If effectively implemented performance management will somewhat improve business performance. Performance management in relation to management accounting can be explained as “The process of developing measurable indicators that can be systematically tracked to assess progress made in achieving predetermined goals and using such indicators to assess progress in achieving these goals.” (Interoperability Clearinghouse Glossary of Terms, 2005). In order for a company to reach future successful objectives and targets an effective performance management system must be in place. This process is vital in ensuring a company’s success and fulfilling shareholder requirements. In previous years financial information was the main focus of performance measurement however through the introduction of New Public Management it’s clear that “performance measures may be based on financial as well as on non-financial information” (CIMA Official Terminology, 2005). With performance management previously being purely focused on measures such as profit and cash flows; there is now more attention to multi-dimensional performance measures which aim to achieve a firms future goals. There are several performance measurement techniques that have arisen in recent years due to the insufficiency of original financial measurements. Such frameworks are used in organisations within the public and private sector. It is believed that performance management techniques may differ in reference to private and public sector organisations due to the difference in organisational goals. Public Sector organisations generally tend to focus on the delivery of their service along with the maximisation of wealth to shareholders, whereas private sector organisations have a sole focus of creating profit. However through New Public Management (NPM) there is an assumption that performance measurement techniques will have the same effect in both public and private organisations.
The ‘Balanced Scorecard’ is the best known and most commonly used performance management tool used in business, both private and public. Developed by David Norton and Robert Kaplan (1990 – 1992), it was used to bring both financial and non-financial aspects of the organisation “that report the results of actions already taken and operational measures on customer satisfaction, internal processes, and the improvement activities – operational measures that are drivers for the future financial performance”(Kaplan and Norton, 1992, p.71). This framework interprets and orders business strategy into “4 key perspectives in performance management”: Financial, Customer, Internal business processes and Organisational learning & growth. The scorecard gives a business flexibility and the ability to adapt to alternative situations. The balance scorecard can be utilised in several businesses whether be for commercial organisations in the public sector or a government owned business in the public sector. This flexibility of the framework assures it as a useful measure of performance. Evidence of the balanced scorecards success have been reported throughout different industries within the public and private sector. Organisations, both private and public, have utilised this technique to focus on business strategy in comparison to financial metrics. This technique acts on the interest and means of every stakeholder involved in the business, thus making the balanced scorecard a useful and accurate method of performance management. Attention, however, was drawn on the complexity involved with the system and “many pitfalls and problems were identified in practice” (Kaplan and Norton 1996b). The main downfall of the balanced scorecard is that its main focus was to give managers an overall view of performance, thus meaning that it would not be applicable for use in lower level operations.
Performance management has significantly evolved in previous years and has moved centre stage in terms of driving organisational performance. Organisations in the private sector differ from those in public sector due to them being characterised by private ownership and that cash flow is derived directly through consumers, not taxpayers. These organisations may utilise performance management techniques in order for shareholders to predict and carry out successful business improvements. Private Sector companies may use performance management techniques in order to encourage and control their managerial staff to focus on measures that reflect direct impact; such as profits and business growth. Other performance management systems have been created in the private sector that take a more sensitive approach to business growth such as managing teamwork and improving customer loyalty. A framework for successful performance management is having an HR department that supports managers and by using different techniques can tackle issues head-on. A theory of performance management in private sector organisations is that Customer consideration must be the main focus of Strategic Planning for businesses as customer loyalty is the key to financial success.
Public Sector organisations are constantly under huge scrutiny to perform well, improve service quality and become more responsive to stakeholder needs. Historically, it was deemed impossible for managers to measure performance in the public sector. However, through the introduction of the New Public Management (NPM) it is clear that measurement techniques from the private sector are being imported into the public sector making performance management efficient and effective. With the public sector having numerous variables around the world such as politics and economic performance; it is impossible to find a single solution to how all performance can be measured. Traditionally, organisations within the public sector has set financial aspects of the organisation as their main focus, as companies with high profit were seen to be performing well. With the introduction of private sector measurement techniques, public sector organisations are beginning to focus more on the consumer rather than the aspect of financial risk and return.
Organisations within the public sector are said to be broken down into separate components of assessment such as services and departments. These components can then be involved in a performance management process which can monitor the use of resources or compare performance between departments. Kirkpatrick and Ackroyd (2003 p.518) argue that the process of PMM in service departments have an aim of administering “mechanisms for ensuring control and accountability”. Also, Bovaird and Davis (1999, p307) argue that government owned organisations are forced to use “performance measurement and management systems as a way of evaluating their performance”.
Conflict between individual stakeholders is a common issue involving the measurement of performance in public sector organisations. “A common means of dealing with conflicting institutional pressures in public sector organisations is to de-couple the control systems used at each level of the organisation” (Covaleski and Dirsmith, 1983). De-Coupling occurs when different asset classes, that originally stem together, move apart in opposite directions. It is a method which separates structural elements of each part of the business due to institutional conflicts in order to satisfy conflict between individual stakeholders. This will in turn have numerous effects on business therefore aiding the process of choosing an effective method of performance management. This method ensures that “formal inspection and evaluation are minimized” (Meyer and Rowan 1997).
Performance Management Systems are used effectively in public sector organisations such as Education and the NHS. The use of PMM allows schools to measure performance through OFSTED (Office for Standards in Education) in relation to performance indicators including: GSCE pass rates and truancy rates. The NHS has been seen to adopt the Balanced Scorecard approach to performance management: ‘The Performance Assessment Framework’. “The use of the balanced scorecard allows different organisations to get more rounded view of performance by identifying different key elements of performance and understanding how changes in them may have implications for others” (Department of Health, 2001, p.2, Chang et al., 2002, p.350). Despite the public sector having many obstacles in terms of performance management, it does not affect the importance and use for the measurement of performance management.
Ferlie and Steane (2002, p. 1462) offer a contradictory analysis on the effects of performance management and measurement. They claim that only one country, New Zealand, in their sample have seen a positive change on a large scale through the embracing of performance measurement. It is claimed that the increased use of performance management in public and private sectors may have an effect on public sectors and commodifying services. This may involve the undermining of morale and motivation. There are crucial differences between the private and public sector and these differences make it difficult for a successful transfer of private PMS (Performance Measurement Systems) to be transferred and utilised in the public sector. Pollitt(2003. P, 24) explains that the public sector differs from private due to the context in which management decisions are made. Also, they suggest that unlike private sector organisations, public service providers have to be accurate in their demonstrations of “equity, impartiality and a certain moral enlightenment”.
The Education system is an example of an organisation that is affected from the use of New Performance Management. Deem(2004, p. 116) suggests that universities in the UK have become “more akin to a business than an educational institution” and questions “whether the contemporary UK university can survive the domination of management” over academic administration. Talib (2003) claims that through the advanced uses of performance management techniques in universities there will be a movement from “professional activities” which would have a social worth towards activities that are management focused. Furthermore, Kirkpatrick and Ackroyd (2003) suggest that the involvement in this process may improve accountability of operations but there is no certainty that it will affect the quality of services produced.
The Police Force have also been affected due to the introduction of NPM where “new managerialism has increased workload and pressure on officers” (Butterfield et. Al 2004). This increased workload may lead to stress and affect employee motivation. Increasing employee level of stress would inevitably have an adverse effect on staff; thus suggesting that in certain cases performance measurement can have a negative effect on organisations within the public sector. This highlights the fact that although PMS are necessary, it is vital that organisations carefully consider each aspect of the company in order to produce the highest quality of services produced.
In conclusion, the use of PMS in public and private sector organisations carries many arguments and evidence that proves that “Performance measurement and management (PMM) is a management and research paradox” (Melnyk et al, 2014). Although having an effective performance measurement system is vital in making organisational strategic decisions it can have several setbacks for businesses in the private and public sector. Historically, performance measurement techniques were solely based on a financial scale; however through the introduction of New Performance Management there is now more focus on multi-dimensional and non-financial performance measures. Performance measurements originally used in the private sector, such as the balanced scorecard, have been introduced and effectively put to use by organisations in the public sector. Government owned organisations have been affected through the use of introducing a PM System in making strategic decisions.