Jorrit Spijksma s1539620
Developing a management information system
for Rabobank Zuid-Holland Midden
University: Rijksuniversiteit Groningen
Faculty: Economics and Business
Study Program: Msc. Business Administration
Specialization: Organizational & Management Control
Author: Jorrit Spijksma
Student number: 1539620
Email: j.spijksma@student.rug.nl
Telephone: 06 48692549
Date: 30 September 2009
First supervisor: dr. M.P. van der Steen
Second supervisor: dr. R.B.H. Hooghiemstra
Organization: Rabobank Zuid-Holland Midden
Department: Private Banking
Preface
The master thesis, the final test before graduating in a master of science. With this final piece of work, I complete my master of science in Business Administration specialized in Organizational & Management Control at the Rijksuniversiteit Groningen. With this completed Master of Science, a period in life will be closed and a new period will start. The master Organizational & Management Control, and the bachelor Business Studies, which I completed before this master, will form the foundation for my professional career that will start of now.
I have written this master thesis at Rabobank Zuid-Holland Midden. Rabobank Zuid-Holland Midden provided me with, besides an interesting topic to study, a pleasant and stimulating environment to write this thesis. I would like to thank all my colleagues at Rabobank Zuid-Holland Midden for the great time I had there. Special thanks go to my company supervisor drs. Erik Beekes MBA. He provided me with the necessary input which I needed to write this thesis and stimulated me also to keep an eye on the practical aspects of my assignment at Rabobank Zuid-Holland Midden.
Special thanks are also in place for my university supervisor, dr. Martijn van der Steen. Our fruitful discussions always gave my some directions or ideas which I had not immediately thought about and useful comments on the areas of the thesis which needed some extra attention. At last I want to thank dr. Reggy Hooghiemstra for his work in the final appraisal of this thesis.
Bergschenhoek/Opeinde, 2009.
Table of Contents
SUMMARY... 4
1 INTRODUCTION ... 6
1.1 INTRODUCTION... 6
1.2 PROBLEM FORMULATION ... 6
1.3 STRUCTURE OF THE REPORT ... 7
2 RESEARCH DESIGN ... 8 2.1 INTRODUCTION... 8 2.2 PROBLEM STATEMENT ... 8 2.2.1 Research objective ... 8 2.2.2 Research question... 8 2.2.3 Boundary conditions ... 10 2.3 METHODOLOGY... 11 3 RESEARCH DOMAIN ... 13 3.1 INTRODUCTION ... 13 3.2 THE ORGANIZATION... 13 3.2.1 Rabobank Groep ... 13
3.2.2 Rabobank Zuid-Holland Midden ... 13
3.2.3 Private Banking ... 13
4 MANAGEMENT INFORMATION SYSTEMS ... 15
4.1 INTRODUCTION... 15
4.2 DEFINING MANAGEMENT INFORMATION SYSTEMS... 15
4.2.1 Management information system ... 15
4.2.2 Management information systems and performance measurement systems ... 16
4.3 FRAMEWORKS, SYSTEMS AND MODELS ... 17
4.4 PERFORMANCE MEASUREMENT SYSTEMS ... 18
4.4.1 Return on investment ... 18
4.4.2 The Balanced Scorecard ... 20
4.4.3 Medori & Steeples performance measurement system ... 22
4.4.4 SMART performance pyramid ... 22
4.4.5 EFQM excellence model ... 23
4.5 CONCLUSION ... 25
5 IDENTIFYING MANAGERIAL INFORMATION REQUIREMENTS ... 26
5.1 INTRODUCTION... 26
5.2 MANAGERS GENERAL INABILITY TO SPECIFY THEIR INFORMATION REQUIREMENTS ... 26
5.3 METHODS FOR IDENTIFYING MANAGERIAL INFORMATION NEEDS ... 27
5.3.1 Analysis of existing system... 27
5.3.2 Discussion with executives ... 27
5.3.2.1 Critical success factors ... 28
5.3.2.2 Strategic business objectives ... 29
5.3.3 Prototyping... 30
5.4 CONCLUSION ... 31
6 ENVIRONMENTAL FACTORS OF PERFORMANCE MEASUREMENT SYSTEMS ... 32
6.4 MANAGEMENT PROCESSES ... 33
6.5 INFORMATION CHARACTERISTICS ... 34
6.6 DECISION MAKING ... 34
6.6.1 Literature on decision making ... 35
6.6.2 Combining the insights from the literature ... 37
6.7 DYNAMIC ... 40
6.8 CONCLUSION ... 41
7 PERFORMANCE MEASUREMENT SYSTEM DESIGN PROCESSES ... 42
7.1 INTRODUCTION ... 42
7.2 STEPWISE PROCESSES ... 42
7.3 KAPLAN &NORTON’S DESIGN PROCESS ... 43
7.4 MEDORI &STEEPLE’S DESIGN PROCESS ... 43
7.5 ENDNOTES ... 44
7.6 CONCLUSION ... 45
8 A MODEL FOR PERFORMANCE MEASUREMENT SYSTEM DESIGN ... 46
8.1 INTRODUCTION... 46
8.2 A MODEL FOR PERFORMANCE MEASUREMENT SYSTEM DESIGN ... 46
9 DESIGNING A PMS FOR RABOBANK ZUID-HOLLAND MIDDEN ... 49
9.1 INTRODUCTION... 49
9.2 DESIGN PROCESS AND METHODOLOGY ... 49
9.3 CLARIFYING STRATEGY ... 51
9.3.1 Vital cooperation ... 52
9.3.2 Entrepreneurial culture based on values ... 52
9.3.3 Employee involvement ... 52
9.3.4 Customer involvement ... 52
9.3.5 Controllability and financial health of the organization... 53
9.4 IDENTIFYING MANAGERIAL INFORMATION REQUIREMENTS AND ENVIRONMENTAL FACTORS 53 9.4.1 Analysis of existing systems ... 54
9.4.2 Critical success factors interview ... 55
9.4.2.1 Vital cooperation ... 55
9.4.2.2 Entrepreneurial culture based on values ... 56
9.4.2.3 Employee involvement ... 57
9.4.2.4 Customer involvement ... 57
9.4.2.5 Controllability and financial health of the organization ... 59
9.4.3 Clarifying environmental factors... 60
9.4.3.1 Management processes ... 60
9.4.3.2 User characteristics ... 61
9.4.3.3 Decision making processes... 62
9.4.4 Drawing up a list of indicators ... 63
9.5 PROTOTYPING ... 64
9.5.1 Deciding about scope, timeliness, and aggregation ... 64
9.5.2 Choosing a theoretical PMS ... 65
9.5.3 Designing the prototype ... 65
9.5.4 Testing the prototype ... 66
9.6 DESIGNING THE FINAL PMS ... 67
9.7 RECOMMENDATIONS FOR PERIODIC REVIEW ... 67
9.8 CONCLUSION ... 67
10 CONCLUSIONS AND RECOMMENDATIONS ... 69
10.1 INTRODUCTION ... 69
10.3 RECOMMENDATIONS ... 70
10.4 LIMITATIONS ... 72
REFERENCES ... 74
APPENDIX A: LIST OF ABBREVIATIONS ... 83
APPENDIX B: QUESTIONS TO IDENTIFY USER CHARACTERISTICS ... 84
APPENDIX D: LIST OF PERFORMANCE INDICATORS ... 86
Summary
In September 2008, Rabobank Zuid-Holland Midden was formed following the merger between Rabobank Delflanden, 3B-Hoek, and Nootdorp-Pijnacker. While forming the new Private Banking department, not enough attention was being given to organize management control. Because areas of control were not clear, management could not consciously formulate which management information they needed for controlling the organization. The goal of this study was to design a management information system that fits the needs of management of the department Private Banking of Rabobank Zuid-Holland Midden. The following research question is used for that purpose:
Which management information system fits the needs of management of Private Banking at Rabobank Zuid-Holland Midden?
In the first part of the study, a theoretical discussion takes place. Management information systems (MIS) are described and defined. MIS’s are ‘automated system which presents information, both internal and external to the business, that aids in making a specific set of routine decisions’ (Stern, 1970). Performance measurement systems (PMS) are specific types of MIS’s. PMS’s are information systems that provide managers with information about both the internal and external performance of the organization. Because of the type of information sought by Rabobank Zuid-Holland Midden, and also the better suiting theoretical background of PMS over MIS, the concept of MIS’s is analyzed from a performance measurement perspective.
In the literature of PMS, a multitude of readily available PMS’s is available. An overview is given by describing return on investment, the balanced scorecard, the PMS of Medori and Steeple, the SMART performance pyramid and the EFQM excellence model. Return on investment is used to illustrate the traditional, on financial figures based PMS. These systems are being criticized very often because of their vast amount of dysfunctional side effects. The other described PMS all are based more or less on the strategy of the organization as the central focus of control.
is recommended to use a mixture of methods to benefit fully of the advantages of the different methods.
Next, some factors are identified which influence the functioning and usefulness of PMS’s. These factors are strategy, management processes, information characteristics, and decision making processes. It is also stated that PMS’s should be dynamic to be able to cope with changes in the environment of the PMS. At last, a study towards how PMS should be designed according to the literature is performed. A couple of design processes of various authors are discussed.
The theoretical discussion is completed with the development of a PMS design model which assembles all the knowledge acquired into a comprehensive model. According to this model, the first step in PMS design is identifying and clarifying strategy. Strategy is the basic input for the PMS. When the strategy is clear for the designer and the users, the managerial information requirements can be identified. The use of a mixture of methods is advised. The managerial information requirements are influenced by environmental factors such as user characteristics and management processes. When the information requirements are identified a prototype of the PMS can be developed. Based on the feedback on the prototype given by the intended users of the system, the final PMS will be designed. The last step in the model is periodic review. When the system is operational it has to be reviewed when its environment changes. How fundamental the changes should be depends on the type of changes in the environment of the PMS.
In the second part of the study, the PMS for Rabobank Zuid-Holland Midden is designed. This part starts with making the developed model operational. Then the different steps are being followed to design the system. First the strategy is clarified. The five strategic themes are described and the role of the department Private Banking in realizing these objectives is discussed. Next the information requirements are identified. This identification starts with an analysis of the existing systems together with the manager and the business controller. Then, a discussion is being held with the manager. The method that is used to structure this discussion is that of critical success factors. Also the environmental factors are identified in the empirical situation. The management processes and their influence on information requirements are described. Also user characteristics and the likely decision processes of the manager are being examined. After these analyses a list of performance indicators is developed which forms the information requirements of the manager Private Banking of Rabobank Zuid-Holland Midden.
1
Introduction
1.1 Introduction
The problem that underlies the research objectives and question will be outlined in paragraph 1.1. Paragraph 1.2 will outline the structure of the thesis.
1.2 Problem formulation
In September 2008, Rabobank Zuid-Holland Midden was formed. Rabobank Zuid-Holland Midden is the result of a merger between Rabobank Delflanden, Rabobank 3B-Hoek and Rabobank Nootdorp-Pijnacker. During the merger a new Private Banking department was formed. The original Private Banking departments had to be integrated to become one efficiently operating entity. Because the original departments all had their own processes and procedures, a new organizational structure was designed. In this new organizational structure, decisions were made about strategy, systems, structures and operating procedures.
In short, management has not thought about important areas of control and the type of decisions that they have to make. As a result, they now do not have the right information available to help them signal relevant areas of attention.
1.3 Structure of the report
2
Research Design
2.1 Introduction
In this chapter the research design will be outlined. Paragraph 2.2 formulates the problem statement and paragraph 2.3 outlines the research methodology.
2.2 Problem statement
A problem statement consists of a research objective, a research question and boundary conditions (De Leeuw, 1996). These facets of the problem statement will be outlined below.
2.2.1 Research objective
In the previous chapter a discussion took place about the problem of Rabobank Zuid-Holland Midden with respect to their management information. The conclusion was, that during the design, nobody really had thought about which areas of control were important. Also, the likely decisions that would originate from that were not defined. Therefore, management information about these subjects is also not available. The objective of this research is to identify a management information system that fits the needs of management of Private Banking at Rabobank Zuid-Holland Midden. The system has to provide the information that management needs to manage and control effectively. The management information system will mainly report about the investment services and life insurances (see chapter 3 for a further explanation of the structure and responsibilities of Private Banking).
2.2.2 Research question
The following research question is formulated to serve the purpose described above:
Which management information system fits the needs of management of Private Banking at Rabobank Zuid-Holland Midden?
To answer this research question, the following sub questions are phrased:
Theoretical part:
1. What is a management information system?
2. What types of systems are available to present management information?
Management information can be presented in numerous ways. In the literature, several systems are described in which management information is presented orderly. These systems will be identified and described here. In a later stage a choice has to be made between these systems.
3. Which considerations about the identification of information requirements are described in the literature?
The content of the management information system that is going to be designed has to follow the information requirements of management. In this sub question, the literature will be reviewed in order to describe the available methods to identify managerial information requirements.
4. Which factors influence the design of management information systems?
Management information systems have to fit within the environment in which they have to operate. Specific factors which surround the system have to be taken into account when developing a management information system. These factors will be identified in this sub question.
5. Which considerations about the design process of management information systems are described in the literature?
Besides considerations about factors which influence the design of management information systems, the literature gives recommendations about the design process of management information systems. These design process recommendations are the subject of this sub question. Together with the first four sub questions, a complete theoretical picture will then be available about management information systems and their development.
Empirical part:
6. Which information is required by the management of Private Banking of Rabobank Zuid-Holland Midden?
7. How can this management information best be presented?
In this sub question the management information system for Private Banking of Rabobank Zuid-Holland Midden will be designed. The necessary information is identified. A choice has to be made between the information systems described in sub question three. Keeping in mind the theoretical considerations about the design and the design process of management information systems, the system for Rabobank Zuid-Holland Midden will be developed.
8. Does the designed management information system meet all the information requirements of management of Private Banking at Rabobank Zuid-Holland Midden?
In this last sub question, the designed management information system will be reviewed. It will be checked if the system indeed meets the requirements of management and is a solution to the problem identified in the first chapter.
Figure 2.1 presents the questions and their relations graphically.
2.2.3 Boundary conditions
2.3 Methodology
Two types of research can be distinguished. The first one is testing research and the second exploratory research. Exploratory research explores and forms sharper ideas and hypotheses by giving answers to open questions. Testing research gives answers to closed questions. Testing research is a very strong form of research because it tests its results thoroughly. When using exploratory research there is a chance that the acquired insights are based on coincidence (De Leeuw, 1996). This research will, however, be characterized by an exploratory nature because it gives richer answers. The generalizability for practically orientated research is less important because the goal is to provide insights for a specific situation instead of producing general knowledge (De Leeuw, 1996). Therefore, exploratory research is suitable for this study.
During this research a ‘designing research method’ will be used. A ‘designing research’ is a method that is also named the ‘engineer-procedure’. This method is characterized by testing in practice of something that is contemplated or designed. ‘Designing research’ is for that reason often a
Which management information system fits the needs of management of Private Banking at Rabobank Zuid-Holland Midden?
1. What is a management information system?
2. What types of systems are available to present management information?
7. How can this management information best be presented? 8. Does the designed management information system meet all the information requirements of management of Private Banking at Rabobank Zuid-Holland Midden?
3. Which considerations about the identification of information requirements are described in the literature?
5. Which considerations about the design process of management information systems are described in the literature?
6. Which information is required by the management of Private Banking of Rabobank Zuid-Holland Midden?
4. Which factors influence the design of management information systems?
This study will consist of a desk research period and a period in which a specific company situation is analyzed. During the desk-research-phase a literature review will be done and some internal documents of Rabobank will be used. For the literature review mainly academic articles will be used as a source of theory. Sometimes books will be used, but that will be prevented if possible. During the second phase, interviews will be held with employees of Rabobank in order to get a better understanding of the requirements of the management information system. In order to identify information requirements, interviews will be held with the intended users of the management information system. This will be the manager Private Banking. Several authors mentioned that getting managers to specify what they want as the number one problem in designing and implementing management information systems (Ackoff, 1967; Daniels, 1961; Jenkins et al., 1984; Davis & Monroe, 1987; Stecklow, 1989; McClatchy, 1990; Wetherbe, 1991; Watson & Frolick, 1993). A deeper investigation of this problem and possible solutions will be given in chapter five.
An interview will also be held with the business controller for the customer division. This controller can help provide a better understanding of the organizations present planning and control processes, and the information that is needed to effectively steer and control.
3 Research Domain
3.1 Introduction
This chapter will give a brief description of the research domain: Rabobank Zuid-Holland Midden. The organizational structure of Rabobank Zuid-Holland Midden will be discussed.
3.2 The organization
In this paragraph the internal organization of the Rabobank Groep and Rabobank Zuid-Holland Midden will be outlined.
3.2.1 Rabobank Groep
The Rabobank Groep is a cooperation formed by all the local banks which are members and shareholders of Rabobank Nederland. Rabobank Nederland advices and supports the local banks in their service provision to customers. Their main tasks are developing new products and providing the local banks with diverse staff services such as Investor Relations, Knowledge Research and Shared Services and Facilities.
Besides supporting the local Rabobank organizations, the Rabobank Groep manages some (international) subsidiaries and minority interests.
3.2.2 Rabobank Zuid-Holland Midden
Rabobank Zuid-Holland Midden, one of the 153 independent local banks, is formed in September 2008 following the merger of Rabobank 3B-Hoek, Rabobank Delflanden and Rabobank Nootdorp-Pijnacker. Rabobank Zuid-Holland Midden serves Rabobank customers in the area above Rotterdam. Rabobank Zuid-Holland Midden is like all the local Rabobank organizations, on the one hand, an independent cooperative bank but on the other hand indissolubly connected to the Rabobank Groep. Local Rabobanks are just as Rabobank Nederland cooperative. The members of a local Rabobank are part of the local clientele of a specific Rabobank. This means that customers are owners of their own bank. Because of this cooperative structure local Rabobank organizations are able to be close, leading and involved in their local society.
Figure 2.1 shows the organization chart for Rabobank Zuid-Holland Midden.
3.2.3 Private Banking
are two Private Banking teams consisting of account managers and assistant account managers. These account managers have, what is called customer responsibility. They are responsible for a portfolio of Private Banking customers. They are responsible for the total service provision and sale of products to customers and are the first contact person for a customer. Important products which are sold by account managers are mortgages and life insurances. Private Banking has product responsibility for life insurances but not for mortgages. Product responsibility means responsibility for sale, maintenance and the choices for cooperation with external service providers.
The third team is the team Investing. It consists of investment specialists and assistant investment specialists. The team Investing, has what is called, product responsibility for the total investment services of Rabobank Zuid-Holland Midden. The total investment service consists of several service concepts which are sold by a diversity of advisors to all types of customers. The main task of the team Investing is, however providing the service Rabo Selectbeleggen (RSB). RSB is an exclusive investment service to prosperous customers. Within RSB, agreements are made with the customer about the procedure and amount of contact, the advisory procedures and support with specific information, tailored to customer needs. By making these agreements, customers can count on customer tailored investment services with personal attention of an investment specialist (Rabobank Zuid-Holland Midden, 2008b). Investments specialist’s advice customers in their investment portfolio. Assistant investment specialists support the investments specialists in their work of advising customers. This separation is part of proactive risk management (Rabobank Groep, 2006; Rabobank Groep, 2008).
Figure 3.1: Organization chart (Rabobank Zuid-Holland Midden, 2008b)
Rabobank Zuid-Holland Midden
Chairman of the Board
Internal Management Business Customers
Cooperation Marketing/ CRM Communication HRM Audit Control
Process- & Project- Management
Facility Management
Administrative Services
Private Customers
Food & Agri
Large Business Customers
Small & Medium Sized Enterprises
Insurance
Credit Management
Client Advice
Private Banking
4
Management Information Systems
4.1 Introduction
In this chapter, the concept of management information systems will be outlined. Management information systems will be defined in paragraph 4.2. This will be the answer to the first sub question. Paragraph 4.3 will elaborate on the difference between management information systems, frameworks, and models. Paragraph 4.4 will, in order to answer sub question two, identify a couple of readily available management information systems.
4.2 Defining management information systems
In this paragraph, management information systems will be defined. First, the term management information will be outlined and defined. Second, a specific type of management information system will be introduced.
4.2.1 Management information system
Data can be defined as ‘detailed facts about business events related to business processes or facts about the external environment’ (Chaffey & Wood, 2005, p23). Information is ‘organized data, meaningful and contextually relevant, used for decision making’ (Chaffey & Wood, 2005, p21). Information is data presented in such a way that it becomes usable and understandable (English, 1999). For data to become information, some procedure or system is needed in order to collect, process and present data. Chaffey and Wood (2005) summarized the activities involved in processing by using four C’s of:
- Context. Ordering data. Displaying it relative to other data items in for example trend graphs, time series ore sorting it alphabetically of numerically.
- Calculation. Producing derived metrics such as calculating percentage capacity utilization. - Classification or categorization. Grouping information into different categories.
- Condensation. Aggregating or totaling information is always important in presenting business event data as summary information. Filtering is also used to summarize information.
(1991, p14) defined an EIS as follows: ‘a computerized system with easy access to internal and external information that is relevant to their critical success factors’. In essence MIS’s and EIS’s are the same but there is a difference in their target groups. EIS’s are targeted at top-level managers whilst MIS’s are targeted at lower level managers. Leidner and Elam (1995) defined EIS’s to include both lower level managers and senior managers. Conceptual differences between MIS and EIS are apparently minimal.
4.2.2 Management information systems and performance measurement systems
The goal of this study is to design a MIS for Rabobank Zuid-Holland Midden. The focus lies on the identification of information needs and the choice for a specific system to present that information. The subjects as information technology aspects and computer architectures will not be covered in this study. The term MIS’s, however, originates from the field of information and information technology. This field provides insights in information uses, structures of information systems (including soft- and hardware) and the technological design of these systems. These are the subjects that are not being treated in this study, and therefore, the term MIS is not very useful. A field of research that is of greater relevance for this study is the field of performance measurement because of its relation with MIS’s and its focus on management issues.
Neely et al. (1995, p81) defined a performance measurement system (PMS) as ‘the set of metrics used to quantify both the efficiency and effectiveness of actions’. After that they defined efficiency as ‘the extent to which customer requirements are met’ and effectiveness as ‘a measure of how economically the firm’s resources are utilized when providing a level of customer satisfaction’. PMS’s thus measure facts internal (the resources utilization) and external (customer requirements) to the business. Traditional, on financial figures based PMS’s did not provide much external information, but modern strategy based PMS’s do. They often have measures such as market share or customer satisfaction (Kanji & Moura e Sá, 2002; Kaplan & Norton, 1996; Neely, 1999; Neely et al., 1995; Rolstadås, 1995). When this data is used for decision making, it is essentially a MIS (when compared with the definition of MIS’s in the previous paragraph). This decision making dimension is captured in the definition of a PMS of Garengo and Bititci (2007, p803). They defined a PMS as ‘a balanced and dynamic system that supports the decision-making process by gathering, elaborating and analyzing information’. Some authors even called a PMS a specific type of information system (Glaser, 1991; Bititci, 1995; Forza & Salvador, 2000).
systems, marketing, and management accounting and control (Neely, 1999, 2002; Mar & Schiuma, 2003; Franco-Santos & Bourne, 2005; Franco-Santos et al., 2007; Rusjan, 2005; Sandbrook, 2005). For a PMS or a MIS to function in practice both, viewpoints have to be addressed; the information technology function and the organizational/managerial functioning. This study however focuses on the design of the MIS in its organizational and managerial context, on the identification of the information that is needed to effectively manage and control. For that reason, the theoretical foundations which underlie the performance measurement literature are more useful than those of the MIS literature. Also, the information that is sought for by Rabobank Zuid-Holland Midden focuses on performance information.
To conclude, PMS’s are very much related to MIS’s, and can even be called a specific type of MIS. Because of its theoretical background and the type of information sought by Private Banking of Rabobank Zuid-Holland Midden, the concept MIS will be analyzed from a performance measurement perspective.
4.3 Frameworks, systems and models
In the next paragraph, the PMS’s that are available in the performance measurement literature, which give recommendations about how to organize and present management information, will be discussed.
4.4 Performance measurement systems
In this paragraph the second sub question will be answered. Readily available PMS’s will be identified in a literature study. Because Rabobank Zuid-Holland Midden searches for a PMS those types of information systems will be identified. Managers and academics have been interested in the measurement of performance for a long time (Bourne et al., 2000; Neely, 1999; Otley, 1999). Therefore, performance measurement systems are already available for decades. Traditional PMS’s focused primarily on financial performance. One of the major reasons for the popularity of financial measures is the possibility to aggregate performance from different departments (Rolstadås et al., 1995). An example of on financial figures based PMS is the return on investment (ROI) method of performance measurement.
4.4.1 Return on investment
The ROI PMS (see figure 4.1) is a method that is based upon accounting figures. It is often used in divisionalized organizations where managers were held primarily responsible for profits. The ROI method was developed at the DuPont Company in the early Twentieth Century. Its widespread use, however came after the Second World War as a reaction towards the greater size and complexity of business at that time (Merchant & Van der Stede, 2007). Almost every decentralized company uses some form of ROI (Dearden, 1969; Merchant & Van der Stede, 2007)
‘ROI is a ratio of the accounting profits earned by the division divided by the investment assigned to the division’ (Merchant & Van der Stede, 2007, p445). By using formula charts such as the one presented in figure 4.1, the ROI measure can be further analyzed. An analyst can decompose the ROI measure to get an understanding of the specific measures that were the reason for a change in the ROI. The use of these formula charts also makes it possible to link various organizational levels with the ROI measure (Merchant & Van der Stede, 2007).
However, the ROI method has also some significant downsides. When the method was developed by DuPont it was far superior to any other control and performance measurement system that was available at that time. Over time, problems in the system are identified and changes in accounting methods caused problems that did not exist when the system was designed (Dearden, 1969). The problems with ROI are mostly the same problems as with all the, on accounting measures based, PMS. These problems are often so severe that they counteract the objectives that are sought for with performance measurement. Traditional accounting based performance measures are said to encourage short termism (Banks & Wheelwright, 1979; Hayes & Abernethy, 1980), lack strategic focus (Skinner 1974), encourage minimization of variance rather than continuous improvement (Johnson & Kaplan, 1987; Lynch & Cross, 1992), encourage local optimization (Fry & Cox, 1983; Goldratt & Cox, 1986; Hall, 1983; Schmenner, 1988; Turney & Anderson, 1989), be not externally focused (Kaplan & Norton, 1992), fail to provide information on what customers want and how competitors are performing (Camp, 1989; Kaplan & Norton, 1992), being historically focused (Dixon et al., 1990) and even have destroyed the competitiveness of the US manufacturing industry (Hayes & Abernethy,
MINUS PLUS PLUS PLUS PLUS PLUS DIVIDED BY MULTIPLIED BY Return on investment Profit Profit as % of sales Asset turnover Direct costs Sales Sales Sales Total investment Selling expenses Administrative expenses Cost of sales Working capital Fixed investment Inventories Cash Accounts receivable DIVIDED BY
In order to tackle the problems listed above, numerous calls for the use of non-financial measures and a better balance in PMS occurred (Merchant & Van der Stede, 2007). These authors advised to develop PMS in which financial measures as well as non-financial measures are used. These systems should provide measures about internal and external performance, measures of past performance and indicators of future performance (Bourne et al., 2000). A diverse set of measures also prevents sub optimization. Because all relevant business areas are covered, managers cannot ignore relevant performance dimensions without seeing the results of it (Ittner, 2003). The PMS’s that are described in the following paragraphs tried to overcome these problems of the traditional PMS’s.
4.4.2 The Balanced Scorecard
The Balanced Scorecard (BSC) (see figure 4.2) has been developed in a response to the discussion in the PM literature about the use of financial and non-financial measures. The BSC consists of financial measures that report the results of actions already taken, and it complements these financial measures with operational measures that are the drivers of future financial performance. The BSC helps managers to look at the business from all important perspectives. The BSC consists of four perspectives (the structural dimension of the Scorecard). It gives answers to four questions which are organized in the four perspectives of the Scorecard (Kaplan & Norton, 1992):
- Customer perspective: How do customers see us? - Internal perspective: What must we excel at?
- Innovation and learning perspective: Can we continue to improve and create value? - Financial perspective: How do we look to our shareholders?
The Balanced Scorecard provides managers information from four different perspectives which are essential for the effective management of the organization. The Scorecard also minimizes information overload by limiting the number of measures used. Managerial attention is focused on a couple of measures that are most critical (Kaplan & Norton, 1992)
Traditional measurement systems have a bias towards control (Butler et al., 1997; Kaplan & Norton, 1992). They measure the results of the predetermined actions taken by employees and compare these results to predetermined targets. This type of PMS’s worked in the Industrial Age with its engineering mentality, but are ineffective today. The BSC fits the present business environment better, because it is focused on strategy and vision instead of control. The goals and measures that are specified are pulling people towards the vision of the organization. Employees have freedom in choosing how to achieve these goals (Kaplan & Norton, 1992). The BSC can help managers in communicating strategy in the organization. The choice for a specific measure gives a signal about what is important. It can also help to align the goals and initiatives of individuals and departments in order to direct them towards the overall goal of the organization. The Scorecard is a device for communication, information, and learning instead of only a traditional control system (Kaplan & Norton, 1996).
In summary, the BSC is a translation of the strategy of an organization in a set of linked performance measures that articulate the long-term strategic objectives and also the mechanisms of obtaining feedback on these objectives (Kaplan & Norton, 1996).
Despite of its widespread use, the BSC has been subject of criticism. Kennerley and Neely (2000), for example, noted the absence of a competitiveness dimension. Nørreklit (2000) however had critics on more fundamental aspects of the BSC. In the design process of the BSC for a specific company a dimension of competitiveness could be added to the system.
The cause-and-effect relationships between the measures of the BSC are essential. They allow the non-financial indicators to predict future financial performance. When this assumption is given up, the whole argumentation of the BSC becomes obsolete (Nørreklit, 2000). Nørreklit (2000) concludes from her analysis that the relationships in the BSC are not causal but rather logical. This is a fundamentally different relationship. Nørreklit (2000, p70) explained the difference as follows:
‘Logical relationships are part of the concepts of a language, but cause-and-effect relationships are part of the structures of the empirical world and can be shown empirically. Logic, on the other hand, cannot be verified, or determined empirically.’
Nørreklit (2000) proposed the following adjustment to the BSC in order to make it more effective. Instead of inferring that the relations on the BSC are causal, one can infer that the relations are coherent. Coherence focuses on whether the phenomena match or complement each other. Coherent relations have the potential of obtaining the results that were sought for, but there is no certainty in this relation. The significance of the availability of coherence determines the strength of the relationship.
4.4.3 Medori & Steeples performance measurement system
The framework developed by Medori and Steeple (2000) is based upon two separate, but linked documents called ‘Document A’ and ‘Document B’. The first document, ‘Document A’ is a six-stage plan that specifies exactly how to develop a PMS. It is a process for the design of the PMS and will be covered in chapter 7. The second document, ‘Document B – Spectrum/checklist’ is a list of performance measures that are build around six competitive priorities (quality, cost, flexibility, time, delivery and future growth). It is a list of measures from which can be chosen when designing the content of the system. This document consists of 105 mainly non-financial measures with full descriptions and methods of calculation for each measure.
Medori and Steeple (2000) advices organizations to identify their strategic requirements or company success factors. These strategic requirements should than, be linked to the six competitive priorities that were listed above. This will result in a performance measurement grid of which a hypothetical example is given in table 4.1. A completed performance measurement grid provides, in terms of competitive priorities, the areas for measurement consideration specific to a company. Next, ‘Document B – Spectrum/checklist’ is being combined with the performance measurement grid. The idea is that from ‘Document B’, the measures are being selected which fit the combinations identified in the performance measurement grid.
4.4.4 SMART performance pyramid
The Strategic Measurement Analysis and Reporting Technique (SMART) system (also known as the Performance Pyramid) was developed by Wang Laboratories, Inc. Their goal was to build a management control system which could help them define and sustain success. The SMART
Competitive priority Company success factors
Quality Improve supplier quality
Cost Reduce stock
Flexibility Reduce set-up time
Time Reduce lead-time
Delivery Achieve schedule
Future growth New product introduction
Pyramid (figure 4.3) consists of four layers of objectives and measures (Pun & White, 2005). The pyramid is build with linked building blocks. An effective link is created between strategy and operations by translating strategic objectives form the top down and measures for the bottom up (Lynch & Cross, 1995). At the top is the corporate vision or strategy is visualized. Management assigns roles to each business unit of the portfolio and allocates resources to it. At the second level, these business unit roles are being translated into market and financial objectives for all business units. At the third level, business operating systems, more tangible operating objectives and priorities can be defined. For each business unit, measures in terms of customer satisfaction, flexibility and productivity are defined. At the lowest level these operating objectives and priorities are translated in specific operation criteria such as quality, delivery, process time, and costs. These operation measures are the foundation of the pyramid and are the keys to achieving the results at higher levels such as successful implementation of strategy (Lynch & Cross, 1995; Pun & White, 2005). The pyramid is a useful method to describe how objectives are communicated down to lower levels of the organization and how measures can be rolled up to the top of the organization (Lynch & Cross, 1995).
4.4.5 EFQM excellence model
The EFQM Excellence Model (see figure 4.4) is a framework that can help organizations manage their continuous improvement efforts to reach organizational excellence (Rusjan, 2005; Sandbrook, 2001). The Dutch INK management model is based upon the EFQM model. Differences between the models are minimal, especially after the changes in the INK model in 2008 (INK, 2008). It consists of four result-elements that describe how the organization performs with respect to these four important result areas. The five enablers of the model provide guidelines for establishing the desired results. The
Figure 4.4: EFQM Excellence Model (Rusjan, 2005)
2005; Sandbrook, 2001). The quality of excellence does not only consist of the achievement of key business results but also the satisfaction of employees and external customers, and of society in which the organization performs its activities (Nabitz et al., 2001). An underlying assumption of the model is that there are interrelationships between the enablers and results. These relationships are however, not explicitly established (Calvo-Mora et al., 2005). Research in this direction is at an early stage and more exhaustive empirical studies are required (Eskildsen et al., 2001). The arrows emphasize the dynamic nature of the model. Innovation and learning can help improving the enables which will eventually improve results (Rusjan, 2005).
The criteria of the EFQM Excellence Model will be outlined below:
Leadership. Continuous improvement and organizational excellence must be developed and facilitated in the organization. Leadership is crucial in this process. The leaders’ task is to develop a vision and provide the structure, culture and support which facilitates improvement (EFQM, 2003; INK).
Policy and strategy. In order to be excellent, organizations need a mission and strategy that is focused on stakeholders and takes into account the market and sector in which it operates. Furthermore, objectives, plans and policies have to be developed to effectively implement and execute the strategy (EFQM, 2003).
and people have to be involved and empowered to develop them. A clear personnel policy is essential for that (EQM, 2003; INK).
Partnership and resources. To support policy and strategy and to guarantee effective operation, resources and partnerships must be managed. Plans have to be made to divide resources in such a way that they are utilized effectively. Current and future resource requirements need to be balanced (EFQM, 2003; INK).
Processes. In order to use resources effectively and ensure customer satisfaction and value creation organizations have to design, manage and improve processes (EFQM, 2003).
People results. Satisfied employees are expected to be motivated to function up to their full potential in their work. This result area measures how employees look at the company. For example: are they satisfied with the amount of motivation and challenge that is provided to them (INK)?
Customer results. Customer satisfaction is an important indicator of future financial performance. This result area reports how customers look at the company. The most important question is probably how satisfied customers are with your products and services (INK).
Society results. The result area society reports how society looks at the company. Measures with respect to environmental issues and job creation are important (INK).
Key performance results. First of all, financial results are part of this key performance results area. Financial results can be measured with financial indicators as profit and margin. To provide a clear picture of organizational performance more operational indicators such as reliability and delivery time should also be reported (INK).
4.5 Conclusion
5
Identifying Managerial Information Requirements
5.1 Introduction
In this chapter, an answer will be given to the second sub question. A literature study will be done towards the theoretical considerations about identifying managerial information requirements. Paragraph 5.2, reports about the difficulties that exists in letting managers specify their information needs. Paragraph 5.3 describes several methods for identifying management information needs.
5.2 Managers general inability to specify their information requirements
In order to develop an effective management information system, it is important to specify the information requirements of management. Asking managers what information they need seems to be a simple and obvious question. However, one of the major problems in MIS design is getting managers to specify which information they need (Ackoff, 1967; Daniels, 1961; Jenkins et al., 1984; Davis & Monroe, 1987; Stecklow, 1989; McClatchy, 1990; Wetherbe, 1991; Watson & Frolick, 1993). Jenkins et al. (1984) found in a study that 76 information systems in 26 organizations all needed major and minor modifications after completion in order to even approach managerial information needs. Davis and Monroe (1987) listed five reasons for this inability. The first reason is the nature and structure of decision-making. Managers will be able to describe very structured decision-making activities. When the decisions are less structured management will have more troubles with describing it. Furthermore, managers often do not reflect actively on their decision-making processes and will for that reason be poor in articulating which additional information will be relevant.
The second reason for managers’ inability of specifying their information needs are differences in cognitive styles. Individuals differ in how they select and use information. Through training, natural inclination and experience, mental models are being developed. Individuals with highly intuitive, unstructured mental models experience considerable difficulty in explaining their decision-making process and the information they use for it.
The third factor is the mental model of managers. They often have an inadequate model of their environment (Axelrod, 1976). Most managers do not fully understand the powerful cause and effect relationships which affects their organization. The mental model will affect what the manager thinks is important and will for that reason influence the perceived information requirements.
Fourth, the relative difficulty of a complete analysis. To completely analyze and rethink activities and decisions is a hard and time consuming job. For that reason, time and effort is often saved by not completely analyzing the situation, but relying on existing documents and reports.
might change (Orman, 1987). Also, when the pace of system implementation is slow, the organizational environment might change which affects information needs.
5.3 Methods for identifying managerial information needs
In this paragraph, a literature search will be done in order to identify methods which can be used for identifying managerial information needs. A methodology has to be used in order to be able to specify the information needs of a manager, because just asking ‘what information do you need?’ is not very effective,
5.3.1 Analysis of existing system
Many organizations analyze their existing management information systems and reports in the early phase of developing a new information system. Considerable amounts of information often are already delivered to managers. They, however often do not fully match the managers information requirements (Watson & Frolick, 1993). Managers are often able to criticize a system but unable to articulate information needs (Alavi, 1984). By discussing the flaws in existing systems with managers, ideas and requests can be generated which can be used as inputs for the new system. This method is, however not very useful in later phases of the development (Watson & Frolick, 1993).
5.3.2 Discussion with executives
Talking with executives is vital in order to define their information requirements (Browne & Rogich, 2001; Watson & Frolick, 1993). However, as was stated in the previous paragraph, managers often are unable to specify their information needs. Just asking what information a manager needs is often not very effective. The given answers will be heavily influenced by information which the manager has recently seen, the context of existing reports, and recent problems that occurred (Watson & Frolick, 1993). Wetherbe (1991) compared the question ‘what information do you need’ with a psychoanalyst asking a patient ‘what therapy do you need?’.
5.3.2.1 Critical success factors
An often used (40,8 percent according to Watson & Frolick (1993)) and well documented method for identifying managerial information requirements is the critical success factors (CSF’s) method. The CSF’s method consists of, in essence an analysis of the corporate planning and control processes. The CSF’s methods results in the identification of information that is associated with these essential management processes which is information to achieve organizational control (Munro & Wheeler, 1980). The method focuses on individual managers and their information needs. It takes into account that information needs differ between managers and change over time (Rockart, 1979).
To start working with CSF’s a clear understanding of the organization’s strategy and objectives is needed. For each of the formulated objectives CSF’s have to be identified. Rockart (1979, p85) defined CSF’s as ‘the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization’. CSF’s are by their nature, a hierarchical structure of constructs. CSF’s are often identified at staff, line and senior management functions (Boynton & Zmud, 1984). Success factors at different organizational levels describe together complex organizational structures (Jenster, 1986).
CSF’s are often defined in a few discussions between managers and system developers. CSF’s can stem from different sources. The four sources below are the primary sources of CSF’s (Rockart, 1979):
- Structure of the particular industry. Every industry has some CSF’s that stem from the characteristics of the industry itself.
- Competitive strategy, industry position, and geographic location.
- Environmental factors. Factors as customer tastes and economic fluctuations can influence the CSF’s of organizations.
- Temporal factors. Sometimes internal organizational considerations form a temporal source of CSF’s. As an example, an organization that loses half its executive team in an airplane crash will make ‘rebuilding of the executive group’ a temporal CSF.
Because the information provided directly relates to the managers tasks, the amount of information the manager has to absorb and analyze, reduces. This makes the manager besides more effective, also more efficient.
The CSF’s method is especially helpful in overcoming the problem of the general inability of managers to specify the information they need for their control and decision making activities. This problem is overcome by specifying which factors of business are important to manage actively. The analyst then specifies the information that is needed to manage these factors effectively.
Using the CSF’s method is difficult. However, other methods of identifying managerial information requirements are also difficult to handle. It is important that the system developer is comfortable with business concepts and understand the business environment of the specific organization. When this is the case, the CSF’s method is probably easier to use than other methods (Boynton & Zmud, 1984).
5.3.2.2 Strategic business objectives
A less well described method for structuring interviews and discussions with managers is that of strategic business objectives (SBO’s). The SBO’s method takes a company-wide perspective. This method is focused on developing an information system that is useful for all personnel through the organization. Therefore, the method tries to identify corporate information needs instead of the information needs of individual managers (Volonino & Watson, 1991).
When using the SBO’s method, first the organizations strategic business unit objectives have to be identified. Organizations can have various strategic objectives such as producing high quality products or providing excellent service. To be able to realize these strategic objectives, the business processes that support the realization of these strategic objectives need to be identified. Information requirements have to be identified following these strategic goals and critical business processes. Information about progress towards the strategic targets is needed. Also information which is necessary to support the critical business processes have to be defined. At last, information about linkages between the critical processes is needed (Watson & Frolick, 1993; Volonino & Watson, 1991).
Just as the CSF’s method, the SBO’s is a helpful technique to focus the search for information requirements to those areas that really matter. As was previously stated, developing a MIS top-down is essential (Daniel, 1961; Zani, 1970). Because the information is tight to those factors that really matter, information overload is being prevented as much as possible.
manager has a high risk of failure when the manager changes position. Because manager turnover is common, this is a significant risk (Volonino & Watson, 1991).
5.3.3 Prototyping
Prototyping is a very useful method to refine conceptual information requirements into more detailed information requirements (Alavi, 1984; Wetherbe, 1991). The information requirements identified with analyzing existing systems and discussions with executives are often not very detailed. When the conceptual requirements are identified, the analyst often completes the detail on its own when he designs the information system. By using prototyping, managers can try (parts of) the designed system and ask for changes and revisions that can enhance the system. A prototype can be used to run through potential solutions in order to identify that set of information that addresses crucial managerial concerns (Boynton & Zmud, 1984). This way of working is very effective because, managers are often able to criticize a system, but unable to articulate information needs (Alavi, 1984), as said in paragraph 5.2.
Trial and error of which prototyping is a form, is often used in problem solving. People for example, are using trial and error when they do a test-drive in a car before buying it or have several relationships before marriage and rearrange furniture several times when decorating a room. Prototyping however has not been incorporated into MIS design (Whetherbe, 1991). Prototyping is already covered in the research design of this study with sub question eight.
With prototyping, the problem that PMS design changes decision making processes can also be overcome. When the manager, while using the prototype, perceives that their decision making processes have changed, the system can still be revised (Wetherbe, 1991). A further advantage of prototyping is that it creates enthusiasm and commitment by the users of the system. Because users already get to see a working system in the design phase, they become more committed and enthusiastic (Alavi, 1984).
Potential downsides or problems with prototyping also exist. Prototyping is difficult to manage and control. Because the amount of revisions and changes are unknown in advance, projects which use prototyping are more difficult to plan in advance than projects that do not use prototyping. A lack of explicit planning and control guidelines may reduce the discipline needed for proper management of a project (Alavi, 1984).
5.4 Conclusion
In paragraph 5.2, the difficulties of identifying managerial information needs are described and discussed. In paragraph 5.3, five different methods were described which can be used to identify managerial information requirements. All methods approach the problem in a different way. Some methods are more useful than other in specific circumstances. Also some methods are better equipped to overcome the problems described in paragraph 5.2. Watson and Frolick (1993), who also discussed several methods, concluded their analysis with the comment that information requirements can seldom be formulated by using a single method. They advised to use a mixture of methods. In that way, the advantages of the methods can be exploited fully, while their downsides can be overcome as much as possible. Davis and Monroe (1987) also mentioned that a mixture of methods could be used to define information requirements more effective.
6
Environmental Factors of Performance Measurement Systems
6.1 Introduction
In this chapter sub question four will be answered. In paragraph 6.2 the factors that influence the design of PMS’s and are relevant for this study will be identified. These identified factors will be discussed in the paragraphs 6.3 to 6.7. A conclusion will follow in paragraph 6.8.
6.2 Factors that influence the design of performance measurement systems
A PMS that is being designed for an already existing organization has to be designed in such a way that it fits in its environment. A PMS has to interact with its wider environment (Neely et al., 1995). The subject of performance measurement has been studied extensively by researchers from diverse functional areas. These studies have contributed to an extensive body of knowledge about performance measurement systems and their functioning. In this paragraph, the factors that are relevant for this study will be identified.
Strategy is the first factor that has to be taken into account in this study. In the literature there is a strong consensus that measures should be derived from strategy (Azzone et al., 1991; Bourne et al., 2000; Dixon et al., 1990; Fortuin, 1988; Globerson, 1985; Goold, 1991; Kaplan & Norton, 1992; Keegan et al., 1989; Lynch & Cross, 1991; Maskell, 1989; Mintzberg, 1982; Neely et al., 1995; Sink, 1986; Wisner and Fawcett, 1991). Because the focus of this study lies in part on indentifying managerial information needs, strategy is also very important in this study. Those information needs are highly dependent on strategy, because strategy dictates what is important to the business and therefore to the manager.
A PMS is part of a wider system which includes goal setting, feedback, and reward or sanction (Neely et al., 1995). Therefore, a PMS is part of the wider management processes in the organization. From these management processes follow information requirements. Therefore, to design a PMS that fits the needs of managers the PMS has to fit the management processes.
The usefulness of information is highly dependent on the characteristics of the information (Chenhall & Morris, 1986; Larcker, 1981; Mangaliso, 1995, Merchant & Van der Stede, 2007). Because this study tries to design a PMS that fits the needs of management, the usefulness of information is important. Only information that is useful will fit the needs of management. Therefore, describing the characteristics of information that determine its usefulness is necessary.
manager. To be able to design a system in a way that fits a manager’s decision making processes and style, a model of a managers decision making is needed (Perkins & Rao, 1990).
At last, the factor dynamic will be discussed. The result of this study is a PMS that fits managerial information needs. To prevent the system becoming obsolete, and not fitting managerial information needs anymore, the system has to be dynamic. Therefore, this factor is very important in this study.
The literature describes more factors than the four described above, that are important in designing PMS. However, in the light of this study these factors are not very relevant and will therefore not be covered in this study. An example of such a factor is organizational culture. It is argued that a PMS should be consistent with organizational culture (Neely et al, 1995). In this study however, a PMS is being designed for the department for the management of the department Private Banking. In this relatively small organizational environment the effects of culture are less severe. The system is designed for and used by primarily the manager Private Banking. When his information requirements are the primary input for the system, and prototyping is used, conflicts with organizational culture are not very likely.
The functional structure of the organization is also mentioned as a factor to bear in mind. A PMS can be a source of conflict between various departments such as marketing and production (Shapiro, 1977). In this study, a PMS is designed for the department Private Banking of Rabobank Zuid-Holland Midden. As was described in paragraph 3.2, this department is part of the customer division. The PMS is designed for one functional area of the organization and not for the total organization. Problems relating to the organizational structure therefore are expected.
The factors that were identified as relevant will be discussed in the subsequent paragraphs.
6.3 Strategy
In the literature on PMS’s there is a strong consensus that measures should be derived from strategy (Bourne et al., 2000). This was already very permanent in the overview of PMS’s in chapter four. Except for ROI, all the described PMS’s have strategy as their central concept in the model which determines the choices for performance measures. A strategy can only exist when decisions and actions are consistent within a firm (Mintzberg, 1978; Neely et al., 1995). Since a PMS exists to inform and support managerial decision making processes, a PMS which is not aligned with strategy can never support decisions which are consistent with strategy.
6.4 Management processes
