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       THE PYRAMIDS AND PITFALLS OF PERFORMANCE MEASUREMENT
　　by Shane Johnson 01 Sep 2005
　　It has become increasingly important for organisations to develop systems of performance measurement which not only reflect the growing complexity of the business environment but also monitor their strategic response to this complexity. The need for good performance management is an ongoing issue which should be addressed by the management of all organisations.
　　This article considers issues which are central to the understanding and assessment of performance measurement within any organisation. The main issues requiring consideration by management are:
　　linking performance to strategy
　　setting performance standards and targets
　　linking rewards to performance
　　considering the potential benefits and problems of performance measures.
　　In attempting to establish a clear link between performance and strategy it is vital that management ensures that the performance measures target areas within the business where success is a critical factor. The performance measures chosen should:
　　measure the effectiveness of all processes including products and/or services that have reached the final customer
　　measure efficiency in terms of resource utilisation within the organisation
　　comprise an appropriate mix of both quantitative and qualitative methods
　　comprise an appropriate focus on both the long-term and short-term
　　be flexible and adaptable to an ever-changing business environment.
　　The last point stresses how important it is that performance measurement systems are dynamic so that they remain relevant and continue to reflect the issues important to any business. There are a number of models of performance measurement which can be used by management. This article considers the 'performance pyramid' of Lynch and Cross (1991)1. The model represents an acknowledgement by the writers that traditional performance measurement systems were falling short of meeting the needs of managers in a much changed business environment.
　　Lynch and Cross suggest a number of measures that go far beyond traditional financial measures such as profitability, cash flow and return on capital employed. The measures that they propose relate to business operating systems, and they address the driving forces that guide the strategic objectives of the organisation. Lynch and Cross propose that customer satisfaction, flexibility and productivity are the driving forces upon which company objectives are based. They suggest that the
　　status of these driving forces can be monitored by various indicators which can be derived from lower level (departmental) measures of waste, delivery, quality and cycle time. The performance pyramid derives from the idea that an organisation operates at different levels each of which has a different focus. However, it is vital that these different levels support each other. Thus the pyramid links the business strategy with day-to-day operations.
　　In proposing the use of the performance pyramid Lynch and Cross suggest measuring performance across nine dimensions. These are mapped onto the organisation - from corporate vision to individual objectives.
　　Within the pyramid the corporate vision is articulated by those responsible for the strategic direction of the organisation. The pyramid views a range of objectives for both external effectiveness and internal efficiency. These objectives can be achieved through measures at various levels as shown in the pyramid. These measures are seen to interact with each other both horizontally at each level, and vertically across the levels in the pyramid.
　　George Brown (1998)2 explains what Lynch and Cross refer to as 'getting it done in the middle' focuses on business operating systems where each system is geared to achieve specific objectives, and will cross departmental/functional boundaries, with one department possibly serving more than one operating system. For example, an operating system may have new product introduction as its objective, and is likely to involve a number of departments from design and development to marketing. At this level, performance focus will be on three needs. First, there will be a focus on the need to ensure customer satisfaction. Second, there will be a focus on the need for flexibility in order to accommodate changes in methods and customer requirements. Third, there will be a focus on the need to achieve productivity which necessitates looking for the most cost effective and timely means of achieving customer satisfaction and flexibility.
　　At the bottom level of the pyramid is what Lynch and Cross refer to as 'measuring in the trenches'. Here the objective is to enhance quality and delivery performance and reduce cycle time and waste. At this level a number of non-financial indicators will be used in order to measure the operations. The four levels of the pyramid are seen to fit into each other in the achievement of objectives. For example, reductions in cycle time and/or waste will increase productivity and hence profitability and cash flow
　　The strength of the performance pyramid model lies in the fact that it ties together the hierarchical view of business performance measurement with the business process review. It also makes explicit the difference between measures that are of interest to external parties - such as customer satisfaction, quality and delivery - and measures that are of interest within the business such as productivity, cycle time and waste.
　　Lynch and Cross concluded that it was essential that the performance measurement systems adopted by an organisation should fulfil the following functions:
　　The measures chosen should link operations to strategic goals. It is vital that departments are aware of the extent to which they are contributing - separately and together - in achieving strategic aims.
　　The measures chosen must make use of both financial and non-financial information in such a manner that is of value to departmental managers. In addition, the availability of the correct information as and when required is necessary to support decision-making at all levels within an organisation.
　　The real value of the system lies in its ability to focus all business activities on the requirements of its customers.
　　These conclusions helped to shape the performance pyramid which can be regarded as a modeling tool that assists in the design of new performance measurement systems, or alternatively the re-engineering of such systems that are already in operation. See Figure 1.
　　Figure 1: the performance pyramid (Lynch and Cross, 1991)
　　David Otley (2005)3 has observed that other related frameworks exist, such as the results and determinants framework by Fitzgerald et al (1991), the balanced scorecard by Kaplan and Norton (1992) and Neely et al's performance prism. A common thread in all of them is that performance measures should:
　　be linked to corporate strategy
　　include external as well as internal measures
　　include non-financial as well as financial measures
　　make explicit the trade-offs between different dimensions of performance
　　include all important but difficult to measure factors as well as easily measurable ones
　　pay attention to how the selected measures will motivate managers and employees.
　　Setting standards and targets To set standards and targets, management could choose to make use of
　　benchmarking and/or target costing while being mindful of the critical need to link rewards to performance as appropriate.