A manufacturer of biscuits can inspect a batch, reject the bad ones and sell only what passes. A restaurant cannot. Its “product” is a meal, served by a waiter who may be having a good or a bad day, to a customer who judges it while it is being delivered. It cannot be stored for next week if the tables are empty tonight.
Performance measurement for services therefore differs from that of manufacturing. The study of services was given a framework by Fitzgerald and Moon, who suggested that a performance measurement system can be analysed as a combination of three building blocks: dimensions (what is measured), standards (the targets) and rewards (how people are motivated).
This topic explains the characteristics of services that make measurement different, the six dimensions and the distinction between results and determinants, how standards should be set (ownership, achievability, equity), how rewards should work, how to apply the framework to a service business, and its limits. It builds on the earlier topic on the balanced scorecard. The next topic covers performance measurement in not-for-profit organisations.
In 30 seconds
Services differ from manufacturing: simultaneity (production and consumption happen at the same time), perishability (a service cannot be stored, so unused capacity is lost), heterogeneity (the standard varies with each provision, especially when delivered by people), and intangibility (much of the value is not physical).
Performance management in a service business should link measures to strategy, include external and non-financial measures, and recognise that compromises are needed between targets such as quality, cost and speed. Fitzgerald and Moon: three building blocks. 1. Dimensions of performance (six): financial performance, competitiveness, service quality, flexibility, resource utilisation and innovation.
Financial performance and competitiveness are results of past actions; quality, flexibility, resource utilisation and innovation are determinants of future results, which counters short-termism. 2. Standards: ownership (do people accept them as their own?), achievability (are they seen as attainable, yet challenging?) and equity (fair across units). 3. Rewards: clarity, motivation (bonus for achieving targets) and controllability (reward only what the person can control, with fair allocation of shared costs).
Measures vary by industry; there is no standard set. Full marks come from sorting measures into dimensions and judging standards and rewards.
Services and the building blocks
Characteristics of services
- Simultaneity. Providing the service and the customer receiving it happen at the same time; a product is made first and sold afterwards. The customer therefore sees and judges the process, not just the result, and errors cannot be corrected before delivery.
- Perishability. A service cannot be stored. There is no inventory of unused services; a seat, a room or an hour of a consultant that goes unsold is lost for ever. Measures of capacity utilisation matter.
- Heterogeneity. A product can be made to a standard specification, but a service provided by people varies. A call-centre operator cannot deal with every call in exactly the same way. Standards are harder to set and check.
- Intangibility. Much of what the customer values, such as courtesy or a sense of security, is not physical and is hard to measure, though the customer notices it.
For these reasons service organisations need performance management systems that link measures to competitive strategy, show how well strategic objectives have been met, identify where improvements are needed, include external as well as internal and non-financial as well as financial measures, and recognise that compromises are needed between targets such as service quality and the cost or speed of providing it.
The measures vary widely, and there is no standard set for all services. Fitzgerald and Moon (1996) offered a framework for analysing them.
The three building blocks
Block 1: dimensions of performance
Research by Fitzgerald and others concluded that there are six dimensions that link performance to corporate strategy. The dimensions are what is measured; the question is which should be measured to assess performance.
| Dimension | Type | Possible measures |
|---|---|---|
| Financial performance | Result | Profit and growth in profit; profit margins on sales. (Return on capital employed is less relevant in a service business with small capital.) |
| Competitiveness | Result | Growth in sales; customer retention or repeat sales; success rate in turning enquiries into sales; market share where measurable |
| Service quality | Determinant | Number and trend of complaints; customer satisfaction from surveys; mystery shopper scores; reliability |
| Flexibility | Determinant | Speed of response to customer requests; mix of work staff can do; ability to handle changes in volume or specification |
| Resource utilisation | Determinant | Efficiency and productivity; the percentage of available time spent on productive activities; occupancy |
| Innovation | Determinant | Number of new services; percentage of sales income from services introduced in the last one or two years |
Results and determinants. Dimensions distinguish the results of past decisions, shown in financial performance and competitiveness, from the determinants of future performance: quality, flexibility, resource utilisation and innovation. The determinants measure progress towards strategic objectives rather than the effect of past decisions.
They help to address the criticism of short-termism in financial reports: quality improvements, for example, may not raise this year’s profit but, if customers value them, will raise later profits. They suit the appraisal of current management.
Block 2: standards
Once the dimensions are chosen, standards (targets) are set. Three issues arise:
- Ownership. Do individuals feel the standards are their own or imposed by senior management? People are more likely to own the standards if they have taken part in setting them. When they own them, better performance is achieved with demanding standards than with easy ones.
- Achievability. Do those responsible consider the standards attainable? Standards that motivate most are those that will not be achieved all the time: challenging but not impossible. There may be conflict between what the company thinks is achievable and what the individual thinks is.
- Equity. Are the standards fair to all managers and units? Where local conditions differ, fairness may mean judging performance by subjective assessment, not by one set of financial measures.
Block 3: rewards
Rewards are how individuals gain from achieving targets. A main role of the system is to link operational performance to strategic objectives. Three points:
- Clarity. The system of targets and rewards must be clear to all; with participation, motivation is greater.
- Motivation. Employees may work harder if rewarded (for example with a bonus) for achieving targets.
- Controllability. Individuals should be held responsible only for what they control (a basic principle of responsibility accounting). Shared costs allocated across units must be shared fairly; arguments often arise on how this is done.
Applying the model
In a case study of a large food retailer, performance management used four of the six dimensions at store and regional level. Financial performance was monitored by profit by store and region, published in league tables. Competitiveness was monitored by market share from published statistics and by watching rivals’ prices locally, with managers sometimes observing competitors’ car parks.
Service quality was monitored by mystery shoppers, who visited disguised as customers and scored service, with league tables for stores and depots, and by customer letters. Flexibility was not measured formally, although managers knew its importance and, for example, phoned part-time staff to cover absences at short notice. This shows how a framework can be used to see which dimensions a company measures and which it neglects.
Limits
- It is a framework for analysis, not a set of measures, so the user must choose the measures.
- Some dimensions (flexibility, innovation) are hard to quantify.
- It gives no weighting between dimensions.
- Standards and rewards need information systems and management time.
- Compared with the balanced scorecard it is built for services and includes standards and rewards, but does not show the cause-and-effect chain as clearly.
Layouts for applying the model
- List the measures in the case and place each in a dimension; mark as result or determinant.
- Calculate the measures from the data (percentages, rates).
- Identify missing dimensions.
- Judge standards (owned, achievable, fair) and rewards (clear, motivating, controllable).
- Recommend changes.
Percentages to one decimal place; each answer is rounded once, at the end.
Worked examples
Example 1: a hotel. A 60-room hotel measured over a 30-day month: 1,404 room-nights sold; room revenue ₦49,140,000; 3,500 guests, of whom 1,085 had stayed before; 42 complaints. Required: the measures by dimension.
- Resource utilisation.
Room-nights available 60 × 30 = 1,800.
Occupancy = 1,404 ÷ 1,800 = 78.0%. - Financial performance.
Average rate = 49,140,000 ÷ 1,404 = ₦35,000
revenue per available room = 49,140,000 ÷ 1,800 = ₦27,300. - Competitiveness.
Repeat guests = 1,085 ÷ 3,500 = 31.0%. - Service quality.
Complaints = 42 ÷ 3,500 × 1,000 = 12 per 1,000 guests. - Comment. The first two are measures of the use of capacity (determinant for the future, result for the month); the repeat rate is a result of past service quality; the complaint rate is a determinant of future repeat business. Flexibility and innovation are not measured, and the hotel might add the time to respond to guest requests and the share of revenue from new services.
Example 2: standards and equity. Two branches both have a standard of 10% growth in profit, and a bonus is paid only if it is met. Branch A reached 8%. Branch B, in an area where a large competitor opened, reached 4%. Required: comment on the standard and the reward.
- Attainment. A achieved 80% of the target and B 40%.
- Equity. The same standard is unfair, because B’s local conditions are outside its control. A good result may be the 4% in that market.
- Rewards. Reward only what the manager controls; use a standard adjusted to local conditions, or a subjective assessment, and involve the branch managers in setting standards so that they own them.
Expect variants: a case for a bank, a hospital or an airline, a requirement to list suitable measures in each dimension, discussion of the difficulties of measuring a service, and a comparison with the balanced scorecard.
Common mistakes
- Confusing the building blocks with the dimensions.
- Mixing up results and determinants.
- Listing measures without placing them in dimensions.
- Forgetting standards and rewards. These are two of the three blocks.
- Applying manufacturing measures to services without adjustment.
- Not saying which dimensions are missing.
Quick revision
- Services: simultaneity, perishability, heterogeneity, intangibility.
- Blocks: dimensions (6), standards (ownership, achievability, equity), rewards (clarity, motivation, controllability).
- Results: financial performance, competitiveness. Determinants: quality, flexibility, resource utilisation, innovation.
How the marks are earned
- Measures placed in dimensions.
- Standards and rewards assessed.
- Gaps and recommendations.
Practice questions
These are original questions, written in the style of the Skills examination. Work each one before you open the answer.
Recall check: multiple choice
Question 1. Simultaneity means that:
- Services are stored
- Services are identical
- Production and consumption of the service happen at the same time
- Services are free
Show the answer
C. So errors cannot be corrected before delivery.
Question 2. Perishability means that:
- Services cannot be stored, so unused capacity is lost
- Services are costly
- Services are fresh
- Services are tangible
Show the answer
A. Capacity utilisation matters.
Question 3. Heterogeneity means that:
- Services are the same
- Standards vary with each provision of the service
- Services are stored
- Services are physical
Show the answer
B. Especially where people deliver it.
Question 4. The three building blocks are:
- Cost, price, profit
- People, planet, profit
- Plan, budget, control
- Dimensions, standards, rewards
Show the answer
D. Fitzgerald and Moon, 1996.
Question 5. The dimensions that are results of past actions are:
- Financial performance and competitiveness
- Quality and innovation
- Flexibility and utilisation
- None
Show the answer
A. The rest are determinants.
Question 6. The determinants of future performance are:
- Profit and sales
- Cost and price
- Quality, flexibility, resource utilisation and innovation
- Debt and equity
Show the answer
C. They help to counter short-termism.
Question 7. Ownership of standards is higher when managers:
- Are not told
- Take part in setting them
- Are rewarded less
- Have no targets
Show the answer
B. Participation builds acceptance.
Question 8. Standards that motivate most are:
- Very easy
- Impossible
- Secret
- Challenging but achievable
Show the answer
D. Not met every time.
Question 9. In a reward system individuals should be held responsible for:
- Only what they can control
- Everything
- Nothing
- Group results only
Show the answer
A. A principle of responsibility accounting.
Question 10. Intangibility means:
- Services are cheap
- Services are stored
- Much of the value cannot be touched or easily measured
- Services are fast
Show the answer
C. Customers notice it nonetheless.
Section B style: written questions
Question 11 (10 marks). (a) Describe FOUR characteristics of services. (4 marks) (b) Name the six dimensions of performance. (3 marks) (c) Distinguish results from determinants. (3 marks)
Question 12 (15 marks). A bank branch reports:
- customer retention 91%
- average waiting time 12 minutes against a target of 8
- productive teller hours 6.0 of 8.0 paid hours per day
- revenue from services launched in the last two years 8%
(a) Place each measure in a dimension and say whether it is a result or a determinant. (6 marks) (b) Calculate the waiting-time gap and the utilisation percentage. (4 marks) (c) Comment and name a dimension that is missing. (5 marks)
Question 13 (20 marks). (a) Explain why performance measurement in services differs from manufacturing. (8 marks) (b) Explain the three building blocks. (8 marks) (c) Advise on the standards and rewards for a chain of clinics whose branch managers receive a bonus if profit growth is at least 10%, whatever the local conditions. (4 marks)
Model answers
Show the model answer to Question 11
(a) Simultaneity; perishability; heterogeneity; intangibility, each explained (4).
(b) Financial performance, competitiveness, service quality, flexibility, resource utilisation, innovation (3).
(c) Results (financial performance, competitiveness) measure the effect of past decisions; determinants (quality, flexibility, resource utilisation, innovation) drive future performance (3).
Show the model answer to Question 12
(a) Retention: competitiveness, a result. Waiting time: service quality (or flexibility), a determinant. Productive hours: resource utilisation, a determinant. New services revenue: innovation, a determinant (6).
(b)
- Waiting time 12 minutes is 4 minutes over, 50% longer than the target.
- Utilisation 6.0 ÷ 8.0 = 75.0% (4).
(c) Retention is good but long waits and 25% unproductive time suggest slack in scheduling and are a risk to future retention; innovation is low at 8%; financial performance is missing and should be added (5).
Show the model answer to Question 13
(a) Simultaneity, perishability, heterogeneity and intangibility: quality is judged during delivery, capacity cannot be stored, results vary with each provision, and much of the value is intangible; so measures are less standard, more non-financial, more external and harder to quantify (8).
(b) Dimensions: the six aspects measured, split into results and determinants. Standards: ownership, achievability and equity. Rewards: clarity, motivation and controllability (8).
(c) The same standard for all branches is unfair if local conditions differ; adjust standards or use judgement, involve managers in setting them, and reward only what they control, with other dimensions such as patient satisfaction included (4).
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