Problems of Performance Measures in Business.

It is human nature of focus on those aspects of performance for they are rewarded. It necessary is design performance measures to reward managers, which are consistent with the business objectives to encourage goal congruence. Lack of consistency between performance measure and business objectives leads to dysfunctional behavior.

Some of the problems associated with performance measures include.

• Tunnel Vision.

Excessive focus on some key performance measures at the expense of other performance measure critical for business success.  Ex, focus on financial performance measures like ROI might lead to ignorance of non-financial performance measures like repeat business from existing customers which gives an indication of customer satisfaction.

• Myopia.

Focus on short term result at the expense of long term growth of the business. Abandoning of project may be beneficial in the long term, but not generate sufficient revenue in the long term. Ex, building a website which can incur costs in the short term, while bring additional profits in the long term.

• Sub-Optimization.

Excessive focus on some objectives while ignoring other objectives which are important, but for which they are not rewarded . Ex, concentration on cost control might lead to deterioration in quality. It is because of usage of poor quality raw material to save costs, which result in poor quality product, absolutely opposed to the objective of increasing quality.

• Measure Fixation.

Adoption of behavior and strategies of unethical in nature to achieve performance targets, which are not effective for achieving business objectives. Ex, manufacturing of products with a view to increasing closing inventory to increase divisional profits and Invoicing customers charging price over the list of the products to customer, which later rectified after performance evaluate period if customers are complaining.

• Misrepresentations.

Divisional managers may report on performance other an actual. It involves creative report writing practices to conceal the underlying performance of the business. Ex. Off-balance sheeting financing can be concealed by not giving disclosures on leased assets to increase ROI, which would otherwise be lower, if these assets are added to capital employed, as they had contributed towards revenue generation.

• Gaming.

Performance measure are distorted to obtain strategic benefits. Ex. Showing more favorable results in terms of profits to direct business resources towards their division, to which otherwise ,they are not eligible amongst competing divisions for resources, like finance. It may be due to fear being redundant, if the division is closed. It involves the use of creative accounting practices like increasing useful life of Fixed assets.

Misrepresentation is associated with communication, while Gaming is associated with accounting.

• Ossification.

Unwillingness or inability to review and update performance measures for its appropriateness as change  in the circumstances for the business take place due to business growth and external factors like PESTEL. Ex. Decision to integrate the down side supply chain requires additional performance measures regarding distribution and after sale service. Performance measure like, no of deliveries on time and time to answer customer questions, which are not made.