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Performance Measurement Systems Essay

1700 words - 7 pages

Performance measurement systems (PMS) have been around for some time and even though it is typically used by businesses, measuring performance is something people do on a regular basis. Measuring performance involves setting goals and developing a plan to achieve the desired results. Part of the planning processes involves determining how to measure performance as you work towards a goal. Measuring progress provides information that can be used to make decisions to continue, improve, or eliminate activities in your plan. Just as a report card assesses how well a student has performed and identifies areas where further growth can be achieved, PMS serve the same purpose in the business world. PMS give organizations feedback on the elements they measure, which helps management determine areas where they have performed well and identify those that need improvement. “As financial and accounting people, we have the opportunity to support our organizations’ efforts towards continuous improvement by creating performance measurement systems that provide relevant, factual information on core business processes and key activities” (Miller, 1992). The key objective of a PMS is to help guide management in understanding, managing and improving their business processes while reducing costs.
Managing costs involves continuously improving processes used throughout the organization in an effort to make them as efficient as possible, whereby reducing costs. As the business world has evolved due to changes in the economy, global competition, technology, and environmental factors, so has the need to develop a new approach to measuring performance. According to Baldwin and Clark, “a good portion of America’s competitive decline is due directly to managers’ use of outdated and inappropriate performance measurement systems” (as cited in Vitale & Mavrinac, 1995). In order for businesses to be successful, it is important for management to implement a PMS that will work effectively for their organization. An effective PMS is one that should encourage management and employees to realize the need for continuous improvement throughout the entire organization.
Two of several different approaches available to measuring performance include an activity-based (AB) or strategic-based approach (SB). The AB approach is tends to be more reliant on financial measures and focuses on achieving reductions in costs through eliminating, reducing, selecting or sharing activities. Although this approach can be effective, increasing competition forced businesses to expand on this concept and develop a system more aligned with the organization’s strategy and objectives. “By translating the organization’s strategy into objectives and measures that can be understood, communicated, and acted upon, it is possible to more completely align individual and organizational goals and initiatives” (Hansen, & Mowen, 2011). The SB approach relies on a balance of several measures that include financial...

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