Designing a Framework for Performance Measurement Systems: Motivations, Challenges, and Guidance for Effective Performance Measurement

Abstract

This master's thesis explores how organisations manage and measure
performance through performance measurement systems. Though as
performance management systems often relies on ad-hoc, informal methods,
leading to inconsistencies and misalignment with organizational objectives.
This study advocates for a systematic approach to performance management
system implementation, aligning it with organizational goals to improve
decision-making, resource allocation, and overall performance management.

An abductive research approach was employed, analysing qualitative data
from internal interviews at a case company, external interviews from “best in-class”
companies and through a literature review. From this a framework
is constructed for the case company on how to create a performance
management system that responds to its unique challenges.

The framework, although mainly theoretical, provides valuable insights into
the initial strategic synthesis of a performance management system, serving
as a roadmap for achieving organizational aspirations through systematic
implementation and refinement. Future research should focus on the
practical operationalization of performance management system frameworks
and the development of supporting databases.

Popular Abstract

With a bigger pressure on corporations and organizations to operate under greater and greater
efficiency. The ability to measure the performance of operations can be seen as an important
prerequisite for improvement and for the daily business cadence, but how does one succeed in doing
so?

The purpose and objective of this thesis is to
explore the complexities of performance
measurement within organizations and to
develop a robust framework for creating an
effective performance measurement system
(PMS) at a case company. This by finding the
underlying logics that make certain PMS
succeed, as no PMS can be copied as each
organization is unique.
While the benefits of performance
measurement systems are plenty, the
establishment and purpose of a PMS is often
done ad-hoc and informally, primarily relying
on personal experience or gut feeling. This
approach may lack consistency, thoroughness,
and alignment with organizational objectives.
Consequently, there is a significant
opportunity to enhance the effectiveness and
efficiency of PMS implementation through a
more systematic approach.
Measuring and analysing organizational
performance is crucial for translating
organizational goals into reality. Performance
evaluation typically involves estimating
qualitative and quantitative performance
indicators. It is imperative for a company to
identify relevant indicators, understand their
correlation with formulated company goals,
and recognize their dependence on performed
activities. From the research conducted, the
following guiding principles for establishing a
PMS was staked out. Which can be
summarized as the 5 A ́s of KPI relevance;
Audience: Who is using the information?
Application: How is the information being
used? Alignment: Why is the information
important and how does it connect?
Accountability: Who has responsibility?

Action-taking: What will done based on the
results?
Then, in the chosen case company, the current
condition and its aspirations regarding its PMS
were mapped. To help build the bridge from
the current condition to the mapped
aspirations and goals, the 5 A’s of KPI
relevance laid the groundwork.
From this groundwork the framework was
built up that was going to act as the bridge.
The framework can be said to consist of two
main concepts. With the first one being
reporting chapters, emphasizing the use of
flexible chapter structures to present KPIs
tailored to specific segments of the business
or groups. By organizing KPIs into chapters,
such as regions, segments, strategic pillars,
and company specific models, this approach
enhances relevance and facilitates connected
action-taking. Each chapter serves as a
dedicated subsection containing KPIs
pertinent to its respective domain. This should
provide stakeholders with a focused insight
that is aligned with their areas of
responsibility and strategic focus. This concept
effectively addresses the A's of Audience,
Application, Accountability, and Action-taking
by ensuring that KPIs are targeted, actionable,
and accessible to relevant stakeholders,
thereby promoting informed decision-making
and driving accountability for performance
outcomes.
However, while this concept effectively
addresses several aspects of the 5 A’s, it falls
short in achieving alignment. Although each
reporting chapter is tailored to specific
segments or groups within the organization,
the lack of explicit alignment across chapters

may hinder the holistic understanding of
organizational objectives and priorities.
Without a cohesive framework that integrates
and aligns reporting chapters with overarching
strategic goals, there is a risk of fragmentation
and sub-optimization in performance
management efforts. Therefore, while the
reporting chapters concept enhances
granularity and relevance, achieving alignment
across all levels and dimensions of the
organization requires a more integrated
approach.
Key concept two introduces the idea of KPI
"trees," employing hierarchical branches of
KPIs anchored by top organizational outcome
KPI "roots." This structure facilitates cascading
by clearly delineating relational mapping,
ensuring that every KPI is linked to an
overarching strategic objective. This forces
prioritization and aligns measurement efforts
with key organizational goals. As KPIs descend
through the levels, their proximity to the root
indicates their position as either lagging or
leading indicators, with lagging indicators
closer to the root and leading indicators
further away. By encompassing accountability,
action-taking, and alignment from the 5 A’s,
this concept ensures a holistic approach to
performance management, covering all
aspects of the 5 As in a comprehensive
manner.

These two concepts summarize the new PMS
foundation at the case company. Though it
may not provide a conclusive "best" method,
the framework offers inspiration and a
systematic approach, steering organizations
away from relying solely on intuition or gut
feeling. it offers valuable insights into the
initial strategic synthesis of a performance
management system, serving as a roadmap for
achieving organizational aspirations through
systematic implementation and refinement.
By using this framework as guidance for a
structured methodology, organizations can
navigate the complexities of PMS
implementation with greater clarity and
purpose, ultimately improving their ability to
measure and manage performance effectively.

• author: Liljedahl, Victor
• supervisor: Bertil Nilsson
• organization: Department of Mechanical Engineering Sciences; Production Management
• course: MIOM05 20232
• year: 2024
• type: H1 - Master's Degree (One Year)
• subject: Technology and Engineering
• keywords: Performance measurement system, Key performance indicator, Metrics, Alignment, Accountability, Commitment
• other publication id: 24/5292
• language: English
• id: 9167328
• date added to LUP: 2024-06-25 17:13:43
• date last changed: 2024-06-25 17:13:43