Performance Measurement Approach Adopted At Ethiopian Airlines
The report presented here with focuses on the amendments that the CEO needs to follow in enhancing the use of the BSC that is already in place within the airline for the past three years. The BSC is adopted to help managers and co-workers monitor their performance both in financial and non-financial terms.
The following is the organizational structure of Ethiopian Airlines as of writing this report.
2. Performance Measurement Approach at Ethiopian Airlines
Ethiopian Airlines uses the Balanced Score Card approach to measure its performance. The Airline uses the BSC as a strategic and communication tool to align the vision and strategy of the organization to the overall business activities and to monitor performance as compared to the set goals.
The BSC helps to measure the drivers to achieve the strategic objectives of the airline; by aligning the strategy with the daily activities, where all involved are duly communicated and are aware of what is expected in their future performance.
The BSC maps the Airlines’ strategic objectives in four perspectives: financial, internal processes, customers, and learning and growth; and specific metrics are attached to each perspective. The balanced score card enables the stakeholders involved to view the activities as internal and external to the airline, as a financial and non-financial metric; and for comparison of past and future performance. My BSC for the current fiscal is attached in the Appendix
During the annual assembly the CEO communicates the strategic objectives to all employees and the targets are cascaded from EVPs all the way to individual level. Management employees prepare BSC in consultation with their immediate supervisor and agree on targets and measurements; non-management staff will have ISCs with the KPIs clearly stated.
The BSC as a performance measurement approach in the Airline can be considered as the control system to monitor the execution of plans and if the targets set are not in line with the plan, the airline will be able to review during the mid-year assessment and seek means of improving the overall performance.
As stated in B2S4p117 performance management “is associated with an approach to creating a shared vision of the purpose and aims of the organization, helping each employee understand and recognize their part in contributing to them, and in so doing, manage and enhance the performance of the individual and the organization.”In this regard the Airline endeavours to help each employee understands the objectives and ‘ensures’ necessary tools are provided so that the performance of employees may not be hindered.
3. Identifying Stakeholders at Ethiopian Airlines
“Stakeholders – any group or individual who can affect or is affected by the achievements of the firm’s objectives (Freeman); or constituents who have a legitimate claim on the firm (Hill & Jones).”
The performance measurement approach used by Ethiopian Airlines is the Balanced Score Card; and very few of the stakeholders were involved during the process of development of the performance measurement system. The following system map shows the stakeholders of Ethiopian Airlines. Despite the numerous sets of stakeholders, the airline (in fact the Kaplan and Norton model – BSC) focuses on employees, shareholders and customers, which the model is presented as a simple form of the actual complex real-life situation if the wider environment is considered.
Fig.3 System Map of Stakeholders at Ethiopian Airlines
I have tried to include as many stakeholders as possible in Fig3. The environment and process stake holders (B1S18p147) are of particular interest in the identification of stakeholders of Ethiopian airlines. The BSC being a strategic and performance measurement tool, stakeholders that define the critical elements of strategy need to be identified. Atkinson et al. identified five stakeholder groups and categorized them as environmental stakeholders, which is comprised of customers, owners and the community; and process stakeholders comprised of employees and suppliers. According to Atkinson et al., the environmental stakeholders “defines the organisation’s external environment that, in turn, defines the critical elements of its strategy; “and the process stakeholders “work within the environment defined by the external stakeholders to plan, design, implement and operate the processes that make and deliver the organisation’s products or services.”
The following are the key stakeholders that constitute the development of the BSC at Ethiopian Airlines:
The Airline is a government owned commercial organization and the activities of the airline are somehow geared with the objectives of the national government. The business being capital intensive, and prone to various environmental situations (STEEP), the government’s stake is so high. The country being very poor, the economic viability of the airline is given priority, i.e. the airline has to be profitable. Hence, the financial perspective of the BSC is of high importance to the government, and in fact the BSC of the airline is designed like theory Z of Halifax PLC (A) (B2S17p64).
The customers are the very reason that the airline exists and how the airline is perceived by the customers really matters. Customers of the airline need a reliable and safe transportation and the service must be at par with competitors’ level of service; with respect to on-time performance, quality, and loss or damage of passenger goods. Therefore, the customers are at the heat of the performance management as the airline must serve its targeted customers to meet the measures in the financial perspective.
This group of stakeholders are the ones that are at the centre of the BSC of the organization; and in the BSC the Internal Process perspective and the Learning and Growth perspective directly affects and they in turn affect those perspectives. The other perspectives being mutually interdependent will also be affected. In the internal process perspective the employee knowledge of the business process and the understanding of it help to provide a quality service as perceived by the customers and drive them to excel in the things they do. The internal process also affects the financial perspective in such a way that the cost incurred to provide quality service comes into factor, where employees are not aware of a cost-effective method of handling a given task. The learning and growth perspective directly affects the employees as they need to be trained both on the way of handling their task and in upholding the corporate culture. The employees drive the business, and as described in B2S14p92, the business process will have greater impact on customer satisfaction.
4. Evaluation of the BSC at Ethiopian Airlines
Atkinson et al., “argue that organisations exist to serve the objectives of their owners or sponsors. If the organisation is commercial, this objective is likely to be increasing shareholder wealth.”
Ethiopian Airlines being a commercial entity aims to make profit from its operations and as has discussed above the primary driver is profit and is aimed at increasing the wealth of the owner – the government.
The Airline from the onset recognised that the BSC would help to manage and measure its performance. The BSC perspectives address both the primary and secondary objectives of the organization. “The primary objectives are defined by an organisation’s owners or funders. What the organisation expects from and gives to each stakeholder group are secondary objectives.”
If we evaluate the contribution that the BSC makes through the management of stakeholders interest using Atkinson et al.’s model it can be seen that all the perspectives of the BSC model addresses the objectives at different levels and lays down the activities in a measureable and tangible manner, thereby enabling managers view the perspective simultaneously in a coherent manner.
Arguably, at Ethiopian Airlines the BSC has created some change in the culture where achievement has become a driver to do more and be recognized. Employees focus on key target areas and monitor trends that might have an adverse effect on the future operation of the organization in general. The attitude change in stakeholders is also worth mentioning that the BSC serves its purpose of being a system of measurement and instilling attitude and cultural change.
The objectives of the government – profitability; and that of the CEO – creating ‘Africa’s World Class Airline’ are not in line; and probably that could be the reason that the motto, which Ethiopian Airlines used in the beginning of the BSC implementation with the Vision 2010 strategy, changed to ‘The New Spirit of Africa’. Though the assumed cascading of the BSC is supposed to start from ‘Africa’s World Class Airline’ it starts from the way of making the airline profitable. All activities are geared in attaining the goals of the financial perspective of the BSC.
Though the BSC is at its infancy at Ethiopian Airlines, the performance review made every six month is so long that some things might go wrong irreversibly. At Halifax the performance is monitored monthly and 75% of the data was available within the company. At Ethiopian Airlines, the data collection task is arduous and cumbersome, which makes the monitoring task unpleasant. Furthermore, as the data to be analyzed is too much the probability of making error increase and the inaccuracy of data creates resentment.
During performance measurement, only the financial perspective is considered. For example my last year performance evaluation was based on the revenue target that was given, which was 5% less from the target. Factors (internal/external) that could have affected the performance are not taken into account. In the long run this will affect the performance of the employees.
Strengths and weaknesses of the BSC at Ethiopian Airlines
Individual performance will relate directly to the Airline’s strategic goals, and values, thereby creating significant impact on productivity and profitability.
Targets ways of improving on providing seamless, consistently high-quality service that address customer issue, enabling to create successful relationship.
Creates opportunity for the employees to continually develop and grow as employees and leaders of the Airline.
Redundant and tasks that do not add value are removed
Easy to understand the relationships of each perspective
Usually data is not readily available
Data collection is arduous and de-motivating
Employees contribution to the achievement of the objectives f the airline is cannot be measured, only the effect of their activity can be measured
Team work is thwarted as each employee focuses on individual BSC
The financial perspective is given priority that dwarfs the other perspectives
5. Identification and Evaluation of Complementary Processes
Acquiring Information and Communication Technology
As discussed above the data collection and the task associated with it takes ample time, the use of ICT will ease the task and in doing so the errors made will decrease significantly. Creation of a database for the required information enables each employee to access pertinent information in relation to his task or the objectives one intends to achieve. In addition a data base has to be created for the measures, targets and initiatives that are to be taken and implemented. The data base helps to easily access information and thereby associate tasks to employees, having in mind the objectives of the organization; and progress can easily be checked and can be used as a tool for tracking changes. In Halifax’s case 75% of the information was available and the implementation of the BSC was not a big challenge as faced by Ethiopian Airlines.
Ethiopian Airlines implementing the BSC as it was recommended by the consultants it hired. The way to go about was not clear, even after three years the BSC of some of the divisions is not prepared on a timely manner. For example the commercial division does not have BSC for the current fiscal year; staffs under that division were forced to prepare their own so that they may have a guidance and deliverables to work on. Ethiopian Airlines can draw lessons from Halifax, as Halifax took over two years to design and implement; and in fact they were making changes till 1999. The consultant that will be hired needs to have the thorough understanding of the national and corporate culture and train the senior management on the principles of the BSC. The consultants need to have their own office where they can monitor the development of the BSC and its implementation from the top management to lower level supervisor.
Training and Development
The employees of the Airline need to be current with the way the business is being dealt in the airline industry and continuous training and improvement is mandatory to stay in business with the ever changing environment and achieve the Airline’s objectives. To help the airline focus on specific training needs, benchmarking would help to keep in pace with competitors and ‘best-in-class’ performers. The benchmarking could be on processes or result areas. As discussed in the case study of Britannia Airways (B2S15p133) a lesson can be drawn on the way to go about. A very good example of South West Airline for refuelling an aircraft in 12minutes, which Southwest adopted from Formula 1, can also, be practiced (B2S15p134). Currently, the airline is implementing ACE (Achieving Competitive Excellence) in its Maintenance and Engineering Division. ACE is an operating system used by United Technology Companies is focused on increasing efficiency and reducing waste. Since the start of ACE at maintenance and Engineering Division, other divisions are also trying to implement and internal benchmarking is taking shape. In Finance division, Ethiopian Airlines is learning best practice from its fierce competitor Emirates Airlines. Process re-engineering can also be implemented at Ethiopian Airlines to avoid unnecessary non-value adding steps from the work flow. For example it sometimes takes six months to get compensation for lost baggage compensation; because of too long and redundant processes.
Performance related pay
As discussed above the BSC has contributed in creating a culture of achievement and employees are striving to achieve to their level best. If their achievement is rewarded in a commensurable way, employees’ effort could increase and their performance as a result can be positively affected. This can be related to equity theory (B1S14 p139) which states that rewards motivate employees provided they are perceived equitable and fair; and according to expectancy theory motivation of an employees can be influenced by the commensurability the task they perform and the reward they got; and comparable reward with other colleagues; and the perception of rewards received by others.
The airline is yet to benefit from the implementation of the BSC as a performance management system. The BSC at Ethiopian Airlines has a gap but follows what every performance management system need to follow – an approach of creating a shared vision among the employees and management where the objectives are clearly defined and employees know the targets and the measurements attached to those targets. The BSC is helping the managers to understand the inter-relationships of the perspectives which eventually results in improved decision making and problem solving, and in the process the airline will be “looking-and moving-forward instead of backward.”B2S14p95.
Hence, the BSC as a performance management system has contributed a lot in “creating a shared vision of the purpose and aims of the organization, helping each employee understand and recognize their part in contributing to them, and in so doing, manage and enhance the performance of the individual and the organization.” The BSC should not be considered as a panacea for the ailments which the company has, but as far as the performance measurement is concerned. Though the BSC is in the right track of serving its purpose as a performance management tool, the practise is far from being perfect.
The airline without having delivered necessary training to perform the given task in a better way the targets are being stretched in order to maximize profit; and staff are also forced to handle multiple tasks in an effort to increase productivity, and after the desired productivity is reached another stretch will follow and some of the staff become redundant, which results in lay-off. The very staff who helped increase the productivity sometimes becomes victims.
Chairman and CEO of Milliken & Co., emphasized on the role played by continuous improvement in customer perspective and internal business process perspective, which implies that the internal measures which a company takes have great impact on the satisfaction of customers B2S14p92. Similarly the airline needs to work on internal business processes and customer perspectives. As people are the primary resources in achieving the organizational goals Ethiopian Airlines needs customized training and development that are provided by aviation experts or the regulatory body – IATA.
According to Kaplan and Norton “the measures are designed to pull people toward the overall vision. Senior managers may know what the end result should be, but they cannot tell employees exactly how to achieve that result, if only because the conditions in which employees operate are constantly changing.” Here, the need for employee empowerment is called for. Employees are not empowered enough to fully utilize their skill and creative talents and the airline benefits thereof.
The need for an information technology should be given priority. As in some cases of measurement, the data needed for analysis already exists and sometimes in a refined form, but what will be required are the discipline and the management dedication and capability to analyse the information; this calls for intensive training in data analysis or use of information technology at all levels of the management hierarchy. As in the case of Halifax PLC, the data was available and it any member was able to access it from any computer. (B2S17p67)
As discussed above the leaders of the organization set the vision and communicate to the employees and targets and measures are placed in each perspective so that the performance of the organization is measured; but the vision changes and the employees have a moving target which will be difficult to hit. Hence, the leadership of the airline needs to be focused in the implementation of the strategy where the processes are aligned with the objectives which the airline needs to achieve.
Ethiopian Airlines operates in different cultures and the attitudes and values attached to the work ethics are different in all localities. The BSC that has been initially conceived by head office located in Ethiopia and with Ethiopian mentality is being forced to be implemented with the same condition elsewhere, even in highly developed countries in Europe and the USA, which is too restrictive in the way employees use their creativity and the means of contributing to the progress of the airline. The BSC for head office and for the field offices, though have a common goal need to have variations with the local cultures and way of doing things or the level of economic or technological development. In the case of Halifax the district manager and the branch manager had different sets of management practices. (B2S17pp69-70) Furthermore, the perspectives used are being followed as dogma, which could have been amended for revenue generating divisions and support offices. The support office instead of having the financial perspective, they can have ‘efficiency and effectiveness perspective’. Hence, a lot has to be done in the implementation of the BSC.
The airline operates in environments where the business process needs the involvement of the community in one way or another, as its revenue is generated from these communities. The BSC developed by Ethiopian airlines, though follows the basic framework laid down by Kaplan Norton, and needs to devise a way where other key stakeholders can be addressed – the community and suppliers.
Finally, though the BSC is workable performance measurement approach for the airline, it needs to address the contribution made by employees and suppliers; and the role of the community in which the airline operates needs to be addressed.