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Ferreira, A. and D. Otley. 2009. The design and use of performance management systems: An extended framework for analysis. Management Accounting Research (December): 263-282.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Performance Management Systems Main Page | Control Main Page | Strategy Main page



The purpose of this paper is to present a performance management systems framework that can be used to describe the structure and operation of management control and performance management systems in a more holistic manner than previously described in the literature. The new framework extends Otley's 1999 five question framework into twelve questions and integrates key aspects of Simons' levers of control framework. The paper includes six sections including the introduction. The second section includes a discussion of the previous research on management control systems and some of the other frameworks presented in that literature. The new or extended twelve question performance management framework is presented in the third section. This is followed by a more involved discussion of the theoretical development of the twelve questions in the framework. Section five includes a short discussion of the authors' view of the new framework and recognition that additional empirical evidence is needed to validate its' adequacy. In addition, there is a short conclusion, acknowledgements, and an appendix with two examples that illustrate key features of the new design.

Introduction

This section emphasizes the need for a more holistic framework than previously presented in the performance management and management control systems literature. Their argument is that most of the literature has tended to focus on specific and fairly narrow aspects of control systems rather than using a more comprehensive and integrated approach.

Management Control Systems

Most of the previous literature related to the management and control of organizational performance has been categorized using the term management control systems. Ferreira and Otley use the term performance management systems as a more general term to capture a holistic view of the management and control of an organization's performance. They begin their discussion with Anthony's 1965 approach1 that included strategic planning, management control, and operational control. They view this as too narrow because it does not connect with strategic planning and implementation. Other broader frameworks are mentioned and two were used as the basis for their extended framework. These include Otley's 1999 framework2 and Simons' 1995 levers of control3.

Otley's framework was presented as a first step in developing a more comprehensive framework for management control systems. Otley discussed five areas that need to be considered in the development of a more descriptive structure for performance management systems:

1. identification of the organization's key objectives,

2. formulating and implementing strategies,

3. setting performance targets,

4. the organization's reward system, and

5. the information flows required to adequately monitor performance.

Some strengths of Otley's framework are that it considers management control systems as a whole, it is compatible with other frameworks, is meaningful and straightforward, and facilitates dealing with large amounts of information in case-based research. Some weaknesses of Otley's framework are that the organization's vision and mission are not explicitly considered, it appears to be focused on diagnostic control systems, rather than all four of Simons' levers of control, does not stress how information in the control system is used, tends to present a static perspective rather than a dynamic view of change and development, and does not explicitly address the connections between different parts of the system.

Simon's framework is an action-oriented theory of control that includes four key concepts:

1. Core values - controlled by the beliefs system,

2. Risks to be avoided - controlled by the boundary system,

3. Critical performance variables - controlled by the diagnostic system, and

4. Strategic uncertainties - controlled by the interactive control system.

Simons indicates that a successful strategy implementation requires all four levers of control. Some strengths of Simons' framework are that it focuses on strategic issues, provides a broad perspective of control systems, and enables a better understanding of control by providing for alternative uses for management control systems. Some weaknesses of the levers of control framework are that it is focused on top level management and does not place enough emphasis on other types of controls that exist at lower levels within the organization (e.g., informal controls), it is not a holistic framework, the meaning of concepts such as "core values" leaves considerable room for interpretation, the term interactive controls is somewhat ambiguous, and the framework is not applicable to all parts of an organization, e.g., subsidiaries.

The Performance Management Systems (PMSs) Framework

The purpose of the extended framework is to provide a descriptive tool that can be used to outline the main features of a performance management system in a comprehensive manner. A condensed description of the twelve-question PMS framework is as follows.

1. What is the vision and mission of the organization and how are the organization's purposes and objectives communicated to managers and employees?

2. What are the organization's key success factors and how are they communicated to managers and employees?

3. What is the organization structure, how does it influence the PMSs design, and how is it related to the strategic management process?

4. What are the organization's plans and strategies, what processes and activities are required to insure success, and how is this information communicated throughout the organization?

5. What are the organizations key performance measures, how are they communicated, and how are they related to performance evaluation?

6. What level of performance is required for each key performance measure, how challenging are these targets, and how are these targets set?

7. What processes are used for evaluating individual, group, and organization performance, are they objective, subjective, or mixed, and how are they related to the formal and informal controls?

8. What rewards (penalties) do managers and employees receive for achieving (not achieving) the performance targets?

9. What information flows or feedback and feed-forward systems and networks are used to support the PMSs?

10. How are the organization's control mechanisms used, how do they compare with those in the literature, and are they different at different levels within the organization?

11. How has the performance management system changed in response to the dynamics of the organization and its environment, and did this change occur in a proactive or reactive manner?

12. How strong and logical are the links between the performance management system components and how they are used?

Two other important aspects of the PMSs design that are not explicitly addressed by the 12 questions above include external contextual factors and organizational culture. For example, some of these contextual factors include the external environment, technology, and ownership structure. The authors acknowledge that organizational culture is a contextual factor that pervades the entire control system. However, organizational culture and the external contextual factors are not included within the framework because they are viewed by the authors as contingent variables that are more related to why some control systems are more or less effective, rather than specific characteristics of the performance management system.

Performance Management Systems

Theoretical Development

This is the longest section of the paper (pp. 267-276) and includes a discussion of each of the twelve questions. My purpose is to provide a brief sketch of the main points of their discussion. In addition, there are a fairly large number of references in this section that support their discussion of each part of the framework. I provide links to summaries of a few of these papers but most of the references are beyond the scope of my brief summary.

Question 1: The mission of the organization is the main purpose the organization exists, while the vision of the organization indicates the "desired future state". Question 1 focuses on determining the organizations values, purposes, and objectives, how they are established, and how they are communicated to influence behavior.

Question 2: Key success factors are more specific representations of the vision and mission as control measures to be reported on a continuous basis.

Question 3: Organizational structure is a very broad area by itself. There are multiple forms of organizational structure that involve various choices related to authority (i.e., centralized or decentralized), and configuration (i.e., structures, processes, and operating relationships). Various forms of organizational structure include functional, multidivisional, holding company, matrix, transnational, team-based, and project based. The term processes refers to supervision, planning, and market activities. Relationships (internal and external) include outsourcing, strategic alliances, networks, and virtual organizations. Although most of the control literature is focused on vertical controls, there are both horizontal and vertical controls as well as built in controls such as kanban inventory controls.4 Organizational structure is closely related to key success factors and strategic decisions. The authors note that strategy and structure are interdependent in that they support and constrain each other.

Question 4: There are many different types of strategy indicated by a fairly large amount of literature on the topic. For example, there are defenders, analyzers, prospectors, reactors, cost leaders, and product differentiators. There are also build, hold, and harvest strategies, and various combinations. The authors refer the reader to the literature review paper by Langfield and Smith5 for more on the various types of strategy. Their discussion of this question also includes consideration of the nature of the strategic planning and communication process, i.e., whether the process follows a top-down approach associated with a hierarchical or vertical organization, or a bottom-up approach that appears to be more relevant to lean, de-layered, horizontal organizations.

Question 5: The discussion of key performance measures includes consideration of how the measurements are chosen, whether they are aligned with operations and strategy, omissions as well as what is measured, and the number of measurements. In relation to how measures are chosen the authors refer to Ittner and Larcker6 who indicate that the choice of performance measures is a function of the organizations competitive environment, strategy, and organizational design. It is also noted that omitted measures may be as influential as the measurements chosen since what is measured tends to drive out what is not measured. In addition, too many measurements can reduce their effectiveness.7

Question 6: In terms of setting targets there is considerable tension between what is desired and what is feasible since targets affect performance. Aggressive targets may or may not improve performance depending on the situation. Embedding continuous improvement into targets and benchmarking are also mentioned in this section as target setting tools that have been discussed in the literature. For example, Hope and Frazer strongly recommend external benchmarks in their discussion of beyond budgeting.8

Question 7: Performance evaluations represent a critical aspect in management control and are applicable to groups (teams, departments, divisions) as well as individuals. Performance evaluations can be objective or subjective and each type of evaluation has advantages and disadvantages. Subjective evaluations allow for correcting flaws in the performance measurement system, but are more time consuming for managers and subject to bias (real and perceived). Objective evaluations do not allow for adjustments to fit the situation, but are more appropriate in cases where the relationship between inputs and outputs is clear. The questions related to performance evaluations also includes consideration of gaming behavior and relative evaluations. Relative evaluations might be more appropriate where outcomes are influenced by uncontrollable factors.

Question 8: Relationships between rewards, motivation and performance are complex. This question includes consideration of both negative and positive influences on behavior. Financial and non-financial, rewards e.g., salary increases, promotions, approval, and recognition can have a positive influence on performance, while withholding those things can have a negative effect. The concepts of equity and fairness are also important aspects in this area as well as a consideration of intrinsic rewards since intrinsic motivation can be undermined by extrinsic rewards. In addition, group rewards such as team-based schemes and gain-sharing are considered as part of the questions related to reward systems.

Question 9: Questions concerning information flows relate to the organization's feedback as well as feed-forward information. Feedback refers to information useful for corrective, or adaptive action, while feed-forward refers to information used to learn and to create new ideas and strategies. This section also includes mention of single loop and double loop learning, ERP systems, broader systems such as the balanced scorecard, information scope, timeliness, aggregation, and integration, and formal and informal networks.

Question 10: This section is a bit confusing, perhaps because the concepts of how performance management systems are used is not well developed. The authors mention Hopwood's concepts of rigid and flexible use, Simons' interactive and diagnostic use, the use of strategic validity controls, and transactional and relational uses of performance management systems.

Question 11: This question incorporates change dynamics into the analysis of the performance management system. In other words, it relates to analyzing the causes and outcomes of changes in the performance management system.

Question 12: The last question addresses the connections or links between the various parts of the performance management system. The authors note that the PMSs is greater than the sum of its parts indicating that there are interactions between the parts that have effects on organizational outcomes. They mention Chenhall (2003)9 who provides some guidance in determining the strength and coherence of the PMSs. For example, does the control system consider multiple stakeholders, measure efficiency, provide both financial and non-financial outcomes, provide vertical links between strategy and operation, and provide horizontal links across the value chain? Other key questions are how performance measures are linked to strategy and how strategy is linked to the organization's key success factors? The main point of this question is that there needs to be balance, harmony, consistency and coherence between the links in the system. According to the authors, determining the strength and coherence of the links in the PMS is the most challenging part of using the framework.

Discussion

Although Ferreira and Otley believe their PMSs framework provides an improved tool, they recognize that empirical evidence from case study research is needed to validate its adequacy. They mention some anecdotal evidence related to the framework's potential usefulness, and two illustrations that are included in an appendix. They also discuss some criticisms of their framework, and point out again that culture and contextual factors are not explored in the PMSs framework because these factors are outside the control of the organization. Managerial influence on organizational culture is controversial, but it might be an appropriate part of a broader framework.

Conclusion

The performance management systems framework is based on inductive reasoning applied to various studies. It represents a powerful research tool for examining the structure of an organization's PMSs in a holistic manner.

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1 Anthony, R. N. 1965. Planning and Control Systems: A Framework for Analysis. Boston: Harvard Business, Division of Research. See the following for an earlier paper. Anthony, R. N. 1964. Framework for analysis. Management Services (March-April): 18-24. (Summary).

2 Otley, D. 1999. Performance management: A framework for management control systems research. Management Accounting Research (December): 363-382.

3 Simons, R. 1995. Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Boston: Harvard Business School Press. Also see Simons, R. 1995. Control in an age of empowerment. Harvard Business Review (March-April): 80-88. (Summary and related Note).

4 See MAAW's JIT and Lean Enterprise section for an explanation of kanban and a great deal more.

5 Langfield-Smith, K. 1997. Management control systems and strategy: A critical review. Accounting, Organizations and Society 22(2): 207-232. (Summary).

6 Ittner, C. D. and D. F. Larcker. 2001. Assessing empirical research in managerial accounting: A value-based management perspective. Journal of Accounting and Economics (December): 349-410. (Summary).

7 For a critical view of the KPI or scorecard approach from the lean enterprise perspective see Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Summary).

8 Hope, J. and R. Frazer. 2003. Who needs budgets? Harvard Business Review (February): 108-115. (Summary).

9 Chenhall, R. H. 2003. Management control system design within its organizational context: Findings from contingency-based research and directions for the future. Accounting, Organizations and Society 28(2-3): 127-168. (Summary).