The Application of Measurement and Performance in a Strategic Environment
Difficult Elements of Launching Performance Measurement Systems; How to Overcome Them
It is difficult to launch a management performance-measurement system when the organization changes its structure because of new ownership. Another difficulty arises when management has to choose between using the measurement system as an operational tool or a strategic tool. In most cases, organizations value their operations more than their strategy. When establishing and implementing a new measurement system, individual tasks become transparent for effective monitoring (Colandro, Lane, & Dasari, 2008). Incumbent staff in the organization are likely to be resistant with a new way of working. Furthermore, the prospect of one’s work being visible to the whole organization levels is scary at first and staff at the first incident of encounter seek to sabotage the measurement system.
For measurement systems to be successful, one has to follow specific guidelines that circumvent any complication arising. Successful organizations notice inflection points in their growth paths and adjust their structure and operations accordingly (Nugent, 2002). Inflection points are perceivable in the future of an organization and thus require the organizational strategy to be timely, accurate and have consistency (Nugent, 2002). To succeed in this endeavor, the establishment and launching of a measurement system should consist of definite elements that sell the system, a competent management for the system, and the resources to sustain the system.
Having the top management or executives to endorse the performance measurement system ensures that there is a top down directive for its implementation. Enlightened executives understand the intricate details of performance measurement and its advantages to the organization. They offer the best option as sponsor for a new performance measurement system. On the other hand, failure to find an enlightened executive does not necessarily spell doom to the implementation of the performance measurement system. Most executives have the thirst for performance measurement but do not have the capacity or knowhow. Others are outright negative about performance dashboard projects (Eckerson, 2011).
Either way, to overcome these kinds of resistance from top management and other staffs there should be education that takes into consideration the overall vision and plan of the organization. Moreover, the development of prototypes serves as a major influencing tool for skeptical individuals. A little competition may also drive the point home, especially when defending budgets and benchmarks comparing what competing organizations are doing is helpful. Other avenues to explore are the use of a catalyst to prompt executives into action or arguing based on a cost benefit analysis for the organization. Lower level managers and other staff must feel part of the project as they feel part of the organization. Staffs must be educated on the value of the system and any negative notion demystified before implementation starts. Finally, on the challenge of financing the budget, the implementing team should consider being creative and identifying multiple funding sourcing within the organization. In addition, piecemeal implementations are a great work around against budget constraints (Eckerson, 2011).
An Altman Algorithm is not as effective as a Management Performance Measurement System
Strategists aim to use the best available tools for measuring the performance of their organizations so that they are in a position to inform effectively the growth paths of their organizations. Performance dashboards in organizations aim at providing timely and accurate metric measurements and are an invaluable tool for strategists. Unfortunately, most strategists do not use the full functionality capable of performance dashboards. According to Colandro (2007), the most important metric to measure in an organization’s performance is its financial distress metric. An Altman algorithm score measures an organization’s financial distress level. The model provides a quick analysis of the financial situation of an organization and promises to be a viable replacement for performance measurement systems.
According to Kaplan and Norton (2001), the major aim of any organization is to survive any turbulence in its operating environment. Balance scorecards are a form of operational dashboards that provide an outlook of the organization’s strength at fulfilling its objectives. Unfortunately, a balance scorecard uses many metrics to measure performance and sometimes becomes inadequate as a strategic measurement tool; instead, it performs exceptionally well as an evaluation tool (Eckerson, 2011).
The arguments for the Altman model as a solution to the measurement of the financial distress of an organization point to the fact that it is a predictive model and offers a practical indication of the present cash flow, better than a scorecard (Nugent, 2002). The Altman superiority lays in its customization to measure change, a critical attribute of organizational performance (Altman, 1983). Rate of change analysis does not form the bulk of performance measurement theory. There the effectiveness of the Altman model remains a possibility rather than an actual practice. Moreover, the Altman model does not fit universally into all kinds of industries and needs further customization (Calandro, 2007).
The main shortfall of the Altman algorithm model is that it uses a single ratio that does not provide a broad view capable of informing a strategist decision on an organization. Test ratings of the Altman algorithm also vary with the expert performing the test and therefore are not reliable. Additionally, Inman’s (1991) analysis empirically disputes the reliability of the Altman algorithm to provide evidence of financial distress in an organization (Edum-Fotwe, Price, & Thorpe, 1996).
References
Altman, E. I. (1983). Predicting corporate bankruptcy: the Z-score model. In Corporate Financial Distress: A complete guide to predicting, avoiding and dealing with bankruptcy. New York, NY: John Wiley & Sons.
Calandro, J. J. (2007). Considering the utility of Altman’s Z-score as a strategic assessment and performance management tool. Strategy & Leadership(35), 37-43.
Colandro, J. J., Lane, S., & Dasari, R. (2008). A practical approach for risk-adjusting performance. Measuring Business Excellence, 12(2), 4-12.
Eckerson, W. W. (2011). Performance dashboards: measuring, monitoring, and managing your business (2nd ed.). Hoboken, NJ: John Wiley & Sons.
Edum-Fotwe, F., Price, A., & Thorpe, A. (1996). A review of financial ratio tools for predicting contractor insolvency. Construction Management and Economics, 14, 189-198.
Inman, M. L. (1991). Z-Scores and recent events: do they shed any light? Management Accounting, CIMA, 69(1), 44-48.
Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Concentrated Knowledge for the Busy Executive, 23(1), 1-8.
Nugent, J. H. (2002). Plan to win: Analytical and operational tools – Gaining competitive advantage. New York, NY: McGraw-Hill.