Management Accounting Research, 1999, 10, 363-382 Article No. mare.1999.0115 Available online at http://www.idealibrary.com on I DE bL 0 * Performance management: a framework for management control systems research David Otley��� This paper proposes a framework for analysing the operation of management control systems structured around five central issues. These issues relate to objectives, strategies and plans for their attainment, target-setting, incentive and reward struc- tures and information feedback loops. Their central focus is on the management of organizational performance. Because the framework has been inductively developed, its application is ���tested��� against three major systems of organizational control, namely budgeting, economic value added and the balanced scorecard. In each case, neglected areas of development are exposed and fruitful topics for research identified. It is believed that the framework can usefully be developed further by its use in analysing other instances of management control systems practice, and that case- based, longitudinal studies provide the best route to this end. 0 1999 Academic Press Key words: performance management management control strategy implementa- tion performance measurement balanced scorecard. 1. Introduction The measurement of the performance of business (and other) organizations has long been of central interest to both managers and management accounting researchers. However, management accounting has tended to restrict itself to considering only financial performance, and to use frameworks and theories drawn primarily from the discipline of economics. Even the attention that has been paid to the so-called ���behavioural aspects��� of management accounting has been incorporated into the economic approach through the development of agency theory. However, the disci- pline of economics does not provide a sufficiently rich picture of the internal activities of organizations to provide reliable guidance to the designers of management control systems. Other approaches, most notably those based on critical theory, have been used to study other aspects of the role and use made of accounting systems, but have tended to concentrate on sectional interest rather than on overall control. The intention of this paper is to provide a perspective more focused on the operation of * KPMG Professor of Accounting, The Management School, Lancaster University, Lancaster LA1 4YX, U.K. Received 5 November 1998 accepted 8 September 1999 1044-5005/99/040363 + 20 $30.00/0 0 1999 Academic Press

364 D. Otley overall control systems, and to do so by looking beyond the measurement of perfor- mance to the management of performance. It is recognized that ���performance��� is itself an ambiguous term, and capable of no simple definition. In particular, the term does not specify to whom the organization is delivering its ���performance���. We will begin at an organizational level of analysis and assume that an organization that is performing well is one that is successfully attaining its objectives in other terms, one that is effectively implementing an appropriate strategy. Nevertheless, it will become apparent that more attention will need to be paid to the definition of performance from the perspectives of relevant stakeholders.��� Furthermore, rather than trying to develop a well-articulated theory from first principles, a more inductive approach will be taken that draws upon previous experience in studying organizational control systems to identify some key issues that seem to be relevant to many different organizations. The usefulness of the framework so generated will be demonstrated by using it to analyse three examples of extant control techniques, and to identify features of their application that appear to have been neglected by both practitioners and researchers. In other words, an inductive approach to the generation of theory is adopted, with the methods that this approach suggests for future research being outlined in the discussion section. 2. Management control systems Management control systems provide information that is intended to be useful to managers in performing their jobs and to assist organizations in developing and maintaining viable patterns of behaviour. Any assessment of the role of such informa- tion therefore requires consideration of how managers make use of the information being provided to them. The traditional framework for considering these issues was developed by Anthony (1965) at the Harvard Business School under the title of ���management planning and control systems���. This distinguished ���management con- trol��� from ���strategic planning��� and ���operational control���. His approach was intended to achieve two aims. First, it was intended to broaden the scope of information being considered beyond just accounting information. Paradoxically, it was largely unsuccessful in achieving this, mainly because of its deliberate neglect of ���operational control���. Operational control was neglected because it was apparent that different organizations used very different practices at the operating level, so Anthony concentrated on the commonalties that existed between them. Focusing on commonalties allowed the use of a common language capable of including all organizational activities. Accounting provided such a language and management control became largely synonymous with management accounting at a time when this discipline of management accounting was in almost terminal decline.��� ���Although this is manifestly a functionalist approach in that it is concerned with the achievement of organizational objectives, it does not preclude the study of power relationships between participants. Critical theories and institutional economics have focussed on these issues, but have tended to neglect the issue of the overall well-being and viability of the organization. The paper is an attempt to redress this balance by explicitly concentrating on issues of overall control and sustainable performance. ���This can be seen with hindsight. Critiques, such as that of Johnson and Kaplan (19871, suggest that the situation had become so acute in the mid-1980s that management accounting either needed to be abandoned as being inimical with modern management, or else required a radical overhaul and revision. The ���new��� techniques of the later 1980s and 1990s can be seen as a response to this situation.

Performance Management 365 Second, it brought issues of managerial motivation and behaviour into view. Here it was much more influential in its effects, influencing much of the behavioural management accounting work which was to dominate the 1970s and 1980s. At the same time, a similar approach was being developed in Europe by Hofstede (1967) and publicized in his now famous book, ���The Game of Budget Control���, which still represents one of the most comprehensive studies of its kind. A further weak link in the management control systems framework was also intentional. Its deliberate neglect of the process of ���strategic planning���, which at best it took as given and, at worst, ignored completely, was intended to simplify the research questions asked. However, such deliberate neglect inevitably led to the specification of control systems and measures that were common to all strategies. Again, accounting measurement was stressed and non-financial performance mea- sures were negle~ted.~ Although it may well have been sensible to concentrate initially on the core area of ���management control���, it is now necessary to pay more attention to the neglected elements of strategy and operations. This is particularly important as contemporary organizations are themselves changing, illustrated by such develop ments as business process re-engineering and de-layering, where the same manager may well be responsible for some elements of strategy, management control and operational contr01.~ This paper represents a first step towards the aim of developing a more complete framework for analysis. 3. The performance management framework It will be argued that there are five main sets of issues that need to be addressed in developing a framework for managing organizational performance that are repre- sented as a set of question^.^ The questions are phrased in a normative tone, reflecting a managerial perspective, but can easily be re-phrased descriptively for use as a research tool. The questions themselves appear to remain constant, but organiza- tions need to continually develop new answers to them. This is because the context in which the organization is set is constantly changing and new strategies need to be developed to cope with new operating environments. The questions are as follows: 1. What are the key objectives that are central to the organization���s overall future success, and how does it go about evaluating its achievement for each of these objectives? What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to successfully implement these? How does it assess and measure the performance of these activities? 2. 31t is paradoxical that this occurred at a time when control techniques were being developed in practice which sought to include a wide range of measures, both financial and non-financial. For example, the General Motors system of performance measures, the development of which culminated in the 1970s (see Johnson and Kaplan (1987)) included several non-financial indicators, and can been seen as the fore-runner of the balanced scorecard approach. 4See Otley (1994) for a more detailed account. 5These questions represent a development of the approach first put forward in Otley (1987) and utilized and developed by Fitzgerald and Moon (1996).