The performance measurement revolution: why now and what next?

Andy Neely
University of Cambridge, Cambridge, UK
Keywords Performance management, Performance measurement, Research Abstract Asks why business performance measurement has become so topical, so recently. Argues that there are seven main reasons: the changing nature of work; increasing competition; specific improvement initiatives; national and international quality awards; changing organisational roles; changing external demands; and the power of information technology. Evidence to support this assertion is drawn from the academic and practitioner literatures, interviews and discussions with people specialising in the field and a broad review of the current state-of-the-art in business performance measurement. Presents a framework onto which current research in business performance measurement can be mapped and identifies areas which require further work.

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Introduction Business performance measurement is on the management agenda. Professional conference organisers such as Business Intelligence and IIR recognise this. Hence the plethora of conferences on Business Performance Measurement. The RSA (Royal Society of Arts, Manufacturers and Commerce) recognise this, as demonstrated by the findings of their inquiry into the role of tomorrows company:
To achieve sustainable business success in the demanding world marketplace, a company must ... use relevant performance measures (RSA, 1994).

Politicians recognise this, as can be seen by the current and previous UK Governments obsession with league tables, and the fact that the above quote appeared in one of the UKs White Papers on competitiveness. What is not immediately obvious is why business performance measurement is on the agenda. What is it that makes the topic so relevant to management today? After all, it has long been recognised that performance measures are an integral part of the planning and control cycle (Barnard, 1962) and managers must have been planning and controlling the deployment of resources since the first organisation was established. Indeed, Chandler (1977) argues that most of the basic methods used to manage big businesses today were in place by 1910:
In 1903, three Du Pont cousins consolidated their small enterprises with many other small single-unit family firms. They then completely reorganised the American explosives industry and installed an organisational structure that incorporated the best practice of the day. The highly rational managers at Du Pont continued to perfect these techniques, so that by 1910 that company was employing nearly all the basic methods that are currently used in managing big business (Chandler, 1977, p. 417).

International Journal of Operations & Production Management, Vol. 19 No. 2, 1999, pp. 205-228, MCB University Press, 0144-3577

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Given that the basic management techniques have been used for so long and that business performance measurement is undoubtedly one of these techniques, then surely most organisations should have had well developed performance measurement systems in place for many years by now. Even the most cursory examination of the academic and practitioner literatures would confirm that this is not the case (Ashton, 1997; Geanuracos and Meiklejohn, 1993; Kaplan, 1984; Neely, 1998; Neely et al., 1995). Numerous authors discuss the problems with the performance measures used by organisations today. Traditional financial measures are criticised because they: Encourage short-termism, for example the delay of capital investment (Banks and Wheelwright, 1979; Hayes and Abernathy, 1980). Lack strategic focus and fail to provide data on quality, responsiveness and flexibility (Skinner, 1974). Encourage local optimisation, for example manufacturing inventory to keep people and machines busy (Goldratt and Cox, 1986; Hall, 1983). Encourage managers to minimise the variances from standard rather than seek to improve continually (Schmenner, 1988; Turney and Andersen, 1989). Fail to provide information on what customers want and how competitors are performing (Camp, 1989; Kaplan and Norton, 1992). The same measures are criticised for being historically focused (Dixon et al., 1990). Sales turnover, for example, simply reports what happened last week, last month or last year, whereas most managers want predictive measures that indicate what will happen next week, next month, or next year. Numerous managers suffer from data overload. Most firms have information systems which generate at least some redundant performance reports. Comments such as we measure everything that walks and moves, but nothing that matters[1] are common. Indeed, the author recently witnessed the production manager of a small manufacturing business throw a freshlydelivered 200-page performance report straight into the bin, without even glancing at it. When asked why, the production manager replied what use is the report to me? All it contains is last months labour absenteeism figures. I need up-to-date information to manage production, not spurious figures from the accounting department. Yet another problem with the performance measures used in many organisations is that they are rarely integrated with one another or aligned to the business processes (Lynch and Cross, 1991). Performance measures are also often poorly defined. It is not unusual to observe two people heatedly arguing over some dimension of performance and later find that the root cause of their disagreement was the imprecise definition of a measure. Somewhat surprisingly, few of these problems are new. In 1908, for example, A. Hamilton Church wrote:

The performance measurement revolution In 1951, GE established a Measurement Project which was intended to
develop performance metrics that could be applied on a decentralised basis (Meyer and Gupta, 1994, p. 348). Johnson (1992) argues that management by remote control i.e. managing by the financials only became popular after the 1950s, before which time senior managers used the financial figures for planning, rather than control. By the mid-1980s there were many vocal and well-respected critics of traditional measures (Berliner and Brimson, 1988; Goldratt and Cox, 1986; Hiromoto, 1988; Hopwood, 1984; Johnson and Kaplan, 1987; Miller and Vollmann, 1985; Richardson and Gordon, 1980; Schmenner, 1988; Turney and Anderson, 1989). The question this raises, however, is why now? What is it about managers in the late 1980s and early 1990s that has made them so receptive to the message that their performance measurement systems are obsolete? Why have these problems come to the fore today? Why have they captured managements attention? What sparked the performance measurement revolution? What has been the impact of this revolution? Where and when will it end? The remainder of this paper seeks to address these questions. The paper begins by presenting evidence that supports the assertion that we are in the midst of a performance measurement revolution. Next, the reasons why this has happened are explored. Finally, the current state-of-the-art in business performance measurement is described and the question where next? is posed. The performance measurement revolution fact or fiction? Between 1994 and 1996, some 3,615[2] articles on performance measurement were published. This is equivalent to one new article on business performance measurement appearing every five hours of every working day. In 1996, new books on the subject appeared at a rate of one every two weeks in the USA alone[3]. Between 1950 and 1991, the membership of AIA (American Institute of Accountants) and AICPA (American Institute of Certified Public Accountants) grew from 16,062 to 301,410 an increase of 1,877 per cent (Meyer and Gupta, 1994):
Chartered financial analysts did not exist before 1963. Through 1971, about 3,000 financial analysts were chartered. From 1972 through 1981, some 3,800 more analysts were chartered, but from 1982 through 1992 more than 8,200 new chartered financial analysts were added (Meyer and Gupta, 1994, p. 318).

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

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Business Intelligence, a professional conference-organising company, based in the UK, have hosted 23 conferences on performance measurement since January 1994. Over 2,500 delegates from some 800 different firms have attended these. Worldwide there are now more than 50 different Web sites devoted to business performance measurement.

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Customer satisfaction questionnaires are ubiquitous. It is almost impossible to stay in a hotel and not be presented with at least one of them. Indeed some hotels have become so obsessed with measurement that they have different customer satisfaction questionnaires in the bedroom, the health club, the bar and each of the restaurants! A novel variation on this theme is the tendency for some organisations to automate the data collection process. While in Finland recently the author noticed an open access computer terminal in the lobby of his hotel. The sign above the terminal read your views count please share them with us. Upon closer inspection it emerged that the computer was running a piece of software designed to elicit customers views. Basically the program was an automated customer satisfaction questionnaire. Capturing the data in this way offers three substantial benefits. First, the customer enters the data online. Hence the hotel does not have to arrange (and pay for) data entry. Second, the risk of secondary keying errors is eliminated. Third, the hotel has real time access to clients views. At any time of the day or night the latest data can be reviewed, and acted upon if necessary. Of course, the use of IT is not limited to data capture and analysis. Organisations such as BT[4] publish their customer service report (and the associated data) on the Internet. While others, such as Cognos[5], Metapraxis[6] and Valstar[7], have built businesses supplying IT support tools for performance measurement applications. Further evidence that a revolution in business performance measurement is taking place is provided by the language used in annual reports. Ten years ago little mention of non-financial performance would have been made in the Chairman and Chief Executives statements. Recently, however, some organisations have been far more explicit about the link between financial and non-financial dimensions of performance. Legal and Generals 1996 annual report, for example, places considerable emphasis on non-financial performance measures. In his statement, the Chief Executive Officer, David Prosser, highlights the importance of the virtuous circle: competitive products = more sales = greater shareholder value. It appears then, that the language of business performance measurement is taking hold. The notion of balance, perhaps most neatly encapsulated by Kaplan and Nortons balanced scorecard, is widely accepted. Indeed the phrase the balanced business scorecard appears to have entered the management vernacular. A recent MORI survey, for example, found that 72 per cent of business leaders agree that a successful business will better serve its shareholders by focusing on the needs of its customers, employees, suppliers and the wider community (MORI, 1996). And there is even some, albeit limited, evidence that this is a good thing. For example, Alan Meekings, a consultant with Gemini, claims that in the early 1990s, British Rails Network SouthEast used performance indicators to help grow off-peak income by 28 per cent, reduce controllable costs by 30 per cent, and improve both service delivery and customer satisfaction from worst ever to

best ever on record (Meekings, 1995). Similarly, a survey conducted by Lingle The performance and Schiemann (1996) found that: measurement
Organisations which are tops in their industry, stellar financial performers and adept change leaders, distinguish themselves by the following characteristics: having agreed-upon measures that managers understand; balancing financial and non-financial measurement; linking strategic measures to operational ones; updating their strategic scorecard regularly; and clearly communicating measures and progress to all employees.

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Further evidence of the value of business performance measurement is provided by work carried out by researchers at the University of Michigan and the Stockholm School of Economics, on the Swedish Customer Satisfaction Barometer. They have identified a significant positive correlation between customer satisfaction and financial performance (Anderson et al., 1994; Fornell, 1992). In the summary of their empirical findings, Anderson et al. (1994) report that an annual one-point increase in customer satisfaction has a net present value of $7.48 million over five years for a typical firm in Sweden. Given their samples average net income of $65 million, this represents a cumulative increase of 11.5 per cent. If the impact of customer satisfaction on profitability is similar for firms in the Business Week 1000, then an annual one-point increase in the average firms satisfaction index would be worth $94 million or 11.4 per cent of current ROI. Perhaps the most exciting development, however, is the establishment of two new investment funds in late 1996, by Kleinwort Benson. These two funds are based on portfolios of companies which deliver and sustain returns. The investment model assumes a strong correlation between inclusive-type companies and better investor returns through three stages: evaluating management; assessing business processes; and the interaction of the above to build shareholder value. Kleinwort Benson constructed their portfolios using a scorecard which built upon the EFQMs Business Excellence Model and Investors In People, along with inclusive and corporate governance approaches to business. A Fundamental Evaluation Assessment, which analyses cash flow, sustainability of growth, sensitivities of financial performance and improvements in individual measurement targets, was conducted to decide which companies should be included in the portfolio. Other key parameters: price/earnings ratio; dividend yield; discounted cash flow; and net asset valuations were also examined. Aggregated, all these parameters helped determine the most undervalued and, therefore, attractive, Tomorrows Company-type, or inclusive, portfolio:
Prior to launch, the model was tested against a sample of 350 UK companies based on market capitalisation: it outperformed them for the measures above by 16 per cent in the short term and 38 per cent in the longer term. Also, Kleinwort Benson calculations have revealed that a 1 per cent change in each of sales growth, employee and supplier value added for portfolio companies, would give a 24 per cent improvement in operating profit, a 5.3 per cent lift to return on capital, and a 43 per cent improvement in economic value added (Ashton, 1997, p. 289).

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The message from this is clear. If the Kleinwort Benson funds are successful and if they deliver better returns, then institutional investors will undoubtedly become much more vocal in demanding that businesses release information on their non-financial performance. The performance measurement revolution why now? In 1991, Bob Eccles wrote a paper for the Harvard Business Review entitled The performance measurement manifesto. In it he predicted that within the next five years, every company will have to redesign how it measures its business performance. Given the current levels of activity in the field, it appears that Bob Eccles assertion was fair, even if his time scale was compressed. The question that this raises, however, is why now? If the limitations of traditional financial measures have been known for some time, then why have so many people become so interested in business performance measurement so recently? It is impossible to answer this question definitively, but evidence suggests that there are seven main reasons: (1) the changing nature of work; (2) increasing competition; (3) specific improvement initiatives; (4) national and international awards; (5) changing organisational roles; (6) changing external demands; and (7) the power of information technology. The changing nature of work Traditional accounting systems allocate overheads on the basis of direct labour. In the 1950s and 1960s this was appropriate because direct labour often constituted in excess of 50 per cent of the cost of goods sold. By the 1980s, however, direct labour rarely constituted more than 5 or 10 per cent of the cost of goods sold, because of the massive investments that had been made in process automation. The net effect of this was that allocating overheads on the basis of direct labour resulted in wildly erroneous product costs, which in turn meant that managers made the wrong decisions (Kaplan, 1983; Schmenner, 1988). These arguments were so widely and vocally publicised that they resulted in the development of alternative methods of product costing most notably activity-based costing and through-put accounting (Cooper, 1987a,b; Galloway and Waldron, 1988a,b; 1989a,b). During the late 1980s and early 1990s, most of the major consultancies were selling services based on these new methods of costing. The associated marketing programmes and the popularity of books such as Johnson and Kaplans Relevance Lost meant that few in business

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could avoid being exposed to the message that, given todays operating The performance environment, the assumptions underpinning the traditional methods of cost measurement accounting were fundamentally flawed. revolution Increasing competition There can be little doubt that the level of competition that firms face is increasing on a global basis. Businesses all around the world are under continual pressure to reduce costs and enhance the value they deliver to their customers. BT, for example, has shed 120,000 jobs since 1989. Most of the resultant cost savings have been passed on to customers in the form of price cuts, which have been made necessary by the deregulation of the UK telecommunications market. The European Commissions open skies policy means that for the first time, cut-price carriers, such as Easyjet and Virgin Direct, will soon be able to offer flights between any two destinations they choose (assuming they can negotiate the necessary take-off and landing slots). Manufacturing businesses, such as Toyota, have revolutionised the way people think about operations through their search for greater efficiency and effectiveness (Monden, 1993). The widespread acceptance of so-called Japanese manufacturing practices demonstrates how successful they have been, but the net effect is a continual rise in global performance standards and customer expectations, which in turn lead to ever greater levels of competition (Womack et al., 1990). In terms of performance measurement, these changes have had three impacts. First, many organisations now seek actively to differentiate themselves from their competitors in terms of quality of service, flexibility, customisation, innovation and rapid response. They have been forced to do so because they now find themselves competing in markets where value rather than cost is the primary driver. Competing on the basis of non-financial factors means that these organisations need information on how well they are performing across a broad spectrum of dimensions. If a business bases its strategy around its ability to customise products, then knowing whether it really is customising products, and whether it is customising them rapidly and cheaply enough, is essential. The traditional measures used to assess business performance simply do not provide this insight. Hence businesses have been forced to change their measures because they have changed their strategies. In doing so, many organisations have realised one of the hidden benefits of matching measures and strategies namely that measures can encourage the implementation of strategy (Neely et al., 1994). It is widely accepted that performance measures influence behaviour. One only has to look at the academic obsession with refereed journal papers to see evidence of this. Indeed the UKs Research Assessment Exercise provides an excellent example of how performance measures can modify behaviours on a mass scale. In 1992, the first Research Assessment Exercise was conducted. The performance of all higher education institutes was assessed along various dimensions. One of the key criteria used was research excellence, which in turn was measured in terms of

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the number of publications per research-active member of staff. Different institutions adopted different strategies to boost their scores. Some recruited prolific publishers. Others chose only to register a small proportion of their faculty as research-active. The exercise was scheduled to be repeated in 1996. In the intervening years, the number of publication outlets appears to have grown exponentially. Whether by accident or design, the 1992 Research Assessment Exercise had the desired effect. It encouraged the academic community to disseminate their work. For the 1996 Research Assessment Exercise the criteria were changed and the emphasis was put on quality, rather than quantity, of publications. Hence everyone was asked to submit details of their best three publications. The message that this changed performance measure sent was you have shown us that you can disseminate your work, now prove that you can disseminate high quality work. The link to strategy is subtle, but powerful. Measures that are aligned with strategy not only provide information on whether the strategy is being implemented, but also encourage behaviours consistent with the strategy. Accepting Mintzbergs (1978) thesis that when an organisation realises that the strategy is a function of the pattern of decisions and actions it takes, then it becomes clear that appropriately designed performance measures can encourage the implementation of strategy. The third way in which the changing basis of competition has affected business performance measurement is in the tendency for organisations to downsize. Most organisations have achieved their downsizing goals by eliminating middle management and empowering the remaining employees. Anecdotal evidence suggests that empowering people can be very powerful, but only if those people know the overall direction in which the business is heading. Middle managers used to ensure that this was the case by translating strategic plans into operational targets, monitoring progress and generally co-ordinating the efforts and activities of their subordinates. Today, few organisations find themselves with sufficient human capacity to operate in this way. Hence they need new ways of communicating to their employees where the business is heading. Business performance measures provide one such means of communication. Just as with the Research Assessment Exercise described earlier, leading organisations are using their measurement systems as a means of communicating to their employees what is important. Specific improvement initiatives In response to increased competition, numerous organisations have embarked upon specific improvement initiatives. Some of these have come and gone, although most have been swept up into generic themes, such as total quality management (TQM), lean production, world class manufacturing (WCM). Few would dispute that, of these, total quality management has been one of the most pervasive. Open any undergraduate text on this topic and you will find discussions of continuous improvement, Deming (plan-do-check-act) cycles,

statistical process control, Taguchi methods, quality costing. All of these tools The performance and techniques have one thing in common. They rely on performance measurement measurement. The essence of continuous improvement, for example, is to seek revolution constantly ways in which products and processes can be improved, so that greater value can be delivered to customers at ever greater levels of efficiency. Before any organisation can determine what it needs to improve, however, it has 213 to establish where and why its current performance falls short. Hence the need for performance measures. Similar arguments apply to statistical process control. Control charts provide a means of checking whether processes, generally repetitive manufacturing processes, are under control i.e. whether the outputs they are producing vary only as much as would be expected, given the norms of statistical variation. Answering this question requires performance data to be collected. Without these data statistical process control quite simply cannot be introduced. Of course, TQM is not the only specific improvement initiative that has put performance measurement on the agenda. The widespread business interest in benchmarking has been another important driver. Xerox, largely through the efforts of Bob Camp, has been particularly vocal on this topic (Camp, 1989). The rapid emergence of benchmarking clubs and a number of high profile research studies (Andersen Consulting, 1993, 1994; IBM Consulting and London Business School, 1993, 1994; Womack et al., 1990) have also heightened industrial interest. In essence, however, benchmarking studies especially those which compare performance rather than practice are effectively structured applications of business performance measurement. Data, which summarise the performance of different businesses, are gathered and compared. Performance gaps, performance shortfalls, even performance advantages are identified. Such studies are valuable precisely because they provide rich performance insights. Often these performance insights result in organisations realising that they need to achieve radical performance improvements merely to survive, let alone prosper. One method for achieving these is business process re-engineering (Hammer and Champy, 1993). Instead of seeking to optimise the efficiency of each operation within each function, business process re-engineering calls for the horizontal flows of information and materials to be considered holistically when seeking performance improvements. This relies on a clear understanding of how the outputs of one micro process impact upon the next micro process, which in turn requires data to be fed back from the receiving process to the supplying process (Slack et al., 1995). Few organisations have measurement systems which allow this to happen, and rarely are the traditional measures of business performance appropriate. Measures such as labour utilisation, for example, might provide some insight into how efficiently a process is running, but provide no indication of the impact the outputs of one process have on the next process in terms of quality and time. One of the first things organisations realise, when they begin to re-engineer their processes, is that once they have done so they will have to re-engineer their measurement systems.

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The theme which underlies all of the comments made in this section is that a fundamental shift is taking place in business. Organisations have transcended their cost phase and entered a value phase. Businesses today operate in an environment where value is paramount. They have to strive continuously to deliver products and services which are of ever greater value to their customers, at ever lower costs. To do so, they have been forced to adopt a variety of performance improvement programmes, the vast majority of which demand that they upgrade their business performance measurement systems. National and international quality awards. In recognition of the substantial improvements in business performance that many organisations have achieved, a number of national and international quality awards have been established. One of the first of these was the Deming Prize, which was introduced in Japan in 1950. Given W. Edwards Demings preeminence in the field of quality management, it is little wonder that this award is made by the Japanese Union of Scientists and Engineers (JUSE) for contribution to quality and dependability of products (Deming, 1986). Numerous other quality awards have since been introduced, although the two with the highest profile are the Baldrige Award, which is available in the USA, and the European Foundation for Quality Management (EFQM) Award. The popularity of these awards is evidenced by the fact that there are over 385,000 references to the EFQM award on the World Wide Web. Each of these three awards requires firms to complete a comprehensive self-assessment as part of the application process. To apply for the Deming Prize, for example, firms have to submit detailed data on: Policies (1) quality and quality control policies and their place in overall business management; (2) clarity of policies (targets and priority measures); (3) methods and processes for establishing policies; (4) relationship of policies to long- and short-term plans; (5) communication (deployment) of policies, and grasp and management of achieving policies; and (6) executives and managers leadership. Organization (1) appropriateness of the organisational structure for quality control and status of employee involvement; (2) clarity of authority and responsibility; (3) status of interdepartmental co-ordination;

The performance measurement (5) status of staff activities; revolution (6) relationships with associated companies (group companies, vendors,
(4) status of committee and project team activities; contractors, sales companies, etc.) Information (1) appropriateness of collecting and communicating external information; (2) appropriateness of collecting and communicating internal information; (3) status of applying statistical techniques to data analysis; (4) appropriateness of information retention; (5) status of utilising information; (6) status of utilising computers for dataprocessing. Standardisation (1) appropriateness of the system of standards; (2) procedures for establishing, revising and abolishing standards; (3) actual performance in establishing, revising and abolishing standards; (4) contents of standards; (5) status of utilising and adhering to standards; (6) status of systematically developing, accumulating, handing down and utilising technologies. Human resources (1) education and training plans and their development and results; (2) status of quality consciousness, consciousness of managing jobs, and understanding of quality control; (3) status of supporting and motivating self-development and selfrealisation; (4) status of understanding and utilising statistical concepts and methods; (5) status of QC circle development and improvement suggestions; (6) status of supporting the development of human resources in associated companies. Quality assurance (1) status of managing the quality assurance activities system; (2) status of quality control diagnosis;

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(3) status of new product and technology development (including quality analysis, quality deployment and design review activities); (4) status of process control; (5) status of process analysis and process improvement (including process capability studies); (6) status of inspection, quality evaluation and quality audit; (7) status of managing production equipment, measuring instruments and vendors; (8) status of packaging, storage, transportation, sales and service activities; (9) grasping and responding to product usage, disposal, recovery and recycling; (10) status of quality assurance; (11) grasping of the status of customer satisfaction; (12) status of assuring reliability, safety, product liability and environmental protection. Maintenance (1) rotation of management (PDCA) cycle control activities; (2) methods for determining control items and their levels; (3) in-control situations (status of utilising control charts and other tools); (4) status of taking temporary and permanent measures; (5) status of operating management systems for cost, quantity, delivery, etc.; (6) relationship of quality assurance system to other operating management systems. Improvement (1) methods of selecting themes (important activities problems and priority issues); (2) linkage of analytical methods and intrinsic technology; (3) status of utilising statistical methods for analysis; (4) status of analysis results; (5) status of confirming improvement results and transferring them to maintenance/control activities; (6) contribution of QC circle activities.

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Effects The performance measurement (1) tangible effects (such as quality, delivery, cost, profit, safety and environment); revolution (2) intangible effects; (3) methods for measuring and grasping effects; 217 (4) customer satisfaction and employee satisfaction; (5) influence on associated companies; (6) influence on local and international communities. Future plans (1) status of grasping current situations; (2) future plans for improving problems; (3) projection of changes in social environment and customer requirements and future plans based on these projected changes; (4) relationships among management philosophy, vision and long-term plans; (5) continuity of quality control activities; (6) concreteness of future plans[8]. The implication for business performance measurement is clear. As an ever increasing number of organisations explore the frameworks underpinning these awards, the fact that their traditional performance measurement systems are woefully inadequate will become painfully clear. Firms will either decide to ignore this message, or act upon it. All the evidence to date suggests that most firms adopt the latter course of action i.e. they change their performance measurement systems. Critics of these awards comment that the application process makes them unsuitable for smaller companies or organisations with limited slack resource (Garvin, 1991). In response to this, simplified versions of the awards have been established at the national and regional levels. In the UK, for example, the British Quality Foundation (BQF) offers a national award, while groups such as Midlands Excellence offer regional awards, with a much simpler application procedure. Whichever level of award businesses apply for, however, they are still expected to complete a self-assessment. Hence the spread of these awards is simply introducing more and more firms to self-assessment, which in essence is another form of business performance measurement. Quite simply, the philosophy underpinning the hierarchy of awards is that firms can be introduced to the process by a regional award. Once they realise the benefits of self-assessment, it is assumed that they will apply for a national and then an international award, each of which requires yet greater commitment and more comprehensive self-assessment.

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Changing organisational roles The 1980s and 1990s have seen subtle changes in organisational roles. Many of the most vocal critics of traditional performance measurement systems have come from the academic accounting community. As the force of their arguments has gathered strength, the professional accounting associations have reacted. In the UK, both the Chartered Institute of Management Accountants (CIMA) and the Institute of Chartered Accountants of Scotland (ICAS) regularly organise conferences and workshops on non-financial performance measurement. Both of these bodies encourage their members to take a more active role in the development of balanced measurement systems, arguing that the role of the management accountant is to provide the management information necessary for running a business, rather than merely the financial information required for external reporting. There is growing evidence that this theme has been picked up by several businesses. In the mid-1990s, for example, Cable and Wireless renamed their Corporate Management Accounting Group, Group Performance Analysis and Development, when asking them to play a more active role in the analysis of performance data. Human resource managers and personnel managers are another group of business professionals who are now taking a more active role in business performance measurement. There appear to be three reasons for this. First, performance measures tend to be integral to performance management systems goal setting, measurement, feedback and reward (IPM, 1992) and these generally fall within the remit of the human resource function. Second, there is considerable debate as to whether performance measures should be linked to reward again an issue which concerns human resources. Finally, many organisations have been through substantial downsizing programmes in recent years. One of the challenges these organisations face is motivating the people who remain once the downsizing programme has been completed. There are several examples of firms using performance measures to achieve this on the grounds that performance measures help clarify performance expectations, which in turn allow more discretion to be given to individuals as the boundaries within which they have to work become more obvious. Changing external demands Organisations today are subject to a wide variety of external demands, each of which has implications for business performance measurement. Deregulation in the UKs power generation, telecommunications and water industries, for example, has resulted in the establishment of various regulators. These regulators demand that the firms which fall under their jurisdiction achieve certain performance standards and have the power to fine those which fail to do so. To enable the regulators to assess whether the required standards are being met, firms in each of these industries have to submit detailed performance statistics on a regular basis. BT, for example, has to release performance data on its quality of service and pricing policies to Oftel the telecommunications

industry regulator, while Thames Water has to release performance data on, The performance among other things, the volume of water lost through leaks to the water measurement industry regulator. revolution As these data are public domain and of general interest, the national press monitors them closely. Thames Water, for example, has been severely criticised in recent months for failing to reduce the amount of water lost in the Greater 219 London area due to leaks, at the rate the regulator wishes. To counter the negative publicity that has resulted, Thames Water has started to advertise its achievements on billboards in the London underground. In terms of business performance measurement, the impact of these changes is twofold. First, the demands of the regulator can result in firms introducing new measures of performance so that the necessary data can be collected. Second, the scrutiny of the regulator forces firms to take certain measures very seriously, thereby ensuring a strong emphasis on business performance measurement in the firm. Legally-constituted bodies, such as regulators, are not the only groups to put pressure on firms. Consumer magazines, such as Which?, regularly conduct and publish performance evaluations of different products and services. Even groups with very limited resources can have a massive impact on a companys reputation. Take, for example, the recent libel case involving McDonalds. Supporters of the protesters established a Web page listing McDonalds alleged misdemeanours. During the trial, which lasted in the region of two years, press reports regularly referred to this Web page and the popularity of it. These two examples highlight the fact that information is very easy to collate and disseminate especially through the Internet. Given this, monitoring and managing public opinion becomes critical for high-profile businesses. Of course, public opinion is not the only thing that firms have to monitor. As already discussed, most businesses are now competing in an environment where value, not price is the key driver. Given these circumstances, then ensuring that value is delivered to customers becomes key. Which is one of the main reasons why the use of customer opinion surveys has become so widespread. Some customers today not only expect high levels of service, but also expect firms to operate in specific ways. The extent to which a customer can influence the way in which their supplier works is a function of many factors, a key one being power. Ford, for example, used their power as a major purchaser of automotive components, to demand that their accredited suppliers introduce a scheme known as QOS (quality operating system). Basically QOS is a performance measurement process. Suppliers to Ford are expected to identify six key business parameters, record the relevant data in a format approved by Ford and submit the information to Ford on a monthly basis. When they introduced the scheme, Ford declared that they expected all accredited suppliers to show improvement in the majority of these parameters on an annual basis if they wished to remain accredited. In many ways, QOS is simply an extension of the various supplier accreditation schemes that came into being through the 1980s and beyond. In

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the automotive industry, moves have been made to rationalise these schemes as suppliers were being forced to achieve accreditation to slightly different standards by each of their major customers. These accreditation schemes were introduced for two reasons. First, to enable cost in the customer-supplier relationship, especially that associated with multiple inspection, to be reduced. Second, to help customers decide with which suppliers they should concentrate their business, as they sought to rationalise their supply base. As more and more organisations moved down this route, more and more suppliers are being asked to submit themselves for audit (again a form of business performance measurement). So once again external demands i.e. those external to the business come into play, as organisations are forced to improve their performance data in preparation for these audits. There is one final group that is also putting pressure on firms to think about what they measure and how they measure it the investment community. At first sight this statement seems incredible, as it is widely accepted that institutional investors are interested only in short-term financial performance:
The perception within companies is that their discussions with investors lead them to neglect long-term strategies in the interests of immediate financial returns. Investors are perceived as placing a relatively low priority on the business fundamentals such as customer loyalty, investment in people and supplier relationship which will determine long-term success (RSA, 1995, p. 18).

The above quote is based on data collected during the RSAs Tomorrows Company Inquiry. This study is particularly interesting because representatives of the investment community were also asked what information they would like, and they replied:
The perception within the investment community is that companies are preoccupied with immediate returns and are reluctant to volunteer information about the fundamentals (RSA, 1995, p. 18).

The RSAs interim report describes this situation as a dialogue of the deaf, because neither group really understands the others interests and needs. Recently, however, there has been some evidence to suggest that this situation is changing. Traidcraft and Prototype Plc, for example, release alternative annual reports which summarise employee and customer satisfaction, as well as financial performance. Skandia, a Swedish insurance company, publishes an addendum to its annual report which identifies the value of Skandias intellectual capital. As mentioned earlier, David Prosser, the Group Chief Executive of Legal and General, talks explicitly about the virtuous circle between competitive products, sales and shareholder value in his statement in the 1996 annual report. The power of information technology The final driver in the performance measurement revolution is undoubtedly the power of information technology. Not only has this made the capture and analysis of data far easier, but it has also opened up new opportunities for data

review and subsequent action. Indeed the considerable effort that is being The performance exerted by supermarkets on data mining is a case in point. The electronic pointmeasurement of-sale systems used in most supermarkets provide an opportunity to monitor revolution individual buying patterns and tailor discount offers to them to encourage them to shop in particular stores. Of course, IT plays a role not only in data capture, but also in data analysis 221 and presentation. There has been a rapid growth in demand for management information systems and executive information systems in recent years. Indeed many vendors of these software packages are now proactively linking their product offerings to balanced measurement frameworks, such as Kaplan and Nortons balanced scorecard. Business performance measurement: state-of-the-art and where next? The arguments put forward so far in this paper have concentrated on the reasons why business performance measurement is on the agenda. To complete the paper, two further questions have to be addressed: what is the current stateof-the-art in the field and what are the issues that remain unresolved i.e. where next? Research in the field has been, and is being, undertaken by a diverse group of people from a wide variety of disciplines, including accounting (Bromwich and Bhimani, 1989; Chandler, 1977; Cooper, 1987a,b; Johnson, 1983; Kaplan and Norton, 1996), business strategy (Chakravarthy, 1986; Simons, 1995), human resource management (IPM, 1992), manufacturing and operations management (Dixon et al., 1990; Fitzgerald et al., 1991; Neely et al., 1996), marketing (Fornell, 1992) and organisational behaviour (Meyer and Gupta, 1994). As one would expect, the research stance adopted by these individuals differs in terms of the questions being addressed and the methodology adopted. In essence, however, they are all seeking to address one of the two fundamental questions associated with business performance measurement, namely: what are the determinants of business performance; and how can business performance be measured? What are the determinants of business performance? Identifying the determinants of business performance is a topic in which progress, if not interest, seems to wax and wane over the years. Prominent authors, such as Lawrence and Lorsch (1967), for example, have explored issues such as the relationship between the match between the business and the environment, and the effect of this on performance. Books, such as In Search of Excellence, which purport to have found the answer, appear from time to time (Peters and Waterman, 1982). In many ways, identifying the determinants of business performance is the holy grail for the field. Unfortunately, or fortunately for those who wish to continue working in the field, progress on this question has been limited to date.

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In recent years an interesting development has been the notion of using performance measures as a means of testing ones theory of business (Drucker, 1990; Eccles and Pyburn, 1992) or to facilitate strategic learning (Kaplan and Norton, 1996; Simons, 1995). Basically the suggestion is that if the appropriate measures can be identified, and the right data captured, then it should be possible to identify causal relationships between different dimensions of performance. To date, little evidence that this is possible has been presented. Indeed, the only published evidence, of which the author is aware, is: the claim by BT that they have been able to identify a correlation between customer satisfaction and customer loyalty (Johnson and Jakeman, 1997) and the claim by Milliken that they have been able to identify a correlation between customer satisfaction and financial performance (Jeanes, 1996). Given the importance of this question, however, the implication, in terms of further research, is clear namely the need to explore if, and how, the relationship between different dimensions of business performance can be mapped. Assuming this proves possible, then the benefits will be substantial not least because this would begin to solve the taxing issue of how predictive performance measures, or leading indicators can be identified. How can business performance be measured? It is widely accepted that business performance is a multi-faceted concept and hence it is not surprising that once again the question of how business performance can best be measured has been tackled by a variety of people from different disciplines. Accountants, such as Bromwich and Bhimani (1989) and Cooper (1987a, b), have concerned themselves with questions such as: what are the flaws with traditional accounting systems and how can these flaws be best overcome? Business strategists, such as Chakravarthy (1986), on the other hand, have sought to address issues such as what are the most appropriate methods of measuring strategic performance? There are also substantial bodies of literature which explore how key constructs such as customer satisfaction (Parasuraman et al., 1990); employee satisfaction (Beer et al., 1978); innovation (House and Price, 1991); and productivity (Sumanth, 1985) can be measured. Indeed one of the difficulties facing people as they enter this area is which of the thousands of possible measures they could adopt, should they adopt? Work to rationalise the alternatives and summarise their strengths and weaknesses, taking into account different country and cultural settings, would undoubtedly be beneficial, as would further academic studies to establish the rigour of the various measures that are available given that many of them are proposed in the practitioner literature (Chakravarthy, 1986). Despite its apparent simplicity, the question of how business performance can be measured is complicated by two factors: (1) it is not always obvious which measures a firm should adopt; and (2) the measures that will be most relevant to the firm will change over time.

These two factors give rise to two sub-streams of work. The first of these seeks The performance to answer the question how to decide which performance measures to adopt, measurement while the second, which is much less well-developed, addresses the topic of revolution how to manage the evolution of the measurement system. How to decide which performance measures to adopt As already suggested, the issue of which performance measures a given business should adopt is a topical and complex one. Various authors offer prescriptions such as that measures should be derived from strategy (Keegan et al., 1989). Numerous authors have proposed performance measurement frameworks which prescribe which dimensions of performance organisations should consider monitoring (Fitzgerald et al., 1991; Kaplan and Norton, 1996). Others have adopted a different stance and developed audits which help organisations identify the strengths and weaknesses of their measurement systems in terms of gaps and false alarms (Dixon et al., 1990). While still others have accepted the argument that measures have to be derived from strategy and hence sought to document processes designed to help management teams decide which measures are appropriate for their organisation (Neely et al., 1996). Much of this work focuses on the issue of designing measures and measurement systems. Once the systems have been designed, however, they have to be implemented, and then they have to be used to manage the business on an ongoing basis. These two topics the implementation of measurement systems and using them to manage business performance both appear to be areas in which further research effort is required. How can the performance measurement system be managed? To date, much of the work on business performance measurement has been static in orientation. Various authors comment in passing that measurement systems need to be changed in the light of evolving circumstances i.e. changing markets and strategies. Yet when one looks at the measurement systems used by businesses they are usually a mess! Organisations, or rather people in organisations, appear happy to introduce new measures of performance, but rarely do they delete obsolete ones. Few businesses have processes for managing the evolution of their measurement systems. Authors such as Chandler (1977) and Johnson (1983) discuss the evolution of accounting systems, while Meyer and Gupta (1994) explore the performance paradox and seek to explain why organisations end up with seemingly disconnected performance measures in their measurement systems. Waggoner et al. (1997) propose a framework which encapsulates some of the factors that appear to influence the evolution of business performance measurement systems. Such studies, however, are the exception rather than the rule and indeed, one of the greatest weaknesses in the field of business performance measurement today is that few people are actively exploring the issue of how the evolution of measurement systems can be managed over the long term.

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Conclusion This paper sought to address two questions: why is business performance measurement on the agenda; and second, what further research is required in the field? In answer to the first question it was argued that there were seven main reasons why business performance measurement is on the agenda: the changing nature of work; increasing competition; specific improvement initiatives; national and international quality awards; changing organisational roles; changing external demands; and the power of information technology. In answer to the second question, nine main topics were identified: (1) What are the determinants of business performance? (2) Can the relationship between different dimensions of business performance be mapped? (3) Can predictive performance measures, or leading indicators, be identified? (4) What are the strengths and weaknesses of the various performance measures proposed in the academic and practitioner literatures? (5) How valid is each of these measures? (6) Does the appropriateness and validity of the measures vary according to the country and cultural setting? (7) How can measurement systems be implemented? (8) How can measurement systems be used to manage business performance? (9) How can the evolution of measurement systems be managed over the long term? Business performance is an important and wide-ranging topic. Indeed one of the problems in writing this paper was deciding where to draw the boundaries. Valuable work on benchmarking (Andersen Consulting, 1993, 1994; IBM Consulting and London Business School, 1993, 1994; Womack et al., 1990); strategic control (Goold and Quinn, 1990; Horovitz, 1979; Simons, 1995); and performance management (Beer et al., 1978) has been deliberately, if somewhat unfairly, excluded. In essence, this paper has argued that there are four fundamental questions that research in business performance seeks to address: (1) What are the determinants of business performance? (2) How can business performance be measured? (3) How to decide which performance measures to adopt? and (4) How can the performance measurement system be managed? This agenda, however, is essentially a personal one. It represents a necessarily limited and narrow view of the field. In many ways this admission is indicative of a deeper problem. Research in the field of business performance is being undertaken by academics from a

wide variety of disciplines. The topic does not belong to accountants, operations The performance managers, business strategists, human resource managers or marketeers. The measurement biggest hurdle facing the field is that few academics cross these functional revolution boundaries. Review the work in accounting and you will find references mainly to the work of other accountants. Review the work in operations and you find references to the work of other experts in operations. Several factors compound 225 this problem, but probably the main one is language. Academics in different disciplines talk different languages. They have different mental models of what constitutes good research. While excellent progress has been made in the field in recent years, substantive breakthroughs are likely to arise when these academics learn to talk and work with one another. One of the fundamental challenges facing the field today is how to achieve this? How can a common language and shared research agenda be developed?
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