M EASUREMENT AT C OMPANY X I NTEGRATED P ERFORMANCE

I

NTEGRATED

P

ERFORMANCE

M

EASUREMENT AT

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OMPANY

X

MASTER

THESIS

Company X International

Supervisor RUG: dr. L. Maruster

Supervisor Company X: Ir. P.C.L. Walraven (Senior Functional Consultant BPM)

Author: Florine Beukers

Student number: 1398768

Study: Technology

Management

Page | 1

G

LOSSARY

BPM Business Process Management BSC Balanced Scorecard

EFQM European Foundation for Quality Management KPI Key Performance Indicator

PPI Process Performance Indicator OpCo Operating Company

PMS Performance Measurement System PM Performance Measurement

Page | 2

P

REFACE

Almost five months ago, I started my internship at the Business Process Management Department at Company X International located in Amsterdam. Main goal of my internship was to create a Performance Measurement System for the common processes within Company X.

My internship and research at Company X was a great learning experience. It was interesting to work in an environment where every operating company of Company X is being managed on a strategic level. It was interesting to learn that scientific theory cannot always be applied to practice. As such, I have learned that reality is often different from the ideal situation described in academic literature.

At Company X, I would like to thank Pieter Walraven for his good and intense support during my internship. His conceptual thinking was very useful in conducting the Performance Measurement System. Furthermore, I would like to thank the rest of the Business Process Management team for their assistance in defining the performance objectives and their patience and kindliness.

I would also like to thank Mrs. Maruster, my professor at the University of Groningen, who supported me in my research process. Especially, her coaching in conducting scientific research and writing an appropriate academic thesis was very useful to me. I also appreciated her realistic view on the scope of my research. That thesis could not have come about, without the help of these people.

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A

BSTRACT

In this research, an integrated Performance Measurement System (PMS) is created for Company X. Main objective of the PMS is that it covers the four core processes within Company X. The PMS contains features, which suit Company X and its requirements. Furthermore, input of key business drivers is needed to define process performance objectives, aligned with Company X’s strategy. At a later stage in this thesis, a method is proposed, to integrate strategic level with process level within the PMS. This integration is carried out, by assigning every strategic objective to one or more key business drivers. Secondly, every process performance objective can be allocated to the efficiency or/and effectiveness function of every key business driver. Finally, it is illustrated, in two cases, in which way the key business drivers are capable of creating the integration of the process level and the strategic level within the PMS.

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C

ONTENTS

2 Research Design and Methodology ... 11

2.1 Research Objective ... 11

2.2 Research Questions ... 12

2.3 Research Scope ... 15

2.4 Data Collection ... 17

3 A PMS for a process-orientated company... 19

3.1 Towards a definition of a PMS ... 19

3.2 Literature review... 23

3.3 Feasible PMS characteristics for Company X ... 42

4 Input for Company X’s PMS ... 49

5 Proposing a method to integrate process level with strategic level ... 52

6 Illustration of the proposed method at Company X ... 55

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1

I

NTRODUCTION

In this chapter, the relevant background of Company X will be described. In section 1.2 Company X’s Business Process Management (BPM) will be discussed regarding to the topic of this research; Performance Measurement (PM). The research will be motivated in section 1.3 and in the last section 1.4, the structure of the research will be explained.

1.1

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X

Company X owns and manages one of the world’s leading portfolios of product X brands and is one of the world’s leading actors in terms of volume, sales and profitability (www.Company Xinternational.com). Besides Product X and Product Y, Company X sells more than 170 international premium, regional, local and specials of product X.

Company X is characterised by a decentralised culture. The operating companies (OpCo’s) all over the world have their local differences in the way they manage and control their processes and activities. Because of the specific way of working of every OpCo, it is hard to exchange knowledge, to integrate IT-systems or to share best practices. The benchmarking within the different OpCo’s is hardly possible either. Since the different OpCo’s do not have a uniform way of managing and controlling the business it makes it hard incorporate the acquired breweries of Scottish and Newcastle. In this case, for example, employees are not flexible to be relocated to other OpCo’s because of their different way of working in the business. After acknowledging these issues, Company X decided, in 2008, to put more focus on BPM into practice on a centralised level. Main task of the BPM is to introduce common processes that will standardise the processes of every OpCo (BPM document, 2009) Main reasons for the introduction of the common processes are:

· Flexibility of employees

· Successful mergers and acquisitions · Benchmarking

· Best practice exchange · Controllability

Page | 6 A framework to build these processes on, centralised process governance and a uniform process language formed the basis for this process standardization. Because of the common processes, Data management, IT management and Performance management can be integrated and standardised as well.

1.2

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X

BPM

To develop common processes, BPM structured the different processes on enterprise level in strategic management processes, core processes and enabling processes (Figure 2). Within in this process map the strategic management processes manage and control the core and the enabling processes on a long-term basis. The enabling processes on the other hand, facilitate the strategic management processes and the core processes. The core processes are directly related to the stream of products or services from supplier to customer or consumer.

Strategic Management Processes

Strategy development Risk & Compliance Management Company Performance Management Core Processes Innovate &

Market Source to_{Pay Warehouse}Demand to Market toCash

Record to Report Enabling Processes HR Management Enterprise Services Execution Master Data

Management Communication Health &Safety

Page | 7 BPM allocated a hierarchy to every enterprise process (Figure 3), in order to distinguish, process domain, process groups, processes, sub processes and activities. The process domains are the highest levels and are aligned with the Enterprise Process Map (Figure 2). In Figure 4, an example of a common process (Source to Pay) is described with its process groups and processes.

Figure 3: Hierarchy of Process levels (Intranet Company X)

Figure 4: Source to Pay: process domains, process groups and processes (Intranet Company X)

Source to Pay

Sourcing

Execution ManagementContract

Page | 8 Currently, Company X is defining the common process for every different process domain. Parallel to this, performance management is being standardised and centralised. The standardisation of the performance management will generate information concerning the best practices and benchmarking between the different OpCo’s of Company X. Not only this comparison is of great importance, standardised PM is also needed to define performance on higher levels to know how the company is performing on international level and to make strategic decisions.

Company X has already made some effort on the definition of a performance management system (PMS) in 2004, see appendix A for the representation of this PMS (Corporate Control & Accounting Commercial Excellence, 2004). This PMS did not get much attention in the last five years and was not updated either. From interviews done with P. Walraven (Senior Functional Consultant BPM Company X), M. Goumans (Business Process Director Company X) and E. Effourit (Business Consultant Company X), there can be concluded that this PMS failed to be implemented because of its complexity and incompleteness. Since the PMS was created out of knowledge from years of experience and is therefore very useful, it will be used as secondary data for this thesis. The main goal of this research is to define a PMS that is suitable for Company X. The next section will motivate the research by describing the importance of performance management in managing business processes.

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“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of Science, whatever the matter may be.” (Lord Kelvin, 1883)

Performance management is something that every organization does. It is important for making judgments and decisions within the company. Parker (2000) mentioned different reasons for measuring performance:

· Identify success

Page | 9 · Identify waste

· Ensure that decisions are made by facts and not by emotion or intuition · Show if planned improvements actually happened

Besides the fact that PM is necessary, Parker (2000) also mentions difficulties regarding the PM. Issues and complexities arise with regards to what to measure, the time frame, the method and the cause and effect relationships of a measurement. Parker (2000) argues that an appropriate measurement form depends on the nature of the organization and the purpose of the measurement.

PM is an objective that is of great value in nowadays research. Traditional PMSs measure only financial performances. Parker (2004) argues that these measurements are precise and objective but they are inward, backward and tangible looking. This means that in the traditional PM method, there is no focus on external measurement, forward looking measures or measurement of intangible assets (like quality and satisfaction).

Companies have realised that not only financial measures are able to accomplish company’s goals. “Businesses have realised the importance of a multi-dimensional and a balanced PMS as a tool that would enable them to drive the company forward” (Najmi et al., 2005: 109). Examples of PMSs that do not only take into account the financial indicators are the Balanced Scorecard (BSC) (Kaplan and Norton, 1996) and the Performance Prism (Neely, 2002). Tangen (2004) mentioned that although there has been made remarkable progress in PM over the past few years, companies are still relying on traditional financial performance measures.

Page | 10 strategic level need to know which process performance objectives need to be influenced to accomplish a strategic goal.

Company X International has already done much effort on performance management. Still not every level or process within the company is using the knowledge and information that is available on measuring the performance of the company. The aim of this research is to create an integrated PMS framework that covers the core processes of Company X. Additionally, information and knowledge on PM that is available at Company X and new information and knowledge on PM within and outside the company need to be structured.

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2

R

ESEARCH

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ESIGN AND

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ETHODOLOGY

In this chapter, the research design and methodology will be defined. In the first section 2.1, the research objective will be described. Section 2.2 explains the main research question of the research objective. To come to an answer for the main research question, different research questions with a brief description of their methodology are formulated in section 2.2 as well. Section 2.3 will define the scope of the research.

2.1

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O

The measurement of performance needs to be done in line with the company’s performance objectives. Translating the company’s objectives into different performance indicators is not easy. Many perspectives and stakeholders are involved in this process. It is not only about the complexity of defining performance indicators. The distinction of PM between the different levels of the company needs to be taken into account as well. Different measures have to be done on operational level compared to the strategic level. Where the Net Profit is of great importance on strategic level, the product availability needs to be measured on operational level. The total of performance indicators need to be aligned. This alignment is important in order to understand the performance, from top-down to bottom-up. For example, if performance indicators are performing badly on strategic level, causes need to be found to understand this bad performance. These causes can lie in a wide range and on different levels within the company. Finding the causes behind a bad performance will give more insight in order to make performance improvements. Based on the importance of an integrated PMS the objective of this research is as follows.

“The objective of this research is to create an integrated PMS that covers the four core processes within Company X.”

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2.2

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The model in Figure 5 (Pourshahid, Chen, Amyot, Forster and Weiss, 2007) describes the methodology to monitor measure and evaluate business processes. This model is a very abstract picture of monitoring, measuring and evaluating business performance. Therefore, the model will be the starting point of this research. Key Performance Indicators (KPI’s) are being set to measure how well performance objectives and performance requirements are satisfied. By comparing the real-time value with the target value of the KPI, the performance objectives can be improved or the process can be improved. The model in figure 5 shows the iterative and continuous character of the process.

Page | 13 because it is important to know why a certain top-level performance objective was not accomplished. By focussing on the related performance objectives on lower levels, the reasons of the bad performance can be found. Johnston and Pongatichat (2008) mention the necessity of aligning strategy in PM on different levels within a company:

o Informing the organization about the strategic position that is taken o Communicating the priorities as a result of the strategy

o Make employees understand the strategic goals, an make their behaviour consistent with the strategy

o Monitor the progress of the strategic objectives

o Linking short-term actions to the long-term strategic objectives

Although the strong benefits of aligning strategy with operations, it is still not reality in nowadays companies. Johnston and Pongatichat (2008) propose the following four reasons of the misalignment between operational and strategic level:

· Operations managers suggest that strategic management is not seen as relevant for operation performance.

· The timelines of the two dimensions are different. This by meaning of the long-term strategic timeline and the short-term, day-to-day operational timeline.

· The power asymmetries between the senior manager and the operational and their activities are not able to execute the process of strategy-aligned measurement. The concerns of senior managers are not being acknowledged by the operation managers. · There is no integration of theory and practice in this area. The theory about PM and

performance management has become too theoretical in order to implement these methods in reality.

Page | 14 Main research question:

“Which features of PMSs are suitable for Company X’s four core processes and which method can be applied to integrate different performance objectives on different levels within the company?”

The main research question can be divided into four research questions:

1. Which PMS features from existing literature suit best with Company X’s core processes?

This research question will be answered by defining a PMS. Secondly, differences and similarities of existing PMSs out of literature will be discussed followed by a conclusion of which combination of characteristics will be used as the basis for the PMS of Company X.

Next step is to define which input is necessary in order to define the performance objectives of the PMS. In general, the performance objectives derive from strategy. It is a complex task to translate strategic objectives directly into process performance objectives in a structured way. Therefore, the next research question will investigate which input is most valuable for the definition of different performance objectives in the PMS:

2. What input can be used to formulate different performance objectives within a company like Company X?

Because of the scarce research on integration of PM objectives in practice (Olsen at al., 2007), the third question will come up with new insights and a proposed method to link different performance objective levels within a company.

3. Which method should be introduced to integrate the performance objectives on strategic level with the performance objectives on process level?

Page | 15 The last question will give an illustration of the proposed method for Company X. The question will be answered by combining theoretical and practical research.

4. How can the proposed method be applied in the case of Company X?

The analysis done in chapter 3 and 4 (question 2) is used to define the characteristics and input for the PMS in case of Company X. Subsequently, the proposed method will be applied on a case study at Company X which will illustrate whether the Integrated PMS is applicable for Company X.

2.3

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S

This research is about the creation of an Integrated PMS for Company X’s core processes (Figure 6) from level 1 till 5 (Figure 3). In general, the development of PMS contains two different main phases (Bourne et al., 2000):

1. The creation of the PMS: This phase is about the identification of performance objectives and designing performance measures.

2. The use of the PMS: This phase is about measuring of the performance indicators, reviewing of the performance indicators and acting on the performance measures. This research will only consider the first phase, the creation of the PMS. At this moment Company X is introducing common processes that need to have common performance measures as well. Therefore the focus of the BPM department is on the identification of performance objectives and the designing of the measures (BPM document, 2009). The measuring-, reviewing-, and action process is not considered by the BPM department yet. For that reason the ‘use phase’ will be out of scope.

Page | 16 process domain (Figure 6). The Market to Cash process involves all the processes that affect the relation with the customer. The Order to Cash step can be seen asevery step between the order of a customer and the payment of a customer. This process is shown in figure 7. The Integrated PMS is created for common processes, which means that differences within OpCo’s, that cannot be changed, will not be taken into account.

Record to Report

Strategic Management Processes

Core Processes Strategy development Risk & Compliance Management Company Performance Management

Innovate and M arket

Trade Marketing Management Product development Market to Cash Enabling Processes Brand Management Demand to Warehouse Demand and Supply

planning Logistics Production Demand and

Supply

planning Logistics Production

Customer

planning Customerexecution Customerservice Order toCash

HR Management Source to Pay Purchase to Pay Enterprise Services Execution Master Data Management Sourcing Execution ContractMgmt Communica

tion Health &Safety

Trade Marketing Management

Product development

Figure 6: Research scope related processes (Intranet Company X)

Page | 17 Market to Cash Customer Planning Customer Execution Customer

Service Order to Cash

Plan Promotions Create Distributor Plan Create Account Plan Define Territory Management Plan Customer Calls Contract Customers Execute In-store activities Execute Trade Promotions Define Customer Service Levels Provide Customer Technical Services Manage Customer Complaints Manage Consumer Support Real Estate Management Credit Management Order Delivery Accounts Receivable

Figure 7: The Market to Cash process description (Intranet Company X)

2.4

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C

The data for this research is firstly gathered from scientific literature on performance management, performance measurement, performance measurement systems, operational performance measurement and strategic performance measurement.

Secondly, primary and secondary data of Company X were collected through accessible data files and documents, interviews, workshops and meetings. Five interviews were done with the following employees: P. Walraven (Senior Functional Consultant BPM Company X), M. Goumans (Business Process Director Company X), M. Tolboom (Business Process Consultant Finance), E. Effourit (Business Consultant Company X) and L. Lockefeer (Business Controller Company X). Main goal of the interviews was to get more insight in the requirements of Company X in relation to the created Performance Measurement System.

Page | 18 data concerning the goals, focus and requirements of Company X in relation to performance management.

Page | 19

3

A

PMS

FOR A PROCESS

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ORIENTATED COMPANY

The aim of this chapter is to come up with a combination of features of PMSs that match with the requirements of Company X. According to Wongrassamee et al. (2003), it is difficult to find a perfect match between company and an existing PMS out of literature. Therefore, different characteristics of different PMSs should be considered to know which one of them suit with Company X. The terms ‘feature’ and ‘characteristic’ are considered the same and will be used interchangeably.

Different PMSs will be analysed and reviewed in this chapter, to define suitable characteristics for Company X’s PMS. Main goal of this research is to create a PMS that covers the core processes at Company X. Therefore, PM on process level plays a critical role in the analysis and discussion. The following question will be answered;

1. Which PMS features from existing literature suit best with Company X’s core processes?

The most suitable features will form the basis for the Integrated PMS for Company X, which will be proposed in chapter 6. In order to analyse the features of different PMSs, a definition of a PMS is required. Research done by Franco-Santos et al. (2007) has shown that there is no uniform definition of a PMS. For that reason, section 3.1 will come up with key features of the content of a PMS. Section 3.2 will analyse and discuss the existing PMSs out of literature according to the characteristics described in section 3.1. Section 3.3 will define the most feasible PMS features for Company X with the main objective of covering the core processes. Besides the theoretical analysis and discussion, the requirements of the company itself will be selection criteria for Company X’s PMS features.

3.1

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PMS

Page | 20 Because of the lack of a uniform definition in literature, research investigated the content of different PMSs. Franco-Santos et al. (2007) systematically reviewed PM literature on their PMS definitions. They evaluated more than 300 documents and ended up with seventeen different definitions. Next, they identified the key characteristics of the content of a PMS. According to Marchand and Raymond (2008) the evolution of the Information Technology generated an extra necessary ‘Information System’ approach to nowadays PMSs. They classified the characteristics of the content of a PMS as well. The content characteristics generated by Franco-Santos et al. (2007) and Marchand and Raymond (2008) will be analysed in this section to identify the characteristics that will be used as criteria in order to compare the different PMSs in the next section.

Franco-Santos et al. (2007) showed that the basis of the definition is a combination of the features, roles or processes related to the PMS. Features can be seen as elements or properties where the PMS consist of. The roles are the functions or purposes that are carried out by the PMS. The processes are the sequences of actions that represent the PMS.

Organizational objectives and goals are main features to build a PMS system on. Before you know what to measure you need to know why you are measuring, company goals are the reasons behind the measures. This feature forms the input of a PMS and will be discussed in chapter four.

Measuring performance is the main role of a PMS, this category is about monitor progress and measure performance/evaluate performance. Strategy management can be executed by PMS as well; this role is about the planning, strategy formulation, strategy implementation/execution, and focus attention. Measuring performance is done in order to learn and improve, therefore the learning and improvement role is part of the content of a PMS and contains feedback, double loop learning and performance improvement. Necessary for this learning and improvement function process, is the provision of information about performance to actually know what to improve. Hence, the information provision is an important role of the PMS as well.

Page | 21 actions. Besides the initial supporting and controlling function of the PMSs, Marchand and Raymond (2008) mention that PMSs can contribute to continuous improvement of performance, to alignment of operations with strategic objectives, to the deployment of strategy, to managerial development, to organizational learning and to competitive benchmarking.

Information output is another important function of a PMS (Marchand and Raymond, 2008). Information is provided to the managers by the PMS, which determines the organization’s performance. This information is expressed in performance indicators and their values. Performance indicators can be characterised and divided as qualitative/quantitative, results/determinants, operational/strategic, internal/external, retrospective/prospective, short/long term measures (Marchand and Raymond, 2008).

Besides the two functions, Marchand and Raymond (2008) mention three other characteristics of a PMS. First character can be defined as the focus of a PMS regarding the different perspectives, the different stakeholders, and different dimensions of performance. Meant by the different dimensions of performance is for example, whether it is a holistic balanced performance view, a process view or a strategy view but also the data source in order to determine the performance.

Second characteristic is the architecture of the PMS. According to Toni en Tonchia (2001) PMSs can be divided into three different architectonic connotations vertical, balanced, or horizontal. A combination of these connotations is possible as well. Last characteristic is the alignment of the organization’s performance. Meant by this is whether the performance measures are aligned with the business strategy, the business model or another input.

As an outcome of these researches, the following characteristics will form the basis for this research in order to compare different PMS´s: Focus, architecture, alignment and function. With the focus characteristic, different perspectives, stakeholders and views are taken into the analysis. The architecture is about the architectonic structure of the PMS. Because not every PMS aligns its measurements with its strategy, the alignment characteristic will be analysed as well. By analysing the function characteristic, the different functions, roles and processes mentioned by Franco-Santos et al. (2007), Marchand and Raymond (2008) will form the basis of this characteristic.

Page | 22 this research is to create a PMS intended for process level, an extra criteria is included within the function. This criterion will be the role of BPM. Managing business processes is about defining process goals, finding the weaknesses of the business processes, make process improvements and business process reengineering (Kueng and Krahn, 1999). Table 1 shows the different characteristics that will be investigated and taken into account in this research.

Characteristic Content Focus Perspectives Stakeholders Performance dimensions Architecture Vertical Balanced Horizontal

Alignment Alignment of measurements

Function Measuring performance role

Strategy management role BPM Function role

Provision of information role Learning and improvement role

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3.2

L

In this section, different PMSs are briefly analysed and discussed. The intensity of the analysis of each different PMS will depend on the existing knowledge available in literature about the specific PMS. The analysed PMSs are selected based on prominence in literature and frequency of use in companies (Kueng and Krahn, 1999; Neely et al., 2000; Tangen, 2004; Anderson and McAdam, 2004; Franco Santos et al., 2007). In the analysis, firstly the PMS will be explained and secondly, the different characteristics will be discussed.

The comparison is done according to the key features described in the previous section (3.1). The PMSs that will be analysed and discussed are:

· Du Pont Chart (Du Pont Company, 1903) · The PM Matrix (Keegan et al., 1989)

· Measures for time based competition (Azzone et al., 1991) · EFQM Excellence Model (www.efqm.com, 1991)

· Performance Pyramid (Lynch and Cross, 1995)

· Brown’s input, processes, outputs and outcomes framework (Brown, 1996) · Balanced scorecard (Kaplan and Norton, 1996)

· Performance Prism (Neely et al., 2001)

3.2.1 Du Pont chart

Page | 24 Figur 8: Based on the DuPont Chart (Chandler, 1977, p.417)

Page | 25 measurements are about short-term results, the system is not developed in order to learn and make improvements on the long run. The chart is capable of measure design and selection function because they are already proposed in the chart. Behaviour of employees can be influenced by showing the chart although this is not a main objective of the chart. Aim is to clarify the financial performance in order to create value for the company’s shareholders.

Discussion

The cost related measurement of the chart can play a role in managing the processes but the measurements are aggregated from more processes, which make it hard to address the right cost to the right activity. Kueng and Krahn (1999) argue that although the DuPont chart is criticised heavily, in many companies, controllers still define performance through financial measures. Financial measurements are concerned with cost elements and they quantify performance in financial terms. However, many performances are hard to express in financial terms, like lead-time reduction, customer satisfaction and quality improvements. Second disadvantage of measuring financial performance is the possibility to manipulate figures that are reported (Kueng and Krahn, 1999). Financial measures are not externally focused to customer and competition, which is of great importance in considering the company’s performance (Anderson and McAdam, 2004).

Galayini and Noble (1996) argue that the traditional financial performance is not enough in nowadays competitive markets. Not only low-cost production, but quality, flexibility and short lead-times are important to sustain in this environment. They mention four general limitations of the traditional financial PM:

1. Financial reports are usually closed monthly, it are results of past decisions. In order to determine operational performance, this information is too old to be useful.

2. DuPont’s financial performance measurements have not incorporated strategy, the financial PM is about decreasing cost, and machine utilization.

3. Because the performance is expressed in financial terms, it is difficult to understand for operators. As a result the operators will be less motivated to accomplish a good result. 4. Financial reports are inflexible because they assign cost to a combination of departments

Page | 26 Although financial PM is a frequently used tool to consider a company’s performance, there can be concluded that the DuPont chart lacks its ability to measure non-financial related performance, which is necessary in nowadays business environment.

3.2.2 The Performance Measurement Matrix

According to Keegan et al. (1989) the central problem with PM is not the lack of performance measures, but the fact that companies have too many performance measures. As a respond to this overload of measures, they propose to start with the strategy in order to define different performance measures. This can be done by translating strategic objectives into performance measures. Hereby Keegan et al. (1989) mention that it is of great importance to define meaningful measures on lower levels as well, this shows the hierarchical character of this PMS. Besides the hierarchical structure, Keegan et al. (1989) mention that the integration across business functions is of importance as well.

Page | 27 Number of repeat buyers Number of customer complaints Market share

Product image among target customers

Competitive cost position

Relative R&D expenditure

Supplier cost position Relative labor cost

Design cycle time Percent on-time delivery Number of new products Product complexity Design cost Material cost Manufacturing Distribution cost End-product cost

Non-cost

Cost

E

xt

e

rn

a

l

In

te

rn

a

l

Figure 9: Based on the Performance Measurement Matrix (Keegan et al., 1989)

Third part of this PMS is to budget and report what is important today (Keegan et al., 1989). This means that not only financially related measures are being budgeted but non-financial measures as well. For example, the manufacturing cycle time may be budgeted in order to gain information about this key cost driver.

Fourth part of the PM Matrix is to determine and decompose. This can also be identified as the Key Metric Approach (KMA). This technique addresses cost drivers and performance measures in large companies (Keegan et al., 1989). Main goal within this approach to find out what the cost drivers of a department are. Second step is to decompose these departmental budgets into functions. Having this information companies can monitor which functions seem out of line.

Page | 28 Keegan’s Matrix, performance measures should derive from strategy, so the matrix can be characterised with a strategy alignment.

The PM role is executed by the matrix by monitoring progress, measuring and evaluating performance while looking at cost drivers behind the measures. As mentioned before strategy alignment is main objective of Keegan’s PMS. Therefore, the PMS helps in planning, formulating and executing strategy. Strategy objectives change overtime and so the measure need to be adapted to that as well (Keegan et al., 1989). BPM plays an important role in the architecture of the PMS as well. Within this, integration between functions, in measuring performance is of great importance. Information is provided in cost-drivers behind the different measurements. Because measurements are integrated horizontal en vertical, information can be communicated in both directions. Because of the multi-dimensional character, there is a learning and improvement role. Measure design and selection is done derived from strategy, although there are no practical guidelines in actually translating strategy into different measurements. The measures coming out of Keegan’s PMS will be translated in cost-drivers, which will be the subject of influencing behaviour.

According to the first step, objectives are taken as the basis in defining measures. According to Keegan et al. (1989) strategy objectives change over time and so the measure need to be adapted to that as well. According to this, the role of strategy management is one of the basis contents of the PMS.

Discussion

Page | 29 3.2.3 EFQM Excellence Model

As a response to the lack of quality, productivity and competitiveness at companies in the dynamic world market by the early 1980s, the European Foundation for Quality Management (EFQM) was founded in 1988 (Wongrassamee et al., 2003). They introduced the European Quality Award (EQW) in 1992, for the companies that demonstrated excellence in quality management as the basis for continuous improvement. The Quality award is based on the EFQM Excellence Model (www.efqm.com), which has the main objective of self-assessment and improvement planning. The EFQM Excellence Model (Figure 10) is being used by many companies, in order to better understand their company and to recognise where they need to focus on to achieve business excellence.

Figure 10: Based on the EFQM Excellence Model (www.efqm.com)

Page | 30 Enabler criteria

· Leadership: relates to the leaders within the company and how they are able to develop a vision that stands for quality and continuous improvement, which the organization and its people can accomplish.

· People management: relates to the way the company is capable of developing knowledge and full potential of its people to carry out continuous improvement.

· Policy and Strategy: relates to the company’s mission, vision and strategy and the alignment of them with the concept of total quality and continuous improvement.

· Resources: relates to the way the company’s managers utilises the internal resources and the external partnerships in order to carry out effective business performance.

· Processes: relates to the way the organization controls and improves its activities and processes in order fulfil the needs of the stakeholders.

Result criteria

· People satisfaction: considers in which way the company is able to satisfy its employees. · Customer satisfaction: considers in which way the company is capable in satisfying

customer need.

· Impact on society: considers the way in which the company is satisfying the requirements and expectations of the local, national and international society.

· Business results: considers what the company has achieved according to the planned performance and the shareholder needs.

Page | 31 Discussion

Because there is a cause and effect relationship between the ‘enablers’ and the ‘results’, the EFQM Excellence Model helps companies in order to improve their performances easier because they know what the causes (enablers) of their performances are (Najmi et al., 2005). Because the model is being used on a wide basis and it is part of the EFQM, benchmarking makes it possible to compare the position of the company to the external environment. The organizations can use the model to asses themselves against the nine criteria of the model to understand their position and then use this benchmark to carry out improvements. Besides the proposed self-assessment, the EFQM Excellence Model proposes no further detailed instructions for its use.

3.2.4 Measures for time-based competition

Azzone et al. (1991) propose a framework that focuses on time in relation to strategy as a competitive advantage. They recommend that organisations need to employ time as a strategic objective of competitive advantage (Anderson and McAdam, 2004). Their model includes three dimensions in which time measures need to be applied: research and development, operations and sales and marketing. Besides these three dimensions, they distinguish between the efficiency (the internal configuration) and the effectiveness (the external configuration) as dimensions of performance. In table 2, different dimensions with their time-based measures are presented.

Internal configuration External Configuration

R&D engineering

time · Number of changes in projects _{· Delta average time between two}

subsequent innovations

· Development time for new products

Operations

through-put time · Adherence due to dates · Incoming quality

· Distance travelled · Value-added time (as a

percentage of total time) · Schedule attainment · Outgoing quality · Manufacturing cost Sales and marketing order Processing lead time · Complexity of procedures

· Size of batches of information · Cycle time · Bid time

Page | 32 The focus of Azone’s PMS is on time. Azzone et al. (1991) argue that competitive advantage can only be accomplished when time is employed as strategy. The architecture of the PMS is balanced because every proposed dimension is considered as having the same value. The measurements are aligned with a based strategy. The PM function is executed by the PMS by monitoring time-based progress and by measuring and evaluating time-related indicators. The PMS is a tool for managing strategy, which is solely based on time related objectives. The time-based PMS is useful in BPM. This because process performance is often determined related to time. The PMS provides information about time related performance of the three dimensions. Performances are communicated internally focused. Organizational learning and improvement can be achieved by the importance placed on human resources (Azzone et al., 1991). The measure design and selection is proposed by the PMS. Behaviour is influenced by emphasise on human resources.

Discussion

Page | 33 3.2.5 Performance Pyramid

According to Lynch and Cross (1995) different performance measures at different hierarchical levels within the company should be related. This means that every different function and division keeps the same goals in mind. Lynch and Cross (1995) introduced the Performance Pyramid (Figure 11) to integrate the company’s strategic objectives with its processes by translating goals from top down and measures bottom up (Tangen, 2004). The Pyramid contains four levels that describe the company’s internal efficiency on the right side of the pyramid and the external effectiveness on the left side of the pyramid. First, the organization’s strategy needs to be defined on the highest level. Subsequently the strategy can be translated into business unit objectives. Short-term financial objectives and long-term market objectives are being set for the second-level business units. The business operating system objectives link the highest level with the operational measures. These operational measures done by departments and work centres are used on a daily basis (Tangen, 2004).

Page | 34 The focus of the Performance Pyramid is on linking the strategic objectives to operational activities. The Pyramid makes BPM possible because the strategy objectives are drilled down until process level in order to relate the processes with the company’s objectives. Within the vertical (hierarchical) structure, the PMS makes an explicit difference between measures that are of interest to external parties and measurements that are considered in the business (Anderson and McAdam, 2004). According to the architecture of the performance pyramid, Toni and Tonchia (2001) mention that that the structure can be defined as vertical, with a balanced structure at the top, where the vision is being translated into strategic objectives. This because the objectives will be financially related on one hand and related to the market on the other. The measures of the performance pyramid are totally aligned with the strategy. Strategy management can certainly be one of the main roles of the performance pyramid. This because the pyramid is a tool in order to execute strategy on different levels. Because of flowing down of the business objectives through the pyramid, a reverse flow of information flows upward (Rouse and Putterill, 2003). Because of the upstream flow of information, objectives can be improved and the information is useful in providing feedback. There are no specific guidelines in order to define measurements according to the pyramid but the framework itself should be very useful in defining performance objectives.

Discussion

The strength of the Performance Pyramid is that it links the hierarchical view with the business process view in order to measure performance (Neely et al., 2000). Other strength of the Performance Pyramid is its competence to link strategy whit its operations, by translating objectives top down, and to connect measurements bottom up (Anderson McAdam, 2004). The explicit difference in measuring external effectiveness and its internal efficiency is very useful in defining organizational performance.

Page | 35 3.2.6 Balanced Scorecard

Kaplan and Norton developed the BSC in 1992 as respond to the traditional backward looking financially related PM. They introduced non-financial measurements besides the financial ones. Four perspectives form the basis of the BSC: the customer perspective, the internal business perspective, the learning and growth perspective and the financial perspective (Figure 12). Kaplan and Norton (1992) address the three non-financial perspectives to future performance and the financial perspective on past performance. The aim of the BSC is to give managers a quick wide-ranging view of the company’s performance by focusing on critical areas, which drives the organization’s strategy forward (Wongrassemee et al., 2003). The BSC can be used for three purposes (Kaplan and Norton, 1996a): to look from different perspectives at performance, to translate strategy into performance objectives and to see how the strategy is performing.

Page | 36 The focus of the BSC lies in its balance. Kaplan and Norton (1992) defined four perspectives to look from in order to achieve strategic objectives. Not only the financial part will determine success but also the other three non-financially related perspectives. The architecture can also be seen as being balanced because the different performances are considered independently (Toni and Tonchia, 2001). The analysis of the different performance perspectives will remain separate and their links are only defined in a general way. The BSC assures the alignment of its measurement indicators with the organization’s strategic objectives. Kaplan and Norton (1996b) proposed a set of rules to align the strategy with its measurements:

1) Clarify and translate vision and strategy

2) Communicate and link strategic objectives and measures 3) Plan, set targets, and align strategic initiatives

4) Enhance strategic feedback and learning

According to this, one of the main functions of the BSC is strategy management, translating a company’s strategy into objectives and measurement indicators in order to see whether they are achieving the company goals. The BSC has an improvement and learning function as well. The BSC is constantly reviewing the organization’s strategy. The information function of the BSC defines balanced measurement values, related to financial and non-financial indicators. According to the information about performance values, feedback can be given whether the operations have met the pre-set targets and the need for action. Kaplan and Norton (1996b) propose a double-loop learning which implies a feed-forward as well. A feed-forward means that the system is reacting pro-actively on future happenings. BPM can be executed by the BSC in order to define process objectives and make process improvements.

Discussion

Page | 37 perspective. According to the different perspectives of the BSC there can be concluded that it is missing some critical perspectives in order to measure a company’s performance.

Kueng and Krahn (1999) argue that the BSC is concentrated on strategy level and the PMS is therefore only looking at the performance of processes when it is critical for the performance of the strategy in order to create customer or shareholder value. This means that some process performances are not relevant enough to measure according to the strategy while there is still expected that they should perform well. It is a fact that basic processes and activities should perform according to a standard to control and improve these processes, but by not considering them the controlling/improvement function will not occur.

Wongrassemee et al. (2003) argue that, although the idea of translating strategy into performance measures is conceptually good, in reality there are no practical guidelines to follow for the definition of different performance measurements. This complexity of defining the operational measures results in a problematic execution of the strategy (Hudson et al., 2001).

Page | 38 3.2.7 Brown’s PMS

Brown (1996) proposed a horizontal perspective to PM. He used a process-based way to measure performance. He stated that by following the horizontal flow of information and materials, the organization’s performance can be measured. Brown’s process-oriented framework (Figure 13) defines the input, process, output and outcome measures. Brown (1996) argues that each stage of the framework is the driver of the next stage. The framework created the concept of linking measures by describing the cause and effect relationships of the measures (Anderson and McAdam,2004).

Figure 13: Based on ‘the Inputs, processes, outputs, outcomes’ PMS (Brown, 1996)

Page | 39 Discussion

Strength of Brown’s PMS is its process-orientation, which defines relationships between measures. The process based PM takes every activity in consideration as well, which assures process improvement. Weakness of the PMS is its lack of different perspectives and stakeholders and setting its priorities. Because the strategy is not taken into consideration in Brown’s PMS, no emphasis can be put on prescribed priorities.

Rouse and Putterill (2003) argue that Brown’s process-orientated PMS is more suitable for PM on process level than using it as a PMS that covers the total performance of the company. This because the Brown’s PMS ignores different stakeholders and resource provision.

According to Anderson and McAdam (2004), lead benchmarking should be implemented to define improved output and outcome goals and results for organizations.

3.2.8 Performance Prism

Neely et al. (2001) created the performance prism. They propose that a PMS should be organised around five different integrated perspectives (Figure 14):

1. Stakeholder perspective: relates to the wants and needs of the stakeholders.

2. Strategy perspective: relates to he strategies required to assure the needs of the stakeholders.

3. Processes: relate to the processes that are able to achieve the strategic objectives.

4. Capabilities: relate to the combination of people, practices, technology and infrastructure that are required to carry out the processes.

Page | 40 Figure 14: Based on the Performance Prism (Neely et al., 2001)

The focus of the performance prism is on the diversity of its perspectives.

Page | 41 Discussion

The performance prism takes into account several perspectives, which provide a more comprehensive and integrated framework for defining organizational performance (Anderson and McAdam, 2004). Anderson and McAdam (2004) also mention that this integrated and wide approach in meeting the requirements and needs of all stakeholders can more easily assure competitive success. Other strength of the performance prism is its balanced picture of business performance in terms of internal and external measurements, financial and non-financial measures and efficiency and effectiveness measurements (Anderson and McAdam, 2004).

Page | 42

3.3

F

PMS

C

X

This section will come up with feasible characteristics for the PMS of Company X. Firstly, Company X’s requirements regarding to the different characteristics mentioned in table 1 (Page 22), will be discussed. Next, the characteristics of existing PMSs that suit with Company X’s requirements will be classified. A ranking method will be used to give an indication to which extends certain features suit with Company X’s required characteristics. Finally, the most suitable characteristics will be discussed.

Company X’s requirements

One of the main goals of BPM within Company X is to design and implement PM for the common processes. Kueng and Krahn (1999) propose some additional functional requirements of a process-orientated PMS. Out of data collected from interviews (see section 2.3: Data Collection) it can be said that Company X agrees on this set of additional requirements. They agree on the requirement that the PMS should be process-orientated and able to visualise and improve performance continuously. Secondly, the PMS needs to give an integral and holistic view of the performance of business processes. In order to give this holistic and integral view, different stakeholder should be considered. Furthermore, the PMS should define the cause-effect relationships between applied performance indicators in order to find out where the origin of a particular performance lies.

As mentioned before, there has already been developed a PMS for strategic purposes in 2004 (Corporate Control & Accounting Commercial Excellence, 2004). The strategic drivers behind the PMS will stay the same (Company Presentation, 2009).

· Have a balanced view on OpCo performance

· Focus on the key business drivers, critical success factors · Be able to track the results of the execution of OpCo activities

· Have a common Company X structure and language around OpCo performance · Drive consistent behaviour around business drivers and deploying resources · Develop an agreed set of OpCo KPI’s for the main drivers of the business

Page | 43 Focus

One of the focuses of Company X’s PMS is on its core processes (Company X BPM, 2009). Measurements on process level need to derive from strategy in order to know what a certain process performance objective contributes to. This is called the cause-effect relationships. Within this, it is important to translate strategic objectives to the process level. Therefore, the PMS should be able to integrate the process level with the strategic level.

To integrate the different levels, the strategic objectives will be one of the focuses of the PMS as well. Out of sources on corporate level (Company X Annual Report, 2008) the Return on Assets (RONA) will stay the main corporate goal. Other important performance perspectives are still considered on corporate level but the RONA will be the company’s major performance indicator.

The PMS that was created in 2004 (Corporate Control & Accounting Commercial Excellence, 2004), identifies different perspectives that need to be considered as a starting point in order to define strategic performance objectives, these perspectives are still considered as relevant (Company Presentation, 2009) and are as follows:

· Productivity & Cost Leadership · Customer Satisfaction

· Social Responsibility

· Organisation & People Development · Quality

Architecture

Page | 44 Alignment

Main goal of Company X is to accomplish its strategic objectives (Company Presentation, 2009). Performance will be evaluated according to the achievement of the strategic objectives. Therefore, the measurements will derive from the company’s strategy. The measures of Company X will be aligned with its strategy.

Function

In the first place, Company X’s PMS should measure performance of the business processes and monitor the progress of the business processes. Because every measure of the business processes out of Company X’s PMS is derived from strategy, strategy management is another role of the system. The strategy can be formulated according to the perspectives used as a starting point on corporate level. Priorities can be given to some process activities in order to accomplish the strategic objectives. The information of performances on process level can be used to give feedback and change or improve the processes. Subsequently, the information function is useful in order to learn and improve which is also one of the main objectives of Company X’s PMS.

Page | 45

Ranking 2 = suitable 1 = partly suitable 0 = not suitable

Du Pont Chart The Performance Measurement Matrix Measures for time based competition EFQM Excellence Model Performance Pyramid Brown

’s i

nput, processes, outputs

and outcomes framework Balanced scorecard Performance Prism

Focus RONA 2 0 0 0 0 0 0 0

Different perspectives 0 1 0 1 2 0 2 1

Strategy 0 1 1 0 2 0 2 0

Key Business Drivers 0 0 1 1 2 0 0 0

Business Processes 0 0 1 1 2 2 1 1

Architecture Balanced 0 0 1 1 2 0 2 0

Vertical 1 1 0 0 2 0 0 1

Horizontal 0 1 0 0 0 2 0 0

Alignment Strategy alignment 0 1 1 0 2 0 1 0

Total 3 5 5 4 14 4 8 3

Page | 46 The perfect combination

After the analysis of the required PMS characteristics in combination with the existing PMSs from literature, this section will discuss why (a) certain(s) characteristic(s) suit best with Company X’s requirements.

Company X’s major focus is its RONA. The DuPont chart is the only PMS that has its main focus on this financial criterion as well. Instead of using the term RONA the DuPont chart uses the term ROI. Both terms have the same meaning. ‘Investment’ in the term ROI refers to the capital employed, the funds invested by shareholders and lenders. Since ‘capital employed’ has the same meaning as ‘net assets’, ROI and RONA are the same (Pandey, 2006; 34). Because the DuPont chart is too limited to fulfil the rest of the requirements of Company X’s PMS, this financially focused PMS as a whole, will not be the solution for Company X.

Some PMSs consider more perspectives in order to define performance and some of them emphasise on the financial perspective as well. The BSC and the Performance Pyramid take into account more perspectives, in which the financial perspective plays a critical role as well. The other multi-perspective PMSs give the financial dimension none or just little attention. Although the RONA is the key objective for Company X, the BSC and the Performance Pyramid are suitable regarding their multi-perspective character and their emphasis on the financial dimension.

Company X’s aim is to translate strategy into strategic objectives from different perspectives as mentioned in the previous section. Given that the financial perspective is a main objective on Company X’s strategic level, the PM Matrix and the Measures for time-based competition will only be partly useful for Company X since they do not consider the financial perspective enough. The BSC and the Performance Pyramid, on the other hand, start from strategy in order to define their objectives and measurements, they consider the financial perspective as well. Subsequently, these two PMSs are matching with Company X’s requirements.

Page | 47 business drivers, Company X tries to accomplish their strategy goals. Measures for time-based competition use key business drivers as one of its main parts. Still this time-based PMS is not useful because of the fact that the strategy should be based on time, conforming this PMS. This is not the case for Company X. The Performance Pyramid on the other hand, is able to use key business drivers in order to achieve its strategic goals. Hence, this concept is useful for Company X’s PMS.

The core processes play a major role in Company X’s PMS. To align strategy, the process role needs to be integrated, but still it needs to be the main attention in the PMS. Processes carry out the leading role in Brown’s ‘input, process, output and outcome measures’ PMS, the only limitation is that it does not integrate the process level with the corporate level. The performance pyramid is able to perform this integration but it does not engage the process on a deep enough level. The other PMSs (Table 3), are not able to integrate the processes with corporate level. They rather use the process-part as one of their perspectives and there is no major role for the processes. The time-based measurement PMS could be applied for the PM of the processes although time-reduction is not the only major goal for processes at Company X. There can be said that Brown’s PMS is useful in order to measure performance on process level and the performance pyramid is able to integrate process level with corporate level.

Because integration of the process-level with corporate level has a lot to do with its architecture, it can be said that the vertical structure of the Performance Pyramid is suitable for its architecture as well. At the same time, the Performance Pyramid is balanced at the top, which is required by Company X. The BSC could also be used for balanced architecture for the major role the processes play in Company X’s PMS, the horizontal architecture of Brown is useful for the required architecture as well.

Strategy alignment needs to be one of the major functions of the PMS. The integration of the processes is very important because the company needs to know where to put its priorities in the processes in order to achieve its strategic objectives. Only PMS that answers to these requirements is the performance pyramid. The other PMSs (Table 3) are not able to integrate the different levels.

Page | 48 business processes, the integration of process with corporate level and the vertical and balanced architecture. Yet the performance pyramid lacks its ability to zoom in on the PM on process level. Brown’s ‘input, process, output and outcome measures’ PMS responds to this with its process-orientated, and horizontal structured PMS.

Page | 49

4

I

NPUT FOR

C

OMPANY

X’

S

PMS

In this chapter, the specific input for Company X’s PMS will be discussed. Measuring performance is about setting performance objectives. The performance objectives need to be translated into measurements that will be part of the PMS. In question is where the performance objectives derive from. Although research has shown that strategy should be the starting point for the definition of performance objectives, it is a complex task to translate the strategic objectives into process performance measurements. Since the aim of this research is to create a PMS that covers the core processes within Company X, the input in order to define performance objectives on different levels will be considered in this chapter. The following research question will be investigated:

2. What input can be used to formulate different performance objectives within a company like Company X?

Page | 50 Figure 15: Business Model Definition Framework (Pateli and Giaglis, 2003)

Pateli and Giaglis (2003) also mention that the business model explains how the company works. This can be translated in the drivers of the business; the business drivers. Further, the business model is defined as the core logic for value creation. A business model consist of business drivers that create value; key business drivers. The business drivers are critical (key) for success. They can also be defined as the ‘critical success factors’. The use of key business drivers make the PMS more flexible as well. This because the strategy will change in the upcoming years and the key business drivers will stay the same since they are the ‘core logic’ of the company. In case of a change in strategy, the key business drivers will stay the same, there will only be a transformation in the priority setting.

Key Business Drivers at Company X

The PMS that was developed for Company X in 2004 (Appendix A), identified six key business drivers. These key business drivers are still very useful in the current business model of Company X. Because of the requirement of Company X to use a uniform language (Company X BPM, 2009), it is not wishful to change or reformulate the structure and the definitions of the key business drivers, unless it is useful of course. Company X mentions the following six key business drivers (Corporate Control & Accounting Commercial Excellence, 2004):

v Production and Logistics: Logistics is about receiving products/services, storage