture, its objectives and management ideology that dictates the type of performance measurement tool utilized and how this might have effect on organizational performance. The Effects of Performance Measurement Van Dooren (2006) refers to the process of gaming within the organization, whereby leaders purposefully set lower performance standards in order to avoid being the victim of having to comply with higher performance targets in the next operating year. This is known as the ratchet effect, a fear that sustaining high performance could drive impossible targets in the following year. In such a case, performance measurement would be a tool for appeasing executive level or Board level management simply to show that the organization has been able to achieve desired performance targets even when the managers know that targets were deflated to avoid the ratchet effect. The quality of the instruments utilized for performance measurement, therefore, would be rather invalid, however to the stakeholders of the organization, it would appear that the business has maximized its productivity and performance since deliberately-deflated performance targets had been reached. In reality, under the process of gaming, the organization might have been able to exceed expectations of performance, however the managerial culture wanted to ensure that the organization was not over-burdened with unrealistic performance targets in the following fiscal year of operations. Hence, when determining the effects of performance management on organizational performance, stakeholders must recognize that there are mitigating factors involved with management competency, management commitment to ensuring the well-being of their employer, and a culture that is able to, ethically, use performance measurement tools to measure performance even when they understand that the organization is capable of providing better performance results. This phenomenon can also be witnessed in the phenomenon of cream skimming, whereby leaders of the organization cherry pick easy scenarios and clients and redirect performance measurement for more difficult organizational situations and activities (van Dooren). In this type of situation, as with the phenomenon of gaming, the performance measurement tool does not represent the holistic and tangible activities of the entire organization. Hence, the effects of performance measurement on organizational performance would be theoretically rather nil since the original targets and criteria established were unrealistic and involved only situations that managers knew could bring a reported level of high performance. In reality, if the managers had not cherry picked the performance criteria, the organization might have illustrated low performance since the performance measurement process would have taken into consideration areas in which the organization has historically struggled or been able to support effectively. Gaming and cherry picking as criteria for performance would seem to illustrate that the effects of performance measurement on organizational performance is one of manipulation of data. Even though the measurement tool is established as a control methodology to ensure that proper managerial decision-making is occurring, the basis on which the measurement process is founded is either irrelevant or unrealistic. In these scenarios where information and criteria for measurement is manipulated by leadership of the organization, the effects on performance are miniscule. Since the first duty of most organizations today is to ensure the financial wealth of shareholders, the reporting process in performance measurement in a criteria-manipulating environment only satisfied the interests of shareholders or other stakeholders rather than being a true measure of organizational performance. Business managers can look toward Tektronix, a manufacturing company in the United States. The company’s performance measures were established in the pursuit of continuous improvement. Through the measurement process, the company experienced 80 percent drop in inventory levels (which avoids holding costs and taxation), vendors in the supply chain were reduced from 1,500 to less than 200, and 70 percent of total sales were actually delivered to customers within the expected deadline (Kasie & Belay, 2013). The performance measurement tool’s effects, in this situation, were significant as the criteria by which the measurement tools were developed were rational and dedicated to ongoing improvement initiatives in the organization as a means of cost control, efficiency and customer satisfaction. By using legitimate criteria that was aligned with the actual capacity of the firm and the tangible resources on hand, Tektronix achieved positive organizational performance as illustrated by performance measurement analyses. As a result, the reporting process of the measurement system provided legitimized data which illustrated to stakeholders that the business was capable of achieving superior performance outcomes. Thus, when considering the effects of performance measurement, individuals must be considerate of the environment in which performance measurement tools are being created, designed and implemented. Accuracy of data, legitimacy of target selections, and the emphasis given to the instruments designed to measure performance are variables that determine the effects on organizational performance. Van Dooren (2006) further supports that attitudes and environment are variables in determining the effects of performance measurement. The author discusses complacency in the organization, which involves making comparative performance evaluations was a means of staying “securely in the pack” (p.197). When organizational leadership begins comparing its own performance to the performance of others (such as in the competitive environment), it is likely going to have impact on the type of instrument used for performance measurement or involve using inferior data as a means of measurement. Complacency in determining performance criteria tends to be non-discriminate when deciding what constitutes good and bad performers as organizations tend to adapt to one another under the premise of being securely in the pack, hence impacting how performance is ultimately measured. This phenomenon could have significant impact on how organizations establish the criteria for measurement, especially in highly saturated competitive markets. If all other organizations in this established market have adapted to one another and have complacency in terms of financial analysis (as one example), this will serve as a potential benchmark for another organization. When comparing performance targets and outcomes to other competitive entities and it is determined that their performance is sufficient, the instruments used for performance measurement in the comparing organization will theoretically be substandard or generally mediocre. Hence, the effects of performance management on organizational performance, in a complacency-oriented environment, will again be minimal and of little consequence. Van Dooren again identifies another phenomenon in the organization which he refers to as myopia. Managers will sometimes remain overly-obsessed with short-term goal attainment without looking at the long-term. Shareholders and Board members often coerce companies to improve their quarterly results. This can lead to creative accounting in order to make financial results appear more superior or simply create performance measurement instruments that only evaluate a small variety of factors that would lead to short-term improvements that would be illustrated and reported on quarterly performance reports. Hence, this would eliminate the potential for adopting continuous improvement performance criteria and only ensuring cost controls, change in accounting procedures, or other short-term remedies that would appease a Board or group of shareholders that demand performance for their investments. However, it is not just financial performance that is relevant for determining the true state of organizational performance. Businesses must be considerate of ensuring customer satisfaction, building a positive public relations and brand identity through marketing, employee satisfaction and other important factors that will dictate whether or not the company is competitive and maintains advantages over other competitive entities. Abu-Jarad, Yusof & Nikbin (2010) describe that there is growing pressure for organizations to satisfy not only the shareholders, but multiple stakeholder groups at the same time. As a result, internal employee satisfaction (as one example) must be considered when determining performance measurement criteria. The real-world state and multi-faceted aspects of operations and the conditions of the external market create a need for more diversified performance measurement instruments. Organizations that believe they can over-simplify the performance measurement process are missing out on measurement of mitigating circumstances that directly impact strategic development and operations management and are not getting a holistic view of the organization (Abu-Jarad, et al.). Having performance measurement instruments with only a single variable or handful of variables are ill-equipped for measuring total business performance. Therefore, as in the other aforementioned scenarios, the effects of performance measurement are highly dependent on the competency of the evaluator, the creator of criteria, and the changing market conditions in which the organization operates. A more well-developed and considerate set of criteria and measurement instruments would provide one firm with the ability to genuinely measure performance and would likely lead to positive continuous changes that promote financial good and improve internal structuring to better service an established market. An organization that does not have the managerial competency to develop worthwhile instrument tools using only a few variables would likely experience diminished organizational performance as a result of overlooking important business constructs that are influential in how the business operates and services its markets. A company with multi-goals using a multi-criteria measurement methodology would theoretically find that the effects of performance measurement are optimistic and encouraging for positioning the business in a competitive market in a structure that provides substantial marketing benefits and revenue benefits. Having the correct instruments and criteria established, therefore, should be recognized as being a predictor of holistic organizational performance. The effects of having single variable instruments in a dynamic and ever-changing environment would be unconstructive and perhaps even detrimental to achieving long-term organizational performance. Having a well-constructed instrument with diverse and thoughtful criteria in the same type of organization where change is ever-present would likely lead to better performance since the company now understands its weaknesses and strengths and is able to improve or capitalize on these quantitative findings. The problem, as described by Abu-Jarad, et al. (2010), is that there is no benchmark stating that one criteria or instrument is superior or inferior to another when considering what measurement tools are available to organizations. Management establishing the criteria for measurement must consider whether sales growth is a primary goal, whether earnings per share analysis is most important for shareholder satisfaction, or even liquidity in some organizational environments. Once the determinations are made as to what actually needs to be measured for correction, improvement or sustainment, only then can the proper instrument be developed. Even if the criteria for measurement is valid and relevant for attaining strategic goals, if the instrument is incapable of validly measuring data and activity, the effects on organizational performance will likely be negative. Hence, it cannot be stressed enough that the quality of the measurement ideology and structure are highly influential in whether or not the effects of performance measurement would be constructive to accurately measure performance results. Yet another issue in determining effects of measurement is the level of risk it imposes. Uncontrollable and controllable events that occur in the external market cause businesses to regularly change their strategies in order to be flexible, adapt to the change, and ensure that no competitive advantages are lost. In business theory, risk management is one of the most fundamental methods of insulating a company from either predictable or unpredictable events in the established market. Multiple performance measures using both financial and non-financial criteria provide advantages in risk management. Therefore, again, the competency of measurement and the diversity of measurement methodology is directly correlated with whether effects on organizational performance are superior or inferior; negative or positive. Only if the measurement instruments are directly aligned with the tangible realities of what is occurring as threats or opportunities for internal change initiatives will the effects of performance measurement on performance be encouraging and optimistic. Conclusion This comparative research study identified that the effects of performance measurement on organizational performance is highly contingent on many different factors. Managerial competency, criteria selection, employee participation, diversity of measurement methodologies, and the culture of management within the organization are influencers on whether effects are positive or negative. Therefore, it would seem that when determining effects of measurement, that there is a complexity of inter-dependent environments, activities and phenomenon that must be considered in order to obtain positive organizational performance. The goal of performance measurement is to provide valuable data to not only satisfy shareholder and other stakeholder expectations, but to provide both qualitative and quantitative data (both subjective and objective) that allows a business to make internal structural changes or new strategy developments that will better align the organization to the external and internal marketplace. Based on all comparative research findings, it would appear that the ultimate effect of performance measurement on organizational performance is that of prejudice, being highly dependent on competency and proficiency when constructing a measurement methodology. Slanted or biased results and the construction of inferior instruments that are not valid for proper and holistic measurement will have an absolutely negative impact on organizational performance, even when (it would seem) that managers are deliberately lowering performance targets or cherry picking what criteria to include. Performance measurement is clearly a complex and multi-faceted set of tasks and obligations and the effects on organizational performance are highly diverse and varied depending on the market conditions, management systems, and ideologies of culture occurring within the organization. References Abu-Jarad, I.Y., Yusof, N. & Nikbin, D. (2010). A review paper on organizational culture and organizational performance, International Journal of Business and Social Science, 1(3), pp. 26-46. Kasie, F.M. & Belay, A.M. (2013). The impact of multi-criteria performance measurement on business performance improvement, Journal of Industrial Engineering and Management, 6(2). Van Dooren, W. (2006). What are the Effects of Performance Measurement?, in Performance Management in the Flemish Public Sector. Proefschrift Leuven. Read More