PMSs rely on the selection of the right measurements, data collection, information management, and the knowledge management system in place. Selecting the right measurements is a first step in this direction. Measurements can be (a) related to a strategic decision, (b) partial or aggregate, or (c) in units of money or other units. A performance measure can be defined as a verifiable measure that consists of an actual measure—the numerical value that identifies the minimum threshold of performance and the context within which the measurement operates.

Measurements and measurement systems do not operate in a vacuum without a business objective. A good measurement system maintains alignment and coordination with other functional units of the organization. This alignment deals with consistency of strategic goals during the planning process. Coordination deals with the consistency of measurements in various areas, including within the strategic business context. A measurement system will adapt to a particular strategic business context. This strategic business context is shaped by the corporate strategy, its customer, and its competition. For example, a mature firm in a stable market will face different issues as compared to a growth firm in a growing market or a not-for-profit firm or a firm with high contact with its customers.

Measurements should have the same meaning and connotation across the organization. In general, there is a need for common language and terminology that is easily understandable by all stakeholders for various managerial decision-making systems. Few issues should be noted with the common measurement systems. Often, measurements lack strategic focus and intangible components and solely focus on financial outcome and quantitative outcome.

The thinking of including nonfinancial measures is now well established. Nonfinancial measures, however, should be aligned with the strategy of the firm. Similarly, qualitative components, which are relevant in the service context, should be incorporated into the measurement system. Another common issue with measurements is their response to a particular observation. Generally, a particular measurement is flowing down as a proxy for a particular strategic intent. Often the cause-effect relationship is not that straightforward and has not been established.

Seven deadly sins of performance measurement are described by Michael Hammer in a recent article. A few sins of performance measurement are described in this section. The first sin, vanity, is related to measuring what one makes look good. Measuring what is necessary to measure is needed as opposed to measuring what could look like a really good number. The second sin, provincialism, involves suboptimization at the business unit or functional level. Measurements need to optimize overall corporate performance. Pettiness, another sin, relates to measuring some small component of what really matters in the big picture. The deadliest sin, frivolity, relates to a lack of seriousness about measurement in the first place. In summary, measurements should emphasize the end-to-end business process and focus on the drivers of the enterprise value creation. A cookie-cutter approach to measurements selection is bound for failure.

As discussed, an understanding of the strategic objective of a firm is critical while designing a PMS. Organizations need to balance current and future needs. The ambidextrous organization principle, presented by Charles A. O’Reilly III and Michael L. Tushman, discusses the importance of an ambidextrous organization in the business world. Ambidextrous organization is good at both creating innovation and sustaining current business opportunities. Many companies are failing at this duality because they are not embracing the new innovations and technology or the organization barriers exist for a successful implementation. According to this article, the only way to succeed in the business world today is by exploiting the present and exploring the future (that is, an ambidextrous organization). Doing so allows companies to accept new innovations and keep the traditional aspects of their businesses the same.

A recent report in Business Week magazine about the impact of Six Sigma implementation on the innovation culture at 3M also makes the same argument. Each organization needs to find the appropriate balance between improvement and innovation and accordingly devise appropriate systems. Understanding the need for an ambidextrous organization is critical when designing and implementing a PMS.

An ambidextrous organization analyzed in the O’Reilly-Tushman article is CIBA Vision, which sells contact lenses and other eye-care products to optometrists and consumers. CIBA Vision was a successful company until Johnson & Johnson came out with the first disposable contact lenses. Disposable contact lenses were a new innovation compared to the traditional contact lenses that CIBA Vision was selling. CIBA Vision needed to adopt the new innovation in contact lenses to remain profitable. The R&D was now focused on finding innovations in contact lenses instead of promoting traditional contact lenses. The firm faced challenges in the area of change management and integration.

Similarly, Microsoft created separate organizations for MSN.com, Gaming and Xbox, and Mobile Windows. Separate organizations exist for Windows and Office products. These examples illustrate the importance of companies willing to integrate traditional business ideas with new innovations to stay successful in the business world today. The employees, and the leaders of the company, should be open to being ambidextrous. Sometimes being ambidextrous means a company must dismiss some of its workers if they are not willing to change with the company. Management should be aggressive and work hard to make the company and its employees ambidextrous and willing to share ideas across departments.

A successful PMS is a set of performance measures, a decision-making process, and a feedback learning loop that helps to manage, control, plan, and perform the activities undertaken in the company. This information gained from the PMS is turned into accurate and relevant information for decision making and feedback learning. The system is aligned with other systems already in place, such as a corporate planning system, knowledge management system, and human resources system. Three questions vital to a PMS are

The What question decides what measurements are relevant for the measurement system. Criteria need to be established outlining the balance between financial and nonfinancial measures, leading and lagging measures, and internal and external measures. The answer to the second question of How provides (a) a basis to the methodology for measures, and (b) guidance in frequency of measurement and mode of measurement. The answer to the third question of What response provides a response to the information collected. The decision response process should be aligned with corporate decision making.

Not all PMSs are created equal. Broadly speaking, three different classes of PMSs exist. The first class of systems emphasizes being fully integrated with existing systems and processes. This class of systems requires a focus on all stakeholders, both internal and external. The second class places the focus on the customer and is constantly striving to improve—not just to monitor. The third class of systems is focused on internal measures only, such as the cash flows and return on investment. Some requirements are fulfilled by all three classes.

Providing accurate information is the most important requirement of a PMS. Other requirements are supporting strategic, tactical, and operational objectives; guarding against suboptimization; and including a limited number of performance measures. Usually, a firm starts with a class-three PMS. As the system matures, it moves on to the class-two PMS and eventually graduates to the class-one system.

The third class is obviously the most basic class of systems. This class is classified as “mostly financial.” This class has some basic requirements that should be fulfilled by a good PMS, which is in all the classes. An additional requirement for a third class is using traditional performance criteria that control different costs, return on investments (ROI), and cash flows. These class-three performance management systems are profit-oriented and optimizing against cost efficiency and mainly short-term results. The main focus for this basic class is internal operations, and this class is one-dimensional.

The second class of PMSs is often classified as “balanced.” This class is multidimensional, where the focus is internal, and external needs are fulfilled. Financial and nonfinancial criteria are used covering cost, quality, delivery, and flexibility. Short- and long-term horizons are considered as well. The vital information of this class goes to the specific people without any delay. This class supports innovation and is very customer-oriented. The second class aims to improve rather than monitor.

The performance measures within the first class must support improvement and stand up to the highest standards. The needs from all the customers, shareholders, competitors, suppliers, employees, and society are important for this first class. The PMS is updated when needed and directly presented to the people who require it. Performance measurement databases should be fully integrated. This is causal-relationship dimensional, and the focus is for all stakeholders.

A firm should be continuously evaluating the needs and requirements of the system. In case any of the requirements for a PMS is not fulfilled, an evaluation must be done. As a next step, one should determine whether the type of system used is appropriate for the current stage of the firm. Stage here refers to the maturing of the offerings portfolio, the firm, and the firm in relation to the use of a PMS. If a company does not meet the requirements, the focus should be directed to the areas of need. If a company does fulfill all requirements, the possibility of moving up to the next class is taken into consideration.

Typically, a company utilizes scenarios to define its possible alternative approaches to future developments in the external environment, which are then used to form both a current strategy-based assessment and a futuristic strategy-based development. In developing these approaches, the focus has changed from a traditional market-based approach to the resource-based approach. The resource-based approach identifies new concepts of organizational resources, such as intangible assets and an intellectual capital. Scenario management plays a vital role in developing diverse methods of systems thinking, future open thinking, and strategic thinking. The essence of all of these scenarios is not to invent a completely new strategy, but to examine the suitability of the existing strategies with the help of external scenarios.

Comprehensive PMSs designed specifically for services are lacking. Only three systems that were designed specifically for the services context can be identified: the ServQual Model, the Service Profit Chain Model, and the Service Model presented by Fitzgerald et al. The Service Quality Model (i.e., ServQual) focuses on the customer satisfaction aspects of service quality and is not a comprehensive performance management model. The Service Profit Chain Model is a strategic tool and includes a service profit chain management audit. The Fitzgerald model is a PMS, but no measures are provided in this model. None of these models is comprehensive.

The 1991 version of the Parasuraman et al. ServQual Model is discussed here. These authors have contributed significantly to the service quality literature. The model uses a questionnaire to identify service quality gaps from customers’ perspectives. A set of 22 questions representing different service quality dimensions is administered. The questionnaire has two parts. One part asks about the expectation of the service, and a second part receives responses about the perception of an actual service experienced. The final section has questions on the relative importance of quality dimensions. Analysis of the survey provides gaps in a service system according to the model. The current version of the model includes the following five dimensions:

Heskett et al. presented a Service Profit Chain Model. This model has three levels. Level one describes the process wherein a company chooses a certain strategic market position, and a service concept is the end result. The service delivery system needs to be aligned with the operations strategy of the firm, which in turn should be aligned with the corporate strategy.

Level two refers to employees and customer satisfaction. Employees play a critical role in the process. Employee satisfaction and loyalty lead to customer loyalty and satisfaction. Level three describes appropriate financial ratios or a profit model. An audit developed according to the Service Profit Chain Model is performed in the following five steps:

The model presented by Fitzgerald does not have any specific name attached to it. Fitzgerald et al. conducted the most comprehensive study in this service context. The model proposed by them for service firms included measures related to results (financial measures and competitiveness) and measures that related to cause (quality, resource utilization, and innovation). These six dimensions can be classified into two broad categories: SBU strategy results (financial performance and competitiveness) and determinants of the strategy’s success (resource utilization, quality of services, innovation, and flexibility). The concept of causality is included in this model. In addition, the business unit is considered the main unit for performance management in this model. Fitzgerald et al. provided some guidelines for measurement types that could be used in service businesses.

An example of a scorecard in the service context is provided by Christopher Ryder Jones. The service excellence scorecard was created to help Gulf Bank provide exceptional service to its customers. Gulf Bank has around 700 employees with 31 branches in Kuwait and is also Kuwait’s second-leading and rapidly growing commercial bank. This scorecard communicates drivers of customer satisfaction, delivery channels, performance standards, and measurement and reporting systems, which in turn provide consumer feedback and process measurements. Performance was measured for 16 drivers of customer satisfaction, including branches, ATMs, the telephone, the Internet, consumer loans, and credit card services. Gulf Bank implemented its service excellence program by creating reports and communicating those reports to managers and branch employees. The results were then integrated in business Key Performance Indicators (KPIs) and turned into employee incentive schemes.

Christopher Jones illustrates how the Gulf Bank created the scorecard for service excellence. It was meant to help the growth of potential customers, to retain current customers, and to gain maximum profit from those customers through superior service. In 2003 the service excellence program at Gulf Bank was launched. Key elements of this program are the reports that were to be prepared for the management of service quality performance. The three key requirements for these reports are the following:

A survey was carried out from the institute of Banking Studies in Kuwait to determine key drivers of consumer satisfaction. The key drivers were excellent staff, efficient operations, convenience, competitive costs, and excellent image. The excellent staff should work quickly and efficiently. They must also be knowledgeable, polite, and friendly. Efficient operations components included accuracy of transactions and statements and availability of a full range of service. When consumers were looking for convenience, they wanted less waiting time, as well as reliability, comfort, and effective services. Regarding competitive costs, customers wanted lower charges for loans and lower service charges. Excellent image basically demanded an excellent reputation and corporate image.

Many insights were gained from implementing the service excellence scorecard. The first insight was to incorporate service quality management with overall business management. The second insight was the recognition of service attributes, which were imperative to consumers. The last insight was that great paybacks occurred from defining service excellence in numerical terms and implementing competitive benchmarking wherever it was feasible.

The Six Sigma Business Scorecard, a newly developed business scorecard presented by Gupta, offers a comprehensive performance-measurement methodology to create a predictive performance model. This scorecard fulfills a majority of these requirements. A causal link to corporate outcome still needs to be established, however. The Service Scorecard, presented in this book, is an adaptation of the Six Sigma Business Scorecard but is designed for the service sector. The Service Scorecard is a unique business-performance model to quantify, predict, and manage service-oriented corporate performance. Figure 6.1 presents a hierarchy of the service performance system. At Level I, we have leadership driving sustainable and profitable growth of the firm. The next level represents the value chain of different stakeholders from partners to employees to customers. The final level is the execution and design of the service delivery system. The design of the service delivery system includes managerial decisions such as service capacity, service inventory, and service delivery channels.

Figure 6.1. Hierarchy of service performance

The elements of GLACIER (Growth, Leadership, Acceleration, Collaboration, Innovation, Execution, and Retention) provide a systems perspective of the organization. The scorecard includes processes and methods at the operational level (execution), as well as strategic decisions at the corporate level (leadership) and the tactical level (engagement and innovation). The architecture of the scorecard also includes all the stakeholders in the service chain—customers, employees, managers, and service chain partners. This architecture is the foundation of the scorecard. As a next step, one would adapt the Service Scorecard appropriate to the business context. For example, a for-profit firm will have different measures than a not-for-profit firm.

As the scorecard is adapted to the situation, one should take into consideration all the issues discussed in the previous sections. Some salient features of the scorecard are the following:

Service Scorecard measurements identify operational opportunities for sustaining profitable growth and productivity improvement. Opportunities for profit and productivity improvement are addressed using Six Sigma and Lean principles, and growth is achieved through service innovation. The service innovation begins with employee ideas, and excellence in idea management will ensure continual flow of employee ideas for developing new services.

Table 6.1 shows measures under various categories in the service context. Various categories represent elements of Service Scorecard. In this treatment on the subject, the aim is to utilize elements of existing models and measurement systems and reflect on the field of performance management in the service-dominant context. In other words, three questions are addressed here:

The overall objective of an effective performance management system is to control, manage, plan, and perform the business undertaken by the entity. An effective performance measurement system has various requirements:

After the Service Scorecard architecture is ready, implementation of the scorecard is the next step. The implementation process, as shown in Figure 6.2, has the following steps:

Figure 6.2. Scorecard design roadmap

Design of Service Scorecard is the focus of this chapter. Implementation steps are discussed further in other chapters.