Various techniques and framework are developed and applied in the process of performance measurement, depending upon contingent factors. Such techniques are also called performance measures. Out of them some of the important and new techniques are as follows;
- The value-based management (VBM)approach
VBM is a return to economic values in assessing the performance of the firm and places the concerns of shareholders above others. In this tool, it maintains that an organization's strategy should be tested, based on whether it adds value for its shareholders. Shareholder value, a key corporate objective of many companies, is achieved when the return from capital employed in the business is greater than the cost of obtaining funds. Traditionally performance in this area has been measured using accounting ratios such as earnings per share, return on capital employed and return on investment.
- Activity-based costing and activity-based management (ABC and ABM)
The focus of ABC is on the activities and processes within an organization and is based on the principle that by controlling the activities that consume resources, costs can be controlled at source. The development of activity based costing (ABC) and activity-based management (ABM) has led to radical changes in cost management systems.
ABC provides accurate information about the true costs of those activities; ABM makes use of this information through value analysis and performance measures which support strategic and operational decision- making. Where ABM is implemented it can provide the data needs to plan and direct improvement activities and eliminate waste.
- Balanced scorecard
The balanced scorecard is a tool to articulate, execute and monitor strategy using a mix of financial and non-financial measures. It is designed to translate vision and strategy into objectives and measures across following four balanced perspectives:
-internal business processes and
-learning and growth.
It, therefore, focuses on all the activities that generate financial results, rather than the financial side alone. The scorecard depicts strategy as a series of cause and effect relationships between critical variables and gives a framework for ensuring that strategy is translated into a coherent set of performance measures.
It is a method or tools for identifying and importing best practices in order to improve performance. It is the process of learning, adapting, and measuring outstanding practices and processes from any organization to improve performance. Finding Key Performance Indicators knowing the best practices of “Best in class Organization” is the aim of organization to improve its performance. It tends to be used more for generic or common processes and functions such as human resources and finance.
- Six Sigma
Six Sigma is a performance measurement framework initially pioneered by Motorola but now adopted by many companies. The letter sigma δ, derived from the Greek alphabet, is used by statisticians to measure the variability of a process. Companies that advocate the Six Sigma approach measure their performance against a standard of 3 variations per million opportunities – which equates to getting things right 99.999 per cent of the time.
Essentially, Six Sigma is a management tool designed to cut waste and make better, cheaper or faster products or services. It does this by selecting an objective or a goal, measuring how well the company is doing against it in terms of variation and then making changes in order to achieve the Six Sigma standard
Six Sigma forms a part of a larger performance management model
D- Define the goal of the improvement activity. At the top level the goals will be the strategic objectives of the organization, such as higher ROI or market share. At the operations level, a goal might be to increase the throughput of a production department. At the project level goals might be to reduce the defect level and increase throughput. Apply data-mining techniques to identify potential improvement opportunities.
M- Measure the existing system. Establish valid and reliable metrics to help monitor progress towards the goal(s) defined at the previous step. Begin by determining the current baseline. Use exploratory and descriptive data analysis to help you understand the data.
A- Analyze the system to identify ways to eliminate the gap between the current performance of the system or process and the desired goal. Apply statistical tools to guide the analysis.
I- Improve the system. Be creative about finding new ways to do things better, cheaper or faster. Use project management another planning methods to validate the improvement.
C- Control the new system. Institutionalize the improved system by modifying compensation and incentive systems, policies, procedures, MRP, budgets, operating instructions and other management systems. You may wish to utilize systems such as ISO 9000 to assure that documentation is correct.