Performance Measurement: Linking Balanced Scorecard to Business Intelligence

By Luca Quagini and Stefano Tonchia

Business Intelligence (BI) and Performance Management (PM) – the development and delivery of business insight for users and the management of execution based on that insight – are two solution-types that promise to bring great value to enterprises. Yet most organizations haven’t yet realized the elusive bene?ts of these two important disciplines. The reasons for this are manifold. However, the primary causes are the culture of the organization and it leadership. This is a topic, which I’ve addressed at length in my latest book: Pro?les in Performance – Business Intelligence Journeys and the Roadmap for Change. The culture and leadership of the organization determines the importance and strategic intent surrounding the use of BI and PM. Sadly, most organizations lack the motivation to embrace transparency and accountability – or to align with the strategy of the organization – enabling execution and coordination in unison with the mission. However, once an organization and its leadership are ready to take a step towards real change – creating an environment of openness, sharing and alignment – with BI and PM as its centerpiece – the next question then becomes one of “how and where to begin”? Even with great strategic intent, missteps in the development and deployment of BI and PM and can cause disillusionment and disappointment – lending support to the naysayers of the organization – and leading to failure and abandonment of these critical programs.

• Language: English
• Publisher: Springer
• Release date: Aug 24, 2010
• ISBN: 9783642132353

Book preview

Stefano Tonchia and Luca QuaginiPerformance MeasurementLinking Balanced Scorecard to Business Intelligence10.1007/978-3-642-13235-3_1© Springer-Verlag Berlin Heidelberg 2010

1. Performance Measurement and Indicators

Stefano Tonchia¹   and Luca Quagini²  

(1)

Dept. Ingegneria Elettrica, Gestionale e Meccanica (DIEGM), Università di Udine, Via delle Scienze 208, 33100 Udine, Italy

(2)

SDG Group, Via Moscova 18, 20121 Milano, Italy

Stefano Tonchia (Corresponding author)

Email: [e-mail]

Luca Quagini

Email: [e-mail]

Abstract

This chapter introduces the concept of Performance Measurement as an integral part of Business Management. It highlights the importance of measuring performances to achieve successful corporate management procedures, from planning right through to the final control. Economic-financial performances are, in fact, just the tip of the iceberg when it comes to operative performances and customer satisfaction performance levels; they require specific measurements using accurate performance indicators from the Performance Measurement System (PMS), the most renowned model being the Balanced Scorecard. Performance Measurement is also crucial to the implementation of managerial practices and human resource evaluation.

1.1 Company Management and Performance Measurement

Profit and profitability can jointly be referred to as the ultimate goals for any business: profit over time provides for positive cash flows, whilst adequate profitability levels justify pouring investment funds back into the company, rather than funding other forms of investment.

These two aspects need to be pursued on a long-term basis; in short, their results should be considered globally over a period of time, and not on a year to year basis, as positive results for one year only could easily be achieved, but at the expense of the results of the years to follow (with financial transactions that can seriously undermine the confidence of customers).

Another goal often pursued by companies – i.e. market share – is not actually an objective unto itself, as the examples above are, but rather an important driver used to guarantee such results, boosting production and purchasing economies of scale, control over distribution networks and prices, cutting edge technological and research activities, etc.

One should also bear in mind that the ultimate performance of profit and profitability mainly concerns the shareholders. It would be time, however, to consider giving more concern to other stakeholders when assessing and planning the successful future of the company: executives and employees (to maintain their wages and salaries), customers and suppliers (to maintain, respectively, the supply and sales markets), and the global community (for social policies and objectives related to employment and protection of the environment).

Profit and profitability are generally determined by (Fig. 1.1):

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Fig. 1.1

Business management and performances

1.

Core business management. Management activities (design, development, production, sales, distribution, servicing, administration and control) which are typical of the sector in which the company operates

2.

Non-core business management. These refer to financial activities which aim to accumulate the capital needed by the company, at the best possible conditions, and therefore it does not substantially depend on the business sector (except for the cost of capital associated to sector risks)

3.

Economic scenario. By definition, this includes all the contextual, institutional and market factors that the Company cannot manage or control

The core business or operating management involves the analysis and subsequent decisions regarding the relationship between drivers and operational performance: it can be argued that the essence of management is the consideration of the relation between drivers and performance (Fig. 1.2).

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Fig. 1.2

The essence of management: to understand the relationship between leverage and performance

This definition of management may be linked to another, just as valid and practical i.e. management considered in its two first sequential phases: planning followed by control. But what do I plan first, and check later? I plan and control (i.e. manage) variables which can be influenced – even partially – by my own decisions (I do not manage something that cannot vary or something – like the weather – which varies but over which I have no control). In the case of corporate management, the variables concern, on one hand the intervention drivers and on the other hand performance.

It can be said that performance measurement is a fundamental part of business management, as it allows you to understand:

Where we were

Where we are

Where we want to go

How we will know when we get there

In other words, if we want to manage performance, we have to be able to measure it. We could therefore use the motto: manage only what you can measure! That is, if you can’t measure it, you can’t manage it! Experience, intuition, and in certain cases luck, are really important, but within the scope of a scientific-based management the presence of adequate methods and measuring instruments are by far the most important aspect.

Then, if we consider the fact that human resources are becoming an increasingly important factor in a company, and bearing in mind that people also behave according to how they are valued, we can fully understand the importance of the issue of performance measurement.

Intervention drivers can be classified into (1) technological drivers (production and support technologies, such as IT systems); (2) organizational drivers (regarding human resources, the organisational structure, intra-and inter corporate relations); (3) management drivers (such as Just-In-Time, Total Quality Management, Project Management, etc.).

1.2 Operational Performances

The operational performances indicated in Fig. 1.2 can be further analysed as seen in Fig. 1.3: performance is divided into external and internal, depending on whether or not they are visible to customers. In fact, good external performance does not necessarily correspond to good internal performance: for instance, large warehouses can perhaps allow for extremely fast deliveries despite rather slow internal operations or quality control over outgoing merchandise which can prevent any non-qualities from reaching the customers.

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Fig. 1.3

Relationships between operational performances and financial results

External performances are gauged according to customer satisfaction, and refer to products that are tangible, and services which are intangible, both of which in relation to prices.

External services which determine customer satisfaction levels, boost buying incentives, brand loyalty and word-of-mouth, and these combine to increase company turnover (Fig. 1.3). Turnover is often used as the major indicator of corporate performance, as it reflects the company’s capability to do business and is not influenced by the various cost items that can actually lead to a change in profit.

External services are, in turn, determined by internal performance, and more precisely, the so-called non-cost service (quality, timing, flexibility, etc.). In fact the customer is not aware of the other internal operating performances, the so-called cost performances (costs, productivity, saturation of capacity, level of assets, etc.), because – as mentioned earlier – they only see the product and the service in relation to the price they pay for it (corporate price policies however tend to take such costs into account). These internal operating performances, that the customers do not see, have a direct impact on the final economic-financial results, without making an allowance for customer satisfaction (Fig. 1.3).

The distinction between cost and non-cost internal performance is not really the reference to monetary unit of measure (which it often is), but rather to the existence of a direct relationship, explicit and measurable in mathematical terms, with the final economic-financial results. If, in fact, it is plausible to expect greater market satisfaction and therefore improved final results following improvements to non-cost performances (quality, timing, flexibility), the extent of the increase in turnover cannot be predicted in advance; vice versa, cost performances can be linked to a given improvement and a precise return in economic-financial terms: this refers not only to costs, as one would imagine, but also, as we will see further on, to the other cost performances such as productivity, working capital levels and the saturation of production systems.

Due to their physical and not monetary nature, non-cost performances are sometimes associated at an operational level only, estimating their strategic importance and their impact on profit and profitability. It is in fact common practice to distinguish performance indicators according to the level of corporate organisation:

Economic-financial indicators (with synthesis and strategic importance) at a global level (corporate)

Indicators relating to critical success factors, for products/lines/customers (with tactical decision-making utility) at a business unit level

Operating indicators, typically non-cost measures (for daily management), at a department/office level

However, the measurement of non-cost performances should not be referred to as a purely operating aspect, that is, limiting activities to the medium low levels of the corporate pyramid: considering the non-cost part of performance measurement systems as a part that refers to levels of department or work centres, as opposed to the accounting system and strategic planning which are duties assigned to top management, with the far too simplistic.

It is true however that these indicators have their own decision-making powers at an operating level, the new dimensions of competition on the other hand require that this part be integrated within management systems.

In the past, this has been prevented for two different reasons:

As long as production strategies, related to mass production, achieved cost leadership, the only operating performances of any interest was how economic production costs where and the profitability level of resources which, given their direct and casual relationship to overall economic-financial performances, made it possible to pursue such adopted strategies.

The need to measure non-cost performances have not however led to sustained development of the non-cost part, as in this case the relationship with the economic-financial results are much more difficult to quantify. One of the primary objectives when designing an effective performance measurement system, therefore depends not only on the definition of non-cost measures, but also of their integration with the accounting and strategic aspects.

We must not, however, make a mistake in an inverse manner, that is, focusing on operating performances alone, where, as they determine economic-financial results, it could be sufficient to measure operating performances alone. In actual fact, the above indicated relationship is never explicit or associated to precise regulations, and they often have an effect which is delayed over time, and also with other intervening variables which are difficult to analyse and assess. It is therefore advisable to keep the non-cost part of the performance measurement system separate from the economic-financial costs, regardless of whether or not it has been integrated.

1.3 Customer Satisfaction Measurement

Customer satisfaction is the combination of external performances, by those perceived by the customer/buyer. In the case of industrial and commercial companies (i.e. those which manufacture/assemble and/or distribute products) which are always price-related (Corbett and Van Wassenhove 1993), we find:

Performances regarding the product: performance, features and product attributes (including packaging), cutting-edge content, design and image, conformity with required specifications or catalogue indications, model number, versions and options/configurable aspects (range levels) eco-compatibility, product life and level of reliability, etc.

Performances regarding services: speed, punctuality and overall completeness of deliveries, free pre and post sales assistance, wide catalogue choice (extensive range of products), customisation services (extra catalogue), order flexibility (changes to volumes and mixes of orders in process), facilitations for orders (for instance, small batches) and payments (discounts and hired purchase agreements).

Most of the performances associated to the product can be traced to its quality level. In actual fact, one of the very first quality dimensionalisation studies by Garvin (1988) refers specifically to product quality; it includes eight different dimensions: performances, attributes, compliance, reliability, working life, assistance, aesthetics, perceived quality. This classification has been superseded by the modern concept of quality systems, where the attention is focused on the quality system (everything within the company is important for quality: resources organisation policies, procedures, etc.) and not simply the output of the same, that is the products (see Chap.​ 2).

As far as services are concerned, this is conceived in a different manner, as it is in actual fact a mix of performances. This mix has the common feature of being the intangible part that the customer perceives, includes performances which refer to time categories (speed, punctuality, completeness of deliveries), quality (wide choice of products or customisation options) and flexibility (changes in volumes and mixes on orders in process), and support services – characteristics which are: free pre and post sales assistance, all collateral and additional services, facilities for orders and payments.

As far as manufacturing and trading companies are concerned, the service makes it possible to provide them with more customised products and hence differentiate their merchandise. For other companies in the service sector, however, services represent the core business of the company; in this case specific service contents are supplied to customers to which it is possible to add, with all due distinctions, a number of services similar to those described above for manufacturing and trading companies (Fig. 1.4).

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Fig. 1.4

Customer Satisfaction in terms of product and service

There are several ways of measuring Customer Satisfaction: directly, using the Customer Satisfaction Index, or indirectly using the Customer Retention Rate, or through trade performance.

Although trade performance measures the performance of one’s sales force, it does in fact indirectly measure the level of satisfaction of the market towards the company (assuming there is an adequate sales-force): further sales capacity (or productivity) indicators can be fine-tuned regarding reliability of forecasts and the success rate (number of orders/number of contacts).

The Customer Retention Rate (C.R.R.) corresponds to the percentage of customers who remained loyal at the end of a certain time frame (normally a year) compared to new customers and lost customers. Bear in mind that other indicators, such as the number of claims, are not always capable of fully assessing the level of satisfaction/dissatisfaction, as they are generally only a minimum part of customer claims and, in any case, it is not said that all of the received claims are actually recorded and therefore acknowledged by top management.

The direct Customer Satisfaction Indicators (C.S.I.) on the other hand, evaluate satisfaction and the consistency between expectations on one side and benefits/perception of products/services on the other according to what is expressed by the customer; customers in fact express their views using the opinion registration tool (postal questionnaires, telephone interviews, etc.). Generally speaking scales are used with an odd number of score points, so their level of satisfaction above the midpoint is said to be positive, whilst below the midpoint it will be negative.

Measurement of services refers both to their content and their provider process (this is also evaluated by the customer/user due to its participates in the process itself). All of this can be translated into service dimensions.

Among the most famous dimensionalisation of services is the one by Zeithaml et