How to Take Action for Successful Performance Management

A Pragmatic Constructivist Approach

Falconer Mitchell, Hanne Nørreklit

• Publisher: Business Expert Press
• Year: 2019
• ISBN:
  9781631578366
• Topic: Business
• Subtopic: Contabilità gestionale
• Index: Business

This book is intended for practitioners, students, and researchers who are interested in designing, using, assessing, and researching performance management systems.

Managerial personnel involved in such activity will hold many beliefs about how their organization functions. This text uses the philosophy of pragmatic constructivism to show how managerial beliefs that underlie action can be made explicit and so facilitate their assessment and improvement. This involves recognizing and integrating the four dimensions (facts, possibilities, values, and communication) that represent how managers relate to the reality in which they operate.

When managerial beliefs are based on an accurate representation of reality, they are more likely to be successful. Problems occur where reality is misrepresented in managerial beliefs. This is especially so in performance management, as the book illustrates using real-world examples. Specific topics addressed include planning and decision making, performance management of investment center managers, strategic performance management, and operational performance management.

CHAPTER 1

Introduction

Falconer Mitchell and Hanne Nørreklit

This book is concerned with the production and use of information for performance management. Performance management is considered to include the organizational planning and control processes that facilitate managers and employees in making decisions and help them take actions that are in the overall interest of the organization. For a performance management system to function effectively in planning and control, it has to be grounded in the business reality of an organization.

The pivotal point in the conventional wisdom of performance management is the objective measurement of the results of organizational activities and historical data–based estimations of consequences of decision alternatives. The relationships between action and observational points of measurement tend to be explained by a type of deterministic “natural law causality.” However, such mechanical prescription for management practice might be damaging for organizational practices (Ghoshal 2005). For instance, there is a huge literature pointing to the flexibility inherent to the techniques used in performance measurement as well as the various short- and long-term dysfunctional effects of performance measurement on the actions of the managerial staff whose performance is assessed by their use (Merchant and Van der Stede 2012).

Overall, there are more dimensions involved in understanding human action than can be encompassed in the force of mechanical law, and there are no meta-empirical laws for running a business. The successes of companies such as LEGO and Apple did not happen because their top managers recognized and made employees adapt to some meta-laws for conducting business successfully. Rather, their successes are the result of organizational actors’ efforts in developing and establishing a joint set of functioning activities, producing products and services that meet or even change peoples’ values by introducing new functions and qualitative features in their lives. Hence, human actors are central to the construction of organized reality.

In view of that, this book considers pragmatic constructivism as a paradigm for understanding actors’ construction of business practices to be performed. Pragmatic constructivism approaches organizational practices as constructed through the activities of the organizational “actors.” Herein, the actors are organizational managers. Thus, an actor is a human being who participates in overseeing and conducting organizational activities with the intention of being a part of initiating and developing them. Driven by their own intentions and way of reasoning, actors create, influence, and control organizational activities in interaction with the organizational environment. From this perspective, they can be viewed as the coauthors of organizational activities. Organizational actors change, adapt, and align their actions and goals with existing organizational structures, routines, rules, and objectives. But since even the most specific instructions are to be interpreted and reflected within context of the situation in which specific practice occurs, managers and employees cannot function as adaptors only. They should also concerned about whether structures, routines, rules, and objectives are “reasonable.” Accordingly, the practice of all actors, at all levels of the organization, is interactive, reflective, and innovative to some extent.

Actors do not act in a void but act in the physical, biological, human, and social world. Actors always act under presumptions of a specific perception and understanding of the world and creating a relationship with that world. They continuously construct, adjust, and reconstruct their relationship with the world in light of new experiences, contexts, and communication. The outcome of the actor–world relationship is a reality construction. The reality construction may be well-functioning and creating intentional results, or it may be ill-functioning and dominated by activities that do not succeed. The thesis of pragmatic constructivism is that the four dimensions of reality—facts, possibilities, values, and communication—must be integrated in the actor–world relationship if an actor’s belief construct aims to form a successful basis for effective actions.

In the view of pragmatic constructivism, the shortcomings of the conventional approach to performance management do not imply that the management accounting tools for such purposes as planning and control are obsolete. Indeed, to observe and create a coordinated set of construct causalities across organizational activities, practitioners need to create a highly detailed and complex set of performance management models.

Based on the pragmatic constructivist conceptualization of human reality, this book discusses the concepts and methods developed for the performance management of organizational practices (NØrreklir 2017; NØrreklit et al. 2007, 2010). Part 1 of the book explains core concepts of a pragmatic constructivist approach to performance management while part 2 provides specific applications of pragmatic constructivism to the core task of performance management action in a series of real-life case illustrations. More specific, it addresses such topics as (i) core features of a successful construction of organizational reality, (ii) organizational actors and an actor-based method, (iii) planning and decision making, (iv) performance management of investment center managers, (v) strategic performance management, and (vi) operational performance management. It is intended for students and practitioners who work actively with developing, using, and assessing performance management systems.¹

 

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¹See Jakobsen et al. (2019) for further details on how educators might use pragmatic constructivism as a paradigmatic base to prepare students of management accounting for the new demands of the role of trusted business partners in live practices.

PART I

Pragmatic Constructivism

CHAPTER 2

The Four Dimensions of Reality

Falconer Mitchell and Hanne Nørreklit

Introduction

This chapter provides an outline of how the four dimensions of pragmatic constructivism (facts, possibilities, values, and communication) relate to the actions involved in creating and using performance measures. It contains an explanation of each dimension in principal, as the nature of the dimensions for this type of action is situation specific and the detailed composition of each dimension is, therefore, particular to the prevailing circumstances extant within each organization when action is being determined. The latter chapters of the book complement this chapter by providing specific applications of pragmatic constructivism to performance measurement action in a series of case illustrations.

Performance measurement is viewed as a human action that can be predicated on a pragmatic constructivist framework (NØrreklit H. 2017; NØrreklit L. 2017; NØrreklit et al. 2007, 2010; 2013). However, performance measurement does not simply involve a single discrete action. Rather, it involves an interrelated series of actions comprising initiation (need for), design (planning), implementation (operation and use), and assessment (adjustment). All of these actions have to succeed if performance measurement is to be successful and pragmatic ­constructivism–based analysis can contribute to the success of all of these types of action.

Facts

The Nature of Facts

Facts can differ markedly in nature. First, there are facts that are a part of the physical work world. The existence and physical characteristics of land, machinery, vehicles, and buildings or of a workforce or a set of competitors would all possess this factual aspect. The physical aspects of a situation in which performance measurement action is to be taken can impinge directly on the type of measures that are needed. Performance is influenced by the physical resources available and so the success of a performance measurement system can be determined by its focus on the physical facts. A labor-intensive activity may require a very different approach to performance measurement than a capital-intensive one. Setting performance targets that are well beyond the capacity of physical resources is unlikely to be accepted for long by those subject to it.

Second, facts can be the creations (or constructs) of those involved. They can comprise beliefs and ideas about how things (including the physical) work in the work world. For example, the belief that quality issues originate from quality shortcomings of the employee as opposed to mechanical inadequacies of the production system has direct implications for performance measurement design. This type of fact is developed by individuals involved. It will reflect their observations, competencies, and experiences in the work world where they will continually appraise, absorb, and use the events that surround them. Many will reflect employee beliefs on why observed behavior is as it is found, that is, they relate to the factors that cause action. This type of fact can often be personal but may also be shared as a more general managerial belief in an organization. Although such beliefs exist and represent work world facts, they may have greater or lesser levels of accuracy. As time elapses they may be proved true or false. If they lack accuracy, then action based on them is likely to be unsuccessful. Consequently, people involved will seek out evidence that allows them to develop and substantiate their beliefs. This can be in the form of observed behavior that supports the belief, for example, a particular set of employees are motivated primarily by monetary rewards because their productivity rises when a bonus is paid to them. Thus, experience of the work world allows the assessment of this type of constructed fact. The facts deemed relevant in a situation will, therefore, be the result of the learning that people experience in their work world over time. Beliefs will be hardened, modified, or jettisoned and new beliefs developed as evidence is gathered and assimilated.

The Role of Facts

The world in which people exist is constituted by facts. Consequently, it is the recognition of relevant facts in one’s work world that will provide a foundation for successful action in initiatives such as designing and operationalizing performance measurement systems. Just as the successful detective can act to deduce the culprit of a crime from the evidence comprising the facts of the case, so the accountant or business person can recognize and use the pertinent facts as an initial basis toward the selection of the performance measures that will satisfy their needs for intelligence on organizational performance. Facts comprise the context or situation in which this type of action takes place. They, therefore, provide the grounding or foundation on which action can be based. If the wrong facts are selected or if the selected facts prove to be erroneous, then the efficacy of the performance measurement system will be compromised.

However, the organizational world is a dynamic one and it is likely that the fact-comprised situations pertaining to performance measurement in different organizations (and, indeed their parts) or within an organization at different points in time will be markedly divergent. The basis on which performance measurement action is built is, therefore, subject specific and susceptible to alteration rather than homogeneous and unchanging. This is why, general prescriptions on the specifics of performance measurement practice (e.g., the performance pyramid, the balanced scorecard, the performance prism) tend to be of dubious plausibility. The “law of each situation” must be paramount if action is to be successful. This creates the first of many challenges in performance measurement and is the subject of this chapter which explores the nature of facts in an organizational context, how they can be identified, and how they relate to performance measurement action. Exhibit 2.1 outlines how actions in performance measurement and facts are related.

Exhibit 2.1

Actions and facts

Actions	Facts
Initiate (need specification)	Objectives, Strengths, and Weaknesses
Design (set plans)	Problems, Constraints, and Capabilities
Implement (operate)	Resources
Assess (modify)	Constructs and beliefs

If each of the actions in the process of performance measurement is to be successful, then it has to be grounded in relevant facts. We have to know what we are trying to do (our factual objectives), we have to know what we have to do it with (our factual resources both physical and behavioral), we have to be aware of the challenges (the factual problems and constraints on action) and we have to possess credible ideas on how events occur in our work world (the factual constructs and beliefs about how things operate and function).

Possibilities

The Nature of Possibilities

The recognition of facts provides the base from which action possibilities can be identified. If these are reliably determined from the facts then they will be genuine possibilities with the potential that leads to successful action. Possible actions that do not adhere to the relevant facts are likely to be impossibilities and lead to unsuccessful action. The fact that I have $100 in my pocket provides an almost infinite list of spending action possibilities for me. Similarly, the organization with money assets will have great scope for spending action. However, normally action possibilities will not be as open ended as this simple money possession fact allows. A set of relevant facts will narrow the possibilities down considerably. The types of fact in Exhibit 2.1 on our needs, purposes, resourcing capabilities, and beliefs about variable relationships in the work situation will restrict the possibilities for action. Possibilities originate in the facts but must also fit (or integrate) with them if they are to be viable.

Identifying Possibilities

To illustrate the recognition of action possibilities in a performance measurement context, let us take the example of an organization that has a segment that is performing poorly (need), is a profit seeker (objective or purpose), has accounting expertise (resourcing), and has managers who believe that the causes of poor performance lie in the areas of staff expertise and the poor quality of output.

Initiation action will be founded in the factual beliefs of those involved as to the specification of the problem and the need for performance measures. Possible actions based on these facts will encompass such issues as (a) who to involve in designing the system, (b) how to communicate about it, (c) the extent and nature of consultation with those affected, and (d) the creation of a schedule of meetings to get the project underway. This will be followed by design actions. Here the possible performance measurement alternatives will be considered. For example, the use of a segment profit measure is likely to be considered given the organizational objectives and the need facts that exist. However, this decision gives rise to multiple accounting alternatives in respect to how profit is being measu...