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The performancemeasurement revolution: why

now and what next?Andy Neely

University of Cambridge, Cambridge, UK

Keywords Performance management, Performance measurement, Research

Abstract Asks why business performance measurement has become so topical, so recently. Arguesthat there are seven main reasons: the changing nature of work; increasing competition; specificimprovement initiatives; national and international quality awards; changing organisational roles;changing external demands; and the power of information technology. Evidence to support thisassertion is drawn from the academic and practitioner literatures, interviews and discussions withpeople specialising in the field and a broad review of the current state-of-the-art in businessperformance measurement. Presents a framework onto which current research in businessperformance measurement can be mapped and identifies areas which require further work.

IntroductionBusiness performance measurement is on the management agenda.Professional conference organisers such as Business Intelligence and IIRrecognise this. Hence the plethora of conferences on “Business PerformanceMeasurement”. The RSA (Royal Society of Arts, Manufacturers and Commerce)recognise this, as demonstrated by the findings of their inquiry into the role oftomorrow’s company:

To achieve sustainable business success in the demanding world marketplace, a companymust ... use relevant performance measures (RSA, 1994).

Politicians recognise this, as can be seen by the current and previous UKGovernment’s obsession with league tables, and the fact that the above quoteappeared in one of the UK’s White Papers on competitiveness.

What is not immediately obvious is why business performancemeasurement is on the agenda. What is it that makes the topic so relevant tomanagement today? After all, it has long been recognised that performancemeasures are an integral part of the planning and control cycle (Barnard, 1962)and managers must have been planning and controlling the deployment ofresources since the first organisation was established. Indeed, Chandler (1977)argues that most of the basic methods used to manage big businesses todaywere in place by 1910:

In 1903, three Du Pont cousins consolidated their small enterprises with many other smallsingle-unit family firms. They then completely reorganised the American explosives industryand installed an organisational structure that incorporated the “best practice” of the day. Thehighly rational managers at Du Pont continued to perfect these techniques, so that by 1910that company was employing nearly all the basic methods that are currently used inmanaging big business (Chandler, 1977, p. 417).

International Journal of Operations& Production Management,

Vol. 19 No. 2, 1999, pp. 205-228,© MCB University Press, 0144-3577

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Given that the “basic management techniques” have been used for so long andthat business performance measurement is undoubtedly one of thesetechniques, then surely most organisations should have had well developedperformance measurement systems in place for many years by now.

Even the most cursory examination of the academic and practitionerliteratures would confirm that this is not the case (Ashton, 1997; Geanuracosand Meiklejohn, 1993; Kaplan, 1984; Neely, 1998; Neely et al., 1995). Numerousauthors discuss the problems with the performance measures used byorganisations today. Traditional financial measures are criticised because they:

• Encourage short-termism, for example the delay of capital investment(Banks and Wheelwright, 1979; Hayes and Abernathy, 1980).

• Lack strategic focus and fail to provide data on quality, responsivenessand flexibility (Skinner, 1974).

• Encourage local optimisation, for example “manufacturing” inventory tokeep people and machines busy (Goldratt and Cox, 1986; Hall, 1983).

• Encourage managers to minimise the variances from standard ratherthan seek to improve continually (Schmenner, 1988; Turney andAndersen, 1989).

• Fail to provide information on what customers want and howcompetitors are performing (Camp, 1989; Kaplan and Norton, 1992).

The same measures are criticised for being historically focused (Dixon et al.,1990). Sales turnover, for example, simply reports what happened last week,last month or last year, whereas most managers want predictive measures thatindicate what will happen next week, next month, or next year.

Numerous managers suffer from data overload. Most firms have informationsystems which generate at least some redundant performance reports.Comments such as “we measure everything that walks and moves, but nothingthat matters”[1] are common. Indeed, the author recently witnessed theproduction manager of a small manufacturing business throw a freshly-delivered 200-page performance report straight into the bin, without evenglancing at it. When asked why, the production manager replied – “what use isthe report to me? All it contains is last month’s labour absenteeism figures. Ineed up-to-date information to manage production, not spurious figures fromthe accounting department.”

Yet another problem with the performance measures used in manyorganisations is that they are rarely integrated with one another or aligned tothe business processes (Lynch and Cross, 1991). Performance measures are alsooften poorly defined. It is not unusual to observe two people heatedly arguingover some dimension of performance and later find that the root cause of theirdisagreement was the imprecise definition of a measure.

Somewhat surprisingly, few of these problems are new. In 1908, for example,A. Hamilton Church wrote:

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Shop charges (overhead) frequently amount to 100 percent, 125 percent, and even much moreof the direct wages. It is therefore actually more important that they should be correct thanthat the actual wage costs should be correct (quoted in Kaplan, 1984, p. 395).

In 1951, GE established a “Measurement Project” which “was intended todevelop performance metrics that could be applied on a decentralised basis”(Meyer and Gupta, 1994, p. 348). Johnson (1992) argues that “management byremote” control – i.e. managing by the financials – only became popular afterthe 1950s, before which time senior managers used the financial figures forplanning, rather than control.

By the mid-1980s there were many vocal and well-respected critics oftraditional measures (Berliner and Brimson, 1988; Goldratt and Cox, 1986;Hiromoto, 1988; Hopwood, 1984; Johnson and Kaplan, 1987; Miller andVollmann, 1985; Richardson and Gordon, 1980; Schmenner, 1988; Turney andAnderson, 1989). The question this raises, however, is why now? What is itabout managers in the late 1980s and early 1990s that has made them soreceptive to the message that their performance measurement systems areobsolete? Why have these problems come to the fore today? Why have theycaptured management’s attention? What sparked the performancemeasurement revolution? What has been the impact of this revolution? Whereand when will it end?

The remainder of this paper seeks to address these questions. The paperbegins by presenting evidence that supports the assertion that we are in themidst of a performance measurement revolution. Next, the reasons why this hashappened are explored. Finally, the current state-of-the-art in businessperformance measurement is described and the question – where next? – isposed.

The performance measurement revolution – fact or fiction?Between 1994 and 1996, some 3,615[2] articles on performance measurementwere published. This is equivalent to one new article on business performancemeasurement appearing every five hours of every working day. In 1996, newbooks on the subject appeared at a rate of one every two weeks in the USAalone[3]. Between 1950 and 1991, the membership of AIA (American Institute ofAccountants) and AICPA (American Institute of Certified Public Accountants)grew from 16,062 to 301,410 – an increase of 1,877 per cent (Meyer and Gupta,1994):

Chartered financial analysts did not exist before 1963. Through 1971, about 3,000 financialanalysts were chartered. From 1972 through 1981, some 3,800 more analysts were chartered,but from 1982 through 1992 more than 8,200 new chartered financial analysts were added(Meyer and Gupta, 1994, p. 318).

Business Intelligence, a professional conference-organising company, based inthe UK, have hosted 23 conferences on performance measurement since January1994. Over 2,500 delegates from some 800 different firms have attended these.Worldwide there are now more than 50 different Web sites devoted to businessperformance measurement.

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Customer satisfaction questionnaires are ubiquitous. It is almost impossibleto stay in a hotel and not be presented with at least one of them. Indeed somehotels have become so obsessed with measurement that they have differentcustomer satisfaction questionnaires in the bedroom, the health club, the barand each of the restaurants!

A novel variation on this theme is the tendency for some organisations toautomate the data collection process. While in Finland recently the authornoticed an open access computer terminal in the lobby of his hotel. The signabove the terminal read “your views count – please share them with us”. Uponcloser inspection it emerged that the computer was running a piece of softwaredesigned to elicit customers’ views. Basically the program was an automatedcustomer satisfaction questionnaire. Capturing the data in this way offers threesubstantial benefits. First, the customer enters the data online. Hence the hoteldoes not have to arrange (and pay for) data entry. Second, the risk of secondarykeying errors is eliminated. Third, the hotel has real time access to clients’views. At any time of the day or night the latest data can be reviewed, and actedupon if necessary.

Of course, the use of IT is not limited to data capture and analysis.Organisations such as BT[4] publish their customer service report (and theassociated data) on the Internet. While others, such as Cognos[5], Metapraxis[6]and Valstar[7], have built businesses supplying IT support tools forperformance measurement applications.

Further evidence that a revolution in business performance measurement istaking place is provided by the language used in annual reports. Ten years agolittle mention of non-financial performance would have been made in theChairman and Chief Executive’s statements. Recently, however, someorganisations have been far more explicit about the link between financial andnon-financial dimensions of performance. Legal and General’s 1996 annualreport, for example, places considerable emphasis on non-financialperformance measures. In his statement, the Chief Executive Officer, DavidProsser, highlights the importance of the virtuous circle: “competitive products= more sales = greater shareholder value”.

It appears then, that the language of business performance measurement istaking hold. The notion of balance, perhaps most neatly encapsulated byKaplan and Norton’s balanced scorecard, is widely accepted. Indeed the phrasethe “balanced business scorecard” appears to have entered the managementvernacular. A recent MORI survey, for example, found that “72 per cent ofbusiness leaders agree that a successful business will better serve itsshareholders by focusing on the needs of its customers, employees, suppliersand the wider community” (MORI, 1996).

And there is even some, albeit limited, evidence that this is a good thing. Forexample, Alan Meekings, a consultant with Gemini, claims that “in the early1990s, British Rail’s Network SouthEast used performance indicators to helpgrow off-peak income by 28 per cent, reduce controllable costs by 30 per cent,and improve both service delivery and customer satisfaction from worst ever to

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best ever on record” (Meekings, 1995). Similarly, a survey conducted by Lingleand Schiemann (1996) found that:

Organisations which are tops in their industry, stellar financial performers and adept changeleaders, distinguish themselves by the following characteristics: having agreed-uponmeasures that managers understand; balancing financial and non-financial measurement;linking strategic measures to operational ones; updating their strategic scorecard regularly;and clearly communicating measures and progress to all employees.

Further evidence of the value of business performance measurement isprovided by work carried out by researchers at the University of Michigan andthe Stockholm School of Economics, on the Swedish Customer SatisfactionBarometer. They have identified a significant positive correlation betweencustomer satisfaction and financial performance (Anderson et al., 1994; Fornell,1992). In the summary of their empirical findings, Anderson et al. (1994) reportthat an annual one-point increase in customer satisfaction has a net presentvalue of $7.48 million over five years for a typical firm in Sweden. Given theirsample’s average net income of $65 million, this represents a cumulativeincrease of 11.5 per cent. If the impact of customer satisfaction on profitabilityis similar for firms in the Business Week 1000, then an annual one-pointincrease in the average firm’s satisfaction index would be worth $94 million or11.4 per cent of current ROI.

Perhaps the most exciting development, however, is the establishment of twonew investment funds in late 1996, by Kleinwort Benson. These two funds arebased on portfolios of companies which deliver and sustain returns. Theinvestment model assumes a strong correlation between inclusive-typecompanies and better investor returns through three stages: evaluatingmanagement; assessing business processes; and the interaction of the above tobuild shareholder value. Kleinwort Benson constructed their portfolios using ascorecard which built upon the EFQM’s Business Excellence Model andInvestors In People, along with inclusive and corporate governance approachesto business. A Fundamental Evaluation Assessment, which analyses cash flow,sustainability of growth, sensitivities of financial performance andimprovements in individual measurement targets, was conducted to decidewhich companies should be included in the portfolio. Other key parameters:price/earnings ratio; dividend yield; discounted cash flow; and net assetvaluations were also examined. Aggregated, all these parameters helpeddetermine the most undervalued and, therefore, attractive, Tomorrow’sCompany-type, or inclusive, portfolio:

Prior to launch, the model was tested against a sample of 350 UK companies based on marketcapitalisation: it outperformed them for the measures above by 16 per cent in the short termand 38 per cent in the longer term. Also, Kleinwort Benson calculations have revealed that a 1per cent change in each of sales growth, employee and supplier value added for portfoliocompanies, would give a 24 per cent improvement in operating profit, a 5.3 per cent lift toreturn on capital, and a 43 per cent improvement in economic value added (Ashton, 1997, p. 289).

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The message from this is clear. If the Kleinwort Benson funds are successfuland if they deliver better returns, then institutional investors will undoubtedlybecome much more vocal in demanding that businesses release information ontheir non-financial performance.

The performance measurement revolution – why now?In 1991, Bob Eccles wrote a paper for the Harvard Business Review entitled –“The performance measurement manifesto”. In it he predicted that “within thenext five years, every company will have to redesign how it measures itsbusiness performance”. Given the current levels of activity in the field, itappears that Bob Eccles’ assertion was fair, even if his time scale wascompressed. The question that this raises, however, is why now? If thelimitations of traditional financial measures have been known for some time,then why have so many people become so interested in business performancemeasurement so recently?

It is impossible to answer this question definitively, but evidence suggeststhat there are seven main reasons:

(1) the changing nature of work;

(2) increasing competition;

(3) specific improvement initiatives;

(4) national and international awards;

(5) changing organisational roles;

(6) changing external demands; and

(7) the power of information technology.

The changing nature of workTraditional accounting systems allocate overheads on the basis of direct labour.In the 1950s and 1960s this was appropriate because direct labour oftenconstituted in excess of 50 per cent of the cost of goods sold. By the 1980s,however, direct labour rarely constituted more than 5 or 10 per cent of the costof goods sold, because of the massive investments that had been made inprocess automation. The net effect of this was that allocating overheads on thebasis of direct labour resulted in wildly erroneous product costs, which in turnmeant that managers made the wrong decisions (Kaplan, 1983; Schmenner,1988).

These arguments were so widely and vocally publicised that they resulted inthe development of alternative methods of product costing – most notablyactivity-based costing and through-put accounting (Cooper, 1987a,b; Gallowayand Waldron, 1988a,b; 1989a,b). During the late 1980s and early 1990s, most ofthe major consultancies were selling services based on these new methods ofcosting. The associated marketing programmes – and the popularity of bookssuch as Johnson and Kaplan’s Relevance Lost – meant that few in business

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could avoid being exposed to the message that, given today’s operatingenvironment, the assumptions underpinning the traditional methods of costaccounting were fundamentally flawed.

Increasing competitionThere can be little doubt that the level of competition that firms face isincreasing on a global basis. Businesses all around the world are undercontinual pressure to reduce costs and enhance the value they deliver to theircustomers. BT, for example, has shed 120,000 jobs since 1989. Most of theresultant cost savings have been passed on to customers in the form of pricecuts, which have been made necessary by the deregulation of the UKtelecommunications market. The European Commission’s open skies policymeans that for the first time, cut-price carriers, such as Easyjet and VirginDirect, will soon be able to offer flights between any two destinations theychoose (assuming they can negotiate the necessary take-off and landing slots).Manufacturing businesses, such as Toyota, have revolutionised the way peoplethink about operations through their search for greater efficiency andeffectiveness (Monden, 1993). The widespread acceptance of so-called “Japanesemanufacturing practices” demonstrates how successful they have been, but thenet effect is a continual rise in global performance standards and customerexpectations, which in turn lead to ever greater levels of competition (Womacket al., 1990).

In terms of performance measurement, these changes have had threeimpacts. First, many organisations now seek actively to differentiatethemselves from their competitors in terms of quality of service, flexibility,customisation, innovation and rapid response. They have been forced to do sobecause they now find themselves competing in markets where value ratherthan cost is the primary driver. Competing on the basis of non-financial factorsmeans that these organisations need information on how well they areperforming across a broad spectrum of dimensions. If a business bases itsstrategy around its ability to customise products, then knowing whether itreally is customising products, and whether it is customising them rapidly andcheaply enough, is essential. The traditional measures used to assess businessperformance simply do not provide this insight. Hence businesses have beenforced to change their measures because they have changed their strategies.

In doing so, many organisations have realised one of the hidden benefits ofmatching measures and strategies – namely that measures can encourage theimplementation of strategy (Neely et al., 1994). It is widely accepted thatperformance measures influence behaviour. One only has to look at theacademic obsession with refereed journal papers to see evidence of this. Indeedthe UK’s Research Assessment Exercise provides an excellent example of howperformance measures can modify behaviours on a mass scale. In 1992, the firstResearch Assessment Exercise was conducted. The performance of all highereducation institutes was assessed along various dimensions. One of the keycriteria used was “research excellence”, which in turn was measured in terms of

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the number of publications per research-active member of staff. Differentinstitutions adopted different strategies to boost their scores. Some recruitedprolific publishers. Others chose only to register a small proportion of theirfaculty as research-active. The exercise was scheduled to be repeated in 1996. Inthe intervening years, the number of publication outlets appears to have grownexponentially. Whether by accident or design, the 1992 Research AssessmentExercise had the desired effect. It encouraged the academic community todisseminate their work.

For the 1996 Research Assessment Exercise the criteria were changed andthe emphasis was put on quality, rather than quantity, of publications. Henceeveryone was asked to submit details of their best three publications. Themessage that this changed performance measure sent was – “you have shownus that you can disseminate your work, now prove that you can disseminatehigh quality work”.

The link to strategy is subtle, but powerful. Measures that are aligned withstrategy not only provide information on whether the strategy is beingimplemented, but also encourage behaviours consistent with the strategy.Accepting Mintzberg’s (1978) thesis that when an organisation realises that thestrategy is a function of the “pattern of decisions and actions” it takes, then itbecomes clear that appropriately designed performance measures canencourage the implementation of strategy.

The third way in which the changing basis of competition has affectedbusiness performance measurement is in the tendency for organisations todownsize. Most organisations have achieved their downsizing goals byeliminating middle management and “empowering” the remaining employees.Anecdotal evidence suggests that empowering people can be very powerful, butonly if those people know the overall direction in which the business is heading.Middle managers used to ensure that this was the case by translating strategicplans into operational targets, monitoring progress and generally co-ordinatingthe efforts and activities of their subordinates. Today, few organisations findthemselves with sufficient human capacity to operate in this way. Hence theyneed new ways of communicating to their employees where the business isheading. Business performance measures provide one such means ofcommunication. Just as with the Research Assessment Exercise describedearlier, leading organisations are using their measurement systems as a meansof communicating to their employees what is important.

Specific improvement initiatives In response to increased competition, numerous organisations have embarkedupon specific improvement initiatives. Some of these have come and gone,although most have been swept up into generic themes, such as total qualitymanagement (TQM), lean production, world class manufacturing (WCM). Fewwould dispute that, of these, total quality management has been one of the mostpervasive. Open any undergraduate text on this topic and you will finddiscussions of continuous improvement, Deming (plan-do-check-act) cycles,

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statistical process control, Taguchi methods, quality costing. All of these toolsand techniques have one thing in common. They rely on performancemeasurement. The essence of continuous improvement, for example, is to seekconstantly ways in which products and processes can be improved, so thatgreater value can be delivered to customers at ever greater levels of efficiency.Before any organisation can determine what it needs to improve, however, it hasto establish where and why its current performance falls short. Hence the needfor performance measures.

Similar arguments apply to statistical process control. Control charts providea means of checking whether processes, generally repetitive manufacturingprocesses, are under control – i.e. whether the outputs they are producing varyonly as much as would be expected, given the norms of statistical variation.Answering this question requires performance data to be collected. Withoutthese data statistical process control quite simply cannot be introduced.

Of course, TQM is not the only specific improvement initiative that has putperformance measurement on the agenda. The widespread business interest inbenchmarking has been another important driver. Xerox, largely through theefforts of Bob Camp, has been particularly vocal on this topic (Camp, 1989). Therapid emergence of benchmarking clubs and a number of high profile researchstudies (Andersen Consulting, 1993, 1994; IBM Consulting and LondonBusiness School, 1993, 1994; Womack et al., 1990) have also heightenedindustrial interest. In essence, however, benchmarking studies – especiallythose which compare performance rather than practice – are effectivelystructured applications of business performance measurement. Data, whichsummarise the performance of different businesses, are gathered andcompared. Performance gaps, performance shortfalls, even performanceadvantages are identified. Such studies are valuable precisely because theyprovide rich performance insights.

Often these performance insights result in organisations realising that theyneed to achieve radical performance improvements merely to survive, let aloneprosper. One method for achieving these is business process re-engineering(Hammer and Champy, 1993). Instead of seeking to optimise the efficiency ofeach operation within each function, business process re-engineering calls forthe horizontal flows of information and materials to be considered holisticallywhen seeking performance improvements. This relies on a clear understandingof how the outputs of one micro process impact upon the next micro process,which in turn requires data to be fed back from the receiving process to thesupplying process (Slack et al., 1995). Few organisations have measurementsystems which allow this to happen, and rarely are the traditional measures ofbusiness performance appropriate. Measures such as labour utilisation, forexample, might provide some insight into how efficiently a process is running,but provide no indication of the impact the outputs of one process have on thenext process in terms of quality and time. One of the first things organisationsrealise, when they begin to re-engineer their processes, is that once they havedone so they will have to re-engineer their measurement systems.

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The theme which underlies all of the comments made in this section is that afundamental shift is taking place in business. Organisations have transcendedtheir cost phase and entered a value phase. Businesses today operate in anenvironment where value is paramount. They have to strive continuously todeliver products and services which are of ever greater value to their customers,at ever lower costs. To do so, they have been forced to adopt a variety ofperformance improvement programmes, the vast majority of which demandthat they upgrade their business performance measurement systems.

National and international quality awards.In recognition of the substantial improvements in business performance thatmany organisations have achieved, a number of national and internationalquality awards have been established. One of the first of these was the DemingPrize, which was introduced in Japan in 1950. Given W. Edwards Deming’s pre-eminence in the field of quality management, it is little wonder that this awardis made by the Japanese Union of Scientists and Engineers (JUSE) for“contribution to quality and dependability of products” (Deming, 1986).

Numerous other quality awards have since been introduced, although thetwo with the highest profile are the Baldrige Award, which is available in theUSA, and the European Foundation for Quality Management (EFQM) Award.The popularity of these awards is evidenced by the fact that there are over385,000 references to the EFQM award on the World Wide Web. Each of thesethree awards requires firms to complete a comprehensive self-assessment aspart of the application process. To apply for the Deming Prize, for example,firms have to submit detailed data on:

Policies

(1) quality and quality control policies and their place in overall businessmanagement;

(2) clarity of policies (targets and priority measures);

(3) methods and processes for establishing policies;

(4) relationship of policies to long- and short-term plans;

(5) communication (deployment) of policies, and grasp and management ofachieving policies; and

(6) executives’ and managers’ leadership.

Organization

(1) appropriateness of the organisational structure for quality control andstatus of employee involvement;

(2) clarity of authority and responsibility;

(3) status of interdepartmental co-ordination;

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(4) status of committee and project team activities;

(5) status of staff activities;

(6) relationships with associated companies (group companies, vendors,contractors, sales companies, etc.)

Information

(1) appropriateness of collecting and communicating external information;

(2) appropriateness of collecting and communicating internal information;

(3) status of applying statistical techniques to data analysis;

(4) appropriateness of information retention;

(5) status of utilising information;

(6) status of utilising computers for dataprocessing.

Standardisation

(1) appropriateness of the system of standards;

(2) procedures for establishing, revising and abolishing standards;

(3) actual performance in establishing, revising and abolishing standards;

(4) contents of standards;

(5) status of utilising and adhering to standards;

(6) status of systematically developing, accumulating, handing down andutilising technologies.

Human resources

(1) education and training plans and their development and results;

(2) status of quality consciousness, consciousness of managing jobs, andunderstanding of quality control;

(3) status of supporting and motivating self-development and self-realisation;

(4) status of understanding and utilising statistical concepts and methods;

(5) status of QC circle development and improvement suggestions;

(6) status of supporting the development of human resources in associatedcompanies.

Quality assurance

(1) status of managing the quality assurance activities system;

(2) status of quality control diagnosis;

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(3) status of new product and technology development (including qualityanalysis, quality deployment and design review activities);

(4) status of process control;

(5) status of process analysis and process improvement (including processcapability studies);

(6) status of inspection, quality evaluation and quality audit;

(7) status of managing production equipment, measuring instruments andvendors;

(8) status of packaging, storage, transportation, sales and service activities;

(9) grasping and responding to product usage, disposal, recovery andrecycling;

(10) status of quality assurance;

(11) grasping of the status of customer satisfaction;

(12) status of assuring reliability, safety, product liability and environmentalprotection.

Maintenance

(1) rotation of management (PDCA) cycle control activities;

(2) methods for determining control items and their levels;

(3) in-control situations (status of utilising control charts and other tools);

(4) status of taking temporary and permanent measures;

(5) status of operating management systems for cost, quantity, delivery,etc.;

(6) relationship of quality assurance system to other operatingmanagement systems.

Improvement

(1) methods of selecting themes (important activities problems and priorityissues);

(2) linkage of analytical methods and intrinsic technology;

(3) status of utilising statistical methods for analysis;

(4) status of analysis results;

(5) status of confirming improvement results and transferring them tomaintenance/control activities;

(6) contribution of QC circle activities.

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Effects(1) tangible effects (such as quality, delivery, cost, profit, safety and

environment);

(2) intangible effects;

(3) methods for measuring and grasping effects;

(4) customer satisfaction and employee satisfaction;

(5) influence on associated companies;

(6) influence on local and international communities.

Future plans(1) status of grasping current situations;

(2) future plans for improving problems;

(3) projection of changes in social environment and customer requirementsand future plans based on these projected changes;

(4) relationships among management philosophy, vision and long-termplans;

(5) continuity of quality control activities;

(6) concreteness of future plans[8].

The implication for business performance measurement is clear. As an everincreasing number of organisations explore the frameworks underpinningthese awards, the fact that their traditional performance measurement systemsare woefully inadequate will become painfully clear. Firms will either decide toignore this message, or act upon it. All the evidence to date suggests that mostfirms adopt the latter course of action – i.e. they change their performancemeasurement systems.

Critics of these awards comment that the application process makes themunsuitable for smaller companies or organisations with limited slack resource(Garvin, 1991). In response to this, simplified versions of the awards have beenestablished at the national and regional levels. In the UK, for example, theBritish Quality Foundation (BQF) offers a national award, while groups such asMidlands Excellence offer regional awards, with a much simpler applicationprocedure. Whichever level of award businesses apply for, however, they arestill expected to complete a self-assessment. Hence the spread of these awards issimply introducing more and more firms to self-assessment, which in essence isanother form of business performance measurement. Quite simply, thephilosophy underpinning the hierarchy of awards is that firms can beintroduced to the process by a regional award. Once they realise the benefits ofself-assessment, it is assumed that they will apply for a national and then aninternational award, each of which requires yet greater commitment and morecomprehensive self-assessment.

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Changing organisational rolesThe 1980s and 1990s have seen subtle changes in organisational roles. Many ofthe most vocal critics of traditional performance measurement systems havecome from the academic accounting community. As the force of their argumentshas gathered strength, the professional accounting associations have reacted. Inthe UK, both the Chartered Institute of Management Accountants (CIMA) andthe Institute of Chartered Accountants of Scotland (ICAS) regularly organiseconferences and workshops on non-financial performance measurement. Bothof these bodies encourage their members to take a more active role in thedevelopment of balanced measurement systems, arguing that the role of themanagement accountant is to provide the management information necessaryfor running a business, rather than merely the financial information requiredfor external reporting.

There is growing evidence that this theme has been picked up by severalbusinesses. In the mid-1990s, for example, Cable and Wireless renamed theirCorporate Management Accounting Group, “Group Performance Analysis andDevelopment”, when asking them to play a more active role in the analysis ofperformance data.

Human resource managers and personnel managers are another group ofbusiness professionals who are now taking a more active role in businessperformance measurement. There appear to be three reasons for this. First,performance measures tend to be integral to performance managementsystems – goal setting, measurement, feedback and reward (IPM, 1992) andthese generally fall within the remit of the human resource function. Second,there is considerable debate as to whether performance measures should belinked to reward – again an issue which concerns human resources. Finally,many organisations have been through substantial downsizing programmes inrecent years. One of the challenges these organisations face is motivating thepeople who remain once the downsizing programme has been completed. Thereare several examples of firms using performance measures to achieve this onthe grounds that performance measures help clarify performance expectations,which in turn allow more discretion to be given to individuals as the boundarieswithin which they have to work become more obvious.

Changing external demandsOrganisations today are subject to a wide variety of external demands, each ofwhich has implications for business performance measurement. Deregulationin the UK’s power generation, telecommunications and water industries, forexample, has resulted in the establishment of various regulators. Theseregulators demand that the firms which fall under their jurisdiction achievecertain performance standards and have the power to fine those which fail to doso. To enable the regulators to assess whether the required standards are beingmet, firms in each of these industries have to submit detailed performancestatistics on a regular basis. BT, for example, has to release performance dataon its quality of service and pricing policies to Oftel – the telecommunications

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industry regulator, while Thames Water has to release performance data on,among other things, the volume of water lost through leaks to the waterindustry regulator.

As these data are public domain and of general interest, the national pressmonitors them closely. Thames Water, for example, has been severely criticisedin recent months for failing to reduce the amount of water lost in the GreaterLondon area due to leaks, at the rate the regulator wishes. To counter thenegative publicity that has resulted, Thames Water has started to advertise itsachievements on billboards in the London underground. In terms of businessperformance measurement, the impact of these changes is twofold. First, thedemands of the regulator can result in firms introducing new measures ofperformance so that the necessary data can be collected. Second, the scrutiny ofthe regulator forces firms to take certain measures very seriously, therebyensuring a strong emphasis on business performance measurement in the firm.

Legally-constituted bodies, such as regulators, are not the only groups to putpressure on firms. Consumer magazines, such as Which?, regularly conduct andpublish performance evaluations of different products and services. Evengroups with very limited resources can have a massive impact on a company’sreputation. Take, for example, the recent libel case involving McDonald’s.Supporters of the protesters established a Web page listing McDonald’s allegedmisdemeanours. During the trial, which lasted in the region of two years, pressreports regularly referred to this Web page and the popularity of it. These twoexamples highlight the fact that information is very easy to collate anddisseminate – especially through the Internet. Given this, monitoring andmanaging public opinion becomes critical for high-profile businesses.

Of course, public opinion is not the only thing that firms have to monitor. Asalready discussed, most businesses are now competing in an environmentwhere value, not price is the key driver. Given these circumstances, thenensuring that value is delivered to customers becomes key. Which is one of themain reasons why the use of customer opinion surveys has become sowidespread.

Some customers today not only expect high levels of service, but also expectfirms to operate in specific ways. The extent to which a customer can influencethe way in which their supplier works is a function of many factors, a key onebeing power. Ford, for example, used their power as a major purchaser ofautomotive components, to demand that their accredited suppliers introduce ascheme known as QOS (quality operating system). Basically QOS is aperformance measurement process. Suppliers to Ford are expected to identifysix key business parameters, record the relevant data in a format approved byFord and submit the information to Ford on a monthly basis. When theyintroduced the scheme, Ford declared that they expected all accreditedsuppliers to show improvement in the majority of these parameters on anannual basis if they wished to remain accredited.

In many ways, QOS is simply an extension of the various supplieraccreditation schemes that came into being through the 1980s and beyond. In

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the automotive industry, moves have been made to rationalise these schemes assuppliers were being forced to achieve accreditation to slightly differentstandards by each of their major customers. These accreditation schemes wereintroduced for two reasons. First, to enable cost in the customer-supplierrelationship, especially that associated with multiple inspection, to be reduced.Second, to help customers decide with which suppliers they should concentratetheir business, as they sought to rationalise their supply base. As more andmore organisations moved down this route, more and more suppliers are beingasked to submit themselves for audit (again a form of business performancemeasurement). So once again external demands – i.e. those external to thebusiness – come into play, as organisations are forced to improve theirperformance data in preparation for these audits.

There is one final group that is also putting pressure on firms to think aboutwhat they measure and how they measure it – the investment community. Atfirst sight this statement seems incredible, as it is widely accepted thatinstitutional investors are interested only in short-term financial performance:

The perception within companies is that their discussions with investors lead them to neglectlong-term strategies in the interests of immediate financial returns. Investors are perceived asplacing a relatively low priority on the business fundamentals – such as customer loyalty,investment in people and supplier relationship – which will determine long-term success(RSA, 1995, p. 18).

The above quote is based on data collected during the RSA’s Tomorrow’sCompany Inquiry. This study is particularly interesting becauserepresentatives of the investment community were also asked what informationthey would like, and they replied:

The perception within the investment community is that companies are preoccupied withimmediate returns and are reluctant to volunteer information about the fundamentals (RSA,1995, p. 18).

The RSA’s interim report describes this situation as a “dialogue of the deaf”,because neither group really understands the other’s interests and needs.Recently, however, there has been some evidence to suggest that this situation ischanging. Traidcraft and Prototype Plc, for example, release alternative annualreports which summarise employee and customer satisfaction, as well asfinancial performance. Skandia, a Swedish insurance company, publishes anaddendum to its annual report which identifies the value of Skandia’sintellectual capital. As mentioned earlier, David Prosser, the Group ChiefExecutive of Legal and General, talks explicitly about the virtuous circlebetween competitive products, sales and shareholder value in his statement inthe 1996 annual report.

The power of information technologyThe final driver in the performance measurement revolution is undoubtedly thepower of information technology. Not only has this made the capture andanalysis of data far easier, but it has also opened up new opportunities for data

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review and subsequent action. Indeed the considerable effort that is beingexerted by supermarkets on data mining is a case in point. The electronic point-of-sale systems used in most supermarkets provide an opportunity to monitorindividual buying patterns and tailor discount offers to them to encourage themto shop in particular stores.

Of course, IT plays a role not only in data capture, but also in data analysisand presentation. There has been a rapid growth in demand for managementinformation systems and executive information systems in recent years. Indeedmany vendors of these software packages are now proactively linking theirproduct offerings to balanced measurement frameworks, such as Kaplan andNorton’s balanced scorecard.

Business performance measurement: state-of-the-art and wherenext?The arguments put forward so far in this paper have concentrated on thereasons why business performance measurement is on the agenda. To completethe paper, two further questions have to be addressed: what is the current state-of-the-art in the field and what are the issues that remain unresolved – i.e. wherenext?

Research in the field has been, and is being, undertaken by a diverse group ofpeople from a wide variety of disciplines, including accounting (Bromwich and Bhimani, 1989; Chandler, 1977; Cooper, 1987a,b; Johnson, 1983; Kaplan and Norton, 1996), business strategy (Chakravarthy, 1986; Simons, 1995),human resource management (IPM, 1992), manufacturing and operationsmanagement (Dixon et al., 1990; Fitzgerald et al., 1991; Neely et al., 1996),marketing (Fornell, 1992) and organisational behaviour (Meyer and Gupta,1994). As one would expect, the research stance adopted by these individualsdiffers in terms of the questions being addressed and the methodology adopted.In essence, however, they are all seeking to address one of the two fundamentalquestions associated with business performance measurement, namely: whatare the determinants of business performance; and how can businessperformance be measured?

What are the determinants of business performance?Identifying the determinants of business performance is a topic in whichprogress, if not interest, seems to wax and wane over the years. Prominentauthors, such as Lawrence and Lorsch (1967), for example, have explored issuessuch as the relationship between the match between the business and theenvironment, and the effect of this on performance. Books, such as In Search ofExcellence, which purport to have “found the answer”, appear from time to time(Peters and Waterman, 1982). In many ways, identifying the determinants ofbusiness performance is the “holy grail” for the field. Unfortunately, orfortunately for those who wish to continue working in the field, progress on thisquestion has been limited to date.

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In recent years an interesting development has been the notion of usingperformance measures as a means of testing one’s theory of business (Drucker,1990; Eccles and Pyburn, 1992) or to facilitate strategic learning (Kaplan andNorton, 1996; Simons, 1995). Basically the suggestion is that if the appropriatemeasures can be identified, and the right data captured, then it should bepossible to identify causal relationships between different dimensions ofperformance. To date, little evidence that this is possible has been presented.Indeed, the only published evidence, of which the author is aware, is: the claimby BT that they have been able to identify a correlation between customersatisfaction and customer loyalty (Johnson and Jakeman, 1997) and the claim byMilliken that they have been able to identify a correlation between customersatisfaction and financial performance (Jeanes, 1996). Given the importance ofthis question, however, the implication, in terms of further research, is clear –namely the need to explore if, and how, the relationship between differentdimensions of business performance can be mapped. Assuming this provespossible, then the benefits will be substantial – not least because this wouldbegin to solve the taxing issue of how predictive performance measures, orleading indicators can be identified.

How can business performance be measured?It is widely accepted that business performance is a multi-faceted concept andhence it is not surprising that once again the question of how businessperformance can best be measured has been tackled by a variety of people fromdifferent disciplines. Accountants, such as Bromwich and Bhimani (1989) andCooper (1987a, b), have concerned themselves with questions such as: what arethe flaws with traditional accounting systems and how can these flaws be bestovercome? Business strategists, such as Chakravarthy (1986), on the other hand,have sought to address issues such as what are the most appropriate methodsof measuring strategic performance?

There are also substantial bodies of literature which explore how keyconstructs such as customer satisfaction (Parasuraman et al., 1990); employeesatisfaction (Beer et al., 1978); innovation (House and Price, 1991); andproductivity (Sumanth, 1985) can be measured. Indeed one of the difficultiesfacing people as they enter this area is which of the thousands of possiblemeasures they could adopt, should they adopt? Work to rationalise thealternatives and summarise their strengths and weaknesses, taking intoaccount different country and cultural settings, would undoubtedly bebeneficial, as would further academic studies to establish the rigour of thevarious measures that are available – given that many of them are proposed inthe practitioner literature (Chakravarthy, 1986).

Despite its apparent simplicity, the question of how business performancecan be measured is complicated by two factors:

(1) it is not always obvious which measures a firm should adopt; and (2) the measures that will be most relevant to the firm will change over time.

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These two factors give rise to two sub-streams of work. The first of these seeksto answer the question – “how to decide which performance measures to adopt”,while the second, which is much less well-developed, addresses the topic of –“how to manage the evolution of the measurement system”.

How to decide which performance measures to adoptAs already suggested, the issue of which performance measures a givenbusiness should adopt is a topical and complex one. Various authors offerprescriptions such as that measures should be derived from strategy (Keegan etal., 1989). Numerous authors have proposed performance measurementframeworks which prescribe which dimensions of performance organisationsshould consider monitoring (Fitzgerald et al., 1991; Kaplan and Norton, 1996).Others have adopted a different stance and developed audits which helporganisations identify the strengths and weaknesses of their measurementsystems in terms of “gaps” and “false alarms” (Dixon et al., 1990). While stillothers have accepted the argument that measures have to be derived fromstrategy and hence sought to document processes designed to helpmanagement teams decide which measures are appropriate for theirorganisation (Neely et al., 1996).

Much of this work focuses on the issue of designing measures andmeasurement systems. Once the systems have been designed, however, theyhave to be implemented, and then they have to be used to manage the businesson an ongoing basis. These two topics – the implementation of measurementsystems and using them to manage business performance – both appear to beareas in which further research effort is required.

How can the performance measurement system be managed?To date, much of the work on business performance measurement has beenstatic in orientation. Various authors comment in passing that measurementsystems need to be changed in the light of evolving circumstances – i.e.changing markets and strategies. Yet when one looks at the measurementsystems used by businesses they are usually a mess! Organisations, or ratherpeople in organisations, appear happy to introduce new measures ofperformance, but rarely do they delete obsolete ones. Few businesses haveprocesses for managing the evolution of their measurement systems. Authorssuch as Chandler (1977) and Johnson (1983) discuss the evolution of accountingsystems, while Meyer and Gupta (1994) explore the performance paradox andseek to explain why organisations end up with seemingly disconnectedperformance measures in their measurement systems. Waggoner et al. (1997)propose a framework which encapsulates some of the factors that appear toinfluence the evolution of business performance measurement systems. Suchstudies, however, are the exception rather than the rule and indeed, one of thegreatest weaknesses in the field of business performance measurement today isthat few people are actively exploring the issue of how the evolution ofmeasurement systems can be managed over the long term.

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ConclusionThis paper sought to address two questions: why is business performancemeasurement on the agenda; and second, what further research is required inthe field? In answer to the first question it was argued that there were sevenmain reasons why business performance measurement is on the agenda: thechanging nature of work; increasing competition; specific improvementinitiatives; national and international quality awards; changing organisationalroles; changing external demands; and the power of information technology. Inanswer to the second question, nine main topics were identified:

(1) What are the determinants of business performance?(2) Can the relationship between different dimensions of business

performance be mapped?(3) Can predictive performance measures, or leading indicators, be

identified?(4) What are the strengths and weaknesses of the various performance

measures proposed in the academic and practitioner literatures?(5) How valid is each of these measures?(6) Does the appropriateness and validity of the measures vary according to

the country and cultural setting?(7) How can measurement systems be implemented?(8) How can measurement systems be used to manage business

performance?(9) How can the evolution of measurement systems be managed over the

long term?Business performance is an important and wide-ranging topic. Indeed one ofthe problems in writing this paper was deciding where to draw the boundaries.Valuable work on benchmarking (Andersen Consulting, 1993, 1994; IBMConsulting and London Business School, 1993, 1994; Womack et al., 1990);strategic control (Goold and Quinn, 1990; Horovitz, 1979; Simons, 1995); andperformance management (Beer et al., 1978) has been deliberately, if somewhatunfairly, excluded. In essence, this paper has argued that there are fourfundamental questions that research in business performance seeks to address:

(1) What are the determinants of business performance?(2) How can business performance be measured?(3) How to decide which performance measures to adopt? and (4) How can the performance measurement system be managed?

This agenda, however, is essentially a personal one. It represents a necessarilylimited and narrow view of the field.

In many ways this admission is indicative of a deeper problem. Research inthe field of business performance is being undertaken by academics from a

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wide variety of disciplines. The topic does not belong to accountants, operationsmanagers, business strategists, human resource managers or marketeers. Thebiggest hurdle facing the field is that few academics cross these functionalboundaries. Review the work in accounting and you will find references mainlyto the work of other accountants. Review the work in operations and you findreferences to the work of other experts in operations. Several factors compoundthis problem, but probably the main one is language. Academics in differentdisciplines talk different languages. They have different mental models of whatconstitutes good research. While excellent progress has been made in the fieldin recent years, substantive breakthroughs are likely to arise when theseacademics learn to talk and work with one another. One of the fundamentalchallenges facing the field today is how to achieve this? How can a commonlanguage and shared research agenda be developed?

Notes1. Comment made by manager of service business based in the UK during a discussion on

business performance measurement.2. Number of articles published and listed on the ABI Inform Database.3. Number of books with performance measurement in their title published in the USA

according to the “Books in Print” database maintained by Reed Elsevier. NB: this estimateis a conservative one, as several well-respected books on the subject, e.g. Kaplan andNorton (1996), do not contain the words performance measurement in their title and henceare excluded from the list.

4. See http://www.bt.com/quality_of_service/index.htm5. See http://www.cognos.com6. See http://www.fpm.com7. See http://www.valstar.co.uk8. Extract from the 1996 Deming Prize Guide for Overseas Companies.

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