PERFORMANCE MEASUREMENT IN A NETWORK CONTEXT

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1 Tampere University, 5 February 2016 PERFORMANCE MEASUREMENT IN A NETWORK CONTEXT Selena Aureli selena.aureli@unibo.it Selena Aureli

2 Peformance measurement WHAT IS: An activity usually associated with a set of metrics used to quantify both the efficiency and effectiveness of actions (Lebas, 1995; Neely, 2005). The process of defining, monitoring and using indicators of the performance of organizations and programs on a regular basis WHY IS IMPORTANT: measurement is necessary to (Performance) Management WHO STUDIES THE TOPIC: Management accounting Strategy management Operations management..

3 Networks: a definition undefined In social sciences. A network consists of a set of actors or nodes along with a set of ties (relations) of a specified type (such as friendship) that link them. Networks involve individuals or organizations. The pattern of ties in a network yields a particular structure, and nodes occupy positions within this structure. Hubs

4 Networks: classifications Networks at the inter-organizational level: Network relationships -Cooperative agreements (sharing inputs and outputs) -Associations -Consortia Dyadic relationships -Subcontracting -Licensing -Franchising -Joint venture -Virtual organizations -Strategic alliances -Industrial districts and clusters (no direct contacts with partners) Degree of formality Formal interactions based on governance rules Informal cooperation based on trust and reciprocity

5 Networks: perspectives of analysis Different objects: A single relationship The single organization managing several relationships (the perspective of one single company trying to manage its business relationships ) Whole network/system (consider the network as an entity, which requires coordination) Different subjects: The manager responsible for the relationship(s) The staff/function involved in the relationship(s) The organization

6 Networks: reasons for investigation With reference to industry Evolution from vertical hierarchies to network forms of organization (supply chain model) in both manufacturing and service sector Search for subjects with complementary resources Cost benefits (Ebers, 2001), greater specialization and risk reduction associated to new projects (Nohria & Eccles, 1992), Source for additional opportunities: networks are the infrastructure for knowledge exchange and learning, thus help partners to innovate, enter new markets and develop activities favoring growth (Birley, 1985; Fletcher, 1994; Coviello & Murno, 1997; Aureli et al., 2011; Oviatt & McDougall, 2005; Kontinen & Ojala, 2011)

7 Networks: reasons for investigation With reference to public sector - Deregulation + decentralization -> reorganization and rationalization of services which requires to shift from the hierarchical model to a collaborative model with private organizations which may contribute to satisfy citizens needs - Example: PPP for the provision of infrastructure services or services traditionally the responsibility of the public sector alone, i.e. the municipality of Padua involves cooperatives and associations to increase home care services for elderly and children and avoid residential care Network coordination increases the capacity to address complex problems, implies a more efficient use of resources, provides advantages including enhanced learning and sharing of risks and responsibilities (see Alter and Hage 1993; Brass et al. 2004; Huxham and Vangen 2005)

8 Measuring performance in networks is challenging because The partner owns the resources we need -> we cannot fully control the final outcome PAST STUDIES: Management/Accounting literature focused on dyadic relationships adopting the perspective of the single organization and how it evaluates the outcomes/costs/benefits obtained through its relationships RECENT STUDIES: Adopting the perspective of the network and of its network manager (CEO of the network) which works as an intermediary Look at the example of contract-based networks like those established in Italy

9 Contract-based networks In Italy, among several different forms of collaboration we can choose the networks of ex law 122/2010 also called network contracts It is a legislative instrument designed to support inter-firm cooperation by grouping two or more firms to achieve common goals. It is designed to be a partnership among equal members (members have the same decision power and they all take part to strategic decisions), who may have legal subjectivity, adopt a governance model guided by a common body (one network manager or a Board lead by a manager which acts as a connecting element in terms of information and activities), to form a financial fund for the execution of the strategy.

10 Network contracts in Italy In Italy: great usage of cooperative agreements (Euricse, 2012) and recent widespread adoption of a new instrument called network contract launched in 2009 Companies involved N. Of contracts Source: Infocamere - Chamber of Commerce, January 2016

11 Network models 3 Dimensions Legal Strategic Organizational - "light" network (no legal subjectivity; no common body nor fund) - "intermediate" collaboration (no legal subjectivity but Board and fund) - complex network with legal entity, guided by a common body, with a common fund and obliged by law to prepare annual reports - information exchange - coordination between complementary activities aimed at a final result unit (commercial transactions are usually in place) - complex joint business activity by participants - informal coordination and control mechanisms - formal mechanisms

12 Actors involved in a contract-based network clients other stakeholders Product/ Service 1 Product/ Service 2 Organization D Network manager Organization A Organization B Organization C.. individual organizations Restaurants, hotels, travel agengies, transport companes portarage, catering and event management companies

13 At the network level there is a need for information PM (metrics and systems) are important for the network manager because he/she needs to monitor activities and evaluate results to: - manage the collaboration - motivate network members - be accountable towards the participant members who appointed he as manager

14 Challenges when adopting the network perspective When planning a PMS at the network level the complexity increases because we have to consider at the same time: - Nodes satisfaction - achievement of individual objectives (which may be conflicting) and their own performance (i.e. increase in turnover) - Network s satisfaction - ability of the system to service the customer (network effectiveness, which is the attainment of positive network level outcomes that could not normally be achieved by individual participants) while maximizing the efficiency (reducing costs) - and obviously the clients satisfaction (especially in service sector) ->multiple perspectives at the same time

15 The network perspective We also have to take into account that network results depend on individual companies resources, how they interact and how they integrate these resources -> input and processes are fundamental aspects Moreover, networking may generate intangible benefits -> some alliances might be created to foster innovation among partners, without necessarily pursuing network growth -> also non-financial measures are important

16 Some proposals from the Literature Review An adapted multidimensional scorecard (Kaplan et al., 2010). OUTCOMES: performance regarding various dimensions FINANCIAL PERSPECTIVE network s growth, productivity, profitability.. CUSTOMER PERSPECTIVE customer satisfaction, loyalty, knowledge, INTERNAL PROCESSES PERSPECTIVE efficiency, quality, flexibility, ENABLING FACTORS: inputs and mechanisms that support the collaboration Values & Culture Modes of interaction Resources & Competences cause and effect relationships Adapted from Varamäki et al. (2008) & Parung and Bititci (2008)

17 Some proposals from the Literature Review The Business Network Scorecard reporting is made up of three parts (Lombardi et al., 2015 Common objectives that the cluster of companies defines with reference to different perspectives: - Financial - Customer - Internal processes - Development and Growth - Value Creation (added value generated by network action) which represents the reason why companies create a network Indicators for all perspectives (network s turnover; n. of customers, n. complaints; n. of projects launched; costs for R&D. + indicators for value creation as knowledge transfer or number of stakeholders involved or reduction of the environmental) + Indicators of network synergies to undestand the effect of collaboration based on the following comparison A+B+C = SUM vs NET Sinergy is when SUM< NET Comparison between the network performance and the performance of each companies -> based on the hypothesis that each company involved adopts a similar management control system to the one proposed for the network

18 Some proposals from the Literature Review A sort of Integrated Balance made up of the following parts (Formisano et al., 2013): a) Financial situation of the network as an entity (Balance Sheet & Profit and Loss Statement) b) Financial indicators of the intersection of activities (es. profit/roe/roi calculated on the network s balance sheet c) Non financial indicators of the intersection of activities (n. of new projects; n. of services delivered by the network; n. of new contacts/relationships developed) d) Indicators on stakeholder perspective (survey to collect feedback from revelant stakeholders are you happy.how often do you interact - and to identify the reputation of the network) Data should be compared every year. Somehow designed to voluntary disclose network s activities to external subjects

19 But few empirical examples in theory and practice because Performance evaluation is problematic: - 1. each member has its own measurement culture (no agreement on common metrics); - 2. some members may be not interested in a network PM because the alliance refers to non-core activities for them; - 3. individual members should be willing to share critical information with the other partners - 4. networks may not be culturally prepared to develop a supporting infrastructure (people and tools) to collect data - 5. also researchers found difficulties in using objective measures such as network s revenues and profitability because there are some hidden costs related to operational interdependence among partners

20 Even less examples regarding SMEs The problems explain why PMS at the network level are mainly set up in franchising networks and in SMEs networks organized along a value chain guided by a leading company imposing its rules and aiming to minimize total costs in the network (Hines et al., 2000; Dekker, 2003; Bititci et al., 2005; Busi & Bititci, 2006; Varamäki et al., 2008). Studies lack to address other forms of SMEs networks (Pekkola & Ukko, 2011; Dekker, 2003; Varamäki et al., 2008).

21 Starting a new empirical research Aiming to fill a gap in the literature we question: Do SMEs networks implement a performance measurement system? Which characteristics? If SMEs maintain their attitudes (preference for simple IS, focus on accounting-based and ex post results) when involved in networks, we expect networks to monitor at least their global financial performance (network s financial statements), without necessarily implement a structured information system Because collaboration is the key element we expect networks to define specific metrics related to collaboration and what allows collaboration (members knowledge and willingness to collaborate)

22 Empirical analysis what we have done so far Focus on networks in Italy that are a fully separated legal entity compile financial statements and record more than 50,000 of revenues for at least 1 year excluding networks made by companies having corporate links inclusion of networks working in the service sector to avoid manufacturing supply-chain networks

23 Some examples of our case studies Networks seeking short-term advantages (18 MEMBERS) RETE IMPRESE RIMINI made by restaurants and bath establishments aiming to create a common culture of tourism welcoming, save costs, share knowledge and achieve economies of scale Networks designed to generate competitive advantages in the existing domain over firms outside the network (4 MEMBERS) CASA TURISMO JESOLO made by hotels, tour operators and other tourism businesses aiming to transform the image of Jesolo from a mass tourism and traditional seaside area into a high quality and sustainable tourism location Networks aimed to seek new business domains (12 MEMBERS) PISA DEI MIRACOLI made by hotels, transport companies and other tourism businesses aiming to promote the area as a business tourism destination. Objectives: communicate the quality of the destination to national and international event management companies and convince them to organize fairs and similar events in Pisa.

24 Findings All networks have defined a shared mission, strategic objectives and activities (planning is the prerequisite of controlling ) Network Mission CASE STUDY B Casa del Turismo di Jesolo (4 members) The network made by hotels, tour operators and other tourism businesses aims to transform the image of the tourism destination (Jesolo) from a mass tourism and traditional seaside area into a high quality and sustainable tourism location Strategic objectives Activities Members want to (1) improve the energy efficiency of members tourism facilities and (2) direct tourists to select high quality, green accommodations. Launch of an eco-efficiency project for energy improvement and creation of a booking portal for tourists.

25 Findings - very few performance measures are defined and the main focus is on final outcomes regarding financial or customer aspects (expenses or n. of contacts) - the measurement of input factors is poor developed, mainly refers to financial and human resources provided by network members and their commitment to the collaboration (n. of participating subjects and time dedicated to meetings) - the BSC logic is absent: almost no metrics on internal processes nor on employees learning and development and cause and effect relationships are ignored

26 Metrics used within the analyzed networks RESOURCES or INTERNAL CUSTOMER FINANCIAL INPUT FACTORS PROCESSES PERSPECTIVE RESULTS

27 Findings - No real system designed to measure network s performance (no procedures/recurrent practices; no dedicated resources to collect the information); - only one network prepares a budget on future activities and related costs - performance assessment mainly occurs through direct confrontation among partners - only in 3 cases out of 5, meetings are supplemented by internal reports (documents shared by ) prepared on a monthly basis by the network s President

28 Some questions to be solved Problems of implementation? The absence of performance measures contrast -to some extent - with the attention dedicated to the definition of strategic objectives and specific activities the participants agreed on. Which obstacles? Academics propose something that organizations do not need? For example because common projects/activities are not complex From an academic point of view we see possible treats for the survival of these networks: - network managers rely on incomplete information - absence of a structured approach to evaluate network s processes and outcomes may lead partners to not agree about the progress of the planned activities

29 Thank you for your attention