Factsheet: a contribution to the Balanced Scorecard?

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Scorecard?

“A research on an additional performance measurement system within the Department SCAD”

Author: Sem Treffers

Student number: s 1385569

Email address: s.f.treffers@gmail.com University: University of Groningen

Faculty of Economics and Business administration Master of Science in Business Administration

Specialisation; Organisational and Management Control Supervision: First supervisor: P.E.Kamminga

Second Supervisor: Second supervisor: W.E. Westerman

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Sem Treffers, 2009-2010 2

Preface

The thesis lying in front of you is the result of a research performed to complete my education at the faculty of Economics and Business Administration at the University of Groningen. The inherent research that will be discussed is an outcome of my assignment for the company Unilever N.V. The assignment contained a research on whether an additional performance measurement system would be beneficial to the department of Supply Chain Accounting Department (SCAD). This idea was born due to the fact that the Balanced Scorecard (BSC) was not performing adequately for the department of SCAD. The thesis will therefore show the outcomes of the research on the functional and behavioural consequences that the additional performance measurement system generated. At the company Unilever N.V. I was able to get in touch with the financial philosophy of the Supply Chain Accounting Department (SCAD) of Unilever N.V. I enjoyed working for the company, especially thanks to the colleagues in my team and the open culture within the company. There is a lot of knowledge at the department and they all tried to give me the opportunity to learn from them. I therefore believe that this internship has really developed my own knowledge, especially on financial matters. That is why I first of all want to thank my supervisor within SCAD Mevr A. Kingma. Special thanks goes out to her guidance, friendliness, cooperation and especially the instructive moments making me able to successfully accomplish the project. Of course I also want to thank my colleagues in the team of Decision Support for giving me a good time and helping me in all kinds of ways. Finally, I want to thank to my thesis supervisor Dhr. P. Kamminga for his patience, constructive criticism and the many advises. Furthermore, I would like to thank the people in my immediate surrounding for their support during my education. Especially Mevr. S van der Meer, Mevr. S van der Feltz and Dhr. T Elffers.

Hopefully you will enjoy reading this research. Yours sincerely,

Sem Treffers

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Executive Summary

This paper discusses the functioning of the Balanced Scorecard (BSC) within the department of Supply Chain Accounting Department (SCAD). The research elaborates on the existing literature concerning obstacles that influence the functioning of a performance measurement system (PMS) and the relationship between a PMS and its effect on employee behaviour. The general opinion in this thesis is that when management and employees pay attention to these subjects, the

effectiveness of the performance measurement system (PMS) will enhance and its contribution to the performance of the department/ organization will increase.

The reason for starting this research is the fact that, as in many other companies, the Balanced Scorecard (BSC) is not performing as adequately as is desired by the management. The management of SCAD was therefore interested in the reasons underlying the inadequate functioning of the BSC, and whether it could improve the performance of the BSC. The research question was therefore put up as follows:

“How can the BSC within the department of SCAD be improved so that it will perform adequately?” In order to answer the question the research has been conducted by carrying out an intensive literature study and an additional analysis based on a practical case within the organization of Unilever N.V.

Due to the examined obstacles that have influenced the performing of the BSC, the management decided to design an additional PMS that should support the BSC. The evaluation of the functioning of this additional PMS was made by interviewing and closely observing the general management, the team managers and the subordinates of SCAD for a period of 9 months.The conclusion that we can draw is that the additional performance measurement system, that is to say the introduced

Factsheet (FS), will be able to support the existing organizational control tool (i.e. the BSC). Several reasons found this conclusion. Firstly, the FS provides the employees with more clarity regarding the targets and objectives of department as it provides the financial outcomes on the KPI’s. In our case-study, the financial perspective was appeared underexposed by the BSC. This underexposure

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Sem Treffers, 2009-2010 4 employees as well. Therefore, we state that the influence of KPI’s should not be neglected. Therefore, in this case the FS will be beneficial to the existing BSC as it leads to the specific desired behaviour of the employees the management was aiming for, that is to say, a more proactive involvement of the employees in realizing the department’s vision and objectives. In other words, the FS has generated the behavioural characteristics of accountability, action orientation and cooperation by its

employees. Additionally, the use of the FS enabled the employees to share their knowledge with each other.

The main contribution of this paper for the department is that it pays attention to the fact that the introduction of an additional tool (besides the BSC) will be beneficial to this department since it increases the adequate performance of this department.The results of the research contributes to the existing literature, since it elaborates on the mechanisms that cause the positive or negative effects of performance management. In practical perspective, managers may become more able to optimize the effectiveness of the PMS by paying attention to technical, behavioural and organization characteristics that may influence the functioning of the PMS.

Key words; BSC, Performance Measurement Systems (PMS), Behaviour consequences and the

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Chapter 1) Background

The company where I have been working for is the company called Unilever N.V. Unilever N.V. is the product of a merger, in the year 1930, between the British company Lever Brothers Ltd. and the Dutch company Margarine Unie. Instead of producing the same product, they combined forces to fulfil the fast expanding business. Nowadays, Unilever N.V. contains more than 400 brands due to innovations but also acquisitions and mergers. The well known Fast Moving Consumer Good (FMGC) is the market where Unilever is operating in. The FMGC stands for products that are used on daily basis; they have a relatively low cost and a quick turnover. In the Netherlands we know Unilever N.V. from products like Blue Band, Becel, Ola, Hertog Jan, Knorr, calve, Dove, Omo, Cif, Axe en Vaseline. In May 2006, Unilever N.V., established the department called USCC within its organization. The department USCC stands for Unilever Supply Chain Company (USCC). The department of USCC is responsible for managing the supply chain of Unilever’s products within Europe. With the concept supply chain we refer to the whole process of fabricating and distributing the products of Unilever towards its consumers. Responsible for the financial performance of USCC are the Unilever Financing Operations (UFO). The department of UFO can further be split down in the following departments; 1) Supply Chain Accounting Department (SCAD) 2) Financial Accounting Department (FAD) and 3) Value Added Taxes (VAT). The department SCAD will be the subject within this thesis. The department SCAD is known as a financial service centre for all of Unilever’s factories and distribution centres where cost controllers, the working staff, monitor the budgets and make cost price calculations of its products.

With the establishment of the department of USCC, the supply chain activities became synchronized and in that way the European sourcing activities were bundled in one ESM (European Supply

Management). From August 2008, every country and therefore every Sourcing Unit (SU, factory) or Distribution Centre (DC) had to work according to one “blueprint”, one way of working, and

therefore had to adjust their current working processes. This new way of working was implemented in a small amount of time which resulted in high complexity within the department of SCAD but as well for the SU’s and DC’s. In a short time multiple and especially all kind of problems were issued especially due to data overload and the receiving of incorrect information from its business partners. Most of the delivered information is not correct while the department of SCAD is be called

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Chapter 2) Introduction

2.1 Introduction

As further explained in the chapter background, the department within Unilever N.V. that stands central within this thesis is the division called SCAD. The Supply Chain Accounting Department (SCAD) was founded five years ago. For the last couple of years the department was not be able to focus on stability and existing teething problems rose. Examples of these specific problems are receiving data overload from other departments within the company and not be able to provide constant costing of its products without errors. This has resulted in somewhat of a bad name of the department of SCAD. Therefore one of the first priorities of the managers was to win back the trust from their superiors, the Unilever Supply Chain Company (USCC). In order to do so the managers of SCAD decided to implement the Balanced Score Card (BSC) as one of the most important instruments to control and steer their employees. Therefore the goal of this BSC was to improve the performance and results that were made through the departments working activities.Moreover it should keep the overall focus of its staff on the planned and preferred department’s strategy.

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Sem Treffers, 2009-2010 9 The goal of this research is to have a look at the concept of the BSC, which is currently in used at the department of SCAD, and look at the factors that may hinder it from performing. Hereby the case of the BSC in the department of SCAD will show to what extend these antecedents exist and need to be solved and thus in which perspective the BSC needs perfection. This has leaded to the following research question; “How can the BSC within the department of SCAD been improved so it will perform adequately?

2.2 Sub questions

Hereby the sub questions are;

 What is being meant by a BSC?

 Which factors may obstruct the functioning of a BSC?

 What was the reason for the not functioning of the BSC within SCAD?  How can the BSC for the department of SCAD may be improved?

 What are the first experiences that can be seen from the new improved BSC?  What are the theoretical and practical implications of the experience?

2.3 Relevancy of the research

This research will have its focus on the following concepts; Performance Measurement Systems, the Balance Score Card (BSC) and behavioural consequences. Hereby this thesis tries to clarify and link these concepts with each other in order to provide a broader perspective and reflect on their relationship. This will be done by the help of existing diverse literature, and furthermore the concepts will be applied in practice at the department of SCAD within Unilever N.V. Hopefully new insights about the aspects in the research will pop up which can contribute in helping other

organizations overcome their own problems by making suitable use of controlling instruments in the business.

2.4 Type of research

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Sem Treffers, 2009-2010 10 when and in what situations similar events will occur again. As last, the explanatory study attempts to answer the questions how and why, this in order to explain the phenomenon that is researched. This thesis will execute a explanatory research as it will try to explain the reason of why the BSC is not working adequately for the department of SCAD. Moreover it will try to find a solution by looking at how the BSC can be supported in order to improve its functioning. In order to do so, this

explanatory research will be done by analyzing the provided data based on the present literature but also by looking at the practical side of the solution for the problem.

2.5 Research material

When doing research some restrictions have to be made, otherwise the research can become too broad and the research question cannot be addressed adequately in the study (Cooper & Schindler, 2003). For this thesis the literature focus will be on Performance Measurement Systems (PMS) in general but the practical purpose will only focus on one department (SCAD). Here for we examined the existing literature on factors that may hinder a PMS, and more specific a BSC, of functioning properly. For the practical part of this thesis I have been working within the department of SCAD for the last 9 months. Therefore, in favour of the research, the method of data collection has been done by monitoring, interviewing and by looking at the existing theory on the main concepts within this thesis. Monitoring is actually observation of the actions of individuals or groups as decision makers. By interviewing it is questioning the subjects and collecting the responses by personal or impersonal means (Cooper & Schindler, 2003). In this way it is able to generalize the improvements on the current BSC and experience the whole process of implementation.

2.6 Structure of Thesis

In here we will provide a short introduction of what one can expect to find in each of the eight chapters. After the chapters background and introduction, chapter three will explain what the main topics are in the current literature on the concepts of the Balanced Scorecard (BSC). Hereby we will discuss; which authors have invaded the BSC?, what was the reason here for?, and out of which components does a BSC exist? On the other side, the next chapter will look at what the literature have been writing so far on factors that may obstruct the functioning of a Performance

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Sem Treffers, 2009-2010 11 the obstacles mentioned in the literature from chapter four are as well present when related to the BSC of the department of SCAD. As we noticed what the influences are that have hindered the BSC of performing, we will, in chapter six, examine how the BSC for SCAD can be improved so it will perform more adequately, hereby the suggesting of an additional tool will be provided. Subsequently, chapter seven will look back at the first progresses that we could observe through working with the

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Chapter 3) Balanced Scorecard

“A company that wants its employees to participate actively in the execution of its strategy will have to make them an associate of the company’s vision and its corresponding objectives. If this happens intensely, it can act as a motivation for the employees and thereby encourage them to perform as is desired” (Balanced Score Card, Kaplan and Norton, 1996)

As been explained within the introduction, the department of SCAD implemented the BSC in order to have more control on the departments performance and how this stand in relation to the planned strategy and objectives of the department. The BSC is a control tool that especially can be beneficial when it provides the management the correct information in a way that it can determine the strategic path of the company for that moment in time and the future. It was developed by Kaplan and Norton in 1992. Before turning to the practical part of the concepts of the BSC and some theoretical background will be examined. The goal of this chapter is to have a wider perspective on the BSC.

3.2 Theory BSC

As a result of the criticism that people had on the fact that financial information was the only performance measure used within a company, Kaplan and Norton developed in 1992 the Balanced Score Card (BSC). More specific the researchers have shown that financial based performance measurement systems have failed to measure and integrate all the factors that a critical to the success of a business. Therefore new Performance Measurement System (PMS) have been proposed where the BSC is one of them (Braam, Nijsen, 2008). The main goals of a BSC are to align business activities to the vision and strategy of the organization, to improve internal and external

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Sem Treffers, 2009-2010 13 Moreover, a distinction within the BSC can be made between so called “lead” and “lag” - indicators which are shown on the BSC. Lead indicators are performance measurements that can lead to future company results. For instance, an increase in training can lead to more improved sealers, higher sales and eventually a higher profit. On the other hand, financial information is for example a lag indicator. A lag indicator can best be explained in a sense that it shows results from the past. Over time, the financial data can show trends in the functioning of the department. At the time this financial information had been given, it is not possible to change the actions of decisions, since they already have been made. The difference between lead and lag can also be explained by distinctive

performance drivers and outcome indicators. The outcome indicators show performance from the past, like the amount of visitors or sales. The performance drivers should direct the company towards the preferred outcome. Market share and the amount of newly introduced products are examples of performance drivers (Kaplan and Norton, 1992).

More specific, the BSC can show both KPI’s and PI’s; reflecting the performance drivers and outcome drivers that the company wants to realize according to their strategy. KPI’s are Key Performance Indicators and show what should be done to dramatically increase the organizational performance. These KPI’s are the result of specific actions and can directly be linked to the strategic objective of the company. On the other hand, the PI’s ,performance indicators, are less powerful than the KPI’s but are more focussed on smaller targeted areas; they should tell the user specific what to do. PI’s can therefore be seen as supportive indicators to realize the, on a higher level operating, KPI’s (Kaplan and Norton, 1992).

3.3 Four perspectives of the BSC

As mentioned before, the four perspectives of the BSC ought to have a causal relationship and should be a balance between short and long term goals. This paragraph will enlarge on these four

perspectives; financial, customer, learning and growth and internal business process (Kaplan and Norton, 1992).

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Sem Treffers, 2009-2010 14 “How do our customers see us?” is the question that the organization must ask itself when taking into account customer perspective. When considering the customers perspective, the organization must ask itself the question how they appear to their customers and maybe more important, how they should appear. Within this perspective, aspects from outside the organization will also play a role. Indicators such as the profit of the customers and the customer satisfaction are examples of these aspects. To focus on the efforts of the employees, the organization has to determine the segments in which it wants to compete. The indicators have to be adapted to this focus of competition.

The internal process must show where the organization is good at, or, in which processes it exceeds. It describes whether or not the implemented process is working effectively and efficiently. When the organization can control its processes, it will be able to realize its financial targets by knowing where the opportunities are in the market and therefore satisfy their shareholders and customers.

The last perspective, the learning and growth, is the improvement and adjustment that the company has to realize, in order to assure that the organizational vision succeeds. This perspective is of importance to minimize the difference between actual reality and the wanted reality.

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Sem Treffers, 2009-2010 15 Figure 2; the BSC

3.4 Chapter conclusion

Through the use of a BSC a company wants its employees to participate passively in the execution of the company’s strategy through making them an associate of the vision and corresponding

objectives, of the company. This can be realized by translating the vision and objectives into the four perspectives that the BSC holds; financial, customer, learn & growth and internal processes.

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Chapter 4) Factors which may influence the performance of the BSC

Researchers and companies are still quite sceptical about the functioning of the Balanced Scorecard (BSC). For instance, not much empirical proof of the benefits of using the BSC in practice has yet been found (Nörreklit, 2000). It is therefore that especially the authors Nörreklit (2000) and Otley (1999) have provided critical remarks that suggest the BSC do not function properly within organizations or departments. The question that this part of the thesis hopes to answer, by looking at the current literature, is what these factors are that may obstruct the performance of a BSC. Before answering this question we first want to discuss several obstacles that may influence the performing of a Performance Measurement System (PMS) in general. The reason behind the fact that this chapter wants to enlarge on issues concerning the performing of a PMS can be explained by giving the definition of performance measurement (PM) and explain its relation with the BSC. Performance measurement can be defined as; Evaluating how well organisations are managed and the value they deliver for their stakeholders, for example their customers (Moullin, 2002). Moreover, performance measurement ought to provide the information needed to access the extent to which an

organisation delivers value and achieves excellence (Moullin, 2005). The BSC is a example of a PMS as its main goals are to align business activities to the vision and strategy of the organisation, improve internal and external communication and monitor organisational performance against strategic goals (Kaplan and Norton, 1996). Through the use of the BSC a organization wants to achieve excellence. To start this chapter, the main influences of technical characteristics on the performance of a PMS will be discussed. With technical characteristics we refer to influences on the functioning of the PMS due to the design of the PMS. Hereby the chapter will firstly refer to technical characteristics that are of influence for a PMS in general followed by technical characteristics specific for the BSC.

Subsequently, the attention will be laid on behavioural characteristics that may pressure the

performance of a PMS. Therefore we will look at behavioural consequences that will be shown by the employee as it is influenced by/ generated through the use of a PMS. The last paragraph of this chapter pays attention to organizational characteristics that will have their weight on the

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Sem Treffers, 2009-2010 17 4.2 Technical characteristics that influence the performing of PMS

The second part of this chapter will enlarge on the topic of technical characteristics that may influence the performance of a PMS. As discussed before, with technical characteristics we imply influences out of the design of the PMS. When the performance measurement is designed well it should cover what ought to be measured. In other words the performance measurement ought to cover what the goal of the PMS is.

First point of attention, concerning the technical characteristics, is that it can occur that the PMS will be used incorrectly when the performance drivers and outcome indicators are not consistent with the organisational strategy (Brown, 1996). The result of this may be that outcome indicators or performance drivers do not show the actual value/ contribution of the performance accomplished by the employees on their work activities. For example, the outcome indicator indicate the quantity of the amount of delivered work by the employee but it neglects the quality of the delivered work. When quality has not been taken into account, incorrect achievement of the employees delivered work will be shown. Moreover, when the performance drivers and outcome indicators are not consistent with the organisational strategy this can lead towards a way that there could be exceptional performance in one area, but performance in another area be neglected and thereby realize a failure of the PMS (Brown, 1996). For example, the employee has caused for an increase on the level of profit, but additionally a lower level of customer satisfaction has been realized. This may mean that the exceptional performance on profit has negatively influenced customer satisfaction. For instance, less attention was paid to the customer or the customer was charged with higher prices which benefited the performance on profit. In the long term, the focus on profit instead of customer satisfaction can be disastrous for the organizational performance. This because the thought is that a higher level of customer satisfaction will positively influence the turnover and thereby as well the profit. When the level of customer satisfaction will become less, more customers will abandon the company and less profit will be realized in the long term.

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Sem Treffers, 2009-2010 18 or too little. This can result in, based on incorrect information, unreasonable decisions; Managers may ignore the provided data or use it ineffectively. Subsequently the manager will fail to base business decisions on the acquired data and rather make decisions on intuition and past experience. Third form of data accuracy is a negative remark that many measurement systems also face; the measurement system suffers from too much data arriving too late and therefore the manager cannot act on this data.

Additionally, the third point of attention concerning technical characteristics can be attributed to the concept of alignment as is been mentioned by De Waal (2004). The meaning of the term alignment can best be explained as the example of; when a corporate strategy is formulated, it must be translated into sub-strategies to lower levels in the organization. To be effective in performing towards the strategy, the strategies at all levels of the organization ought to be aligned with each other. In order for this to realize; vision and strategy have to be clearly defined and communicated, De Waal (2004). Therefore, when concerning the concept of alignment, the KPI’s that will be used for the PMS should in that way been designed/ chosen so that the employee should be able to associate the underlying relation with other organizational units so each working activity corresponds with the input of the entire organisation (De Waal, 2004). In other words, the same goals ought to be shared by the top management , its subordinates and the PMS itself.

Hence, when concerning the technical characteristics we can name the concept of alignment, the possibility that performance drivers and outcome indicators are not consistent with the

organizational strategy and data accuracy as aspects that may influence the performing of a PMS. 4.3 Technical characteristics specific for the BSC

The above mentioned technical characteristics can be attributed to influences on a PMS in general. In this paragraph we will enlarge on technical characteristics that influence the performance of a BSC in specific. This paragraph starts with providing the main negative aspects of/ critical remarks on the BSC which have been researched by many authors. Hereby the research of Nörreklit (2000) and Otley (1999) will be highlighted as they are the most widely known on providing critical remarks on the BSC. These critical remarks can be attributed to technical characteristics as it implies influences out of the design of the BSC.

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Sem Treffers, 2009-2010 19 implies that a time delay has not been taken in account. Normally, in a cause-and-effect relationship, a time delay between the cause and the effect will occur. However, since the BSC does not take this time delay into account, a bias may be created. For example, an innovation may not directly lead to a process improvement.

Secondly, Nörreklit (2000) remarks that a lot of the BSC measurements are said to be logical dependent. However, Nörreklit (2000) claims that this mutual dependent relationship is in some cases a misconception; also called a logical fallacy. With logical fallacy we refer that to the fact that, when reversing a cause-and-effect relation, this leads to incorrect reasoning; assuming that the occurrence of an effect is always preceded by the cause. For example; customers who are not loyal are expensive, but it does not follow that loyal customers are inexpensive (Nörreklit, 2003). Nörreklit (2000) also believes that the BSC is too static (third comment on the BSC). Herby Nörreklit (2000) implicates that the problem of being too static can be explained due to the internal focus of the BSC. As a result, the BSC has the tendency to create measures that are out of touch with the reality; the targets are seen as fixed as it does not consider external changes. For example the BSC does not include the development of its rivals/ competitors neither does it consider the development of technology.

In addition, Nörreklit (2000) argues that the BSC is based on a top down model whereby it will be implemented/ approached from the top of the organization. Thereby support of the strategy by the employees may be inadequate. Especially because the formulation of measures are hierarchical top-down processes. This means that local conditions have been defined by the management while they might not have proper insight on these local conditions (Nörreklit, 2000). This means that an

innovation, for example a BSC, may not be supported by its employees because of the top-down implementation. For instance, the employee sees the BSC as a management tool, the employee thinks that it will only benefit the management, it was/ or is not involved by designing the tool, neither is/ or was it able to give its meaning on it. These are reasons that therefore the employee may neglects working with it.

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Sem Treffers, 2009-2010 20 providing ways to deal with the data and giving a guide for actions in relation to the obtained

outcomes on the BSC.

4.4 Behavioural characteristics related to PMS

Before, we discussed the technical characteristics that have its influence on the performance of a PMS. In this paragraph we will enlarge on behavioural consequences that may appear by the employees, through KPI’s, when an PMS will be in use. The reason behind the focus on KPI´s is that they not only effect performance measures but also cause for behavioural consequences with its employees (De Waal, 2004).In relation, Martins(2000) says that most of the literature on

performance measurement highlights only the technical side while the behavioural aspects stay underexposed. It is therefore that the research of De Waal’s (2004) went into depth on the stimulus of performance aimed behaviour in order to realize better results. It is especially this research, where individual behavioural factors have been mentioned, that will favour performance aimed behaviour. As a first behavioural characteristic that a KPI may generate, according to De Waal’s (2004), is accountability. Accountability refers to the fact that employees should feel that they are responsible for the realized results on the KPI’s. Moreover, the KPI’s should provide the worker insights in the relation between the operational processes and the performance on the KPI’s (De Waal, 2004). Through providing this insight the subordinates will become aware of the outcome of its own work activities. Subsequently, it is that therefore the employee receives a clear view of what is expected by its management.

The second behavioural factor that ought to be shown through the use of the KPI´s is action

orientation. In favour of this specific behavioural characteristic it is essential that KPI’s are integrated in the daily work activities of the employee. The KPI’s are integrated when the employee considers the KPI’s indispensable in order to execute its work activities properly. The KPI’s will therefore result in a way that the members of the staff will learn to understand the meaning of the KPI’s that are in use and what thereby their contribution is in relation to organizational performance (De Waal, 2004). This should provide the employees insight in the possible consequences of their actions in relation to the outcome on their KPI’s. As the performance indicators are integrated in the daily activity of the employees, problems can be addressed immediately and preventive or corrective actions will be taken by the employees (De Waal, 2004).

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Sem Treffers, 2009-2010 21 alignment is ones again been used but should now be seen in a different perspective. Hereby the concept of alignment is been put in relation to the complexity of valuating each indicator individually. As an example, the possibility may occur that performance indicators are too easily obtainable or that the outcome on the performance indicators can be manipulated by the employees. It is therefore that goal congruence/ alignment has to be realized between indicators and incentives. With the concept of goal congruence we mean that consistency or agreement of actions with organizational goals should be established. It is a term that is used when the same goals are shared by both the manager and the employee; Organizational goals ought to be well aligned with the personal and group goals of subordinates and superiors (Accounting dictionary). That this is of importance is further been explained by Hopwood (1974) who mentions that; when performance measures, targets, goals and rewards do not mutually reinforce each other, this may lead to dysfunctional behaviour and unreliable performance. In other words, when the rewards are not consistent with the performance this may lead to irrational or exceptionally high rewards and can consequently call for gaming/ manipulation. With gaming/ manipulation we mean that employees will keep their results up in favour of their own interest instead of the organizations interest. The fourth and last point of attention, concerning behavioural characteristics, is been made by Otley (1999) who mentions that it may be wrong to minimize attention to subjects which are not included in the BSC. This means that often subjects that are not on the BSC will become forgotten or the employees will no longer pay attention to these subjects. Therefore, Otley (1999) believes that besides the BSC, the company should have an additional budget system to control the shortcomings of a BSC.

Hence, when the PMS has been designed it should pay attention to the behavioural consequences that it may generate through the use of KPI´s as they may cause for action orientation and

accountability with its employees. Moreover, it should pay attention to the difficulty of aligning indicators and incentives as it may cause for manipulation/ gaming or the fact that the PMS may minimizes the employees attention.

4.5 Behavioural factors that influence the implementation of PMS

A well-known quote of numerous managers is: “everything stands and falls with the implementation”. The implementation phase is crucial, especially since a non-succeeding

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Sem Treffers, 2009-2010 22 implementation of a PMS. These are factors which managers should take into account when

implementing and working with a PMS.

The first factor can be related to Braam and Nijssen’s (2008) leadership characteristics. Braam and Nijssen (2008) state that leadership characteristics have been found to be one of the most significant determinants for the acceptance of innovations. This is in particular because top managers have a dominant position and influence on the shaping of the organization’s strategy, organizational design and its management system. The second factor mentioned by Bourne et al. (2002) is the factor of needed time and endeavour. Managers usually have a busy schedule and they therefore need to choose carefully on which project most of their time will be spend. When the new PMS is a time consuming system, the commitment of the manager may become less. Here, the manager will compare the costs versus the benefits of the project. Additionally, when the organization wants to let the implementation process to succeed it ought to realize that the employee should clearly notice that management is involved and interested in the outcome on the KPI’s that are in use. Bourne et al. (2002) also concern the possibility of additional new initiatives of the company. With new initiatives we mean different project that are high on the management list of “things that should be done”. In many companies, the implementation or use of a new system may fail because the company (management) assigns necessary resources to projects that, in their eyes, are of higher priority. The above mentioned possible influence of management is supported by Simons and Davila (1998) which state that; not being able to justify a certain amount of time to spend on projects, is one of the most important reasons for the failing of the implementation. For effective use of the new PMS strong leadership, participation and commitment by top management is required. Suggesting should therefore be that the organization includes an executive management planning committee that champions the project, fully supports the cost and is committed to enterprise integration.

The third factor that can hinder the implementation is resistance against an innovative PMS, as been mentioned by Bourne et al. (2002). People are afraid of new ways of working and may be worried that this will mean a deterioration of their personal achievement. Furthermore an additional or new PMS can provide resistance because performance measurement will make the actions of their employees more visible (Merchant and van der Stede, 2003).

4.6 Organizational characteristics

The last part of this chapter will enlarge on the topic of organizational characteristics. Hereby internal and external company´s characteristics that may influence the performance of a PMS will be

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Sem Treffers, 2009-2010 23 indicated that certain factors may play a considerable role in the adoption of an administrative innovation. With an administrative innovation we are referring to the difference between an administrative and a product innovation. While product innovations tend to be determined by their content and tangible design, an administrative innovation, like the BSC, is a multi-interpretable and mainly prone to a lack of clear description and detailed instructions (Benders and Van Veen, 2001). Therefore we can argue that there is not one best way/ a guide for how to use the administrative innovation as is more the case with a product innovation. For that reason administrative innovations calls out for multiple interpretations by its users and may therefore cause for different forms. As an example; Various forms of management systems were adopted by organizations although they were all been put under the label of TQM. This was made possible as it was still meeting many, but not all, of the TQM tool’s key requirements such as systematic quality measurement, procedures for

improvement and customer focus (Easton & Jarrel, 2000).

Coming back to the topic of organizational characteristics, Braam and Nijssen (2008) identified two sets of variables that influence a firm’s likelihood to adopt or exclude an innovation. The first variable that, according to Braam and Nijssen (2008), may hinder the adoption of the innovation is internal organizational structure. Here, the internal organizational structure refers to two factors, that is to say the amount of centralization and formalization of the organizational structure. Centralization refers to the amount of delegation of decision-making authority throughout an organization and the extent of participation by organizational members in decision-making (Aiken and Hage, 1968). Braam and Nijssen (2008) state, that a high level of decentralization may hinder the need to create a

complete acceptance of the PMS throughout the different levels within the organization. We can explain this because the positive influence of top management involvement will be much more effective in a centralized than in a decentralized organization. This is especially because

centralization allows for a more speedy distribution of the early adoption than is feasible in decentralized organizations. In addition, a centralized organization allows the top management to communicate and explain their vision more directly towards their employees.

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Sem Treffers, 2009-2010 24 Formalization must be seen in two perspectives. First as the amount of rules and duties that are present in the current organization/ department. Secondly as the possible increase towards the obligation to rules and ways of working that may arise in the future due to the adoption of an new PMS. It is therefore that we must recognize that the level of formalization will affect the

entrepreneurial spirit with its employees in general but does not affect the performance of the PMS in specific. This can be explained as the literature provides evidence that companies with formal organization are less likely to come into contact with innovations (adopt innovations) than their less formalized counterparts (Aiken and Hage, 1968).

The last variable, that influences a firm’s likelihood to adopt or exclude an innovation, includes the external characteristics of the company. Here, Braam and Nijssen (2008) mention that a highly competitive and innovative environment, for instance, can stimulate the embracement of innovations and thereby will make the manager more able to control its environment. The

competitive and innovative environment stimulates the management to take timely actions. Hereby the organization will recognize that information delivered by, for instance a BSC, will make the manager able to make timely actions and is thereby able to deal with environmental uncertainty (Baines and Langfield-Smith, 2003). This finding is supported as empirical findings confirm a positive relationship between BSC-use and environmental turbulence (Olson and Slater, 2002).

4.7 Chapter conclusion

The aim of this part of the thesis was to have a look at which factors may harm a PMS of functioning properly and more specific what are the critical remarks on the BSC. Therefore, a summary is made which reflects the main organizational, technical and the behavioural characteristics that may hinder a PMS from performing properly.

Main Subjects Explanation of obstacles that influence the

performing of PMS 1) Technical Characteristic

1.1 Technical Characteristic PMS

Performance drivers and outcome indicators are not consistent with organizational strategy Brown (1996)

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Sem Treffers, 2009-2010 25 will be disastrous for another area.

Data accuracy Brown (1996)

Irrelevant data can be selected which can cause for a domino effect. Too much or too little data will be used as a consequence that unreasonable decision will be made. Additionally, data may arrive too late; employees fail to base business decision on the acquired data.

Alignment De Waal (2004)

The employee should be able to associate underlying relation with other organisational units so each work activity corresponds with the input of the organisation.

1.2 Technical Characteristics BSC

Time delay Nörreklit (2000)

With the BSC a time delay has not been taken into account; normally a time delay between a cause and effect will occur. For example, an innovation may not directly lead to a process improvement.

Logical fallacy Nörreklit (2000)

Measurement are said to be logical dependent while this mutual dependent relationship is in some cases a misconception. One cannot say that; not loyal customers are expensive but loyal customers are not expensive

Too static Nörreklit (2000)

The BSC has the tendency to create measures that are out of touch with reality; targets are seen as fixed as the BSC does not consider external changes.

Top- down Nörreklit (2000)

The BSC seems to be implemented top-down, thereby support of the strategy may be

inadequate. Local conditions have been defined by the management while they might not have proper insight on these conditions.

Performance measurement is done implicitly Otley (1999)

No formal procedures have been mentioned; there are no guidelines for what should be done with the results of the BSC.

2) Behavioural Characteristics

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Sem Treffers, 2009-2010 26 Accountability

De Waal (2004)

Need for accountability refers to the fact that the employees should feel that they are responsible for the outcome on the KPI’s.

Action orientation De Waal (2004)

The KPI’s should be integrated in the daily work activities of the employee. Otherwise the employee will not learn to understand the meaning of the KPI and its relation to the overall organizational performance.

Aligning indicators and incentives (Manipulation)

(Kaplan and Norton, 1996)

Hereby we refer to the complexity of valuating each indicator individually. As an example, the possibility may occur that performance

indicators are too easily obtainable and that the outcome on the performance indicators can be manipulated by the employee. More specifically; When indicators and incentives are not well aligned, this may lead to irrational or exceptionally high rewards and can consequently call for manipulation. The

employees will keep their results up in favour of their own interest instead of organizations interest.

Employee may minimizes its attention to specific work activities

Otley (1999)

It may occur that less attention will be paid by the employees to pillars which are not included in the BSC. The subjects that are not on the BSC may become forgotten or ignored by the employees.

2.2 Behavioural Characteristics implementing PMS

Leadership characteristics and Time and endeavour of management

Bourne et al. (2002)

Management has a dominant position and influence on the implementation and shaping of a PMS.

When having a busy schedule management needs to choose on which projects most of their time and endeavour will be spend on. In

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Sem Treffers, 2009-2010 27 Therefore the leadership characteristics like strong leadership, participation and

commitment are required. Resistance against the innovative tool

Bourne et al. (2002)

People are afraid of new way of working, may mean a deterioration of their personal achievement.

3) Organizational characteristic

Internal organizational characteristics (Braam and Nijsen, 2008)

A company that is decentralized organized may face a less speedy acceptance of a PMS as it hinders the top management to communicate and explain their vision more directly.

The level of formalization within a company does not influence the functioning of a PMS but it is more on influence on the acceptance of a PMS in general.

External organizational characteristics (Braam and Nijsen, 2008)

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Chapter 5) Why did the BSC not perform within the department of SCAD

At this moment, the management is not satisfied with the performance of the BSC and is seeking for a way to support the BSC. From this point of view, it seems interesting to find out what the missing points and/or difficulties are with the current BSC. Therefore, we will look at the functioning of the BSC within the department of SCAD and relate these observations to the factors that may obstruct the performance of a PMS as has been discussed in chapter four.

The remarks/ observations that will be discussed in this chapter were established by interviewing and observing closely the employees and management of the department of SCAD. We were able to make these observations as we worked for the company of Unilever N.V. for the last nine months. Hereby, our duty was to investigate what the reason was behind the not functioning of the BSC and how the BSC could be improved. In order to do so, we visited multiple team and department’s meetings where the progresses towards the BSC were discussed. Additionally, the employees gave us insight in their way of working and indicated which problems they saw or had with the BSC in general and their current working activities in specific. Interviewing was done on a regular basis, monthly and weekly, and can be seen as a semi- open way of interviewing. The interview questions were prepared before hand and were given to the managers and subordinates. Most of the questions could be answered but as well it could occur that managers or employees could not answer all the questions and came with new and different insights than was expected. In total all the general managers (four) of the department of SCAD, the team managers (five) have been interviewed and observed.

Moreover, most of the more experienced employees (twelve employees) have given their opinion towards the BSC and their own way of working. The interviews with the subordinates where done on a monthly basis and the interviews with the general and team managers has been executed three times, each time after the progresses where been presented to them

5.2 BSC within SCAD

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Sem Treffers, 2009-2010 29 In practice, the BSC shows the employees, the teams and the department which specific pillars are carried out and what their status is compared to the Key Performance Indicators (KPI’s) that are agreed on for each of the pillars. Monthly, an overall meeting takes place where the management presents the results on the pillars and discusses the progress of the BSC. These pillars are individual or team processes that should be carried out by the employees to perform, as agreed on, regarding their daily work activities. Moreover, these pillars can be projects in which the employees try to make an improvement on the existing processes. An individual pillar can, for example, be that one employee is responsible for communicating the made innovations within the entire organization. An example of a team pillar is that three employees are together responsible for auditing the made price variances, on a monthly basis, for all of Unilever products.

5.3 Observations SCAD

In this part of the research we will discuss the made observations related to the question; Why did the BSC within the department of SCAD not perform adequately? We will therefore look at the technical, the behavioural and organizational characteristics that may influence the performance of a PMS, as described in chapter four.

Technical characteristics PMS

The first part of this paragraph will enlarge on the topic of technical characteristics that may influence the performance of a PMS. As indicated in chapter four, with technical characteristics we imply influences out of the design of the PMS.

Thereby the first observation that we can make can be related to the fact that the performance drivers and outcome indicators are not consistent with the organizational strategy. In chapter four we indicated that this may be the result when outcome indicators or performance drivers do not show the real quality of and/ or effort on the work that has been performed and delivered by the employees. We provided the example of; scoring high on profit but neglecting customer satisfaction. In practice we can argument that this is as well the case for the BSC of SCAD. As an example of this specific issue we observed that each employee can score equally on all of the following three dimensions; on time, correct and complete. Therefore, for a specific project of interest (for instance an analyzing project), an employee can on one hand deliver his work on time and be complete by providing sufficient information as agreed by the given KPI’s. On the other hand he or she may, in relation to the delivered work, not be correct. Meaning that the employee has used incorrect

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Sem Treffers, 2009-2010 30 used at all. Considering the employee’s performance on the BSC in this example, the employee will receive two out of the three possible “points” and subsequently generates a positive score on its performed work. The positive score is achieved despite the fact that the correctness of the analysis ought to be the most important factor in this example. To elaborate on this subject; we will discuss the example of a project called price variance. On this project ‘price variance’, the employee receives a green (positive) score according to the three measurements (complete, on time and correct). The financial results of this activity show a result of minus 2 million, with an impact of 10% on the overall business result. All together, we can argument that the measurements on the BSC are too simple and too broad (not specific enough). They account for each score equally, thereby not prioritising any of the measurements of the BSC. Consequently, we can say that the BSC is not working adequately because it does not show the actual quality of the employees’ performance.

Secondly we observed that the employees are receiving too much data. Anecdotal evidence showed that the BSC has too many pillars and therefore provides the employees with too much information. Apart from receiving too much information from the many pillars that the BSC is presenting, the employees receive a business information overload from multiple business parties (plant controller, country directors, and marketing managers). All together, this has resulted in an ineffective use of the data and has resulted in the ignorance of important information. Hence, currently the employees fail to base business decisions on the acquired data. Considering this observation, the mentioned literature on data accuracy as a factor that may influence the PMS of performing may be a valuable explanation.

The third observation concerns the fact that the employee should be able to associate underlying relation with other organisational units so each work activity is in line with the input of the

organisation. Measurement and the goal of the PMS ought to be aligned with each other. The made observation, concerning the characteristic of alignment, showed us that within the department of SCAD not all the employees are able to associate/ or understand what aspects of the department’s process relate with each other. Especially referring to the meaning of specific work activities, their relation to the entire business process and whether the financial result on these activities cause high or low results. Even worse, we observed that the employee does not know whether the financial results on the work activities are in fact correct. To enlarge on this subject we can look at the

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Sem Treffers, 2009-2010 31 financial result on toll fee they cannot tell whether this is high or low or whether this has a positive or a negative influence on its business partner (plant controller). Therefore we can argue that the employee is not able to associate underlying relation with other organizational units.

Technical characteristics specific to BSC

In this paragraph we will enlarge on technical characteristics that influence the performance of a BSC in specific. Hereby, as far as we could observe, the critical remarks (Nörreklit,2000), time delay, logical fallacy and too static are not present in the BSC that is in use for the department of SCAD. We observed that the pillars and their corresponding KPI’s take the possible problems of logical fallacy and time delay’s into account. Moreover, the external changes does not influence the performing of the BSC for the department of SCAD. The BSC focus only on the department of SCAD and as it does not have to include the development of its rivals/ competitors. This because it does not seem to have an impact on the performing of the department.

Looking back at the described theory from chapter four, we can argue that the BSC of SCAD faces problems that can be related to the critical remarks of; the BSC is a top-down model (Nörreklit, 2000). Since the BSC is based on a top-down approach, embedding of the BSC in the organization may be difficult to realize (Nörreklit, 2000). This can be explained as the employees of SCAD mention that they see the BSC strictly as a tool for the management. Because the employee perceive the BSC as a tool for the management they see it as a tool which will benefit the management rather than that it will help or support the employees themselves. Our opinion is that more involvement of the employees had to be realized when designing and implementing the BSC and therefore realize that the BSC will be supported by most of the subordinates.

The fifth point of made observations concerns the way that the performance measurement seems to be done implicitly (Otley, 1999). Hereby referring to the fact that with the current BSC there is no guideline for what should be done with the results. We observed that the employee’s effort stops after executing their duties in favour of the BSC. This means that the guideline of the BSC does not function properly as the employees are more interested to perform towards the KPI’s that concern their own pillar on the BSC. This, instead of being more proactive with solving problems or finding better ways to approach their own work.

Behavioural Characteristics

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Sem Treffers, 2009-2010 32 the first section. We observed that the effect that the KPI’s of the BSC have on the employee’s behaviour is minimal. Minimal in a way that the employees’ will try and do their best to obtain and realize their targets in relation to the given KPI’s but on the other hand their endeavour stops when having provided the requested work activities. Moreover, the behaviour of the employees is seen as minimal as the personal/ individual goals are no longer the same as those of the manager. The employees want to do their job, but thinks that after that he or she is finished with its obligation towards its jobs responsibilities. The manager on the other hand wants its employees to do their job but subsequently show more proactive behaviour. The employee should look at whether its

individual goals and targets are realized and whether they are in line with those of the department. Additionally, we observed that employees perform according to their own duties but on the other hand do not show an adjustment of its way of working or specific behavioural actions when the performance of the BSC is been discussed by the management on the monthly meeting. Problems are not been addressed immediately neither are preventing or corrective actions be taken without the interfering of the management. Hereby we can refer to the need of action orientation; the KPI’s should be integrated in the daily work activities of the employee. As said before, the employees will try to perform the best they can on their own pillars but, simultaneously, they will not pay attention towards the overall performance, as the BSC indicates, of the department. Therefore we can argue that there is minimal accountability; the employees should feel that they are responsible for the realized performance of their own KPI’s and thereby on the departments performance. After all, the employee feels responsible for the realized performance on its own KPI’s as it will be judged

according to the three measures (on time, complete and correct) of the BSC. The problems is that the employee will only be judged according to the three measures while the financial results of its working activities are not (even) taken into account. It seems that the employee feels not responsible for the department’s performance. Hence, there is little concern for accountability and action

orientation in generating good results on the BSC.

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Sem Treffers, 2009-2010 33 As a fourth observation we will discuss the point of attention concerning the behavioural factor of minimizing attention only those pillars which are shown on the BSC. According to Otley (1996) less attention to subjects which are not included in the BSC may occur. This because subjects that are not on the BSC may become forgotten by the employees. We observed, on the other hand, that the BSC has too many pillars and therefore provides the employee with too much information. This may explain the fact that the employees are more interested in their own project instead of all the other pillars that are shown; the information on individual performance is simply easier to understand. In this way showing too much pillars has caused for an information overload and that may cause that the employees minimized their attention to only those projects/ pillars were they have a direct influence on.

Behavioural factors that influence the implementation process of PMS

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Organizational characteristics

Concerning the organizational characteristics, we cannot argue that the level of decentralisation has caused for any problems that hinder the performance of the BSC. The department of SCAD is located on two work flours within the building “De Brug” (Rotterdam), and therefore the BSC can be shared and communicated easily with all of its employees. Moreover, nothing specific can be said on the level of external environment and thereby its influence on the performing of the BSC. For example, new competitors will not change the way that the supply chain activities for the company will be done, new competitors will rather influence the departments of Marketing and Sales.

On the other hand, the first observation that we made concerns the level of formalization. The BSC has provided for more rules as the work activities of the employees have to be performed on time, complete and correct. Moreover, most of the work that has to been done by the employees is quite strict concerned to specific rules. Employees see their work sometimes as just “pushing the buttons”. Our opinion is therefore that the work activities performed by the employees and moreover, its obligation towards the BSC has caused for a high level of formalization within the department. This can be explained as the implementation of a new PMS will come together with more rules and obligations. It is therefore that we say that as a result, it did not hinder the performing of the BSC it just influenced the level of adoption/ and embedding of the BSC by/ with the subordinates. 5.4 Chapter conclusion

The main findings that we made within this chapter will be show in the following table.

Main Subjects Explanation of obstacles that influence the

performing of PMS 1) Technical Characteristic

1.1 Technical Characteristic PMS

Performance drivers and outcome indicators are not consistent with organizational strategy Brown (1996)

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Sem Treffers, 2009-2010 35 /and effort on the work that has been

performed and delivered by the employees. Data accuracy

Brown (1996)

The BSC has too many pillars and therefore provides the employee with too much information. Moreover, the employees are receiving too much data in general. This has resulted in ineffective use of the data and has resulted in ignorance of important information.

Alignment Not all the employees know with what aspects

of the entire process of the department they are working with. Especially referring to what the meaning is of specific work activities and

whether the financial outcome cause high or low results. 1.2 Technical Characteristics BSC Time delay Nörreklit (2000) - Logical fallacy Nörreklit (2000) - Too static Nörreklit (2000) - Top-down Nörreklit (2000)

BSC was implemented top-down; employees of SCAD mention that they see the BSC as a tool for the management. Embedding of the BSC in the department has not been realized optimally. Performance measurement is done implicitly

Otley (1999)

With the current BSC, no formal procedures have been mentioned. There is no guideline for the employee to indicate what should be done with the outcome of the BSC.

2) Behavioural Characteristics

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Sem Treffers, 2009-2010 36 Accountability

De Waal (2004)

The employees will try to perform the best they can on their own pillars but, simultaneously, they will not pay attention towards the overall performance of the department (shown by BSC). Action orientation

De Waal (2004)

Employees perform according to their own duties but on the other hand do not show adjustments towards its way of working or specific behavioural actions when the

management shows/ indicate the outcome that the department is obtaining on the BSC.

Aligning indicators and incentives (Manipulation)

Kaplan and Norton (1996)

-

Employee may minimizes its attention to specific work activities

Otley (1999)

As the BSC has too many pillars; this has lead to information overload and therefore the

employees are more interested in their own project. The information on individual performance is simply easier to understand.

2.2 Behavioural Characteristics implementing PMS

Time and endeavour of management Bourne et al. (2002)

The management might be failing because it is not able to clearly indicate how one (i.e. an individual employee) can do his or her job as is desired by the management. By that

management does not show an individual employee how one can contribute to the overall performance of the department in relation to the targets and objectives on the BSC. Moreover, it does not seem to clarify what the relevant topics on the BSC are for the employee. Resistance against the innovative tool

Bourne et al. (2002)

The employees see working with the BSC more as a duty and by that it will cause for more work to be done for the employee

3) Organizational characteristic

Internal organizational characteristics (Braam and Nijsen, 2008)

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Sem Treffers, 2009-2010 37 within the department of SCAD.

External organizational characteristics (Braam and Nijsen, 2008)

-

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Chapter 6) How can the BSC be improved

From the previous chapter we could conclude that the BSC is not working adequately for the department of SCAD. We explained the main problems of working with the BSC by dividing them in technical, behavioural and organizational characteristics that have influenced the performing of the BSC. In the end we could argue that the BSC is as a result not able to motivate and to direct its employees in favour of showing performance aimed behaviour towards the department’s goals and targets.

6.2 Specific aspects that are needed for the BSC of SCAD

This paragraph will try to explain what specific aspects the BSC should contain or ought to improve in order to let it work effectively. This will be done by aligning it with the main pitfalls as described with the technical, behavioural and organizational characteristics.

First of all we can say that the department should provide more concreteness/ clarity about the organization’s goals and targets. Hereby, the BSC, ought to be more specific towards its employees of what the department’s targets and objectives are and how the employees can contribute to realizing the department’s strategy. To realize this, the thought is that it should show more specific and concrete the financial results on the performance that is delivered by the employees. As a result, it may prioritise the performed work activities of the employee as the financial results are the main measurements where the employee will be judged on. Additionally, the thought is that thereby it will make it possible that the employees will notice what their contribution is towards the department’s targets and objectives. The employees can compare its own results with that of its colleagues and the entire department. It will provide the employees insight in which of their work activities it is not performing adequately, which aspects it should enlarge its knowledge on or on which work activities it must gain more experience. Hereby, it especially tries to minimize the problem (as discussed in chapter five) that the performance drivers and outcome indicators are not consistent with the organizational strategy.

Factsheet: a contribution to the Balanced Scorecard?

Scorecard?

Preface

Executive Summary

Table of contents

Chapter 1) Background

Chapter 2) Introduction

Chapter 3) Balanced Scorecard

Chapter 4) Factors which may influence the performance of the BSC

Chapter 5) Why did the BSC not perform within the department of SCAD

Chapter 6) How can the BSC be improved