Table of Contents
Every organization has its internal and external environments. What happens internally goes a long way to impact the organization externally (Van der Wees et al., 2014). The internal environment deals with the workplace itself and the people within it such as management and employees. The external environment on the other hand includes the larger market, industry or country in which the organization operates. It also includes key stakeholders within that external scope such as employees, government and civil society (Desilva & Claussen, 2017). Often, goals are set for the internal and external environments. There are always specific work processes that ought to be done to ensure that the internal and external goals set for the organization are achieved. While working on achieving its goals, one thing that is particularly important is the need to measure the extent of performance produced from the organization. This paper highlights on this by discussing the concepts of performance measurement and management control systems.
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Overview of performance measurement and management control systems
In an organizational context, any processes undertaken to collect, analyze and report information on performance of individuals, groups and the organization as a whole constitutes performance measurement (Parida et al., 2015). Because there are several facets of the organizational work process and systems, performance measurement could take many forms including qualitative and quantitative. Qualitative performance measurement involves the use of non-numeric and statistical methods in collecting, analyzing and reporting performance information. This could include the use of interview and observation of employees and work processes (Taticchi et al., 2015). Quantitative performance measurement on the other hand involves using numeric indices and methods to quantify the performance of employees and work processes (Zamn & Lehmann, 2013). Related to performance measurement is management control system (MCS), which is a system, used for the purpose of gathering and evaluating information on performance of different aspects of work such as human resource, financial resource, and physical environment of the organization (Desilva & Claussen, 2017). In sum, performance measurement can be said to be a process, whereas management control system is a tool for undertaking the process. Cassel et al. (2014) noted that MCS may be referred to as performance measurement system as the tools are used for the purpose of performance measurement.
Performance measurement systems and their types
As explained above, performance measurement systems are the tools used in measuring performance at the workplace. There is extensive research on performance measurement systems and their types. Bhattacharya et al. (2014) emphasized that the systems come in many different types so that they fit different type of organization and specific types of performances to be measured. For example a type of performance measurement system that may be used in a startup firm may not be suitable in a global firm. In the same way, a system that may be used in a for-profit organization may not be suitable for a charity organization. Similarly, a measurement system that may be used for employee work may not be suitable for financial output. Below, four common forms of performance measurement systems are briefly described, while selecting one for further discussion in the remaining parts of the paper.
The balanced scorecard
According to Frösén et al. (2016), the balanced scorecard (BSC) may be deemed to be more than a performance measurement system, as it actually fits for the purpose of strategic planning and management control as well. But as performance metric, the BSC is used to identify and improve a number of internal functions of an organization, as well as the external outcomes they produce. As stressed in the introduction, organizations have both internal and external environments and the BSC is a metric or system that perfectly measures the internal inputs and external outputs of the organization. In a study by Van der Wees et al. (2014), it was found that contemporary organizations now use the BSC as a multipurpose metric which among other things communicates the work process, align the work process to the corporate strategy, prioritizes aspects of the work process, measures the progress of work, and monitors impact of the work process. Bhattacharya et al. (2014) observed that what is unique about the BSC is that it works by connecting the organization’s big strategy as manifested through mission and vision statements to operational elements and value chain.
As a MCS, the six sigma works in somewhat unique and different way by focusing on defects and wastes that impede the successful attainment of strategic goals. The six sigma may be used as a strategic thinking or philosophy for the organization but when used as a measurement performance system, it acts as a data-driven approach and methodology for identifying wastes, assigning strategies to eliminating the wastes, and measuring the extent of elimination of the waste (Micheli & Mari, 2014). In a research by Cassel et al. (2014), it emerged that among different types of organizations including small, medium and large, six sigma has often been used by large firms and those in the manufacturing industries including General Electric, Motorola and Toyota. This is because it is in such organizations that most forms of operational wastes are identified. The common types of wastes that is targeted with the six sigma include defect, excess inventory, transportation, unnecessary processing, waiting, excess motion, and overproduction (Parida et al., 2015).
The performance prism
The performance prism is thought to have been developed by the Cranfield University and is considered as a second generation or modern day performance measurement system used to measure performance from five main dimensions of the organization (Love et al., 2015). The five dimensions or elements are what form the prism. The performance prism has mostly been noted to be advantegous over the other types of MCSs since it addresses all key stakeholder’s of the organization including investors, suppliers, employees, the general public, customers, government, and intermediaries (Upadhaya, Munir & Blount, 2014). There are five key aspects of the performance prism that is carefully designed to properly and strategically measure the performance of organizations. This takes into account the extent of identifying the core stakeholders and their needs, strategies to meet such needs and critical processes and capabilities needed to accomplish the strategies. It further identifies the actual contributions needed from the stakeholders in order to hold on to the capabilities.
Social return on investment
Social return on investment (SROI) works specifically with nonprofits who undertake social activities. It is generally accepted that assigning financial value to the kind of social benefits that the activities of these nonprofits undertake is difficult (Chenhall, Hall & Smith, 2014). This notwithstanding, it remains important that like all other organizations, the nonprofits also measure the extent to which they are impacting society and how work processes are being undertaken. What the SROI does therefore is to assign financial value to the charitable activities that the organizations undertake (Micheli & Mari, 2014). By doing this, they are able to measure the extent of social benefits they are creating. Frösén et al. (2016) therefore noted that the SROI is more suitable as an external performance measurement system rather than an internal one. What this infers is that the SROI works best when used to measure the external outputs or impacts of the nonprofit organizations rather than performance of employees. meanwhile, because the external output is mostly a reflection of internal inputs, one can say that the outcome of the SROI gives a reflection of how well employees perform.
Discussion of the performance prism
The five facets of the performance prism
According to Frösén et al. (2016) stakeholder satisfaction is one of the principal interests and focus of every organization. It is therefore important to identify the main stakeholders of the organization and precisely forecast or envisage their basic interest and needs. Such developments will facilitate smoothly the organization’s effort towards working to first identify the stakeholders and second what particular need sustains their interests or stakes in the organization. The performance prism is specially designed to help management of organizations identify the components of their key stakeholders. Subsequently it helps managers to gain insights into the need or interest of each of the identified stakeholders. This is actually one of the contemporary management designs that simply offer the necessary assistance to organizations to come to terms with its stakeholders and their basic needs (Bourne et al., 2014). Identifying stakeholders and their needs dictates how to channel energies and resources by management to achieve them.
Stakeholders actually make an organization survive through the various contributions put forth to sustain the growth and stability of the business (Bourne et al., 2014). This means that the contribution of stakeholders in every organization cannot be overemphasized. But the question remains what constitutes the definite and concrete contribution of each stakeholder for the benefit of sustaining the business. This may lead to identifying the key contributions of the stakeholders in connection with what they bring on board to help achieve the goals and set targets for the organization. The performance prism however considers largely what contributions are expected from stakeholders. This helps management to communicate effectively to stakeholders as regards what is required of them in order to serve the best interest of an organization. It further also help organization to set sights on key competencies needed motivate stakeholders to contribute effectively to it (Saunila, Pekkola & Ukko, 2014).
It is important for every organization to identify the key strategies that is pivotal to enhancing the progress of it in terms of achieving the set targets and goals. One of such strategies inculcates the measure of the extent to which the organization meets the wants and needs of the principal stakeholders. This makes an organizational strategy a key component of performance measurement. The measurement design of the performance prism takes into consideration the key strategies that ought to be implemented by management in order to satisfy the basic needs and wants of the stakeholders (Taticchi et al., 2015). However the strategies must be varied and sustainable within a particular definite context such that it may continue to meet the ever changing needs and wants of stakeholders. Identifying the most critical and result oriented strategies strengthens the modes of operations of the organization which is sure to satisfy all stakeholder interests.
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The process of implementing a strategy as formulated to accomplish a specific purpose by an organization is very fundamental. This is because without an efficient and effective methods or processes to implement the strategy, the main vision and targets of the organization may not see the light of day. It is therefore very important to set forth vital and skilled processes that squarely meet successful implementation of strategies. The performance prism however is carefully designed to facilitate the successful execution strategies and policies of an organization (Upadhaya, Munir & Blount, 2014). If the goal of the organization for instance lies with meeting the needs of the stakeholders, specific policies and approaches may be set to meet the goal. The detailed procedural mechanism for successful implementation of the approach is critical and the performance prism helps to accurately identify them.
In order to productively execute a strategy or a procedure, the essence of developing certain capabilities come to bear. Different abilities and skills are required to implement different strategies and processes. The performance prism again takes into account the element of helping to identify the key capabilities or competencies that may be necessary to successfully execute a plan of action by an organization. To identify them means that the organization may be positioned well to organize special training schedules which afford its workforce the requisite skills and expertise. This may come on the back of a situation where the needed capabilities to execute a process may be lacking among employees. It must be stated that the performance prism influences organizations to settle on relevant capabilities critical to enhancing its modes of operations in order to surmount specific goals (Zaman & Lehmann, 2013).
Theory and philosophy supporting the performance prism
According to the Cranfield University (2017), “the performance prism is based on the belief that those organizations aspiring to be successful in the long term within today’s business environment have an exceptionally clear picture of who their key stakeholders are and what they want”. What this philosophy infers is that the performance prism is used with specific emphasis on stakeholders of organizations. Because of this, the stakeholder theory can be said to be an important theory that supports the use of the performance prism. The stakeholder theory tends to argue that rather than the shareholder alone, all other stakeholders really matter in the organization and so companies become successful when they listen and address the needs of all their stakeholders (Bourne et al., 2014). The philosophy and theory that supports the performance prism system influences how it is used and why it is used. For example, it is used by focusing on both the internal and external environments of the organization.
The performance prism works differently from other performance measurement systems which may only be demanding on the part of employees to deliver certain outcomes (Chenhall, Hall & Smith, 2014). Because employees are seen as stakeholders and not just human resource, when the performance prism is applied on them, it does not only ask the question of what the employees have done but what the organization can do to help them achieve more. Another important indication about the philosophy of performance prism is why the issues of stakeholder satisfaction and stakeholder contribution are all considered as part of the five facets of the system. With those two facets, performance is measured by considering both what stakeholders may contribute to the organization as well as what is required to make them satisfied with the services and products they receive from the organization.
Approach to using the performance prism
The overall approach to using the performance prism is to start with the stakeholder rather than the strategy being used by the organization. By this, reference is made to the need to first ask the question of what satisfies stakeholders. Taticchi, Tonelli and Pasqualino (2013) emphasized that once this question is correctly answered, it will be possible to clearly determine what is it that ought to be measured. Zaman and Lehmann (2013) emphasized that the weakness of most other forms of performance measurement systems is that they set standards for stakeholders as to what is appropriate for them. When measuring performance therefore, the systems are used to evaluate how well the standards set by the organizations have been achieved. The approach in using performance prism is however different because it puts the stakeholder ahead of the organization. This way, what is measured is indeed what those who are affected by the existence and activities of the organization expect.
With this approach, Love et al. (2015) stressed that the performance prism can be used in different types of organizations including governmental institutions that serve large number of people in the public. After the question of stakeholder satisfaction, the question of strategies is also asked by seeking to know the strategies that need to be put in place to meet the needs of stakeholders (Saunila, Pekkola & Ukko, 2014). Based on this, using performance prism would be noted not to be a performance measurement system that sets on a mission to find faults with people. It rather concerns itself with finding collective ways by which people can work best to achieve what they ought to achieve. The third aspect of the approach is by asking the question of process, where critical processes needed to execute the strategies of the organization is asked. The last two questions asked under the approach are capabilities needed to be put in place to make the implementation of the processes easier, and the contributions that can be made by the stakeholders in executing the processes (Taticchi, Tonelli & Pasqualino, 2013).
Key benefits of the performance prism over other performance measurement systems
There are a number of modalities about the performance prism that make it more beneficial to modern organizations when compared to other systems. Bourne et al. (2014) noted that the implementation of the performance prism is based on value based management, which deals with increasing complexity in corporate or organizational systems and processes. The justification for this is that the performance prism does not undertake a simple process of evaluating performance of employees and scoring them. Rather, it is a whole complex system requiring that the entire work process will be broken down according to the five facets earlier discussed. In the light of this, the key benefit that comes with the use of the performance prism is that it continues to fit into the organization’s needs as the complexities of the organization also increases. Just as a normal prism refracts light, the performance prism also exposes hidden complexities within organizations that make its performance retarding. The aspect of the system that makes it offer this advantage is that it does not function based on the perspective of only few people within the organization. Rather, it extends to all stakeholders. Again, this system fails to see performance as a uni-dimensional concept. It rather sees performance as multi-dimensional, while seeking to address all the aspects of performance.
Performance measurement is an important part of every organization. It is the best way to know how well internal stakeholders are performing, as well as how much external stakeholders are being influenced. But in order to undertake performance measurement effectively, using a system, metric or tool is required. Selecting a performance measurement system must be influenced by a number of factors including the type of organization, size of organization and nature of performance to be measured. In most contemporary organizations, some of the performance measurement systems used include BSC, SROI, performance prism, and six sigma. Among these, the performance prism has been noted to be an emerging second generation performance measurement that suits the needs of most modern organization today. This is largely due to the fact that the stakeholder theory drives most corporate agenda of companies and the performance prism is also founded or based on this theory and philosophy. When used, companies get the chance not to only focus on their internal interests but the larger impact they create on society.
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