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.
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.
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
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
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.
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.
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.
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):
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).
Langfield-Smith, K. 1997. Management control systems and strategy: A critical
review. Accounting, Organizations and Society 22(2): 207-232. (Summary).
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).
Other related summaries:
Covaleski, M. and M. Aiken. 1986. Accounting theories of organizations: Some preliminary considerations. Accounting, Organizations and Society
11(4-5): 297-319. (Summary).
Covaleski, M. A., M. W. Dirsmith and S. Samuel. 1996. Managerial accounting research: The contributions of organizational and
sociological theories. Journal of Management Accounting Research (8):
Macy, G. and V. Arunachalam 1995. Management accounting systems and contingency theory: In Search of effective systems. Advances in Management Accounting (4):
Neimark, M. and T. Tinker. 1986. The social construction of management control systems. Accounting, Organizations and
Society 11(4-5): 369-395. (Summary).
Paladino, B. 2007. 5 key principles of corporate performance management: How do Balanced Scorecard Hall of Fame,
Malcolm Baldrige, Sterling, Fortune 100, APQC, and Forbes award winners drive value? Strategic Finance
(June): 39-45. (Note).
Tiessen, P. and J. H. Waterhouse. 1983. Towards a descriptive theory of management accounting. Accounting,
Organizations and Society 8(2-3): 251-267. (Summary).
Van der Merwe, A. 2007.
Management accounting philosophy I: Gaping holes in our foundation. Cost Management
(May/June): 5-11. (Summary).
Van der Merwe, A. 2007. Management accounting philosophy
II: The cornerstones of restoration. Cost Management (September/October):
Van der Merwe, A. 2007. Management accounting philosophy III: The management
accounting evaluation framework. Cost Management (November/December):
Van der Merwe, A., B. D. Clinton, G. Cokins, C. Thomas, K. Templin and J. Huntzinger. 2012. Conceptual Framework for
Managerial Costing: Draft Report of the IMA Managerial Costing Conceptual
Framework Task Force. IMA. (Summary).