This paper examines performance assessment systems in organizations and more so businesses. It highlights benefits and disadvantages associated with the system, the involvement of management accountants in the establishment and use of these measures. The paper also looks at the extent at which these measures and assessments tests are reliable and accurate.
¶ … Performance Assessment Systems in Organizations
Many companies conduct performance assessment systems to cope with the current fast-paced global economy. The assessment reflects on companies past outcomes known as lagging indicators as well as the current leading indicators to inform the management on the latest developments. These indicators appropriately analyzed, reported and evaluated, help the companies achieve higher profits.
The use of leading indicators is increasingly getting popular with many companies and businesses today. According to Gjerde and Hughes (2007), computed deviations with standard cost systems give the management timely data on shortfalls of production allowing them to put emphasis on the unfavorable outcomes and take corrective measures to enhance profits.
In the case of South West Airlines, they put in place a performance assessment system that saw it successfully execute a cost leadership strategy. The liner recorded a growth in operating income using the performance assessment system and took advantage of the overall growth in the airline industry (Mudde and Sopariwala 2008). The airline company enhanced financial performance as a result of the strategic changes it made.
Many organizations use performance assessment system to distinguish themselves from their competitors. Business trends and practices are changing fast and many companies compete in markets that are primarily value driven rather than cost driven. These companies need data on performance across a wide spectrum of dimensions to help them survive the competition based on non-financial factors. According to Neely (1999), many businesses have been forced to adopt assessment measurement system because they have changed their strategies.
Furthermore, performance assessment measures encourage company's to implement strategies. Neely (1999, p. 212), agrees that the connection between assessment and strategy is delicate, but powerful. Further analysis reveal that performance assessment measurements that are in tandem with strategies, motivate behaviors that are inline with the company strategy.
Disadvantages of Performance Assessment Systems in Organizations
In an effort to conduct performance assessment, management may find it easy to identify and evaluate many measures, but individual businesses those in distinct operating areas such as restaurants, laundry mutts may lose focus on the goal in a bid to implement performance to meet the various targets. A report done in 1998 revealed that 70% of implemented scorecards did not materialize (McCunn 1998).
In addition, the numerous metrics as well as over reliance on past financial measures impede the implementation of a balanced scorecard, thus frustrating the value addition of the process to the firms (Williams 1998). A study conducted in 2004 discovered that effective scorecards featured a reduced number of metrics at the header and support metrics listed at the footer (Gjerde & Hughes, 2007).
The objective of performance measurement continues to evolve. Traditional performance measures are no longer applicable to the current competitive world market. The continuously changing global market has subjected the traditional performance assessment system to modifications that include time-based to integration of various performance measures. In addition, Gjerde & Hughes (2007), agree that many businesses have modified scorecards to connect their strategic objectives, financial output, internal business procedure, learning and growth as well as those that relate to customer initiatives, expecting these matrics to result in better future financial out. However this might not be the case as too much over reliance on these aspects impede the implementation of a balanced scorecard. Moreover, according to Panahian (2011), many people agree that reliance on financial indexes are a hindrance to the focus on the firm's strategies. Therefore, reliance on these financial indexes motivate managers to interfere with data in addition to removing strategic objectives.
Management Accountants Involvement with Performance Assessment Systems
Management accounting plays a vital role in an organization's strategic planning. It aims at making adjustments that lead to improved performance and increase company profits. Therefore, management accounting is essential to organizations in competitive environments that require constant monitoring to better their operations.
Consequently, management accountants are involved with work that directly impact the organization's financial security, handling virtually all financial issues that aid in development of the organization's overall management and strategy. Management accountants need to be involved in the establishment and use of performance assessment systems in organizations because their work is directly involved with accounting information that facilitate the implementation of the assessment system. In addition, the work of management accountant is to measure business performance. They measure employee output, assessing whether an employee is producing as needed and applying accounting methods to monitor whether a manager has achieved set target. Nonetheless, management accountants are instrumental in measuring of efficiency. In this case, they monitor efficient utilization of recourses, including but not limited to work hours, capital, equipment and materials. They can then use performance measurement to improve the overall output of the company.
Reliability and Accuracy
It is important to obtain reliable and accurate scores from instruments of assessment. "Traditional approaches to reliability analysis present researchers with an obvious dilemma: Which reliability coefficient should be used to characterize the performance measurement" (The National Academies Press, 1991, p. 121). Choice of activity in a performance assessment test might lead to varying scores. However, "the scores would still be valid if their standard deviation was small relative to the score distribution of the population of incumbents, or relative to the potential score range of the test" ( p. 117).
Reliability can be confirmed by repeat observation to determine fluctuation of the scores.
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