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.

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 measured. Should a profit contribution or a full profit be used? Should it be an operating, gross, or net profit? Should it be based on inventory valuation at full cost or variable cost? If significant inflation is a relevant and recognized fact, then should we use historic cost, current purchasing power, or replacement cost as the basis for profit measurement? Should the measures be linked to targets and rewards? The professional skill of the accountant will be needed to identify and explain the nature, meaning, and suitability of these types of measurement action possibilities. Furthermore, the possibilities of supplementing profit measurement will be considered. If product and staff quality have been identified as relevant facts, then these become aspects of performance that can merit specific attention. ­Nonfinancial measurements of these issues may become part of the performance measure package because of the factual belief of, at least some of those involved, that it is these factors that have caused profit deterioration. In these areas the expertise of production staff, engineers, and HR personnel can contribute to possible ways of measuring these factors. Their factual beliefs in the causality connections of profit-determining factors will ultimately be the source derivation of the performance measurement actions that are undertaken. This approach ensures that alternatives for ­action are identified and considered. This is a rational way of acting.

Once the most appropriate action possibility is selected (see subsequent section on values below) then actions required to implement the scheme have to be taken. At the design stage, the implementation possibilities will also have been identified in relation to the resource and belief facts identified and the preferred route to implementation selected. The same approach can be taken to implementation with alternatives vetted before action. Should implementation be trialed or simply started in full? Should the implementation be staged? Who will use the information generated? How will they use it? Finally, the measurement system, when in use, will generate evidence about the efficacy of the facts from which it has been derived. Are the beliefs about the causes of poor profitability defensible? Are actions taken improving performance? This new factual evidence will lead to further necessary modification action by permitting another round of consideration of the facts about system use and the possibilities it raises for changes to be made.

Values

The Nature of Values

Values are the motivators that allow people to choose between the action possibilities that confront them. At a personal level, values such as friendship, love, and philanthropy guide action. Similarly, professions have values of technical competence, ethics, and in the case of medicine the use of professional skills to assist others (i.e., the hippocratic oath) as determining action guidance. In organizations, values will also be present. These may be largely implicit and informal and simply reflect the ways of doing things that have been developed over time or they may be more explicit and contained informal statements of organizational creed or culture. Evidence of these values will be found in the organization’s objectives and culture, which should directly reflect the values adopted.

Using Values

Many commercial organizations may have a shareholder value approach to business operations. The interests of the business owners will be paramount in deciding on the actions that they will take. A considerable literature exists on the implications of following this business philosophy (Rappaport 1997). When applied to performance measurement, it will ensure that the selected measurement systems report on how performance affects the wealth of and returns to the firm’s shareholders. An “off the shelf” performance measurement structure that can support this approach is the balanced scorecard (Kaplan and Norton 1996). The strengths of this approach lie in the capitalist system’s focus on ownership rights as the underlying engine of economic growth. This value drives economic activity and delivers wealth for many. Its weaknesses lie in the short-termism that it can promote ­(Merchant 1985; Merchant and Van der Stede 2012), which may lead to actions that compromise the longer-term health of the business. In this respect, performance measures may exacerbate the problem where they ­reinforce the short term orientation of many corporate managers.

In contrast, a broader set of values can be taken. This could encompass an ethical or a charitable focus and these values would promote performance measurement that would reflect these aspirations. Another way of broadening values would be to adopt stakeholder (as opposed to only shareholder) value. Here values would be considered not simply in respect of the shareholder group but also for employees, customers, suppliers, and government. The interests of all, or some of these parties, would then be incorporated in performance attainment and, consequently, in the measurement of it. The performance prism (Neely and Adams 2001; Neely 2007) would be an “off the shelf” structure aligned to this approach.

Values are therefore closely related to purpose, and it is purpose that directly motivates action. Not only does a clear knowledge of purpose allow action choices to be made, but it also facilitates assessment of actions taken. Their efficacy can be judged in relation to whether action has achieved what was intended by it (i.e., its purpose). Fitness for purpose can, therefore, provide a key test of whether organizational values are being attained.

Communication

The Nature of Communication

The fourth and last dimension of pragmatic constructivism is communication. An individual does not exist in isolation. People necessarily interact with each other before, during, and after actions are taken. Interaction with others requires effective communication among those involved. Human communication has multiple functions. For example, it facilitates knowledge gathering and dispersal, provides a means of consulting others and promoting participation, indicates and explains intention, demonstrates care and empathy, allows articulation of belief constructs, and gives a means of recording and appraising action. It may be largely based on language but it also involves mode of expression, demeanor, and action. Without good communication, relevant facts and possibilities may not be identified and values may be unrecognized, undeveloped, or not agreed upon. Thus, in the world of human interaction and cooperation, communication is an indispensable precursor to successful action.

The Role of Communication

In the process of action such as performance measurement, communication will play a role at each stage (see Exhibit 2.1).

First, communication is necessary to initiate and set objectives for new performance measures to be established. The recognition of the need for such change may initially be at the level of the individual. However, if this recognition is to be realized, others have also to be convinced of the need for it. Discussion involving the presentation of evidence (the case for new performance measurement) and persuasion of its merits are among the key oral and documented communication needed at this stage. In a nondictatorial organization, a consensus has to be built through communication to mobilize action.

Second, the nature of the new performance measurement has to be specified in the form of planned action. Here the discussion of possible measures and evaluation of their use will be needed. This is likely to be based on input from the range of staff involved in the proposed action. Topics here are numerous. Can the measurement data be readily accessed? How costly will this be? How reliable are the proposed measurements? Could they prove dysfunctional? Can they be matched to staff responsibilities? Also, to ensure ownership acceptance of the new measures, consultation with (and possibly the participation of) those subject to the new measures may be sought. All of these issues are central to the design stage and require extensive and effective communication between and among staff.

Third, the steps to put the new measurements into operation have to be taken. Putting the measures in place initially requires close monitoring and cooperation by all involved. This is a time for discussing the working of the new system and instituting the new reports and procedures such as the meetings needed to interpret and review and react to reported performance information. Given the nature of implementation, communication is central to the effective functioning of any new measurement system.

Fourth, once the new developments in performance measurement are up and running experience of them has to be evaluated. How well is purpose being attained? Does the original purpose remain appropriate? Are dysfunctional actions observable? Have reactions to information been apt? Issues related to assessment should be raised by those involved in designing, operating, using, and being subject to the new performance measures. Communication between and among these parties is an integral part of evaluating whether change has been successful.

Conclusions

The major role played by communication in all the stages of action means arrangements for its facilitation are strongly needed. The communication between staff members has to be ensured through meetings and contacts. Both lateral and horizontal communication mechanisms should be in place. Service staff, such as management accountants, need to interact with line functional staff as do supervisory staff and their subordinates. All can contribute ideas to improve action on performance measurement. However, they cannot do so without effective communication occurring at each stage of the performance measurement process.