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International Journal of Operations & Production Management

Integrated performance measurement systems: a development guide


Umit S. Bititci Allan S. Carrie Liam McDevitt
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Umit S. Bititci Allan S. Carrie Liam McDevitt, (1997),"Integrated performance measurement systems: a development guide",
International Journal of Operations & Production Management, Vol. 17 Iss 5 pp. 522 - 534
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Mike Bourne, John Mills, Mark Wilcox, Andy Neely, Ken Platts, (2000),"Designing, implementing and updating performance
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NONE, Andy Neely, Mike Gregory, Ken Platts, (2005),"Performance measurement system design: A literature review and
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IJOPM
17,5 Integrated performance
measurement systems: a
development guide
522
Umit S. Bititci, Allan S. Carrie and Liam McDevitt
University of Strathclyde, Glasgow, UK

Introduction
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Business performance improvements arising from increased manufacturing


integration continues to be one of the primary competitive issues of the 1990s.
Recent research into manufacturing systems integration (Carrie and Macintosh,
1992) has identified the need for effective deployment of business objectives
down through the organization and the subsequent measurement of
performance in critical areas as key elements of sustainable competitive
advantage.
The objective of the current research and development programme at the
University of Strathclyde’s manufacturing systems group is to provide industry
with a comprehensive and rigorous set of tools, techniques and procedures to
allow auditing of existing performance measurement systems against a
reference model and consequently design more robust, flexible and integrated
performance measurement systems. It is envisaged that a correctly structured
and designed performance measurement system would provide the basis for a
rigorous and effective performance management system which could be used as
a management tool by strategic, tactical and operational levels of management.
The objective of this paper is to introduce and develop the concept of
performance management as a key business process and focus on the criticality
of the performance measurement system embedded within. It presents a
reference model for the performance measurement system which is based on
industry best practice. Figure 1 illustrates the concepts and objectives of the
work presented in this paper.

Background
The hypothesis behind the research described in this paper was borne directly
from the previous research aimed at developing integrating methods based on
analysis of information, material flow and organizational systems (Carrie and
Macintosh, 1992). This previous programme identified the value of using
performance measurement to deploy business objectives and to pinpoint and
monitor performance improvements. Other researchers have also noted the
International Journal of Operations
links between performance measures and strategic plans and/or critical success
& Production Management,
Vol. 17 No. 5, 1997, pp. 522-534.
factors of the business. The research by Grady (1991) and Eccles and Pyburn
© MCB University Press, 0144-3577 (1992) supports the same conclusions drawn in the earlier research programme.
Performance
measurement
systems

523
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Figure 1.
Concept and objectives
of the R&D programme
at the University of
Strathclyde

In summary, the need for an integrated set of performance measures which


supports rather than contradicts business objectives is now clearly established
(Bititci, 1994).
In addition, considerable work is already being carried out by the accounting
profession on performance measurement. Indeed, most manufacturing
organizations have extensive performance measurement systems based on cost
and financial accounting practices. However, because these techniques are often
based on old-fashioned overhead absorption methods, they fail to support the
current business objectives and do not enable continuous improvement (Bititci,
1993). More recent innovations such as activity-based costing improve
allocation methods but still do not promote continuous improvement and
strategic orientation. Notable work has been carried out by Kaplan (1983 and
1990) and Johnson and Kaplan (1987) in recognition of these weaknesses. Neely
(1993) summarizes the shortcomings of the current accounting practices with
respect to performance measurement in manufacturing enterprises.
Because financial measures that are currently in place are not supporting the
change process, there is a case for new styles of measurement systems that are
appropriate to the needs of the modern manufacturing industry. McNair and
Masconi (1987), Drucker (1990) and Russell (1992) show that there is a need for
alignment of financial and non-financial measures that fit within a strategic
framework.
Furthermore, based on research carried out by Bititci and Swenson (1993),
Blenkinsop and Burns (1991) and Gelders et al. (1993), there is evidence that,
even in companies where quality-oriented performance measures are employed,
these are still being used in a manner which do not promote integration. Several
IJOPM cases have been cited where the companies strategy, improvement projects and
17,5 performance measures were in conflict.
A paper by Bititci (1995) asserted that performance management should be
viewed as a key business process which is central to the future wellbeing and
prosperity of any manufacturing enterprise. In this paper this view is further
elaborated and a clear distinction is made between performance measurement
524 and performance management. The performance measurement system is seen
as the information system which enables the performance management process
to function effectively and efficiently.

The performance management process


The performance management process is the process by which the company
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manages its performance in line with its corporate and functional strategies
and objectives. The objective of this process is to provide a proactive closed loop
control system, where the corporate and functional strategies are deployed to
all business processes, activities, tasks and personnel, and feedback is obtained
through the performance measurement system to enable appropriate
management decisions (Figure 2).
In essence, the performance management process defines how an
organization uses various systems to manage its performance. These systems
include, but are not limited to: strategy development and review; management
accounting; management by objectives; non-financial performance measures –
informal; non-financial performance measures – formal; incentive/bonus
scheme; personnel appraisal and review.
At the heart of the performance management process, there is an information
system which enables the closed loop deployment and feedback system. This
information system is the performance measurement system, which should
integrate all relevant information from the relevant systems (as listed above). In
this context integration means that the performance measurement system

D
E Vision
P
L Business
O objectives
Y F
M Strategic E
E goals E
N D
Figure 2. T Critical B
The closed loop success factors A
deployment and C
feedback system for the Critical tasks K
performance action plan
management process Performance measures
should enable the correct deployment of the strategic and tactical objectives of Performance
the business as well as providing a structured framework to allow the relevant measurement
information to feed back to the appropriate points to facilitate the decision and systems
control processes.
This information system, i.e. the performance measurement system, to be
effective in achieving its objectives as described above, should take account of
the strategic and environmental factors relating to the business as well as 525
considering the structure of the organization, its processes, functions and their
relationships. Similarly the effectiveness of the performance management
process which makes use of this information system depends on how this
information is used to manage the performance of the business. Thus, it is
critical that it gives consideration to soft factors such as culture, behaviour and
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attitudes as well as harder factors such as reporting structures, responsibilities


and the use of information technology. Figure 3 summarizes this view of the
performance management process.

The performance
management process

Behavioural Information
issues technology
The performance
measurement system
What is
Cultural measured?
issues Strategy
Environment The
Structure information
Processes system
Attitudes Relationships Who uses the Figure 3.
measures? The performance
Reporting Responsibilities managment process and
structure How systems are the postion of the
used to manage performance
performance measurement system

In this context the structure and configuration of the performance


measurement system becomes critical to the efficiency and effectiveness of the
performance management process. Therefore, the remainder of this paper
focuses on the performance measurement system.

The structure and configuration of the performance measurement


system
The research work undertaken at the University of Strathclyde revealed two
critical considerations with respect to the structure and configuration of
performance measurement systems. These are: integrity of the system; and
deployment.
IJOPM Integrity of the system
17,5 Integrity refers to the ability of the performance measurement system to
promote integration between various areas of the business. Previous research
on manufacturing systems integration undertaken by the same consortium
identified the value of the viable systems model (Beer, 1979; Blenkinsop, 1993)
as a framework for assessing a systems integrity. The theory behind the viable
526 systems model (VSM) is that for any system to be viable it must have five
subsystems. The VSM identifies these five subsystems as System 1, System 2,
System 3, System 4, System 5 and the Meta System which is a combination of
Systems 3, 4 and 5. These systems are discussed in the following paragraphs.
System 1 is the operational units which produce the goods or services. In other
words it represents the productive function of the organization. It could be
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interpreted that system 1 consists of business processes such as order fulfilment,


product development, get order, and so on. From a performance measurement
systems perspective system 1 will consist of performance measures which
objectively measure the performance of an individual business process.
System 2 is the supervisory system which co-ordinates the activities of
operational units. This system represents the business process which co-
ordinates the activities of system 1.
System 3 represents the tactical management system which manages the
operations of systems 1 and 2 by setting targets and priorities. Also, in terms of
the meta system it would be the system which would implement change. This
is the operations management system which is responsible for the performance
of business processes and activities in line with the requirements of the higher
level systems. From a performance measurement systems perspective this is
the system which deploys the strategic policies and priorities. It is therefore
responsible for deploying targets and priorities to the measures under systems
1 and 2.
System 4 is the developmental system which concerns itself with the
external environment and therefore the future. Its focus is on improvement. In
terms of the meta system this is the system which identifies the changes
necessary to the lower level systems, i.e. systems 1, 2 and 3. This effectively is
the benchmarking system which by focusing externally identifies the
improvement gaps. The performance measures used in this system tend to be
externally focused and comparative, e.g. delivery performance with respect to
the competitors or market requirements. In addition to measuring the
performance gaps with respect to the external environment, one other key
function of this system is the prioritization of the these gaps in line with the
corporate and strategic objectives set by the higher level system 5.
It would be appropriate to combine the external focus of this system with the
results category of the EFQM model for TQM where the focus is on customer
satisfaction, people satisfaction, business results and society satisfaction. From
a reference model point of view it may be appropriate to expect externally
oriented measures corresponding to each one of the four areas.
System 5 is the boss. This system sets the direction, the policy and strategy
the organization would be adopting in the future. With respect to performance
measurement system, this system sets the high level priorities and targets by Performance
relating the performance gaps, from system 4, to business objectives and measurement
priorities. systems
The Meta System is a combination of systems 5, 4 and 3 which is responsible
for identifying and managing change. System 5 sets policy and direction,
system 4 identifies the necessary changes and system 3 implements these
changes. 527
According to VSM these five systems represent the core of any viable
system. However, within VSM, there are other concepts which are of critical
importance to performance management. These concepts are further explained
in the following paragraphs.
Amplification is the concept which refers to the deployment of objectives
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from higher level systems to lower level systems. For example, the meta system
will set the strategic objectives and deploy these down to the operational
systems (i.e. system 1s).
Trunsduction is the concept used to describe the translation process required
during Amplification. That is, as higher level objectives are deployed down to
lower levels, the objectives are translated into locally meaningful terms.
Attenuation is the concept which describes the upward communication
process where lower level systems provide feedback to the higher level systems
by filtering the large variety of information to a critical few.
Recursion is the concept which describes the repetitive nature of systems
thinking. In VSM each operational system must exist as a viable system in its
own right. Therefore, each viable system should have its own five subsystems.
Figure 4 illustrates the levels of recursion in the VSM architecture developed by
the research group. This architecture identifies three levels of recursion. At the
first level of recursion the business is considered as a whole with its own
management and with its own system 1s as the business units. Each business
unit consists of its own local management (i.e. systems 2, 3, 4 and 5) and own
system 1s as the key business processes. Similarly each business process
consists of its own management processes (i.e. systems 2, 3, 4 and 5) and own
system 1s as the key activities.
The readers should note that the concepts of amplification, trunsduction and
attenuation apply within each level of recursion as well as between these levels
of recursion.

Deployment
Deployment refers to the deployment of business objectives and policies
throughout the hierarchical structure of the organization as illustrated earlier in
Figure 2. The objectives of deployment, in this context, are to ensure that:
performance measures used at various levels of the organization reflect the
business objectives and policies; deployment is consistent through the
hierarchy of the organization; and deployment is relevant and correct with
respect to the impact and influence of individual business areas (i.e. processes,
functions and activities).
IJOPM
17,5

528
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Figure 4.
Levels of recursin and
the VSM architecture of
an enterprise

A reference model
The reference model developed by the research team at the University of
Strathclyde is based on the two facets of the performance measurement
systems as identified above. These are: integrity; and deployment.
Although, in the above section, integrity and deployment have been
discussed as if they are mutually exclusive, in practice deployment is a function
of integrity.
However, VSM itself does not clearly establish the exact requirements for
correct deployment but, when it is combined with the three basic objectives
specified with respect to deployment, a complete reference model is developed.
A pictorial view of this reference model is provided in Figure 5.
A reference model has been developed following a study of best practices.
The viable systems model (Beer, 1979) has been adopted to provide the basic
structure of the reference model which consists of the following four levels:
Corporate, Business units, Business processes and Activities. At each level of
the structure five key factors are considered; these are: Stakeholders, Control
criteria, External measures, Improvement objectives and Internal measures.
The reference model places emphasis on the amplification, trunsduction and
attenuation of performance objectives between these levels.
Performance
measurement
Stakeholders systems
Control
measures
Corporate level
External
environment Environmental 529
positioning EFQM model, financial
models, RONA tree etc.
Improvement
objectives

Internal performance
measures
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Stakeholders

Control
measures
Business unit level
External
environment Environmental
positioning BU classification, PM classification
competitive criteria, ABC checklist
Improvement
objectives

Internal performance
measures

Stakeholders

Control
measures
Business process level
External
environment Environmental
positioning

Improvement
objectives

Internal performance
Process classification, PM measures
classification ABC checklist

Stakeholders

Control
measures Activity level
External
environment Environmental
positioning

Improvement Figure 5.
objectives
A reference model for
Internal performance integrated performance
measures measurement systems
IJOPM The reference model uses this basic structure to integrate the following
17,5 concepts into a single framework:
• Policy deployment. The deployment of corporate and stakeholders’
objectives throughout the organization.
• Competitive criteria and benchmarking. The definition of key
530 competitive factors and position of the business and the business units
within its competitive environment.
• Process orientation. Focusing on key business processes to manage
business performance.
• Normative planning. The measurement methodology which
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differentiates between actuality, capability and potentiality.


• Active monitoring. The use of proactive performance measures rather
than reactive measures.
Within the framework created, the reference model uses the following models to
ensure completeness and integrity of the performance measurement system:
• The European model for business excellence (EFQM, 1995);
• Business classification model (Hill, 1993; Puttick and Gillis, 1993);
• Systems classification model;
• Performance measures classification model (Dixon et al., 1990).

The audit method


Having identified and defined the key characteristics of an integrated
performance measurement system (i.e. integrity and deployment), the
researchers at the University of Strathclyde have developed and tested a
method for auditing the integrity and deployment of the performance
measurement system as defined in the reference model. The audit process
consists of three phases. These are: data collection; integrity audit; and
deployment audit.

Data collection phase


The data collection phase, using a workbook developed by the research team,
collects all information relevant to the performance management process of the
business. The information collected includes:
• Identification of business units (BU) within the business.
• The market requirements in terms of qualifiers and differentiators for
each BU.
• The development plans or objectives for the business or each of its BUs.
• The performance measures used and reviewed by the executive
management team within the business, i.e. the strategic performance
measures.
• The performance measures used and reviewed within each function of Performance
the business, i.e. the functional or operational performance measures. measurement
• Personal objectives and any associated incentive scheme for the systems
executives, managers, supervisors and operational personnel.
• Review, reporting and performance responsibilities associated with
measures used at all levels. 531
Once the data are collected they are then analysed to conduct the integrity and
deployment audits respectively.

Integrity audit
In order to conduct the integrity audit in a comprehensive, rigorous and
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repeatable manner, the research team has compiled a checklist to search for
objective evidence supporting the existence of all five systems within the VSM.
Following the analysis of these data against this checklist various gaps are
identified with respect to the completeness and integrity of the performance
measurement system. An extract from the results of the integrity audit carried
out on a collaborating organization illustrates the nature of the conclusions
obtained from such an audit (Table I).

The deployment audit


During the early stages of the research programme it became apparent that
most businesses, large or small, consist of discrete business units which in turn
may be treated as stand-alone businesses. The common terminology applied to

System 5
• A policy-making system is in place where the business objectives and strategy are stated in
the form of a business plan.
• There is no evidence of the business plan and objectives being based on external competitive
position and actual performance of the business.
System 4
• There is no evidence of a formal or informal mechanism for identifying the company’s
current performance with respect to the external environment.
• The strategic objectives are not expressed in measurable terms with associted targets, with
the exception of the objective relating to reduction of material costs.
System 3
• There is no evidence of a system which prioritizes and deploys the business objectives to
system 2 and 1 – any deployment seems to be random (see deployment audit results).
System 2
• There is no evidence of a system 2/co-ordination type measures.
• There is no evidence of the recognition of the key business processes.
System 1
• There are numerous measures at this level; however, none of these is linked in any way to the
business objectives. Table I.
• Measures at this level do not have targets associated with them. Extracts from a
• Measures at this level are not prioritized. integrity audit
IJOPM these business units are strategic business units (SBUs). The configuration of
17,5 SBUs within an organization could vary dramatically. In one organization it
could be very much product-driven; in others it could be market-driven, and in
some it may be a hybrid of market and product characteristics.
In the first instance the deployment audit requires the identification of the
individual SBUs and their strategic requirements in terms of the qualifiers and
532 the differentiators. The performance measurement system should ensure that
the priorities between the above two criteria are balanced and appropriately
managed in a dynamic environment.
In order to audit the deployment of the performance measurement system a
three-stage audit method has been developed:
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• Stage one focuses on to the requirements of each SBU environment and


through a series of matrices assesses the deployment of environmental
requirements through business objectives to strategic and functional
performance measures.
• Stage two focuses on to the business objectives and through a series of
similar sets of matrices assesses their deployment through the strategic
performance measures to functional levels.

Stage 1: BU 1 – market requirements


• Differentiator production flexibilty is:
• not deployed as business objective
• not deployed as a strategic performance measure
• marginally deployed within the manufacturing function with no measure of performance
and associated target.
• Qualifier production functional performance is:
• partially deployed as business objective
• not deployed as a strategic performance measure
• is marginally deployed at the manufacturing function and is not deployed in any other
function. Expected deployment path for this measure would have included
manufacturing and technical functions.
Stage 2: BU 1 – business objectives
• Business objective reduce production and inventory costs by range rationalization is:
• not deployed as a strategic measure
• partially deployed in the manufacturing function. Expected deployment path for this
measure would have been the technical function.
Stage 3: BU 1 – strategic measures
• Strategic measure cost is strongly deployed across all functions. Expected deployment path
for this measure would have included all functions.

Terminology:
Strongly deployed – deployment is measurable with an associated target.
Partially deployed – deployment is measurable with no target or priority.
Table II. Marginally deployed – deployment is indirect.
Extracts from a Expected deployment path – identifies the functions where the reference model would expect to
deployment audit see a strong deployment.
• Stage three focuses on the deployment of strategic performance measures Performance
to the functional levels, again through the use of similar matrices. measurement
The audit process is designed to be rigorous in order to ensure repeatability. systems
A scoring system has been devised to measure the strength of deployment
which results in a rigorous approach and repeatable conclusions. An extract
from the results of the Deployment Audit carried out on a collaborating
organization illustrates the nature of the conclusions obtained from such an 533
audit (Table II).

Summary and conclusions


The research and development effort at the University of Strathclyde is aimed
at development of practical tools and techniques to facilitate more scientific and
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precise management of business performance. To this end, the first stage of the
work produced an audit method designed to assess the integrity and relevance
of the performance measurement system used in an organization.
More specifically the research and development work presented in this paper
may be summarized as follows:
• The research project carried out at the University of Strathclyde
as part of a larger project focusing on performance measurement
systems identified the need to study performance management as a
process.
• The performance management process is seen as a closed loop control
system which deploys policy and strategy, and obtains feedback from
various levels in order to manage the performance of the business.
• The performance measurement system is the information system which
is at the heart of the performance management process and it is of
critical importance to the effective and efficient functioning of the
performance management system.
• Research identified two critical elements with respect to the content and
structure of the performance measurement system these are: integrity
and deployment.
• The viable systems model (VSM) provides a framework for assessing the
integrity of the performance measurement system.
• Within the VSM framework, deployment is an integral element which
largely corresponds to system 3.
• The reference model developed for integrated performance measurement
systems provides a framework against which performance measurement
system can be designed and audited.
• The audit methods developed to assess the integrity and deployment of
the performance measurement system provide simple but rigorous and
repeatable tools which may be used to improve the effectiveness and
efficiency of the performance management process.
IJOPM References
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103. Dr Adam Lindgreen, Dr Martin Hingley, Jacques Trienekens, Ruud van Uffelen, Jeremy Debaire, Onno Omta. 2008.
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