Thesis
Business Administration
MSc Organizational & Management Control
“Improving Group Life’s Performance
measurement system”
L.O.T. Bruekers (1270982)
Telephone: 06-46075853
E-mail: lbruekers@hotmail.com / s1270982@student.rug.nl
Company of research: ING Group – Nationale Nederlanden
University of Groningen
Business Administration
MSc Organizational & Management Control
Thesis-coordinator University: drs M. M. Bergervoet
Preface
This thesis is the final result of my graduation for the Master of Science Business Administration: Organizational & Management Control at the University of Groningen. It indicates the end of a period during which I’ve been able to gather a lot of knowledge and experiences, both in Groningen and abroad.
First of all, I would like to thank my thesis coordinators for their support during this research. Mr. Marcel Bergervoet for his advice regarding my writings, his support and patience during the whole trajectory of this thesis. I would like to thank Mr. René Keizer and Mr. René Scholten for giving me the opportunity to work on my research project at Controlling Group Life, and for their advice and support during the project. Next, I would like to thank Mrs. Jessica Bakker for always trying to find flexible planning solutions. And finally, I would like to thank my friends and family for their understanding, advice and patience during the intensive moments of the project.
Finishing my study doesn’t only mean the end of a certain period, but also the start of a new and exciting period. I am sure that the knowledge and experiences of the past months will be of a great help during this new period.
Lars Bruekers
Management summary
Reasons for research: Group Life finds itself in a turbulent time and environment, in which they
want to become the number one performer. Therefore an effective Performance Measurement System is needed that will direct the actions of everyone within Group Life towards achievement of their strategic objectives. At this moment, there is a belief amongst managers that the Performance Measurement System is not as effective as it should be and that it does not contribute to becoming the number one performer.
Research objective and research question: Based on the reasons for research, the following research
objective was formulated: “To provide insight into improvements regarding the effectiveness of
Group Life’s current performance measurement system in order to help GL’s managers to direct their department towards achieving its strategic objectives”.
In pursuance of the research objective, the following research question could be formulated: “Which
improvements should be made in Group Life’s present performance measurement systemin order to increase its effectiveness?”
Conclusions: The following conclusions were drawn from the research:
1.
The PMS is not being treated with enough attention:The PMS is not part of the
day-to-day activities and managers do not use it in their management decision processes.
2.
There is a lack of understanding of the PMS: Because of a lack of explanation and severalproblems regarding the design of Group Life’s PMS, there is a lack of understanding of the PMS by most of Group Life’s managers and employees.
3. There is almost no communication regarding the PMS: There is no possibility for Group Life’s managers to discuss problems they experience with the Performance Measurement System. Consequently, the Performance Measurement System is being experienced as a tool that cannot be influenced.
Recommendations: If Group Life really wants to become the number one in the market, their
Performance Measurement System should be treated more seriously. This could be done by putting the following recommendations in practice:
1. An interdepartmental project group should be established. 2. A clear strategy for each of GL’s sub-levels should be established. 3. The KPI-sheet and KPI’s need to be redesigned.
4. The KPI’s need to be explained.
5. Procedures for updating processes should be formulated. 6. A reviewing committee should be established.
7. Periodical reviews are needed.
Index
Preface ... 2
Management summary ... 3
Index... 4
Introduction ... 6
Chapter 1 The organization and Performance measurement ... 7
1.1
Group life and its position within ING... 7
1.2
Activities Group Life and Controlling Group Life ... 8
1.3
Market developments ... 9
1.4
Strategy... 10
Chapter 2: Research design ... 11
2.1 Introduction ... 11
2.2 Reasons for research... 11
2.3 Problem definition, conceptual model and research conditions... 13
2.3.1 Problem definition and conceptual model... 13
2.3.2 Research conditions... 16
2.4 Research type ... 16
2.5 Research methodology ... 17
2.5.1 Data Sources and data collection ... 17
2.5.3 Analysis... 19
2.5.4 Reporting ... 19
2.6 Research model and summary... 19
Chapter 3: Performance measurement state of the art... 21
3.1 Introduction ... 21
3.2 Principles of performance measurement ... 21
3.3 Performance measurement systems ... 22
3.4 Bourne’s four stages and accessory aspects ... 23
3.4.1 Design aspects ... 23
3.4.2 Implementation aspects of the framework ... 26
3.4.3 User aspects of the framework ... 27
3.4.4 Updating processes... 27
Chapter 4: Group Life’s PMS ... 28
4.1 Background and objective of GL’s PMS ... 28
4.2 Design aspects ... 29
4.3 Implementation aspects ... 31
4.4 The use of GL’s PMS... 31
4.5 Updating processes within GL’s PMS ... 32
Chapter 5: Analysis ... 33
5.1 Design Aspects ... 33
5.2 Implementation Aspects ... 35
5.3 The use of GL’s PMS... 35
5.4 Updating processes... 36
5.5 Summary ... 36
Chapter 6: Redesign & Recommendations ... 38
6.1 Design aspects ... 38
6.2 Implementation aspects ... 40
6.3 User aspects... 41
6.4 Updating aspects ... 41
6.5 Summary and Recommendations... 42
7.1 Introduction ... 45
7.2 Conclusions from the research ... 45
7.3 Conclusions about the research ... 47
7.3.1 Quality of knowledge ... 47
7.3.2 The use of literature... 49
7.3.3 The contribution to science ... 49
7.3.4 Recommendations for further research ... 50
References ... 51
Introduction
Nowadays, Performance Measurement is an important element in running a business. This is because organisations must be able to plan, direct and control their activities in order to react to an ever increasing dynamic and competitive environment. Performance measurement systems (PMS) play a major role in the development and communication of strategic plans, evaluating the achievement of organizational objectives and rewarding managers and their employees. However, a lot of obstacles have to be overcome in order to successfully establish a PMS (Bourne e.a., 2000). This can be confirmed by the fact that 70% of performance measurement initiatives fail (McCunn, 1998).
Group life (GL), as a part of ING’s intermediary division, finds itself in the highly competitive and dynamic life insurance industry. In order to react to this environment, Group Life established a strategy. GL uses a PMS to communicate this strategy and to plan and evaluate its organizational objectives. However this PMS is not fully capable of communicating GL’s strategy to its managers and employees. Consequently, this research will take place at Controlling Group Life in order to analyze and to provide for recommendations concerning the improvement of Group Life’s current PMS.
Chapter 1 The organization and Performance measurement
1.1 Group life and its position within ING
The ING Group is a global financial services company, active in the field of banking, asset management services and insurance. At this moment ING is active in over 60 countries and its working force consists of 120,000 employees. There is a broad customer base, amongst which: individuals, families, small businesses, large companies, institutions and governments. Due to this broad customer base and geographical spread, ING is amongst the 20 largest financial institutions world-wide and in the top 10 of Europe.
The focus of my research will be on Group Life, a line of business within the intermediary division, which in turn is a line of business within Insurance Europe (Figure 1). Group Life is part of the label Nationale Nederlanden, which accounts for 80% of the intermediary division.
Insurance Americas Insurance Asia/
Pacific Insurance Europe Wholesale Banking Wholesale Banking Retail Banking
Central & Rest
Of Europe PARCOM
Intermediary
Division RVS ING IM Europe
Other Insurance Operations
Finance Risk
Advisory board
Executive board
Figure 1: Organizational structure ING Group
Within the intermediary division there are four lines of business and three staff-departments; the four lines of business are within the blue framework (Figure 2).
Regional Collective Pension Corporate Clients services Corporate Clients CZ Product Management Operational Risk Mgt Finance Credit Risk Management JFZ&C SC Finance-V Insurance Risk Mgt ING Pension Services Human Resources Marketing & Sales Banking Individual Life CFO BPI Non-Life and Income CEO Sponsoring & Events NN Mortgage companies BPF Pension actuary MA and consolidation Controlling Banking Actuarial rep. Life Controlling Individual Life Controlling Group Life Controlling Group Life B&O Financial support
Figure 2: Organizational structure Intermediary division
Source: Intranet
One of the staff-departments of the intermediary division is the department CFO.
Finance makes part of CFO and encompasses six different departments, amongst which is the department Controlling Group Life. As mentioned earlier, this is the department that wants the research on the improvement of the performance management system of the line of business Group Life to be conducted.
1.2 Activities Group Life and Controlling Group Life
Group life’s core activities, as being a part of the NN-label, are the sales and services of pensions to collective clients; more specified: making tenders, processing new contracts and handling all kinds of mutations in existing contracts. The clients of Group Life are corporations of various sizes, ranging from Regional Collective Pensions (20-250 employees), to Corporate Clients (>250 employees). The products are sold mainly with the use of ING’s widespread network of intermediaries and insurance agents throughout the Netherlands.
1.3 Market developments
The well-developed distribution network contributes to the fact that Nationale Nederlanden, with 17,50% of the total market value in 2006, is the largest player in the Dutch life-insurance market (figure 3). 17,50% 8,60% 7,70% 66,20% Natione Nederlanden A EGON Lif e Interpolis BTL Other Figure 3: Life insurance market in the Netherlands
Source: Datamonitor Life insurance in the Netherlands 2007
The Dutch life insurance market saw a slight decrease in growth in 2004 and it expanded again fiercely in 2005 and 2006. This market growth is expected to continue until at least the year 2011 (Appendix figure B).
The leading companies within the life-insurance market have strong brands, reputations and generally receive a lot of recognition from their consumers. As a consequence it would be hard for new entrants to compete with these key players. However, this does not imply that the competition on the Dutch life-insurance market is weak.
The typical customer will not replace their life insurance frequently or even more than once. It is therefore difficult to attain repetitive business in this market. That’s why it is of great importance to find new customers. Because of the opportunity to make use of the combined network of NN and ING, it can be said that Group Life is in a good position to approach new customers.
1.4 Strategy
The strategy and main objectives of GL are derived from the strategy, mission and objectives of the ING Group and the Intermediary Division. GL’s mission is to be the number one financial service provider for their clients with a high customer satisfaction, an excellent financial performance and a top market position.
However, in the last few years GL didn’t achieve the growth and customer satisfaction it used to achieve in the past and still has high percentages of errors and working arrears (Appendix figure C,D,E,F).
Group life wants to reclaim their place at the top. They have to fulfil their customer’s expectations in order to reach that place. The customers ask for an excellent service, a quick and faultless processing of mutations, understandable communication, professional and customer-focussed employees and all this as inexpensive as possible. Therefore Group Life has the following strategic objectives:
• To meet the demands of the new pension laws / compliancy • To increase customer satisfaction
Chapter 2: Research design
2.1 Introduction
This chapter will start with an overview of the problems regarding the current performance measurement system of Group Life (GL). Based on those problems, a research objective, a research question and sub-questions will be described. Furthermore, a conceptual model will be provided that visualizes the relationship between the various concepts used in this research. This will be followed by a description of the used research methodology and a research model that, together with the conceptual model, will serve as a guideline for this research.
2.2 Reasons for research
Group Life finds itself in a turbulent environment, as described in Chapter one. Group Life wants to reclaim its position at the top by improving performance on several fields. To achieve this objective in the turbulent environment it finds itself in, it is of great importance to have an effective performance measurement system. This means a system that communicates the strategy to the managers and employees of GL, a system that stimulates the employees of GL to act in line with GL’s strategy and that can measure the degree of achievement of strategic objectives.
GL’s PMS lacks to communicate Group Life’s strategy and strategic objectives to its managers and employees at lower levels. The results of a recent survey proved that only 43% of the managers and employees of Group Life know Group Life’s strategy and strategic objectives, compared to 63% for the strategy and strategic objectives of ING (WPC scan, 2007). Furthermore, both managers and sub-level managers of Group Life do not know how to use the PMS to direct their departments towards achieving their strategic objectives. This is mainly because of the complexity of the performance measurement system and its indicators. All this leads to the fact that GL’s current PMS doesn’t have the potential a PMS should have; an instrument that leads the organization towards achieving its strategic objectives. It can therefore be said that the effectiveness of GL’s PMS is not optimal.
The management of GL and CGL, would like me to further investigating these, and other, problems regarding the performance management system and to come up with improvements.
Figure 4: Overview of problems per party
Involved Party
GL’s Management
GL’s Sub-Level
Managers
CGL’s Management
•
There's room for manipulation of performance measures • Performance measurement reports are based on outdatedinformation
•
Don't know how to use the performance measures to direct thedepartment towards achieving its strategic objectives
•
Trouble with identifying strategy and strategic objectives GroupLife
•
Large quantity of performance measures•
Not being able to measure the degree of achievement of GL'sstrategic objectives
•
Reward depends on performance measures they can't fullyinfluence
•
Problems with understanding the Performance Measures•
Don't know how to use the performance measures to direct thedepartment towards achieving its strategic objectives
•
Trouble with achieving strategic objectives•
Large quantity of performance measures•
Not being able to measure the degree of achievement of GL'sstrategic objectives
•
Reward depends on performance measures they can't fullyinfluence
•
There's room for manipulation of performance measuresPerceived Problems
Group Life’s (sub-level) managers experience that there are too many performance measures, they often do not fully understand them and they believe that their rewards depend on performance measures they can’t fully influence. Furthermore, managers of Controlling Group Life claim that there is room for manipulation of some of the performance measures. It can therefore be said that there is a problem regarding the design of Group Life’s performance measures.
It also became clear that Group Life’s (sub-level) managers do not know how to use the performance measures to direct their department towards achieving its strategic objectives. This, together with the fact that rewards depend on performance measures that can’t be fully influenced by the assigned person, indicates problems regarding both the implementation as the use of the performance measures. As a result of the problems mentioned above, it can be stated that the main problems are:
• A lot of managers and sub-level managers do not know the strategy and strategic objectives • Managers and sub-level managers do not know how to use the performance measures to direct
• Group Life’s management has trouble achieving strategic objectives.
As stated before, the problems that were mentioned in this paragraph, are related to the design, the use and the implementation of the performance measures. In the next paragraph, the problems regarding Group Life’s performance measurement system and its performance measures will be analyzed from a perspective that deals with requirements regarding the design, use, implementation and updating aspects of performance measurement systems. The way in which this will be done, will be described and depicted in the next paragraph.
2.3 Problem definition, conceptual model and research conditions
2.3.1 Problem definition and conceptual model
The problem definition describes the aim of a research. A problem definition of a research consists of a research objective, a research question and research conditions. (De Leeuw, 2001). Before addressing this problem definition, a description of the used terminology will be described.
The terminology that will be used are performance measurement system (PMS) and the effectiveness of a PMS. A performance measurement system can be described as the collection of all the design and process considerations that contribute to the implementation of an organizational strategy, the measurement of strategic achievement and the reviewing processes regarding the effectiveness of an organizational strategy (Bourne e.a., 2000).
The effectiveness of a performance measurement system can be defined as the degree to which it helps to implement the organizational strategy. A PMS can be said to be effective when it (Bourne e.a., 2000):
• helps managers to take actions which are in the organizations best interest • when it can measure the degree of achievement of the strategic objectives • when it challenges the strategic assumptions.
Based on the problems described in paragraph 2.2, the research objective can be formulated as follows:
Following from the research objective is the research question. This question will be further
specified in several sub-questions, and will act as a guideline in this research. The research question can be formulated as follows:
“Which improvements should be made in Group Life’s present performance measurement system in order to increase its effectiveness?”
Strategy Group Life Achievement of GL’s strategic objectives Effectiveness of GL’s PMS •Design aspects •Implementation aspects of the framework •User aspects of the framework •Updating processes •Customer Satisfaction •Growth •Compliancy •Cost reduction GL’s Strategic objectives •Customer Satisfaction •Growth •Compliancy •Cost reduction
Figure 5: Conceptual model based on Bourne’s framework for establishing a PMS (Bourne e.a., 2000).
In paragraph 2.2 we saw that the problems that Group Life faces, concern problems regarding the design, implementation and use of the performance measurement system and its performance measures. Bourne (Bourne e.a., 2000) claim that in order to establish a PMS initiative successfully, designing the performance measures isn’t enough. There are other aspects that need to be dealt with. These aspects can be grouped by the four processes that need to be dealt with when establishing a performance measurement system: the design, the implementation, the use and the updating processes (Bourne e.a., 2000). Consequently, there are design aspects, aspects regarding the use of a performance measurement system, implementation aspects and aspects regarding the updating processes.
Because of the fact that Bourne’s theory deals with the problems that were identified in paragraph 2.2, the concepts from this theory will be used to provide for recommendations regarding the improvement of GL’s PMS. The conceptual model visualizes the concepts that are used within this research (figure 5). It begins with GL’s strategy and the accessory strategic objectives. As described before, an effective PMS is necessary in order to take actions that are in the organization’s best interest; it plays a crucial role in achieving the strategic objectives.
In this section, the sub-questions will be described and will serve as a guideline for this thesis. In order to describe GL’s current PMS, to analyze the problems regarding GL’s PMS and to come up with recommendations, several sub-questions have been established. These sub-questions can be divided in descriptive sub-questions, analytical sub-questions and sub-questions that are concerned with the design of a solution.
• Descriptive: sub-questions that will help to describe the situation regarding GL’s present PMS:
1. What is GL’s purpose of using a PMS ?
In the previous paragraph the objective of a PMS was described as ”to help implement the organizational strategy”. This sub-question will help to find an answer to what GL wants to achieve by using a PMS.
2. How does the performance measurement currently take place within GL ?
By answering this sub-question, a description will be provided of what the design of GL’s PMS looks like, what the considerations were when GL implemented their PMS, how GL uses their PMS to direct the organization towards achieving its strategic objectives and what the current updating processes are within GL’s PMS.
• Analytical: this sub-question will be used to investigate problems within GL’s present PMS:
3. What problems can be identified within GL’s present PMS ?
This sub-question will be answered by analyzing the design, the past implementation, the use and the updating processes of GL’s PMS.
• Design: these sub-questions will be used to provide a design that will help to solve the problems regarding GL’s present PMS:
4. What aspects of the design, implementation, user and updating process of Group Life’s PMS are needed?
This sub-question will provide insight in what aspects are needed by GL in order to establish an effective PMS.
5. How can these aspects be improved?
2.3.2 Research conditions
As stated before, in this research the focus will be on the aspect performance measurement system within Group Life as an aggregation level. The performance measurement system is linked to the strategy of Group Life. Although this strategy was very hard to find and had to be looked up and assembled from several dispersed documents on the intranet, this strategy will be treated as given and is considered appropriate to deal with the environment.
The redesign and recommendations that will be provided in this research gives insight in how Group Life’s performance measurement system can be improved. The redesign and recommendations are a model for improvement and have the aim of showing inadequacies within the current system and of starting a discussion within Group Life regarding the improvement of the performance measurement system. The improvement itself will not be done within this research and should be done by the organization. This is mainly because of the time-limit that stands for this research; four months. The aim is, next to provide a redesign and recommendations for Group Life’s PMS, to deliver a thesis that meets the academic standards for the MSc Business Administration: OMC.
2.4 Research type
De Leeuw has several ways to define research. De Leeuw characterizes research based on two main classifications: based on intended result and based on research approach (De Leeuw, 2001).
If research is described on the basis of intended result it can both be classified as scientific research as well as empirical or real life research. In this thesis the intended result of the research is to make a contribution to solving a real-life problem. It is therefore characterized as empirical or real life research. Empirical or real life research can, in its turn, be divided in policy supporting or problem solving research (Figure G appendix):
• Policy supporting research: this type of research has the aim to result in specific (as defined in the problem definition) knowledge that is useful in a specific situation of a assignable customer and to satisfy a part of the total requirement of knowledge. (De Leeuw, 2001, p.76) • Problem solving research: this type of research encompasses more than policy supporting
research; it takes the entire problem of the customer into consideration.
As stated before, the purpose of my recommendations will be to start a discussion between the management of group life, the management of controlling group life and the sub-level managers of group life concerning the current problems and opportunities of improvement. The decision, whether or not, to act and change the current situation will not be my decision. My research will therefore satisfy a part of the total requirement of knowledge and can be characterized as policy supporting research.
Two types of research can be distinguished if research is described on the basis of research approach: field study and desk research (De Leeuw, 2001). In this research both types of research will be done. The desk research will be done to substantiate the field study and to establish a conceptual model.
2.5 Research methodology
2.5.1 Data Sources and data collection
Within this research the following sources have been used: documents, the reality and my experiences as a researcher. These sources will be described in this paragraph. Furthermore the following ways of data collection will be dealt with: the use of already existing information and obtaining information with the use of interviews (Baarda & De Goede, 2001).
The already existing information can be easily obtained through the use of literature and business-documents. The literature gives an overview of what is already known in the field of performance measurement. The source Business Documents (BD) consists of previous surveys and research, strategic plans, organizational charts, organizational facts and process descriptions (Appendix figure I). Together with the use of a databank (Datamonitor, 2007), it gives a good indication of the structure, environment, processes and strategy of the organization. The use of already existing information has therefore been an efficient way to start this research and was the main input in the development of the sub-questions. The documents that have been used during this research are described in more detail in the references.
The existing information alone will not provide enough information for the research and moreover, is not always up-to-date. The employees that are a part of the reality are an important source of information. Therefore interviews and informal conversations with employees will play an important role in collecting the data from the reality. This way it is possible to get information about the attitudes of the interviewees towards certain subjects.
This will be useful to analyze the current performance measurement system and to trace the existing problems. After these unstructured in-depth interviews, semi-structured interviews will be taken. With semi-structured interviews an answer to the sub-questions can be acquired and still give the interviewee the possibility to clarify and to emphasize certain subjects. The results of in-depth interviews depend on the interviewer and the interviewee and are therefore of a subjective nature. Triangulation is a measure that will be used in this research to increase the validity of the interviews. As stated before, informal conversations will also be part of this research and will help to understand the context of the problem. The list of people that I have interviewed or with which I’ve had informal conversations can be found in figure H in the appendix. The specification of the types of Business Documents that have been used, can be found in figure I in the appendix. The literature that has been used, is specified in the references. In figure 6, the data sources and the way of data collection per sub-question are visualized (figure 6):
Figure 6: Used data sources and type of data collection per sub-question
5. How can these aspects be improved?
•
Literature (See References).•
Interviews & Informal Conversations: Controlling Group Life, (sub-level) Managers Group Life, Intermediary Division, Product Management.4. What aspects of the design, implementation, use and updating process of their PMS are needed?
•
Business Documents: Previous surveys and research, processdescriptions and strategic plans.
•
Interviews & Informal Conversations: Controlling Group Life, (sub-level) ManagersGroup Life, Intermediary Division, Product Management.
3. What problems can be identified within GL’s present PMS ?
•
Business Documents: Previous surveys and research, Processdescriptions.
•
Interviews & Informal Conversations: Controlling Group Life, (sub-level) Managers Group Life, Intermediary Division, Product Management.2. How does the performance measurement currently take place within GL ?
•
Business Documents: Process descriptions.•
Interviews & Informal Conversations: Controlling Group Life, (sub-level) Managers Group Life, Intermediary Division, Product Management.1. What is GL’s purpose of using a PMS ?
•
Business Documents: Previous surveys and research, strategic plans.•
Interviews & Informal Conversations: Controlling Group Life, (sub-level) Managers Group Life, Intermediary Division, Product Management.2.5.3 Analysis
The main objective of an analysis is to sort the relevant material from the irrelevant material. This is not an easy and mechanistic activity; conclusions and recommendations usually aren’t showing up without putting effort in it (De Leeuw, 2001). In this research conclusions will therefore be drawn based on the use of theory, triangulated results from interviews, informal conversations, business documents and through the use of my experience as a researcher. A lot of the results of this research will be of a subjective nature and are not empirically tested. Therefore these results are appropriate for Group Life but cannot be generalized and projected to other situations.
2.5.4 Reporting
The results of this research shall be presented to both the university as the organization in two ways. A written report will be made available for a selected group. Furthermore, a presentation will also be given to the organization. During this presentation the researcher has the possibility to clarify findings, to give answers to still existing questions and to emphasize the results.
2.6 Research model and summary
The research design can be summarized in the following research model:
Design aspects
Effectiveness of
current Performance Management System
Analysis User aspects Implementation aspects Recommendations Design Updating processes
Framework for the establishment of a PMS
Chapter 3: Performance measurement state of the art
3.1 Introduction
This chapter will start with a description of performance measurement principles and systems in general. This will help to place GL’s current performance measurement system in a context and will also give guidance by providing recommendations. After this description, Bourne’s framework (Bourne e.a., 2000) for successfully establishing a performance measurement system, will be described. This framework consists of four stages and will be accompanied by other theories that provide information about what aspects are important to deal with during these stages. This will provide a basis on which the establishment of the performance measurement system of Group Life, which started in 2004 and is still in use, can be analysed.
3.2 Principles of performance measurement
Management control encompasses all the systems and actions that managers use to direct the decisions and the behaviour of managers and employees towards achieving the organization’s strategic objectives. The system itself is called a management control system. Merchant and van der Stede (2003) describe four types of management control: action control, personnel control, cultural control and results control. It goes beyond the scope of this thesis to describe all four types. Performance measurement controls managers and employees on results and can therefore be placed within the category results control.
Performance measurement can be defined as:
“the system and processes that are used to direct the organization towards achieving its strategic objectives, to measure the achievement of organizational objectives and for adjusting the used measures and organizational strategy” (Neely e.a., 1997).
The system as a whole is called a performance measurement system and the collection of measures is called a performance measurement framework.
The design of performance measurement systems that are appropriate for modern firms is a topic of increasing concern for both academics and practitioners (Neely e.a., 1997); and it should be because it is an important part of an organization’s strategic plan on which managers are assessed (Ittner and Larcker, 1998). The shortcomings of traditionally used systems are commonly known. One of the key weaknesses of those systems is the fact that they have a narrow focus (Kaplan and Norton, 1996). In the next paragraph, a few systems that have a more broad, or balanced focus, will be dealt with.
3.3 Performance measurement systems
As described in the previous section, there is an increasing need for a balanced way of performance measurement. Keegan e.a. (1989) presented a framework to create such a more balanced view. In their performance measurement matrix they integrated different classes of business performance: both financial and non-financial and both internally focussed as externally focussed. Kaplan and Norton’s balanced scorecard (Kaplan and Norton, 1996) has continued with this concept and has improved it by adding links between the different dimensions of business performance. In order to achieve a more balanced view Kaplan and Norton aim to help managers answer the following questions by application of their balanced scorecard (Kaplan and Norton,1996):
• How do we look at our shareholders (financial perspective)? • What must we excel at (internal business perspective)? • How do our customers see us (the customer perspective)?
A lot of organizations claim to use the balanced scorecard because of the fact that they are using a mix of both financial and non-financial KPI’s. Kaplan and Norton (2001) describe such a system as a KPI scorecard. The difference lies in the fact that a KPI scorecard doesn’t deal with the customer perspective and the relation between the measures on the different perspectives aren’t being dealt with. The KPI-scorecard can be useful when a strategy has been established in a top-down manner. It can then be used to give managers and employees guidelines on how to act in the organizations best interest. However, it lacks to explain both how the indicators on the different perspectives influence each other and the causal relations between outcomes and performance drivers are absent.
3.4 Bourne’s four stages and accessory aspects
When companies want to achieve enhanced competitiveness through the use of a performance measurement system, they have to start from scratch and ask themselves: “Given our strategy, what are the most important measures of performance?” “How do those measures relate to one another?” “What measures truly predict long term financial success in our business?” (Eccles, 1991). In pursuit of this statement, Bourne e.a (2000) state that, when an organization wants to establish a well working PMS, it is important not only to look at the design of a PMS but also at aspects relevant for the implementation, use and updating process to make sure that the performance measurement system really does contribute to the long term success of the organization.
The purpose of this research is to provide recommendations to improve the PMS as a whole, therefore we will look at relevant aspects for all four stages. In this chapter we will give a description of the aspects that are important to deal with in order to have an effective PMS. After that, in chapter five, based on theoretical findings, an analysis will be made of the shortfalls that have occurred within GL’s current PMS. Finally, this will lead to recommendations for a new begin, i.e. the re-establishment of an effective PMS.
3.4.1 Design aspects
The strategy is considered appropriate to react to the external environment. However it is of great importance that the management of an organization defines a clear strategy. Usually large, centralized corporations define KPI’s in a top-down manner. However, the process of feedback (figure 8) is important to test whether the KPI’s and the strategy are really effective (Bourne e.a., 2000). This process of feedback will be further discussed in the updating-processes paragraph.
When a company fails to define a clear strategy, organizational objectives, KSF’s and KPI’s, during the design of a PMS, the result will be misdirected actions from managers and employees. This will consequently make it very hard to achieve the organization’s strategic objectives (Bourne e.a., 2000).
Vision and Mission Strategy Organizational objectives Key succes factors Key performance indicators
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Fee
d
bac
k
Figure 8: Bititci’s performance pyramid (Bititci e.a., 1997)
Now that we’ve seen the way in which KPI’s should be deducted from the organizational objectives, we will continue with the requirements for effectively designing the KPI’s or performance measures in general. Neely e.a. (1997) have gathered the requirements, described by various authors, that are important for the design of performance measures. These requirements are also valid for KPI’s because KPI’s are also performance measures. The difference lies in the fact that KPI’s should be present in a limited amount and that they are the indicators that are crucial for the success of an organization. The most important requirements for performance measures, and therefore also for KPI’s, are the following; performance measures should be:
• Simple to understand • Derived from strategy
• Is based on performance that can be influenced by the user alone or in co-operation with others
• Be clearly defined • Have an explicit purpose
• Be based on an explicitly defined formula and source of data • Be objective
Neely e.a. (1997) have established a performance measure record sheet that, when used to establish performance measures, meets the requirements for effective performance measures (figure 9).
Performance
measure
Title The title should be clear, self-explanatory and not include functionally specific jargon
Purpose The purpose should be specified
Relates to The organizational objective to which the KPI relates should be identified
Target There should be an explicit target
Formula Should be understandable and defined in a way that it promotes effective behaviour
Frequency The frequency should depend on the importance of the KPI and the availability of data
Who measures? The person who is to collect and report the data should be identified
Sources of data The source of raw data should be specified, so that performance can be compared over time
Who acts on the
data? The person who acts on the data should be specified
What do they do? How to act on the observed performance?
Notes and comments Extra information
Figure 9: Performance measure record sheet (Neely e.a., 2000)
As stated before, key performance indicators are those performance measures that are crucial for the achievement of organizational objectives. These KPI’s do not serve as a replacement of a day to day control mechanism, but they serve to draw the attention of managers and employees to those factors expected to lead to competitive breakthroughs for the organization (Kaplan and Norton, 1996). This implies that there should be a limited amount of KPI’s in order for managers to stay focussed on the KSF’s to achieve the organizational objectives. Simons even claims that people are only capable of remembering and working with seven units of information (Simons, 2000). It can therefore be said that in order for people to be able to work effectively with KPI’s, there shouldn’t be much more KPI’s than seven. This last requirement can therefore be added to the requirements for establishing an effective performance measurement framework.
• There should be a limited amount of KPI’s
When indicators are experienced as not fair, i.e. not being able to be influenced by managers, they promote resistance, game playing, circumvention or other behaviour that is not in the organizations best interest.
It can therefore be said that problems can occur when performance measures (Cowen, 1990): • give conflicting messages
• are too complex • are not relevant or fair • are present in a large number
3.4.2 Implementation aspects of the framework
According to Bourne e.a. (2000) most organizations are capable of designing a performance measurement framework but few of them succeed in implementing it. The implementation stage is therefore a stage that needs careful consideration. Implementation is the stage during which systems and procedures are being prepared for the collection, collation, sorting and distribution of data. There are three main obstacles to a successful implementation of a performance measurement framework (Bourne e.a., 2000):
• Resistance to measurement • Computer system issues
• The lack of top management commitment
As stated in the last paragraph, resistance to measurement can occur when managers or employees do not see the relevance of the performance measures, when performance measures are experienced as not being fair, too complex or when it involves too much effort to work with them. This resistance can be the result of a top-down way of establishing the KPI’s. With a top-down approach the managers and employees are not sufficiently involved in the design process of the KPI’s. Consequently, there will be resistance to the implementation of these KPI’s (Bourne e.a., 2000).
3.4.3
User aspects of the framework
Bourne e.a. (2000) define two processes that should be present amongst the user apects; the process of relating rewards to performances and the process of relating relative importance to each of the KPI’s. The rewards and relative importance of KPI’s should be congruent with the strategic focus within the organization. If these two processes aren’t done properly, managers will not be able to understand the relative importance of strategic objectives. Furthermore, it could lead to gaming because managers act to what measure has the most effect on their bonus instead of to act to what is most important for the success of an organisation.
3.4.4 Updating processes
The establishment of an effective PMS is not a process that needs to be done once and will be appropriate for ever. It is an evolutionary process that calls for continuous adjustment (Bourne e.a., 2000). Both the appropriateness of the measures as the appropriateness of the strategy should be assessed regularly. It is therefore important to develop two processes: an updating process for assessing the appropriateness of the performance measures and an updating process for assessing the appropriateness of the strategy. If these processes are ignored, negative effects will become abundantly present, as described by Neely (Neely e.a.,1997):
“over time, their measurement systems become less and less valuable, as they become more and more complex. New measures are added, but obsolete measures are rarely deleted” and “performance measures will become diverged from the organizations’ strategy”.
Chapter 4: Group Life’s PMS
In the previous chapter we’ve seen some principles of performance measurement and the aspects that are important for the effectiveness of a Performance Measurement System (PMS). In this chapter, the PMS of Group Life (GL) will be described in a way that an analysis can be made in the next chapter. First, the background and the objective of GL’s current PMS will be described, followed by a description of the design, the implementation, the use and the updating processes of the PMS. The aim of this chapter will therefore be, to answer sub-questions one and two:
1. What is GL’s purpose of using a PMS ?
2. How does the performance measurement currently take place within GL ?
4.1 Background and objective of GL’s PMS
The current PMS of GL has been established based on the findings of a research done by a consultant of the department “strategy and business change” in 2004 (Performance Management at LOB LC, 2004). This consultant stated that the ING Group, the intermediary division and GL saw that intensive steering on Key Performance Indicators (KPI’s) was crucial to improve their financial performance . This was part of the strategy called Managing for Value. The problems GL faced before 2004, and at the same time were reason to change the PMS, were:
• the KPI’s weren’t of the quality that was needed for them to be used in the managing process • there were no priorities for assessing results of the different area’s of performance
To overcome these problems, three questions were proposed that needed to be answered in order to reduce the problems mentioned above.
• How can Group Life establish a relevant set of KPI’s?
• How should the KPI’s be translated to the sub-levels of Group Life?
• What should the targets for the KPI’s be in order to achieve the targets on the Middle Term Planning (MTP)?
The PMS that is in use, is intended to communicate GL’s strategy and the strategy of its sub-levels in order for managers and employees to work towards achieving the organizational objectives.
Another important purpose of GL’s PMS is measuring the degree of strategic achievement. Based on business documents (MTP Divisie Intermediair, 2004) and interviews (Appendix figure H), it can therefore be said that the two main purposes of GL’s PMS are:
• Communication of the strategy
• Measurement of the degree of strategic achievement
This is done through the use of a so-called KPI-sheet, which will be described later in this chapter. There are other systems of control, but the KPI-sheet is the performance measurement framework that is intended to communicate strategy and to asses the level of strategic achievement and will therefore be the focus of this research.
4.2 Design aspects
In the previous chapter we saw that, according to Bourne e.a. (2000), design aspects include the identification of key success factors and KPI’s, as well as the design of the KPI’s itself. In this paragraph we will therefore start with describing the relation between strategy and KPI’s, followed by a description of the KPI’s itself.
Translation and Control Translation GL’s Strategy Divisional Strategy Objectives Objectives Objectives
KPI’s with monthly reporting Year plans and objectives GL
MTP GL Strategy Intermediary Division
Intermediary division INGGroup Stakeholders
Figure 10: The objective and KPI selection flow
Source: MTP Divisie Intermediar 2007-2009
We have just seen the way in which objectives and KPI’s are identified for GL and its sub-levels. Now the other important design aspects will be described; the design of the KPI’s itself. The KPI’s for GL and its sub-levels can be found on KPI-sheets. For GL and each of its sub-level department there is a separate KPI-sheet. However, they have great similarities and all have the following basic lay-out (figure 11).
GL’s KPI-Sheet
• Limited amount of KPI’s intended to focus on the most important strategic objectives
• Challenging targets
• Strong relation with bonus
• To asses the degree of strategic achievement
• Progress of projects
• Can have an impact on one’s bonus
• Extra information to help understand trends within KPI-results
• Do not effect the bonus
• No targets
• Minimal requirements concerning the long term and short term objectives
• Intended to prevent gaming
• Not achieving minimal requirements can have impact on one’s bonus
KPI’s
Additional indicators Minimal requirements Projects
Figure 11: KPI-sheet lay-out
The KPI-sheet is divided into four main quadrants: a quadrant for minimal requirements, one for projects, one for additional indicators and a quadrant for KPI’s. In total there are about 35 indicators on the KPI-sheet: 18 KPI’s, 11 projects, four additional indicators and two minimal requirements1. GL’s aim of using KPI’s is to focus managers and their employees on the most important strategic objectives, i.e. to communicate strategy. GL’s second aim of using KPI’s is to assess the degree of strategic achievement. The KPI quadrant will therefore be discussed in more detail (Appendix figure L).
The KPI quadrant consists of about 18 KPI’s , which are divided in different subjects: KPI’s for financial performance, KPI’s for market positioning, for customer satisfaction, for operational performance, for compliance and for human capital. Some of the KPI’s, mostly the KPI’s concerning financial performance and market positioning, are formulated in functional specific jargon (Appendix figure L).
4.3 Implementation aspects
According to Bourne e.a. (2000), implementation is the stage during which systems and procedures are being prepared for the collection, collation, sorting and distribution of data. Procedures for the just mentioned processes are abundantly present within CGL, GL and its sub-levels. During interviews with controllers from the department Controlling Group Life, it became clear that the data that is needed to fill in the KPI-sheet comes from several sources based on software and hardware, but the reports are made in excel (Appendix figure H). These procedures, soft and hardware, make it possible that the results of a certain month will be available and distributed in the third week of the next month. In the previous paragraph it became clear that the identification and design of KPI’s was done in a top-down manner. Consequently, the procedures concerning the handling of the data were also established in a top-down fashion.
4.4 The use of GL’s PMS
As described in chapter three, the use of a PMS consists of relating rewards to performances and relating relative importance to each of the KPI’s. Within the KPI quadrant of the KPI-sheet, a certain weight is assigned to each of the KPI’s (Appendix figure L). This weight indicates the effect, or the relative importance, that such a KPI has on one’s bonus. Furthermore, the frequency with which the KPI is measured is stated in the KPI-quadrant.
1
4.5 Updating processes within GL’s PMS
Chapter 5: Analysis
In paragraph 2.2, the reasons for this research were described. As a result of these problems, or reasons for research, the current performance measurement system (PMS) of Group Life (GL) will be analysed in this chapter. This will be done by identifying the problems GL’s PMS faces in each of Bourne’s (Bourne e.a., 2000) four stages. First an analysis will be made regarding the design aspects, followed by an analysis regarding the implementation aspects, user aspects of the framework and the updating processes. This will then be followed by a summary which will give an answer to sub-question three:
6. What problems can be identified within GL’s present PMS ?
.
5.1 Design Aspects
“When a company fails to define a clear strategy, organizational objectives, KSF’s and KPI’s, during the design of a PMS, the result will be misdirected actions from managers and employees. This will consequently make it very hard to achieve the organization’s strategic objectives (Bourne e.a., 2000)”.
This sentence, as stated before in chapter three, emphasizes the importance of a proper design of a PMS. Bourne e.a. (2000) divide the design stage in identifying strategic objectives and KPI’s and in the design of KPI’s itself. In this paragraph, the observed problems regarding these two aspects will be described.
Now, the design of the KPI-sheet and the KPI’s itself will be analysed. Managers within GL experience the KPI-sheet, with its 35 indicators, as a very complex and confusing sheet (Figure 11). Furthermore, they could not identify a strategy by solely looking at the KPI-sheet. This finding can be confirmed by the fact that only 43% of the managers and employees of GL know what the content is of GL’s strategy (WPC Scan, 2007).
Even the CEO of the Intermediary Division did not like the large quantity of indicators (Roadshow Divisie Intermediar, 2008). He did mention that a lot of them were fixed and passed on from the ING Group. However, it can be concluded that both the KPI-sheet as the KPI-quadrant do not meet the requirement “there should be a limited amount of KPI’s” (Kaplan and Norton, 1996). It will therefore be hard for managers to focus on the strategic objectives (Kaplan and Norton, 1996).
Group Life’s sub-level managers experienced management information as outdated (Appendix Figure H). Information about the results of a previous month is available in the third week of the next month. The CEO of the Intermediary Division acknowledged that the quantity of indicators on the KPI-sheet contributes to the fact that management information is out-dated (Appendix Figure H).
The sub-level managers, that did know their department’s strategy, thought that the relation between the indicators on one side and organizational objectives and strategy on the other side, is not very clear (Appendix Figure H). As described in chapter four, the KPI’s are derived from the strategy but the relation between the former and the latter is not very clear. Furthermore, not all of the KPI’s (Appendix Figure Figure L) “relate to specific organizational objectives” (Neely e.a., 1997). Examples of these KPI’s are: the diversity KPI and APE SME (Appendix Figure L).
During my interviews I found out that, in the past, the formula for Net Growth allowed room for gaming (Appendix Figure L). This was done by not processing mutations that had a negative effect on the performance indicator. Another element in the formula automatically boosted up the results, without any action. This led to achievement of the targets, but was harmful for the organization. It eventually led to the hiring of a lot of external employees to process the work in progress, with a lot of extra costs and negative effects on the customer satisfaction.
5.2 Implementation Aspects
The process of identifying the main objectives and KPI’s and the design of KPI’s influences the implementation aspects. Because of the top-down process, managers have to deal with KPI’s that they weren’t able to select themselves. During interviews with Group Life’s (sub-level) managers the result of that process of identifying became clear (Appendix Figure H). They do not fully support all of the KPI’s and the perceived relevance of some of the KPI’s is not high; like EV Profit, diversity, HR indicators and compliance indicators (Appendix Figure L). This causes resistance to measurement and therefore some of the KPI’s do not promote effective behaviour (Cowen, 1990).
5.3 The use of GL’s PMS
5.4 Updating processes
In order to maintain an effective PMS, two updating processes are needed (Bourne e.a., 2000): an updating process for assessing the appropriateness of the performance measures and an updating process for assessing the appropriateness of the strategy.
As stated before, during my interviews with GL’s (sub-level) managers and research in documents, I have not been able to identify any updating processes concerning the relevance of KPI’s or the appropriateness of strategy (Appendix Figure H). To a certain extend this isn’t strange because of the top-down way of establishing strategy and KPI’s. However, it makes the PMS a lot less effective because of two reasons. First of all, the management of GL and the managers of GL’s sub-levels aren’t involved in any way in assessing the appropriateness of KPI’s. As a consequence, they do not feel very committed to most of the KPI’s; this reaction has also been described by Cowen (Cowen, 1990). Secondly, it is not clear if the strategy behind the KPI’s is still appropriate to react to the external environment.
5.5 Summary
In the previous paragraphs it became clear that GL’s PMS knows problems regarding design, implementation, user and updating aspects. In this paragraph these problems will be summarized and related to each other.
GL’s (sub-level) managers (Appendix Figure H) weren’t allowed to take part in the process of identifying, designing and implementing KPI’s. These managers and their employees weren’t able to fully understand the strategic objectives, the strategy and the role they should play in achieving those objectives. They had to work with KPI’s that they did not fully support and thought were not completely relevant (Appendix Figure L). The KPI-sheet is a very complex, confusing and difficult to understand tool, which does not communicate a strategy without explanation (figure 11). In addition, there are too many KPI’s in the KPI-quadrant, they are not simple to understand, they do not relate to specific organizational objectives and the relation with strategy is not very clear.
It can therefore be said that the KPI’s on GL’s PMS do not completely meet the Neely’s requirements for effective KPI’s (Neely e.a., 1997). At least some of the KPI’s on GL’s PMS are not (completely):
• Simple to understand • Derived from strategy
• Is based on performance that can be influenced by the user alone or in co-operation with others
• Be clearly defined • Have an explicit purpose
• Be based on an explicitly defined formula and source of data
Furthermore, the KPI-sheet does not meet the requirement (Kaplan & Norton, 1996): • There should be a limited amount of KPI’s
Finally, as stated before, no updating processes concerning both the relevance of the KPI’s and the appropriateness of the strategy, from GL or its sub-levels to higher levels, could be identified.
These problems, that are mainly problems concerning the design, implementation and updating aspects, lead to the fact that the PMS can’t be used in an effective way. It can’t fulfil its intended purposes:
• The communication of the strategy
• The measurement of the degree of strategic achievement
GL’s PMS fails in communicating a clear strategy to its sub-level managers and employees. This leads to misdirected actions from managers and employees and will make it hard to achieve its strategic objectives.
Chapter 6: Redesign & Recommendations
In the previous chapter, Group Life’s (GL) Performance Measurement System (PMS) was analysed based on Bourne’s framework (Bourne e.a., 2000). In this chapter a redesign will be made that describes the requirements for a new PMS for Group Life and its sub-levels. These requirements will, again, be based on Bourne’s framework (Bourne e.a., 2000). Based on these requirements, recommendations for improvement will be described at the end of this chapter. This chapter will therefore deal with sub-questions four and five:
4. What aspects of the design, implementation, user and updating process of Group Life’s PMS are needed?
5. How can these aspects be improved?
In chapter four it became clear that Group Life wants to use their PMS to achieve organizational objectives. As a consequence, it is necessary that the PMS communicates a clear strategy and that it can be used to direct the actions of GL and its sub-levels towards achieving the organizational objectives. Therefore, it is necessary to establish a PMS that is easy to use in management decision processes and that communicates a clear strategy. In this chapter, the aspects that need to be considered when re-establishing a PMS, will be described. This description will act as a guideline and will be accompanied by recommendations that will indicate how the improvements can be put into practice. As indicated before in chapter two, the decision whether or not to re-establish the PMS, as the re-establishment itself, should be done by the organization itself.
6.1 Design aspects
As stated before in chapter four and five, the design aspects can be divided in two main categories (Bourne e.a., 2000); identification of the Key Succes Factors (KSF’s) and KPI’s and the design of the KPI’s itself.
After having discussed the project group during my interviews, I found out that the following people would be happy to participate in such a project group (Appendix figure N). This also includes a consultant of the department strategy and business change.
After having established a clear strategy and KSF’s, it is important to establish a Performance Measurement Framework that communicates a clear strategy (Neely e.a., 1997). Such a Performance Measurement Framework should consist of a limited amount of KPI’s which are deducted from the organizational strategy (Kaplan and Norton, 1996). Therefore a Performance Measurement Framework, that looks different then the present KPI-sheet, should be established. It should contain only KPI’s and no other indicators; preferably not much more than seven KPI’s (Simons, 2000). Only KPI’s that are crucial for the achievement of strategic objectives should be placed on the Performance Measurement Framework. These KPI’s should be established according to Neely’s
requirements. Therefore each of the KPI’s should meet all of the requirements (Neely e.a.,
1997):
• Simple to understand • Derived from strategy
• Provide timely and accurate feedback • Relate to specific objectives
• Is based on performance that can be influenced by the user alone or in co-operation with others
• Be clearly defined • Have an explicit purpose
• Be based on an explicitly defined formula and source of data • Be objective
Performance measure
Title Number of New Customers
Purpose To show the importance of extending the customer-base
Relates to Market Growth
Target 2250 at month’s end
Formula
Number of new customers department Regional Collective Pension + Number of new customers department Corporate
Frequency Monthly
Who measures? Controlling Group Life
Sources of data Customer database
Who acts on the data? Group Life’s sales manager
What do they do? Adjust sales and marketing plans, think of attractive propositions
Notes and comments
Figure 12: KPI established according to Neely’s Performance Measure Record Sheet.
This KPI has got a title that is clear, self-explanatory and does not include functionally specific jargon. The purpose is clear and shows that the KPI serves as a driver of achieving market growth. There is a clear target, a simple formula, a description of the data sources and a description of the person that measures and acts on the data. By keeping a KPI understandable for everyone that has to work with it, it is more likely to be used to act in line with the strategy Neely e.a., 2000).
As stated before, the establishment of the collection of KPI’s does not lie within the scope of this research and should be done by members of the, yet to be established, interdepartmental project group (Figure N Appendix).
6.2 Implementation aspects
The implementation aspects are highly interdependent with the design aspects (Bourne e.a.,2000). Therefore, in the design process, it is important to involve the (sub-level) managers and employees that have to work with the KPI’s. By involving those managers and employees the perceived relevance of the KPI’s will increase and the purpose becomes clear. Moreover, the strategic objective that the KPI is related to, the formula of the KPI and the way in which the KPI can be influenced will become more clear for the involved managers and employees. This involvement is an opportunity to further explain the KPI’s and to give sub-level managers an opportunity to take part in the discussion whether or not a certain KPI is appropriate. This involvement could reduce the resistance to measurement (Cowen, 1990). Given the financial character of the organization and its products, this explanation should be done by a group of financial specialists, combined with strategic specialists. Controllers of the department Controlling Group Life, together with one or more strategic specialists from the department Product Management, would be suited for this process of explanation.
