Ridgway begins by saying that quantitative performance measurements are useful tools, but indiscriminate use and undue confidence and reliance on them results because of inadequate knowledge related to the effects and consequences of their use. He discusses cases where all quantitative performance measurements, including single measurements, multiple measurements and composite measurements, have caused undesirable consequences for the over-all organization performance.
Some of the single measurement problems mentioned include:
1. A case where public employment interviewers were evaluated based on the number of interviews. This caused the interviewers to conduct fast interviews, but very few job applicants were placed.
2. A situation where investigators in a law enforcement agency were given a quota of eight cases per month. At the end of the month investigators picked easy fast cases to meet their quota. Some more urgent, but more difficult cases were delayed or ignored.
3. A manufacturing example similar to the above situation where a production quota caused managers to work on all the easy orders towards the end of the month, ignoring the sequence in which the orders were received.
4. Another case involved emphasis on setting monthly production records. This caused production managers to neglect repairs and maintenance.
5. Standard costing is mentioned as a frequent source of problems where managers are motivated to spend a considerable amount of time and energy debating about how indirect cost should be allocated and attempting to explain the differences between the actual and standard costs.
All of the measurements mentioned above motivate effort, but in these cases the effort was wasted or detrimental to the organization.
Ridgway points out that multiple measurements have been recommended by many authors. For example, Peter Drucker listed the following measurements in his 1954 book, The Practice of Management: Market standing, innovation, productivity, physical and financial resources, profitability, management performance and development, worker performance and attitude, and public responsibility. Drucker used the term "balanced stress on objectives" to make his point that multiple measurements were needed.
The problem with multiple measurements, according to Ridgway, is that the individual is forced to judge whether an increase in effort to improve one area of performance will improve the overall performance, or reduce the performance in some other area to more than offset the improvement in the first area.
Composite measurements are where the separate quantities related to a set of measurements are weighted in some way and then added or averaged. There has to be an explicit weighting of the various criteria. One potential advantage of a composite measurement over multiple measurements is that with multiple criteria, pressure to improve one area might be relieved by reducing effort on some other criteria. A composite measurement tends to reduce the motivation to reduce effort in one area to improve another area of performance.
Ridgway discusses two situations where composite measurements were used. One example involved a composite measurement used by the American Institute of Management to evaluate and rank the managements of corporations. He did not mention any problems with this case, but these measurements were external to the company's involved.
Another composite measurement used by the Air Force is said to have caused tension, role and value conflicts, reduced morale, inter-crew antagonism, communication distortions and various other problems. Ridgway makes the point that even composite measurements tend to cause undesirable consequences for the overall organizational performance. He sums up by saying that the motivational and behavioral consequences of performance measurements is inadequately understood and recommends more research so that behavior may be oriented towards the organization's goals.
Berliner, C. and J. A. Brimson, eds. 1988. Chapter 6: CMS performance measurement. Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design. Harvard Business School Press. (Summary).
Clinton, B. D. and S. Chen. 1998. Do new performance measures measure up? Management Accounting (October): 38, 40-43. (Summary).
Fullerton, R. R. 2003. Performance measurement and reward systems in JIT and non-JIT firms. Cost Management (November/December): 40-47. (Summary).
Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).
Hendricks, J. A., D. G. Defreitas and D. K. Walker. 1996. Changing performance measures at Caterpillar. Management Accounting (December): 18-22, 24. (Summary).
Ittner, C. D. and D. F. Larcker. 1998. Innovations in performance measurement: Trends and research implications. Journal of Management Accounting Research (10): 205-238. (Summary).
Ittner, C. D. and D. F. Larcker. 2003. Coming up short on nonfinancial performance measurement. Harvard Business Review (November): 88-95. (Summary).
Kaplan, R. S. and D. P. Norton. 1992. The balanced scorecard - Measures that drive performance. Harvard Business Review (January/February): 71-79. (Summary).
Lessner, J. 1989. Performance measurement in a just-in-time environment: Can traditional performance measurements still be used? Journal of Cost Management (Fall): 23-28. (Summary).
Otley, D. and A. Fakiolas. 2000. Reliance on accounting performance measures: Dead end or new beginning. Accounting, Organizations and Society 25(4-5): 497-510. (See also Hartmann, AOS same issue, pp. 451-482). (Summary).
Reilly, G. P. and R. R. Reilly. 2000. Using a measure network to understand and deliver value. Journal of Cost Management (November/December): 5-14. (Summary).
Roehm, H. A. and J. R. Castellano. 1999. The danger of relying on accounting numbers alone. Management Accounting Quarterly (Fall): 4-9. (Summary).
Schonberger, R. J. 2008. Lean performance management (Metrics don't add up). Cost Management (January/February): 5-10. (Note: Schonberger criticizes the KPI or scorecard approach from the lean enterprise perspective. Summary).
Stivers, B. P., T. J. Covin, N. G. Hall and S. W. Smalt. 1998. How nonfinancial performance measures are used. Management Accounting (February): 44, 46-49. (Summary).
Tatikonda, L. U. and R. J. Tatikonda. 1998. We need dynamic performance measures. Management Accounting (September): 49-53. (Summary).
Vollmann, T. 1990. Changing manufacturing performance measurements. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 53-62. (Summary).