CHANGES IN PERFORMANCE MEASUREMENT SYSTEM IN

BANKING SECTOR: AN ANALYTICAL FRAMEWORK

Rahat Munir, Kevin Baird, Sujatha Perera

Department of Accounting and Finance, Faculty of Business and Economics,
Macquarie University, Sydney, Australia

Abstract
Drawing on institutional theory, more specifically DiMaggio and Powell’s
(1983) notion of institutional isomorphism, and Oliver’s (1991) typology of
strategic responses to institutional pressures, this paper develops an analytical
framework to examine the factors that influence organisations to change their
performance measurement systems, and the responses to consequential change
efforts. The paper suggests that various macro level factors (economic,
technological, socio-cultural and political) that affect organisational
functioning could place pressure on the organisation through various forms
(mimetic, normative and coercive) to change their performance measurement
practices. The paper also suggests that rather than merely submitting to such
pressure, organizations often respond strategically, and the strategic responses
could take various forms. The proposed framework could be used to examine
changes in performance measurement systems in organisations in general and
in the banking sector more specifically.

Keywords: performance measurement system, change, institutional theory, banking

Introduction
Over the last couple of decades in particular, many organisations worldwide have
experienced significant change in their organisational design, competitive environments and
information technologies (Johnson and Kaplan, 1987). The change has largely been driven
by globalization which has profoundly changed the world’s political, socio-cultural and
economic landscape and created a turbulent environment of change (Hopwood, 1987;
Johnson and Kaplan, 1987; Kaplan and Norton, 1992; Meyer and Gupta, 1994; Waggoner et
al., 1999; Bourne et al., 2000; Chow and Van der Stede, 2006). To adapt to the changing
environment, innovative organisations not only changed their strategic priorities, but also
implemented new technologies and management practices (Banker et al., 1993). The
adoption of new technologies and management practices has made organisations reconsider
the suitability of their control systems, including their performance measurement systems,
and also make necessary changes to make those systems more effective in the current
business environment.

Performance measurement systems (PMS) have been used for the efficient and effective
management of organisations (Kaplan and Norton, 1992) and traditionally these systems have
been dominated by financial measures, such as, Earnings per Share (EPS). Return on
Investment (ROI) and Return on Equity (ROE). The aim of these systems was to ensure from
shareholders’ point of view that the organisation’s performance was successful financially
and the progress was in accordance with the business plan (Dixon et al., 1990; Neely, 1998;

1
Bititci et al., 2000). While most of these performance measurement systems were developed
in the early 20th century, their usefulness became limited as the business environment
changed in the latter part of the 20th century. For example, Johnson and Kaplan (1987) claim
that:

“In this time of rapid technological change, vigorous global and domestic
competition, and enormously expanding information processing capabilities,
management accounting systems are not providing useful, timely information
for the process control, product costing, and performance evaluation activities
of managers” (Johnson and Kaplan, 1987, Preface, p .xi).

In particular, Johnson and Kaplan (1987) noted their dissatisfaction with the high focus on
financial measures in traditional measurement systems, and emphasised the need for change
in such systems. As a result, there have been various attempts to develop systems that
overcome the purported limitations of traditional performance measurement systems.
Examples of these new (or contemporary) systems are the performance measurement matrix
(Keegan et al., 1989). SMART pyramid (Lynch and Cross, 1991). the balanced scorecard
(Kaplan and Norton, 1992). result and determinants framework (Fitzgerald et al., 1991). the
performance prism (Neely et al., 2001) and comparative business scorecard (Kanji and
Moura, 2002). The common features of these new systems are: they are multidimensional;
incorporate financial and non-financial measures as well as leading and lagging indicators,
and link performance measures to the strategy of the organisation.

There is evidence which suggests that organisations are moving towards these new
measurement systems. For instance, 50% of the organisations in North America and 40% in
Europe have significantly changed their measurement system by the end of the 1990s (Frigo
and Krumwiede, 1999). In Australia, McCunn (1998) found that 30% of the top 1000
organisations are adopting contemporary performance measurement systems. Additionally, a
survey conducted in the United States in 1998, showed that 43% of 276 companies had
changed from their traditional performance measurement practices with the majority adopting
the balanced scorecard (Rigby, 2001). Silk (1998) found that 60% of the Fortune 1000 firms
in the United States have experimented with new performance measurement systems. A
similar study conducted by the Gartner Group, also suggests that over 50% of large US
organisations had adopted a new performance measurement system (in this case the balanced
scorecard) by the end of 2000 (Downing, 2001).

Researchers in the PMS area have been interested in understanding the reasons for change,
the issues arising in change processes, and the nature and extent of change attempts, and over
the last two decades research has been undertaken to examine such issues using different
analytical frameworks. (Innes and Mitchell, 1990; Cobb et al., 1995; Waggoner et al., 1999).
For instance, Innes and Mitchell’s (1990). based on a number of field studies in the
electronics sector, claim that change process is determined by three factors namely
motivators, catalysts and facilitators. While motivators and catalysts are regarded as the
generators of change, change will not occur without the presence of facilitators.

Cobb et al., (1995) criticized Innes and Mitchell’s framework for not including barriers to
change and also for focusing too much on change elements outside the organisational realm.
More importantly, they noted that Innes and Mitchell’s framework ignores the influence of
individuals on the change process. In an effort to overcome these limitations, Cobb et al.,
(1995) developed a model of organisational change based on Innes and Mitchell’s

2
framework, and additionally included the significance of individuals in the change process
within their extended model. In a similar context, Waggoner et al., (1999) synthesised
several important issues concerning change and forces that can influence change in
performance measurement systems. In the framework that they proposed, the influencing
forces are categorised into: (i) internal influences (power relationships and dominant coalition
interests). (ii) external influences (legislation and market volatility). (iii) process issues
(manner of implementation and management of political processes). and (iv) transformational
issues (degree of top-level support and risk of gain or loss from change).

A review of the existing literature on PMS indicates that most of the research conducted has
been on manufacturing organisations and only limited research has been undertaken in
banking sector institutions (Cobb et al., 1995; Drury and Tyles, 1995). Similar to industrial
organisations, banks too have been subject to dramatic changes in their regulatory and
competitive environments in the last few decades (Cobb et al., 1995). Progressive
deregulation in the 1980s coupled with explosive growth in information technologies and the
stringent capital requirements of the Basel Agreement1 has changed the risk profile facing the
banks. Against this background, over the years the organisational structure of banks has
evolved into focused and semiautonomous lines of business, each with a different product,
customer, distribution, or geographic mandate (Karr, 1997; Humphery, 1985; Kimball, 1988;
Payant, 1996; Zaik et al., 1996). This decentralised organisational structure has created
issues concerning performance measurement, risk management, and resource allocation
(Karr, 1997). As these issues emerged and gained momentum, new approaches to
performance measurement based on products/services, customers or distribution channels
were needed within banks. Further, many banks found they lacked information that would
enable them to analyse performance and its related issues in an objective manner (Helliar et
al., 2002). In response to these pressures, many banks have developed and adopted a number
of innovative solutions for performance measurement, new databases and new analytical
ways to prudently assess costs, benefits and risks (Karr, 1997).

Although existing studies on change in PMS in banks address various issues in relation to
changes in PMSs, they do not explicitly analyse factors that influence organisations to change
their performance measurement systems. Anecdotal evidence suggests that despite the
changes taking place in the business environment, changes to PMS in banks is not
widespread. (Hussain and Hoque, 2002; Jeucken and Bouma, 1999). Traditional
performance measurement systems are still being used in some banks, and they are
considered to be appropriate (Adler et al., 2000). This raises some crucial questions
including; (i) why do some banks choose to change their performance measurement systems,
and what factors influence banking institutions to make such changes; and (ii) how strong are
the strategic responses to attempts to change (or not change) the existing PMS? It is

1
Basel Agreement is an accord developed during a 1975 meeting in Basel, Switzerland of central bankers of the
industrialized nations setting forth guidelines for the supervision of banks. Included are guidelines for minimum
capital requirements. The agreement was reached by the Committee (known as Basel Committee) on Banking
Regulations and Supervisory Practices, meeting under the auspices of The Bank for International Settlements.
The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was
established by the central bank governors of the Group of Ten countries in 1975. It consists of senior
representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United
States. It usually meets at the Bank for International Settlements in Basel, where its permanent Secretariat is
located.

3
important that managers and researchers gain a systematic understanding of these issues
(Hussain and Hoque, 2002).

The environment has been considered as a central factor affecting banks with changes to the
environment having important implications for organisational systems, structures, strategies
and day-to-day activities. Shields (1997) and Scapens (1999) argue that changes in the
environment cause changes within organisations, which in turn cause changes in management
accounting practices (see also Atkinson et. al., 1997). Generally, performance measurement
systems are expected to respond to environmental changes, since these changes have an
impact on the survival of organisations (Cobb et al., 1995; Burns, 1998). Therefore,
organisations should continually be aware of potential environmental changes, be capable of
anticipating them in a timely manner (Burns and Scapens, 2000; Eccles, 1991) and respond
appropriately by modifying their performance measurement systems (Eccles, 1991; Chow
and Van der Stede, 2006). These influences are, however not straightforward and not yet
entirely understood.

The limited number of studies that examines change in PMS in the banking sector use
different frameworks to analyse such change. Cobb et al., (1995) utilised Innes and Mitchell’s
(1990) model of accounting change to study a UK based division of a multinational bank.
Soin (1996) examined change process in a UK clearing bank by drawing on Laughlin’s
(1991) conceptual framework and later used institutional theory in Soin et al., (2002) to
examine the change process in the same context. Further, the frameworks that have been used
to analyse stimulators of change in performance measurement systems in manufacturing
organisations (for instance, Innes and Mitchell’s (1990) presented a framework for
accounting change using data from the electronics industry) are not applicable in banking
institutions due to different conditions experienced by them (for instance, banks are required
to operate under the stringent guidelines of central banks to maintain liquidity, capital
adequacy and risk management). Additionally, the frameworks that have been used to
examine PMS change have failed to accommodate managerial responses to institutional
pressures to introduce change. There have been calls for more research into the reasons and
other challenges confronting organisations when changing performance measurement
systems (Atkinson et al., 1997, p.86; Drury and Tyles, 1995; Helliar et al., 2002). accordingly
the main objective of this paper is to provide an analytical framework to facilitate a
comprehensive analysis in such research. Specifically, this paper draws on institutional
theory, more specifically DiMaggio and Powell’s (1983) notion of institutional isomorphism,
and Oliver’s (1991) typology of strategic responses to institutional pressures, to develop an
analytical framework to examine the factors that influence organisations to change their
performance measurement systems.

The rest of the paper is organised as follows. In section 2, the study outlines the theoretical
construct of the study drawn from new institutional sociology (NIS) variant of institutional
theory. Section 3 discusses a number of factors that affect organisational functioning.
Pressures that may influence change in performance measurement systems are discussed in
section 4 followed by a discussion on strategic responses to institutional pressures in section
5. Section 6 presents the framework developed in this paper and the final section provides
summary of the paper and some concluding remarks.

New institutional sociology strand of institutional theory

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New institutional sociology (NIS) observes the behaviour of organisations as motivated by
forces in wider society. It argues that organisations seek legitimacy by adhering to rules and
norms that are valued by the society and, more specifically, by certain institutions in society.
The mechanism through which organisations adopt systems and procedures is termed
institutional isomorphism. Isomorphism is “a constraining process that forces one unit in a
population to resemble other units that face the same set of environmental conditions”
(DiMaggio and Powell, 1983, p.149). Institutional isomorphism emphasises that
organisations not only compete for resources, but also for political influence and institutional
legitimacy. It points to the influence of political power and ceremonies that are aimed at
increasing legitimacy of the organisation (Meyer and Rowan, 1991).

DiMaggio and Powell (1983, p.150) identify three mechanisms through which institutional
isomorphism occurs, each with its own antecedents – coercive, mimetic and normative.
“Coercive isomorphism” is the response to external pressures prompted by other
organisations on which the organisation relies on and also by societal expectations, either
cultural or environmental. It is the response to “both formal and informal pressures exerted
on organisations by other organisations and impinging external factors e.g., government
policy, regulation, supplier relationships upon which they are dependent and by cultural
expectations in the society within which organisations function” (DiMaggio and Powell,
1983, p.150, see also 1991, p.66). “Mimetic isomorphism” is the act of copying other
organisations when organisations face uncertainty, and modeling themselves on other
organisations in order to overcome uncertainty (DiMaggio and Powell, 1983, p. 151).
Scapens, (1994) argue that mimetic behaviour has a conformity element, wherein
organisations adopt contemporary managerial practices to legitimise their operations by
appearing to be in control. The third mechanism is “normative isomorphism” which is
associated with professionalisation (DiMaggio and Powell, 1983, p.152, see also 1991, p.66).
and “arises when professionals operating in organisations are subject to pressures to conform
to a set of norms and rules developed by occupational/professional groups” (Abernethy and
Chua, 1996, p.574). In this form of isomorphism, firms feel obliged to adopt structures and
processes that have been advocated by dominant professions and professional bodies (Burns,
2000, p.15).

The presence of institutional pressures does not mean that organisational structures are not
also strongly influenced by technical requirements posed by the economy or market in which
they operate. Therefore, a tension may build between the technical requirements and the
institutional requirements posed on the organisation.

Organisations can demonstrate compliance with norms and values in society by having
structures and management practices that are ceremonial, while the actual ways of working
are not greatly affected. This decoupling allows the organisation to adhere to various
institutional demands, while organising its primary processes more efficiently than would be
possible if it were to adhere to all institutional requirements (DiMaggio and Powell, 1983). It
must be noted that decoupling does not necessarily mean that the actual ways of working
remain unaltered while creating a (temporarily) stable organisation (Siti-Nabiha and Scapens,
2005). This stability may, however, create the conditions to introduce change within the
organisation in future.

Scott and Meyer (1983) argue that accounting can be employed to satisfy external
constituents, while protecting internal processes from too much intrusion by these external
constituents. Management accounting procedures, such as performance measurement

5
systems, serves this role when authorities are located outside the organisation (e.g. central
bank, government agency). Based on this view, changes in performance measurement
systems stem from changes in wider societal preferences or institutions. Although NIS
discusses the forces that lead to isomorphism and the forces that cause institutions to change,
it does not address the possible organisational responses to change efforts or to the
consequential changes.

Oliver (1991) discusses various strategies that an organisation can adopt in response to
institutional pressures. While questioning the notion of institutional determinism, she argues
that organisational members can resist institutional pressures for change in various ways. She
proposes that institutions do not cause a course of action to be selected, but rather they are
variables in a selection process of alternative strategies, that constitute a varying degree of
active resistance to institutional pressures. Oliver’s (1991) continuum of strategic responses
enables the examination of institutional pressures for change within the context of strategic
responses to change, while the earlier NIS largely ignored such responses.

The use of the theoretical notions in both DiMaggio and Powell (1983) and Oliver (1991)
enables the development of an analytical framework that facilitates the analysis of the factors
that influence changes in performance measurement systems and also the responses to change
efforts. Prior to a detailed discussion of the factors that are likely to influence change in
performance measurement systems in terms of mimetic, coercive, and normative pressures as
outlined in DiMaggio and Powell (1983). the following section will discuss the macro-level
organisational environment that could drive such pressures.

Environmental factors that affect organisational functioning

Many researchers argue that changes in performance measurement systems are influenced
mainly by the external environment of the organisation (Innes and Mitchell, 1990; Cobb et
al., 1995; Jazayeri and Hopper, 1999; Hussain and Hoque, 2002) and that the changes take
place to enhance the production of better information for decisions and to survive in a highly
competitive environment (Baines and Langfield-Smith, 2003; Cobb et al., 1995). The
external environment is an outer context of organisations which is outside their control. For
example, trade liberalisation, technological developments, level of competition, changes in
regulatory requirements, and economic uncertainty have often been shown in the literature as
major factors that are likely to place pressure on organisations (Cobb et al., 1995). Hussain
and Hoque (2002) suggest that external environmental change influence changes in the
strategy and/or structure of an organisation, which in turn could lead to changes in
performance measurement practices. More specifically, environmental factors such as
economic uncertainty, competition and technological developments impact on performance
measurement practices (Hussain, 2003; Johnson and Kaplan, 1987). Organisations operating
in such environments tend to make an attempt to adapt their systems to fit the environment in
various ways (Granlund and Lukka, 1998). For example, hostile economic conditions create
pressure on banks to increase financial performance. As a consequence, management
generally tend to focus more on using financial measures. It is thus important to consider the
effects of uncertainty in the economic environment on banks when developing a framework
to analyse change in PMSs.

Economic environment

6
According to Cobb et al., (1995). environmental uncertainty in general increases the need for
managers to obtain and process information through organisational structures to adapt to the
perceived environmental uncertainty (Brignall and Modell, 2000). The literature in this area
also suggests that organisations facing a high level of economic uncertainty are likely to use
financial measures to a greater extent than non-financial performance measures (Lynch and
Cross, 1991; Kaplan and Norton, 1996). Negative economic conditions place pressure on
organisations to increase profitability (Burney, 1999). making it difficult for management to
focus on improving and measuring non-financial performance. In recent years banks globally
have faced an uncertain economic climate because of their large non-fund based activities,
swelled non-performing loans (NPLs). huge write-offs and high inflation and interest rates in
the late 1980s and early 1990s (Harker and Zenios, 1998, p.2). Such an economic climate is
likely to place pressures on management to take measures to improve performance, for
instance by using existing control systems more efficiently or by introducing new systems for
that purpose. (Hussain and Hoque, 2002). Therefore, it is important to consider the effect of
the economic environment on organisations (banks in this paper) when examining changes to
their performance measurement systems and their degree of responsiveness and adaptability.

As in other industries, the degree of competition in the banking sector is primarily driven for
creating efficiency of the production of financial services, the quality of financial products
and the degree of innovation in the sector. The degree of competition in the banking sector
has not only facilitated the access of organisations and households to financial services and
financing but also affecting overall economic growth. Cobb et al., (1995) note that markets
are becoming increasingly competitive as institutions fight for profitable business, while
advances in technology and de-regulation allows other organisations to enter the markets. At
the same time, the need for more comprehensive performance measurement systems for
organisations to operate effectively in today’s competitive environment has often been
emphasised by accounting academics as well as practitioners. (e.g. Johnson and Kaplan,
1987). A number of recent studies have also concluded that traditional performance measures
are inappropriate given today’s complex competitive environment. In a similar context,
Fisher (1995) too identified three principal reasons for adopting new performance
measurement systems, one of which is competitive pressure.

The banking sector faces severe competition in the current era (Niemela, 1999).
Deregulation, both within countries and across national boundaries, has led to increased
competition between banks and between banks, and other financial institutions. The pressure
to be more competitive is likely to make banks use existing management control systems
including PMS more effectively and also introduce better systems to manage their functions
more efficiently. Therefore, the effect of competition merits investigation as a force of
change in performance measurement practices in banks.

Technological environment

The impact of technology on performance measurement practices is well researched in the

management accounting literature (Johnson and Kaplan, 1987; Burns, 1992; Otley, 1994).
The impact of advancements in information technology is relatively higher in the service
industry (such as banking sector) than in manufacturing (Kimball, 1997). and Kaplan and
Norton (1996) also argue that the impact of the information era is even more revolutionary
for service than manufacturing companies.
Technology provides an opportunity for banks to improve service performance in addition to
providing a broader scale of financial products and services. Also, technological

7
advancements seem to make banks offer a wider variety of customer services, not only to
fulfill the needs of customers, but also to achieve economies of scale and to be competitive.
The literature on banking reveals that over the last two decades there has been a phenomenal
increase in the offer of ebanking products/services by banks to stay competitive. Information
technology creates opportunities to deliver financial services through alliances which allow
the shared use of technology platforms such as Automatic Teller Machines (ATMs) and
payment processing systems. International payments has traditionally been carried out
through the Society for Worldwide Interbank Financial Telecommunications (SWIFT)
network and the banking regulations ensure that the international banks who form the world-
wide network of correspondent banks receive income for managing payment transactions and
also from interest earned while the money is in their temporary control. During the 1990s a
range of alternative mechanisms for managing international funds transfer emerged. The new
entrants include IBOS2 and smart card technology (Holland and Cortese 1995). The effect of
these new entrants is to reduce the overall size of the payments market by offering cheaper,
and in most cases faster methods of moving money by banks. These developments require
more extensive use of risk management and performance measurement systems within banks
to create competitive advantage and improve performance. It is therefore likely that the
technological advancements in the banking sector may influence banks to change their
performance measurement practices.

Socio-cultural and political environment

The institutional environment is generally characterized by the rules and requirements which
individual organisations must conform if they are to receive support and legitimacy (Scott,
1993). Hoque and Hopper (1994) have characterized a number of overall socio-cultural and
political factors such as uncertainty, political instability and the tendency towards
organisational disorder. Within the performance measurement literature, research has largely
excluded the examination of social and institutional factors by assuming uncertainty in terms
of the technical environment such as economic inputs, market functions and technological
factors (Alam, 1997). Organisations voluntarily, or at times obligatorily, follow international
organisational standards/quality measurement such as International Standards Organisation
(ISO) and the United Nations (UN) environmental conditions, and accordingly adapt their
performance measures (including quality and standards). Transnational institutions like the
World Trade Organisation (WTO) and regional blocs pressure organisations to change their
performance measurement practices to make them consistent with international practices.
Here, the effect of these socio-cultural and political institutions on performance measurement
systems usage is considered to be a relevant influencing force for banks.

Pressures for change

The macro-level factors, discussed in the last section, place pressure on organizations to
various forms (namely mimetic, coercive and normative) to change their performance
measurement system. Each of these pressures are discussed in the following sub sections.

Mimetic pressures

2
IBOS, stands for International Banking - One Solution, is an international banking alliance aimed at serving
corporate customers with cross border banking requirements. 15 banks worldwide have joined this network to
offer corporate customers a comprehensive range of banking services, both locally and internationally.

8
Mimetic isomorphism drives from uncertainty, either within the organisation or in its
environment. DiMaggio and Powell (1983) suggest that in an uncertain environment,
organisations will imitate others in determining appropriate behaviour. Patterning their own
operational or decision making systems on the system used by those seen as the industry
leaders is seen as a means of reducing uncertainty and risk and enhancing legitimacy
(DiMaggio and Powell, 1983; Greve, 2000). Where management is unable to implement and
utilise performance measurement system, for reasons such as inability to link strategy to
operational activities, it often tends to copy publicly accredited best practice performance
measurement systems from other successful organisations (Fligstein, 1985; O’Neill et al.,
1998). This copying tendency occurs from a desire to gain legitimacy for their operating
environment, although the relationship of performance measurement systems with strategy
and performance can still be absent. DiMaggio and Powell (1983) suggested that imitating
the largest firm in industry was a successful institutional rule. As Haveman (1993, p.598)
concluded “under conditions of competition and environmental variability organisations that
mimicked the behaviours of large firms had good survival chances. Large and high
profitability firms serve as strong role models for other firms.” Hence following the banking
reforms and deregulations under environmental uncertainty it is likely that banks will copy
best practices of the industry to gain legitimacy.

Coercive pressures

Coercive pressure refers to the pressure (formal or informal) that is exerted on organisations
by others to conform to the rules and practices that are considered important within an
industry (DiMaggio and Powell, 1983, 1991). Institutional theory suggests that some
institutional fields contain powerful environmental agents who impose structural forms or
practices on subordinate organisational units (DiMaggio and Powell, 1983; 1991). Coercive
pressures reflect the enforcing and regulative aspects of such environmental agents, and they
are receiving increasing attention as important determinants of the structure and functioning
of organisations (DiMaggio and Powell, 1991). Coercive pressures on performance
measurement practices result from other organisations upon which a particular organisation is
dependent (DiMaggio and Powell, 1983). Institutional theorists have directed attention at the
importance of symbolic aspects of organisations and their environment. For instance,
Granlund and Lukka (1998) found that the symbolic aspects of the environment had clearly
created pressures on organisations to change their performance measurement practices to be
consistent with the mandates of transitional institutions.

In relation to the banking sector, prior research highlights the coercive influence exerted on
organisations or on their behaviours through the Central Bank’s Regulatory Control, financial
regulations, and socioeconomic-political institutions (Hoque and Hopper, 1994; Hussain,
2003).

Central bank’s regulatory control

Banks are required to function within the regulations and guidelines of the central banks and
Basel Agreement. The Basel Accord II Framework describes a more comprehensive measure
and minimum standard for capital adequacy that supervisory authorities are required to
implement through rule-making and adoption procedures. It seeks to improve on the existing
rules by aligning regulatory capital requirements more closely to the underlying risks that
banks face. In addition, the Basel II Framework was intended to promote a more forward-
looking approach to capital supervision, one that encourages banks to identify the risks they

9
may face, today and in the future, and to develop or improve their ability to manage those
risks. As a result, banks were required to improve their performance measurement practices
with advances in markets and risk management practices. Therefore, the influence of the
central banks’ regulatory and supervisory framework on performance measurement system in
banks is likely.

Financial legislation

Financial legislation and accounting standards may affect the design and use of a particular
performance measurement system. The international Accounting Standard Board prescribes
International financial reporting standard (IFRS). which in turn impacts on accounting
systems of which performance measurement system is an integral part. Central banks
prescribe banks to follow the IFRSs. The Basel Accord II requires that banks implement a
progressive adaptation of risk evaluation techniques; one result of this requirement is a
changing demand for bank financial information. This generated adaptive transformations of
financial information to change existing accounting systems. Further, most of the changes
were improvements in disclosure of financial information that came about as a result of the
reformulation of accounting rules for entries and reporting. These reformulations were
designed to improve the informational quality of statements so that they accurately
represented the true performance of the bank. An example of recent legislation introduced in
the US is “Sarbanes Oxley Act” which was introduced in response to a series of corporate
scandals in the US. The Act require organisations, in particular banks, to identify, assess and
test the effectiveness of their key management controls and monitoring within the business
for the benefit of greater accountability and transparency (Merchant and Van der Stede,
2007). Thus, these legislations, and principles may affect performance measurement systems
in banks.

Normative pressures

A normative isomorphism stems from professionalism. Professionalism is understood as the

collective struggle of members of an occupation, shared educational and professional
experience and infrastructure that establish norms of behaviour and express those norms to
the management who make up the institutions (DiMaggio and Powell, 1991). As DiMaggio
and Powell (1983, p.152) state “to a certain extent, learning is legitimate in a cognitive base
cultivated by formal training and thought interactions in professional network”. In an
organisation, normative pressure, therefore, can be exerted by professionals, strategic
orientation of the organisation, and the corporate culture and the top management.

Professionals

DiMaggio and Powell (1983) identify professionals as having the most dominant influence on
organisational practices. They suggest that institutions themselves are the outcome of the
actions of organisational members (Burns and Scapens, 2000) and are mediated by values,
norms and rules which people adopt in their various domains of social conduct. Professional
networks are known as prominent sources of isomorphism, as well as the media through
which similar management accounting practices are spread from one organisation to another
(Scapens, 1994; DiMaggio and Powell, 1991). In studying management control practices,
Scapens (1994, p.317) regarded the influence of managers as an important factor in adoption
of new management practices. Hussain and Hoque (2002, p.167) also acknowledge that “the
experience of professionals such as managers may also influence the design and use of a

10
performance measurement system.” Thus, for various reasons, professionals in a banking
context, such as business unit heads and branch managers may influence management to
design and adopt new performance measurement systems.

Corporate Culture

Granlund and Lukka (1998) and Scott (1987) argue that top management often creates
cultural forms consistent with their own aims and beliefs. These, in turn, can influence
organisational practices and systems, including performance measurement systems. Existing
literature suggest that board members and chief financial officers can influence performance
measurement systems change. For instance, Cobb et al. (1995) explicitly stated that such
individuals are generally considered as a significant change agent. Similarly, the
dissatisfaction of top management with existing accounting information was identified by
Innes and Mitchell (1990) as a driver to change. Cobb et al. (1995) also found top
management playing a dual role in the change process; On the one hand top management was
the catalyst which initiates management accounting change processes, and on the other hand
the top management’s leadership ability was found to be necessary to overcome barriers
(Cobb et al., 1995). The power of a strong individual personality can accelerate management
accounting change (Burns and Scapens, 2000). The corporate culture of banks and leadership
and personality of top management in banks could influence the change in performance
measurement practices.

To conclude, it is believed that the factors discussed above play an important role in
performance measurement system change in banks and that they may enable the researchers
to understand and explain the phenomenon of change more systematically. Since these
factors have been taken from all variants of management accounting literature, it is believed
that most of these factors are relevant stimulators of performance measurement system
change in banks.

Strategic responses to institutional pressures

Organisational members respond to change efforts in varying ways ranging from passive
conformity to active resistance and manipulation. Drawing on institutional theory and
resource dependence perspective3, Oliver (1991) identified different strategic responses and
tactics which organisations enact in response to institutional pressures for conformity that are
exerted on them. More specifically, Oliver (1991) proposed a typology of strategic responses
to institutional pressures that vary according to the degree of resistance exerted by the
organisation (See Table 1).

--------------------------------
Insert Table 1 about here
--------------------------------

The most passive response is “acquiescence”, and it may take alternative forms varying from
unconscious habit-like adherence to rules or values to conscious compliance to norms, values
or institutional requirements (Oliver, 1991, p.152). Therefore, acquiescence is a strategic
response that concurs with the idea of institutional environments. More specifically, imitation
3
The resource dependence perspective views an organisational environment as a bundle of resources which an
organisation seeks to mobilise to reach its goals. In doing so, it exercise active choice of behaviour (Oliver,
1991, p.147).

11
as an acquiescence tactic is consistent with the concept of mimetic isomorphism. For
example, in the banking sector most of the small local/domestic banks could be expected to
imitate the practices of major banks and foreign banks.

In addition to passive conformity, organisations may also take more active responses to
institutional pressures. Active responses have different forms and antecedents. A
“Compromise” strategy relates to situations where inconsistencies exist between institutional
expectations and internal organisational objectives. In such situations organisations may
apply balancing tactics (i.e. attempt to achieve parity among or between multiple stakeholders
and internal interest). or pacifying tactics (i.e., monitoring a minor level of resistance to
institutional pressure). or bargaining tactics (Oliver, 1991, p.153). In the context of banks,
such responses are likely to arise in relation to banks operating internationally. Bank branches
located overseas might face a situation where host banking sector’s objectives are in
dissonance with the organisational objective of the bank. For example, risk management
practices, central bank’s capital adequacy and liquidity requirements, prudential regulations
etc. vary from country to country.

Moving towards more active responses, an “avoidance” strategy is an organisational attempt

to preclude the necessity of conformity (Oliver, 1991, p.154). Here, concealment tactics
involve disguising non-conformity behind a façade of acquiescence. Buffering tactics refers
to an organisation’s attempt to reduce the extent to which it is externally inspected,
scrutinised or evaluated by partially detaching or decoupling its technical activities from
external contact (Pfeffer and Salancik, 1978; Scott, 1987). A more dramatic avoidance
response is escape, where an organisation may exit the domain within which pressure is
exerted or significantly alter its own goals, activities or domain to avoid the necessity of
conformity altogether (Oliver, 1991). Literature provides evidence of banks operating
overseas who have exited (escaped) or buffered themselves from the host banking sector due
to uncertain economic, financial and political environment. For instance, in the late 1990s the
Bank of America, J.P. Morgan and Credit Agricole Indosuez banks pulled out of their
operations from most of the East Asian countries4.

The next strategy in the continuum towards increasing resistance is “defiance”, where an
organisation ignores institutional rules and values, and challenges the existing rules and
requirements. The most aggressive defiance tactic is attacking the institutional pressures and
expectations (Oliver, 1991, p.156). Hence, while avoidance strategy means a partial refusal to
follow the rules with the existing practices, a defiance strategy implies that an organisation
actively challenges those rules.

Finally, a “manipulation” strategy is the most active response which focuses on actively
changing the content of the expectations themselves or the sources that seek to express or
reinforce them. As a tactic, an organisation may choose to co-opt the source of the pressure or

4
Source: International Herald Tribune. “Midsized Operations Hit Hard by Shakeout: Asian Banks Count Cost”
(by Thomas Fuller, Published: WEDNESDAY, MAY 19, 1999).
East Asia’s economic crisis began, the shakeout is here, with at least three banks selling operations or shutting
offices in Asia.
The shakeout so far: “Bank of America sold its Asian and European private banking operations to UBS AG in
March. .J.P. Morgan closed its private banking offices in South Asia, choosing to manage its regional business
from Hong Kong Credit Agricole Indosuez shifted the headquarters of its Asian private banking operations to
Geneva, but will maintain administrative offices in the region to manage clients' accounts.
Other banks restructured or trimmed down their operations, as part of larger efforts within their parent companies.
Private bankers say they expect more banks to call it quits soon.”

12
to direct more general influence tactics towards institutionalized values and beliefs or
definitions and criteria of acceptable practices or performance. It can also apply controlling
tactics i.e. specific efforts to establish power and dominance over internal constituents that
are applying pressure on the organisation (Oliver, 1991, p.157). For example, large size banks
tend to create cartels to lobby regulatory authorities to adopt certain practices that fit their
needs.

Oliver’s (1991) typology provides an appropriate conceptual basis for exploring the diversity
of strategic responses that a bank may adopt in response to the institutional pressure to
change. In addition to classifying strategic responses, Oliver (1991, p.160) hypothesized
conditions where different strategic responses would be most likely. She identified five
institutional factors (namely Cause, Constituents, Contents, Control and Context). which the
willingness and ability of organisations to conform to institutional pressures are related to,
and therefore may be regarded as antecedents of strategic responses. “Cause” refers to the
basic question of why the organisation is being pressured to conform to the institutional rules
or expectations. For example, in countries where the banking sector is subject to reform, such
reforms may be seen as the cause behind institutional pressure. Further, in a banking sector
where changes in regulations are unclear or vague, individual banks will be frustrated in
implementing and complying with legislative changes.

Moreover, a central factor in predicting the nature of strategic responses is the institutional
“constituents”. In Oliver’s (1991) terminology they are the ones who exert institutional
pressures. In the context of banks, these include government, central bank, professions and
depositors. Oliver (1991, p.162) hypothesised that the more there are various constituents
and/or the less the organisation is dependent on them, the greater the likelihood of
organisational resistance to institutional pressures. Therefore, perhaps the easiest way for an
organisation to cope with the multiple demands is to comply with those organisations’
demands that it is most dependent upon (e.g. central bank in case of banking sector).

The “content” of institutional pressure is another factor that can be used to predict
organisational responses. Organisations are likely to resist institutional pressures when they
are inconsistent with organisational goal and/or when the conformity to institutional pressures
leads to the loss in the organisational decision making freedom (Oliver, 1991, p.164). In other
words, organisations selectively comply with those pressures that are in line with their
strategy and do not threat their independence. For example, if a government demands from a
public bank (in which the government is the main shareholder) to invest in a particular
segment of the industry/economy which is contrary to the policy of the bank, the bank is
likely to use some strategy to resist the change. “Control” is another factor predicting
organisational responses. The lower the degree of legal coercion or enforcement, the greater
the likelihood of organisational resistance to institutional pressures (Oliver, 1991, p.167). For
example, weak enforcement of certain legislations/regulations by the government on the
banking sector would delineate the effectiveness of the legislative change.

The environment “context” also could predict the likelihood of organisational resistance.
Organisations are more likely to resist institutional pressures when the level of uncertainty
and the degree of interconnectedness in its environment are low. This is consistent with the
idea of institutional isomorphic change as related to field level factors. To cope with
environment uncertainty organisations look for templates (archetype) of organising to adopt
from their environment (Greenwood and Hinings, 1996, p. 1026). For instance banks might

13
mimic other banks with high profitability and stability, thereby conforming to institutional
pressures.

To conclude, this section draws on the theoretical constructs from DiMaggio and Powell
(1983) and Oliver (1991) in order to develop a framework to analyse the stimulators of
change and the strategic responses to consequential changes. The framework is outlined in
Figure 1.
-------------------------------
Insert Figure 1 about here
--------------------------------

A framework to examine changes in PMS

The framework depicted in Figure 1 builds on the concept of institutional isomorphism
(DiMaggio and Powell, 1983) and continuum of strategic responses to institutional pressures
proposed by Oliver (1991). As shown in Figure 1, organisational functioning is influenced by
a number of macro level factors (e.g., economic, technological, socio and political). which in
turn place pressure on organisations in various forms (mimetic, coercive and normative).
Organisations respond to such pressures strategically. This paper adopts the view that
organisations take strategic actions where necessary, rather than blindly conforming to the
institutional pressures. This aspect is accommodated within the proposed framework by
applying the typology of strategic responses proposed by Oliver (1991). which identifies a
variety of strategic responses varying in the degree of resistance from passive acquiescence to
proactive manipulation. Overall, the proposed framework will enable the examination of the
factors stimulating change in performance measurement systems in organisations and the
strategic responses to change efforts.

Summary and conclusions

The purpose of this paper was to present a framework for analyzing change in performance
measurement systems in the banking sector. Only limited research has been undertaken,
particularly in relation to the banking sector, to systematically examine the factors driving
change in PMS and the organisational responses when change is introduced.

There could be a variety of explanations and theories to explore why performance

measurement system change occurs. This paper used concepts mainly drawn from
institutional theory to offer a broader explanation as to what drive banks to change their
performance measurement practices. The paper also used insights from Oliver’s (1991)
typology of strategic responses to institutional pressures to complement the concepts drawn
from institutional theory. The theories were chosen based on their ability to provide a
comprehensive explanation of the phenomenon. The framework developed based on the two
theories will facilitate a comprehensive analysis of the two issues associated with change in
PMS namely what factors drive changes and what are the responses to change attempts.

It is believed that the proposed analytical framework is useful in two ways. First, it is a step
towards more prudent explanation of performance measurement change in banks. Second, it
highlights many important factors of performance measurement system change in banks
which may enable the researchers to identify possible explanations of phenomenon of change
more thoroughly.

14
 Banks are more prone to the effects of the environment change due to extremely high level of
risk involved in their business activities. The literature shows that the businesses
environments for banks are continuously changing and that banks have to adapt their control
systems including PMS to fit the environmental needs (Cobb et al., 1995). Future studies may
apply the proposed analytical framework in banking institution to examine factors that
influence change in performance measurement system and the potential strategic responses to
the change. In addition, interactions between different influencing factors impacting
performance measurement change should be considered, as some of these influencing factors
could decrease the effect of others on the intention for change.

Strategies Tactics Examples

Acquiescence Habit Following invisible, taken-for-granted norms
Low Imitate Mimicking institutional models
Comply Obeying rules and accepting norms
Compromise Balance Balancing the expectations of multiple constituents
Pacify Placating and accommodating institutional elements
Level of
Bargain Negotiating with institutional stakeholders
active
resistance Avoid Conceal Disguising nonconformity
to Buffer Loosening institutional attachments
institutional Escape Changing goals, activities, or domains
pressures Defy Dismiss Ignoring explicit norms and values
Challenge Contesting rules and requirements
Attack Assaulting the sources of institutional pressure
Manipulate Co-opt Importing influential constituents
Influence Shaping values and criteria
High Control Dominating institutional constituents and processes

Table 1 A continuum of strategic responses to institutional pressures (Source: Oliver (1991).

p.152)

15
 Technological
advancements

Normative
pressures

Strategic responses to

Coercive
pressures
Change in Socio-
Economic
environment
Performance cultural
Measurement environment
System

Institutional pressures

Mimetic
pressures

Political
environment

Figure 1 An Analytical Framework for examining changes in performance measurement

systems within the banking sector

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