Towards a contingency approach to performance measurement an empirical study in Scottish SMEs

TOWARDS A CONTINGENCY APPROACH TO PERFORMANCE MEASUREMENT: AN EMPIRICAL STUDY IN SCOTTISH SMEsAbstractPurpose The literature emphasizes the important role performance measurement systems (PMS) plays in supporting organizational development in small and medium enterprises (SMEs). However, there are very few empirical and theoretical studies on the factors that influence performance measurement practices in SMEs. This paper aims to contribute to filling this gap using both theoretical and empirical approaches. Design/methodology/approach A literature review and interviews were used to identify four key contingency factors for PMS in SMEs. A qualitative research design involving a multiple case study methodology was carried out to investigate how these factors influence performance measurement.Findings The relationship between the contingency factors and performance measurement were formalized in four theoretical propositions. First, corporate governance structure is one of the main factors influencing performance measurement adoption and use. Second, advanced information practices and advanced behaviours on the part of the people involved appear to be a necessary condition for the effective implementation and use of PMS in SMEs. Third, a change in a firms business model seems to lead to the development of an improved PMS. Finally, the successful implementation of a PMS seems to be driven by an authoritative management style. Research limitations/implications Contingency factors were studied independently. Future research might investigate how these factors collectively influence performance measurement practices to make interdependence more explicit.Practical implications The theoretical propositions provide useful knowledge for defining a methodology and managerial tool to support performance measurement in SMEs.Originality/value This paper defines key contingency factors influencing performance measurement in SMEs; it contributes to clarifying how these factors could influence performance measurement practices in companies. Keywords: Performance measurement, SMEs, corporate governance, management information system, business models and organizational culture Paper Type: research paper1. Introduction Research studies indicate that performance measurement systems can play a key role in supporting managerial growth in SMEs (Biazzo and Bernardi, 2003; Garengo et al., 2005a). However, most performance measurement studies do not consider company size. The literature on business performance measurement (BPM) emphasizes poor use of PMS in SMEs, but little research investigates the reasons for this. Some of the reasons mentioned in the literature include shortage of human and capital resources, lack of strategic planning, misconception of the benefits of performance measurement and an overly technical orientation (Barnes et al., 1998; Hudson et al., 2001). However, in-depth empirical investigations on the factors influencing performance measurement in SMEs are scarce. The aim of the research presented here is to fill this gap. The purpose is to contribute to a better understanding of the factors that affect the adoption and use of PMS in SMEs and the relationship between these factors and performance measurement practices. In order to carry out this research study, a contingency approach was needed, i.e. the assumption that various factors influence performance measurement in SMEs. This approach is not very common in the literature on performance measurement systems, but it is as an essential starting point to understanding performance measurement in small and medium enterprises. In this paper, the literature on PMS is reviewed along with an analysis of the research based on contingency approach proposed by management control system literature. The remainder of this paper is organized in five sections. First, the research design is presented and the main research phases described. Second, the literature on BPM is analysed making reference to two main research streams, i.e. performance measurement systems and management control systems (MCS); subsequently, based on the literature available, the main contingency factors that were chosen are presented. Third, the profile of the companies involved in the empirical study and the characteristics of their PMS are described. Fourth, the relationship between the identified contingency factors and performance measurement are presented. Finally, the answers to the predefined research questions are summarized along with a discussion of the main issues that require further investigations. 2. Research design Exploratory research was carried out using a social constructionist paradigm (Easterby-Smith et al., 2002). The unit of analysis was a PMS defined as a balanced and dynamic system that supports the decision making process by gathering, elaborating and analyzing information (Bititci et al., 2000; Neely et al., 2002). The object of analysis was SMEs that were identified using Scott and Bruces (1987) definition with some further specifications to define both the characteristics of the population from which the research sample was drawn and the boundaries of generalization of the findings (Eisenhardt, 1989; Yin, 1994). These specifications are as follows: the management is independent, i.e. capital was supplied by an individual or a small group and a parent company could not influence the decision making process and performance measurement activities; the company belongs to the manufacturing sector; the area of operations is mainly local; the number of employees is between 20 and 250; the company has taken part in improvement projects. Three main phases characterized the research process and are described below. First, contributions from the literature on BPM and SMEs were reviewed at the beginning of the study as well as during the empirical phases. The two main research streams of business performance measurement, i.e. performance measurement systems and management control systems, were analysed. Two different approaches stood out: MCS studies adopt a contingency-based approach while PMS research is mainly based on a normative approach. We thought both these approaches were essential to studying performance measurement in SMEs; consequently, we applied a mixed analysis that combines aspects of both management control system and performance measurement system studies. As our focus was on SMEs and few research reports are available on performance measurement in these companies, a study of the factors that enable or constrain performance management in SMEs as well as the relationship between these factors and performance measurement was carried out making reference to the literature on PMS, MCS and SME.“take in Figure 1”In order to further investigate the factors that enable or constrain PMS in SMEs, ten interviews were conducted. Five PMS scholars and five practitioners - entrepreneurs and managers of SMEs - were consulted by means of semi-structured interviews. Each person was interviewed one time individually during a face to face meeting. At the end of the interview process, we asked clarifications to one of the five scholars for a better understanding of his statements. The opinions of practitioners and scholars about factors influencing performance measurement are summarized on Table II.All the information was brought together using the categorical aggregation and interpretation technique, which brings instances together until something can be said about them as a group (Buckley et al., 1976; Stake, 1995). Then contingency factors were identified and four of them were chosen as the most significant ones.Second, to investigate the relationship between performance measurement and the factors identified, further literature was reviewed to find out the key dimensions of specific models supporting the analysis of this relationship. In the following sections, these dimensions and the literature justifying their inclusion in this study are explained. Third, a qualitative research design involving a multiple case study methodology was carried out. This data collection technique was chosen for three main reasons (Eisenhardt, 1989; Meredith, 1993). First, this research study was exploratory since, as mentioned above, there is a lack of research on the topic studied. Second, case studies are considered to be very useful for uncovering possible contingency effects and for finding empirically grounded explanations for them (Gioia and Pitre, 1990). Finally, case studies have proven to be one of the most powerful research methods, particularly in development of theory (Voss et al., 2002). Four Scottish SMEs were analyzed to verify the importance of the contingency factors and to investigate the relationship between these factors and performance measurement using the dimensions identified. The empirical investigation involved SMEs with heterogeneous experience in performance measurement and different contingency factors. The data were collected by visiting the companies and interviewing people at different organizational levels. The interview protocol was dynamically adjusted to maximize insights into the themes that emerged during the interviews. Company documents and interviews with company consultants were used to collect additional information and to better understand the data gathered. When possible, the opinions of other researchers were collected to help confirm our findings. The case studies were analyzed without any predefined hypotheses to test (Eisenhardt, 1989). Some important variables were defined for each contingency factor using the existing literature, but the relationships between these variables were not identified before the analysis of the case studies. In the empirical study it was necessary to use preliminary data to better understand the nature of the problem. Given the social constructionist paradigm adopted and the exploratory nature of the research, the categorization of the companies was very descriptive. Cross case analysis was used to analyze the empirical data. Overlap between data analysis and data collection characterized the entire research process. Nevertheless, the data was formally examined in two main phases. First, some models were defined to study each contingency factor (Meredith, 1993). Then, the companies were categorized into five frameworks and the relationships between each contingency factor and performance measurement were investigated and summarized in the form of theoretical propositions.3. Background literatureIn the last 20 years, business performance measurement has been studied using many different perspectives (Franco and Bourne, 2003), two have been recognised as the most relevant: management control system and performance measurement system.Management control system studies are characterized by a contingency approach: each organization has to choose the most suitable system by taking into account some contingency variables such as strategy, objectives, structures, culture, technology, etc. (Chenhall, 2003). Many empirical studies have been carried out and the literature often calls for an innovative (Ittner and Larcker, 1998; Nanni et al., 1992; Shirley and Reitspergerg, 1991). Though some non-financial measures are introduced in MCS studies, the majority continues to focus on accounting aspects, and innovative models are not proposed nor are the contingency factors well defined (Reid and Smith, 2000).In the literature on PMS many normative models are proposed. Following the criticism of traditional approaches, which were based on financial measures, in the 1980s balanced and dynamic architectures were developed and analysed. However, the literature reveals that little empirical research on the implementation and use of these architectures has been carried out. Few studies have developed PMS models for SMEs and little research uses an empirical approach to analyse performance measurement practices in SMEs. Furthermore, the factors that enable and constrain performance measurement have not been investigated.The aim of this study was to define some of the main factors influencing performance measurement in SMEs and to understand how these factors impact performance measurement. Two research questions were investigated: What are the key factors that influence the adoption and use of PMS in SMEs? What are the relationships between these factors and performance measurement practices in SMEs?In order to identify the contingency factors influencing PMS in SMEs, an in-depth literature review of PMS and MCS literature was carried out, with particular attention to SMEs and managerial themes. Table I summarises the analysis of the literature for the most recurring themes on factors that enable or constrain the use and implementation of PMS and MCS in SMEs along with the main references that support these themes. take in Table ITable I shows that the PMS literature review identifies five main contingency factors that may influence the implementation and use of performance measurement in SMEs: management information system (MIS); strategy; organizational culture and management style; external environment; and company size. The MSC literature also highlights five main contingency factors: strategy; organizational culture and management style; external environment; corporate governance structure; and company size.3.1. Conclusions from the literature review In order to find out the main contingency factors, the information collected through the literature review was aggregated using the categorical aggregation and interpretation technique, which brings instances together until something can be said about them as a group (Stake, 1995). As Buckley et al. (1976) pointed out knowledge consists of building blocks and the aggregation technique can be used to arrange and assemble different sets of blocks for solving more complex problems, i.e. the categorization of properties through intuitive aggregation. Then, interpretation is applied to give a meaning to each group. From this, the following six contingency factors were identified. corporate governance structure; management information system; strategy; organizational culture and management style; external environment; company size.As previously mentioned, further information was gathered by means of interviews with five scholars and five practitioners with experience in implementing and using PMS. A summary of the statements collected are summarized in Table II. take in Table IIThe following sections take a deeper look, through case studies, at four of the six factors identified above: corporate governance structure management information system strategy (referred to as the Business Model from here on Business Model is the type of value a company wants to create for the customer (Magretta, 2002). Different reasons have supported this choice. In this study, the focus is on the competitive dimension of strategy and we consider the model of the entrepreneurial success that a company has adopted or could adopt. Business models are based on value propositions including strategy; as Normand and Ramirez (1993) write “strategy is the art of creating value”. By using a business model this value can be summarized in value propositions that include the business strategies pursued by companies. Moreover, scholars have proposed many heterogeneous definitions of strategy and no suitable typologies are available to study the relationship between strategy and PMS. On the contrary, business models are studied in more recent literature and taxonomies coherent with todays competitive environment are proposed. ) organizational culture and management style. The other two factors were not addressed for the following reasons. The environmental impact on performance measurement was investigated indirectly because our research assumes that environmental dynamics affect business strategy, consequently it is enough to analyze the influence of strategy. Since the study focused on SMEs, attention on size characterized the whole study, and thus it is not analysed as a contingency factor.The following sections introduce the case study companies and then go on to develop the main dimensions of each factor that could potentially be related to performance measurement. 4. Brief profile of the case studyFour Scottish SMEs were involved in the empirical investigation. For each company we collected information about their profile, history, contingency factors and PMS. The companies profiles are summarized in Table III.“take in Table IIIThe PMS of the companies was analysed making reference to the framework proposed by Garengo (2005). This framework is based on two groups of dimensions. The first is called PMS characteristics and it considers how a company is using the measures to manage performance. The second group is called PMS scope and it refers to what the company is measuring, i.e. the existence of many perspectives to measure performance. The PMS characteristics and scope of the companies investigated are shown in Figure 2. “take in Figure 25. Contingency factors and performance measurementIn order to analyse each contingency factor we used four specific frameworks. For the investigation of corporate governance structure and MIS the frameworks were specifically developed while those used to study business model and organizational culture and management style were chosen from the literature. The case studies were placed in these frameworks in order to study each factor separately. The relationships between each contingency factor and performance measurement were investigated and summarized in four theoretical propositions.5.1 Corporate governance structureCorporate governance structure is considered to be the whole set of structures and processes used to guide and control an enterprise (OECD, 1999). Its influence is made explicit in the mutual influence between managerial systems and corporate governance structure (Miller and Toulouse, 1986). Different approaches are applied in corporate governance studies. Most of the papers available use agency theory as a main theoretical background (Zahra and Pearce, 1989). Two dimensions are often applied to analyze corporate governance: the composition of the board of directors and its role. Board composition refers to the number and type of directors who serve on the board, and the widely recognized dichotomy between inside and outside directors has a significant impact on the decision making processes. The board composition in SMEs plays a key role; in these companies the presence of inside directors belonging to the entrepreneurs family is quite common and is a decisive factor in the decision making process. The literature offers a long list of what boards of directors should and could do, but evidence on what boards actually do in SMEs is not yet well documented. With regard to the role of the board of directors, three main roles are recognized by the literature: strategic role, control role and service role (Zahra and Pearce, 1989). Some of the main service roles of the board of directors in family companies are the re-balance role, the share support role and the relationship support role. The service roles are mainly adopted where ownership and management overlap.In order to study corporate governance structure in SMEs, two key dimensions have to be considered: role of the board of directors and the influence of ownership on corporate governance. Using these two dimensions, a framework was proposed and three SMEs typologies were defined, i.e. traditional family company, open family company and managerial company. In a traditional family company capital