How to Develop a Performance Measurement System
The balance Scorecard model is one of the ways of developing a performance measurement system. This model is appropriate for building a system for a firm that purchases products from intermediate goods from its suppliers. The BSC models have four main performance measurement pillars that would be beneficial for any firm’s performance measurement system. They include customer, internal business process, financial and learning and growth perspectives (Braz, Scavarda & Martins, 2011). The measurement elements are critical in developing a more efficient and effective performance measurement system for suppliers of intermediate goods. Since, all components were critical in organizing and collaborating with the employees to meet the overall organizational goals.
The balanced scored card (BSC) model is useful in meeting the diverse performance objectives and requirements of the organization. The BSC also encourages reforms with its different organizational elements. Some of the strengths of the BSC includes adopting a problem solving approach that is not dependent on tools, promoting commitment of the management and developing a cross functional teams that incorporates other functions such as personnel administration and corporate planning (Homburg, Artz & Wieseke, 2012). The implementation of BSC is keen to clarify the real responsibility and authority for financial performance in the organization. For instance, the supervisors and the employees are allocated the responsibility for the firm’s financial performances.
Most importantly, the evaluation of the performance of the various departments helps in measuring the basis of financial indicators. However, the building of the performance management system using the BSC model faced the various barriers. For instance, the employees were only limited to minimal information regarding the system such as the corporate value. The lack of adequate information and limits of control are affected the effective measure of the performance system in the firms. Another way of developing the performance measurement system is root cause approach that focuses on identifying the main problem affecting the performance of the employees. Therefore, the root cause model is another useful way of improving performance and measuring performance in the firm.
Based on the implementation model, the private information to be protected includes the sensitive information of the suppliers and the invoice records for the products. The supplier records are useful in understanding the nature of performance and production in the suppliers. Most importantly, the company has relevant accounts information useful in promoting proper business operations. Some of the accounts information includes receipts, tax records and payroll information. The information is critical for future reference as well as for use as evidence in court proceedings and tax refund claims. The company also seeks to preserve its strategic and business plans and objectives (Besanko et al., 2010). The business strategies and plans define the overall business processes and long-term growth of the company. The business strategies have competitive strategies to support business performance and development. Other sensitive information to be preserved includes the firm’s financial statements and records, business projects and data and the confidence communication emails. Most importantly, the development of a new performance measurement system would be seeking to persevere of some sensitive and critical information.
To represent information to outside investors, the firm will prepare relevant financial statements, management analysis, disclosures, and reports. The reports and representations are reliable in ensuring that the outside investors obtain actual and useful information to make effective financial and investment decisions. The firm understands that without reliable information the investors would be unable to make informed investment decisions.
The transfer prices plays significant role in business that are divided into more than one departments or divisions. This is because the prices are accounted for at different values as well as the absorption of the production elements in the organization. Transfer pricing is crucial in performance measurement and evaluation. Since, the success of each division is measured by the changes return on investment (ROI) or Residual Income (RI). The measures can be interpreted well by determining the performance of the various departments and divisions.
Most importantly, transfer pricing helps in creating performance related pay approaches that are useful in supporting improved performance and growth. The performance related pay reveals that the remuneration of employees is affected by changes in profits (Homburg et al., 2012). Transfer pricing also helping in make or buy decisions, since it is impossible to achieve positive contribution. Motivation is an important concept in making profits among the divisional managers. When the transfer price was determined to be impossible to earn profits in some departments, the employee would be demotivated to perform better. Therefore, it is important to understand the nature of transfer pricing in order to promote effective performance.
The adequate performance methodologies are crucial in determining the diversification-based decisions in the firms. Since, the performance models are significant in understanding the level of productivity in the various departments. Such metrics are crucial in understanding the different diversification based models (Lee & Yang, 2011). This is important in improving the nature of diversification-based criteria in the firm to enhance better performance among the various departments. In summary, the various ways of building performance measurement systems are useful in enhancing performance evaluation and measurement.
Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2010). Economics of strategy , 5th ed. Hoboken, NJ: John Wiley & Sons.
Braz, R. G. F., Scavarda, L. F., & Martins, R. A. (2011). Reviewing and improving performance measurement systems: An action research. International Journal of Production Economics, 133(2), 751-760.
Homburg, C., Artz, M., & Wieseke, J. (2012). Marketing performance measurement systems: does comprehensiveness really improve performance?. Journal of Marketing, 76(3), 56-77.
Lee, C. L., & Yang, H. J. (2011). Organization structure, competition and performance measurement systems and their joint effects on performance. Management accounting research, 22(2), 84-104.