Focus on ... PMA 2006 conference

Citation

(2007), "Focus on ... PMA 2006 conference", Measuring Business Excellence, Vol. 11 No. 1. https://doi.org/10.1108/mbe.2007.26711aaf.001

Focus on ... PMA 2006 conference

PMA 2006 – Performance Measurement and Management: Public and Private, the fifth bi-annual PMA conference of the Performance Measurement Association, proved as successful as ever. Over 250 academics and practitioners attended the conference which took place at the New Connaught Rooms in London between 25th and 28th July 2006.

Approximately one third of the participants who attended were from practice, while two thirds were from academia. Attendees came from all over the globe and had diverse backgrounds. The conference held three days of parallel stream presentations in addition to the keynote presentations, totaling over 170 presentations in all. In addition to the business of the conference, delegates enjoyed a welcome reception at the conference venue and an excellent conference dinner at the Savoy hotel.

The conference hosted four popular panel sessions during which academic and practitioner experts discussed the issues of:

1. 1.

   measuring research performance;

2. 2.

   the impact of performance measurement systems;

3. 3.

   thoughts from practice on current issues and the research agenda; and

4. 4.

   using strategic performance measurement systems for reward purposes.

The panel sessions provided delegates with the opportunity to discuss these issues with the leading experts in their field. The conference also hosted its inaugural “fringe” event, a sponsored evening reception providing networking opportunities at the end of the day. The conference activities combined to continue the innovative drive to integrate both academics and practitioners and also to bring together the diverse disciplines related to performance measurement and management.

The conference was chaired by Professor Andy Neely and Dr Mike Kennerley and welcomed three world-class keynote speakers; Professor Rajiv Banker, of the Fox Business School, USA; Paul Boyle, Chief Executive of the Financial Reporting Council; and Greg Hackett, founder of the Hackett Group, now at Kent State University.

Professor Banker presented his leading research on the topical issue of pay for performance and the need to link compensation to non-financial performance measures. Based on a number of studies he has undertaken in this area he made suggestions about how performance measures can be incorporated into compensation systems and factors that need to be considered when designing such systems. Paul Boyle presented a corporate reporting regulators view of performance measurement. Gregg Hackett made a thought provoking presentation based on his research in to why once successful companies have now failed. He argues that large companies fail to recognize the changes in their environment and are not organised to respond to it. He argued that managers need to change their focus from increasing profitability to survivability. Professor Neely closed the conference by presenting his latest research on the impact of performance measurement systems.

Finally the best paper awards were presented to Vicky Rich of IBM (best practitioner paper – “Interpreting the Balanced Scorecard: An Investigation into Performance Analysis and Bias”) and Klaus Moeller and Peter Horvath of the Technical University of Munich (best academic paper – “The Impact of Organisational Factors and Performance Management Design on Network Performance”).

More information on the event is available at: www.performanceportal.org/pma2006.htm

Summary of keynote addresses

Professor Rajiv Banker, the Fox Business School

In his keynote speech, Professor Rajiv Banker addressed four key questions regarding the use of performance measures to determine pay. These were:

1. 1.

   Should we base compensation on non-financial measures?

2. 2.

   What are the attributes of good performance measures?

3. 3.

   What is the relative importance of past measures of ability versus current measures of performance?

4. 4.

   How should we deal with intangible assets in pay-for-performance?

In response to the first question about the likelihood of using non-financial measures for reward purposes, Rajiv focused on the impact of pay-for-performance schemes. He presented the results of several studies looking at this topic. Based on the findings of these studies he argued that pay-for performance schemes can have a huge positive impact on performance since, firstly, these schemes motivate employees to work harder, and secondly, help to attract and retain the more productive employees. However, a company’s culture and competitive environment can undermine this positive impact. Thus, before establishing a new pay-for-performance scheme, organizations need to analyze the contextual factors surrounding each of their units, and identify whether this type of scheme might not be desirable for some of its units (e.g. Banker, Lee, Potter and Srinivasan, 2001; Banker, Devaraj, Schroeder and Sinha, 2002; Banker and Mashruwala, 2005; Banker, Lee and Mudambi, 2006; Banker, Lee, Potter and Srinivasan, 2006).

Regarding the second question about the attributes of good performance measures, Rajiv proposed 3 different attributes that those performance measures used to determine pay have to possess: sensitivity, precision, and congruence (for more information on this matter please refer to Banker and Datar, 1989 and Banker and Kemerer, 1992). He argued that it is critical for companies to use non-financial measures in their compensation systems as they are lead indicators of future performance.

Non-financial measures are sensitive in that they provide individuals, teams and organizations with an early indication of what is going on before financial results are achieved. These measures are also precise in that they depend more on managers’ actions rather than factors managers cannot control.

Concerning the third question about the relative importance of past measures of ability versus current measures of performance, he observed that while bonus may be contingent on future performance, a significant component of compensation, such as salary, may appear to be “fixed”. In reality, however, the “fixed” component depends on measures of past performance that signal a manager’s ability (e.g. Banker and Hwang, 2004; Anderson, Banker and Ravindran, 2006.).

Finally, for the fourth question about how to use intangible assets in pay-for-performance schemes, Rajiv presented a set of studies showing the positive impact of measuring intangible assets, understanding how these measures are causally related to future performance, and linking these measures to rewards (e.g. Banker, Potter and Srinivasan, 2005; Banker, Huang and Natarajan, 2006; Anderson, Banker, Huang and Liu, 2006).

For further information on this topic or related ones, contact Prof. Rajiv Banker at banker@temple.edu or Monica Franco from the Cranfield School of Management at monica.franco@cranfield.ac.uk. Professor Rajiv Banker’s publications can be found at: http://astro.temple.edu/ ∼ banker/pe.html

Why companies fail, Greg Hackett, Kent State University

Greg Hackett, founder of the Hackett Group, now with Kent State University, gave a thought provoking keynote address on why companies fail. Greg’s presentation was based on his recent research of why once successful companies have failed. His research shows that most companies eventually die – between 1917 and 1987 61 percent of the Forbes 100 have ceased to exist; between 1957 and 1997 only 15 percent of the S&P 500 were long-term survivors. Greg has taken a year researching the 1000 largest public companies from 1960 through to 2004. He found that 12 percent had gone bankrupt, 45 percent had been acquired and 7 percent had been bought out / were taken into private ownership. Of those that were acquired 65 percent were unprofitable or had profits that were slipping fast when they were acquired. The average age of companies when acquired was 23 years.

His research also found:

• •

  profits have slipped 40 percent in 40 years;

• •

  average profitability is only 4.3 percent;

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  small companies are 2.5 times more profitable than large companies;

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  in 75 percent of industries profitability is on a downward trend – in only 16 is the trend upwards;

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  half of companies make less than 9 days profit; and

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  nearly half of companies are unprofitable half of the time.

On the whole he found that 79 percent of companies are stagnating or declining – meaning only 21 percent are growing, and companies are now failing more quickly than ever before. Having discussed the statistics on company failures, Greg discussed the findings from his research of the key reasons why companies fail. He identified four key reasons:

1. 1.

   Missing external changes – all companies are subject to unprecedented change in their operating environment. Greg’s research suggests that large companies don’t pay sufficient attention to identifying the most significant changes in their environment, with no one having organisational responsibility for monitoring the external environment.

2. 2.

   Tolerate inflexible culture – Greg’s research suggests that large companies are too inflexible, risk averse and reward predictability. He argued that age reduces flexibility.

3. 3.

   Have too much “good” management – which he argued is focused on avoiding failure and resists innovative thinking. He argued that large companies employ misguided management principles including short term focus, addiction to incremental improvements and adoption of too many management fads.

4. 4.

   Employ a mid-twentieth century process – which includes too much planning, in too much detail which doesn’t address risk and uncertainty. He argued that there is too much focus on measurement and too much inward focus. This is made worse by the increased availability of data and analysis.

Greg concluded his address by arguing that the new management challenge is survivability. Survivability requires management to:

• •

  adapt to external forces;

• •

  see trends early and understand their effects; and

• •

  organise to innovate – plan, react and implement.

He argued that management shouldn’t be focusing on day to day management but on the future, and the external environment. More specifically he agues that this requires organisations to:

• •

  build an early warning system;

• •

  reset the culture;

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  reorganise to innovate; and

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  redefine decision making – abandoning the assumption of continuity and focusing on external/leading information.

In conclusion Greg argued that if organisations continue to operate as they are, failure rates will continue to rise – to change this, the mindset of management needs to be changed from increasing profitability to focus on survivability.

Andy Neely, Cranfield School of Management and Rachel Griffith, IFS Balanced Perspectives on the Balanced Scorecard

The search for new and better ways of measuring organisational performance is a recurring theme in the management literature. Numerous authors have proposed frameworks and methodologies, the most popular of which – measured in terms of adoption rates – is the balanced scorecard. Yet the empirical evidence exploring the performance impact of the balanced scorecard is remarkably sparse. In this era of evidence based management, it seems that many organisations have adopted an innovation – the balanced scorecard – with remarkably limited evidence of its impact.

This presentation sought to address this shortcoming by presenting the results of an in-depth study evaluating the performance impact of the balanced scorecard in 156 matched pairs of branches. The research adopts a quasi-experimental design. Branches are matched on the basis of geographic location, as a means of controlling for exogenous variables such as local economic activity and labour markets. The empirical data used in the study are drawn from three sources. First we use data gathered during two years participation observation in the process of designing and deploying the balanced scorecard. Second we use the monthly profit and loss accounts for every branch study (6 years worth of monthly accounts for 312 branches in total). Third we supplement these quantitative data with qualitative data gathered during interviews with 20 branch managers. We find that the balanced scorecard had an impact on organisational performance – in terms of sales and gross profits. Yet the impact in terms of net profits is less clear. When the sample is split into two groups – those that perform well on non-financial measures and those that perform poorly, we find that those branches that perform well on non-financial measures clearly perform better than their comparator branches in terms of sales, gross profit and net profit. Importantly this finding holds even when we control for prior financial performance, suggesting that the observed results are not simply an artifact of high performing branches continuing to perform well.

This study is the largest of its kind to explore the performance impact of balance scorecards and provides clear evidence of the positive relationship between non-financial and financial performance measures. Research continues to understand some of the contextual factors which underpin the results.

(Summary by Andy Neely)

Paul Boyle, Chief Executive of the Financial Reporting Council (FRC)

Paul Boyle delivered some interesting facts and figures regarding the structure and views on corporate reporting from the Regulator’s viewpoint. The FRC’s interest is primarily in external reporting. The key message from Paul was that the regulator is approaching corporate reporting with a common sense approach, where they recognise the importance of professional judgement. Paul’s presentation asked some key questions which are of interest to PMA members. First, on financial performance, the audience was asked to consider:

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  What is the measurement objective?

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  What is the most appropriate unit of measurement?

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  Is a single measure satisfactory?

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  Will there be information overload if multiple measures are used?

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  What is the role of accounting standards?

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  Do the consistency benefits of a single global set of standards outweigh the monopoly drawbacks?

• •

  Are cost benefit considerations important?

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  How do we handle the mismatch between those incurring the costs and those receiving the benefits?

• •

  Does it matter if externally published measures are not used by management?

On non-financial measures the audience was asked to consider:

• •

  At whom is the performance report aimed?

• •

  What is the measurement objective?

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  What aspects of non-financial performance should be measured?

• •

  How to ensure consistency and comparability?

• •

  Does audit add value or not?

Paul also discussed how the regulator measures itself, and pointed out that traditional commercial performance measures are irrelevant. The FRC measures itself through:

• •

  Outcomes – By looking at their monitoring and enforcement activities, and through an independent survey of directors, investors and auditors.

• •

  Outputs – By reporting on current and planned projects.

• •

  Effectiveness – By providing a narrative report on adherence to their regulatory philosophy, and their accountability; supplemented by the audited financial accounts.