A PERFORMANCE MEASUREMENT-BASED EARLY WARNING SYSTEM IN A GOVERNMENT REVENUE ORGANIZATION

8/10/2019 A PERFORMANCE MEASUREMENT-BASED EARLY WARNING SYSTEM IN A GOVERNMENT REVENUE ORGANIZATION

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A PERFORMANCE MEASUREMENT-BASED EARLY WARNING SYSTEM IN

A GOVERNMENT REVENUE ORGANIZATION

by

Elnur Asgarli

A Dissertation Presented in Partial Fulfillment

of the Requirements for the Degree

Doctor of Management in Organizational Leadership

UNIVERSITY OF PHOENIX

July 2012


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20 12 by ELNUR K. ASGARLIALL RIGHTS RESERVED


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Abstract

The present quantitative study explored the relationship between the application of the

performance measurement system and the ability of the decision-makers of a government

revenue agency of the Republic of Azerbaijan to detect the events that could harm the

operations of the entire organization. Based on the literature review, the expectation was

that the organizational decision makers could detect organizational crises in earlier pre-

crisis stages using a properly designed performance measurement system. Two

quantitative research designs were used by exploring one research question for each

design. A correlational design was used by running a multiple regression on 28 quarterlyobservations on the quarterly tax revenue, quarterly performance report scores on audit,

cash operations control, tax debts, tax return processing, and taxpayer services, and

quarterly GDP figure of Azerbaijan. A survey design was used by administering an

online questionnaire to 344 managers of the revenue agency. The results of both research

questions indicated an overall positive relationship between the performance

measurement system and the ability of the decision-makers of a government revenue

agency to detect events that could harm the operations of the entire organization.

However, several deviations from the overall observed relationship were detected

indicating that further research may be needed to understand the relationship between

performance measurement and crisis leadership. Recommendations were also included

for the organizational leaders on improving the predictive capacity of the performance

measurement systems of their organizations.


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v

Dedication

I dedicate this dissertation to my parents who always inspired me for continuous

education, and I owe to them for everything that I have achieved in this life. I also

dedicate this dissertation to my wife and my daughters who kept me energized

throughout my study and were my source of joy and happiness.


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Acknowledgments

I am very grateful to everyone who helped me throughout my doctoral studies. I

especially thank my mentor Dr. Richard Brunkan. Dr. Brunkan was very helpful in

providing timely and quality guidance and directing me in the right way towards

completion of my dissertation.

I thank my committee members Dr. Richard Turner and Dr. Mohammad

Shraifzadeh who supported me with their valuable feedback. I also thank my academic

advisor Carola Garfias who would regularly check my progress and help make my

doctoral studies more efficient.I also thank Dr. Gafar Gurbanov for helping me to approach my doctoral

dissertation from a student's perspective. Dr. Gurbanov, based on his online doctoral

experience, provided me with very practical help in balancing my personal life with

doctoral studies ad making it fun and useful at the same time.

My special thanks go to the people at the Ministry of Taxes of Azerbaijan. Mr.

Fazil Mammadov, Minister of Taxes, provided overall support for my doctoral studies,

and I am very grateful to him for this support. I thank Mr. Sahir Mammadkhanov,

Deputy Minister of Taxes, who personally helped me in organizing and conducting data

collection for the dissertation at the Ministry of Taxes. I especially thank Dr. Asaf

Asadov, Advisor to the Minister of Taxes, for his exceptional support in formulating my

research idea and validating my research instrument. My thanks also go to the team of

the performance measurement section of the Ministry of Taxes, Mirgulu Mursaliyev,

Subhan Kamilzada, Ismayil Agalarov, and Ziya Askarov for their continuous support in

data collection.


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Table of Contents

List of Tables ............................................................................................................ xi

List of Figures .......................................................................................................... xii

Chapter 1: Introduction .............................................................................................. 1

Background of the Problem ....................................................................................... 1

Statement of the Problem ........................................................................................... 2

Purpose of the Study .................................................................................................. 4

Significance of the Problem ....................................................................................... 4

Nature of the Study .................................................................................................... 5

Appropriateness of research method .................................................................. 6

Appropriateness of research design. ................................................................... 7

Research population and instrument ................................................................... 8

Research Questions and Hypotheses ......................................................................... 9

Theoretical Framework ............................................................................................ 10

Signal detection theory. .................................................................................... 10

Performance measurement theory .................................................................... 12

The study as a bridge between the framework theories .................................... 12

Controversies in the field .................................................................................. 13

Definition of Terms.................................................................................................. 14

Assumptions ............................................................................................................. 15

Scope and Limitations.............................................................................................. 15

Delimitations ............................................................................................................ 15

Summary .................................................................................................................. 16


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Chapter 2: Review of the Literature ......................................................................... 17

Title Searches, Articles, Research Documents, and Journals .................................. 18

Literature Review..................................................................................................... 19

Historical overview. .......................................................................................... 20

Performance measurement in the first decade of the 21 st century .................... 22

The purpose of performance measurement in public organizations ............ 23

Performance measurement as an early warning system .............................. 24

Crisis leadership ................................................................................................ 26

Signal detection ............................................................................................ 27

Crisis response ............................................................................................. 30

Stakeholder theory of crisis management .................................................... 32

Crisis communication .................................................................................. 32

Organizational complexity ........................................................................... 33

Organizational learning from crises ............................................................. 35

Variables .................................................................................................................. 36

Research question 1. ......................................................................................... 36


Research Gap ........................................................................................................... 39

Conclusion ............................................................................................................... 40

Summary .................................................................................................................. 41

Chapter 3: Method ................................................................................................... 43

Research Method ..................................................................................................... 43

Research Design....................................................................................................... 44


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Research Questions and Hypotheses ....................................................................... 46

Population ................................................................................................................ 48

Sampling Frame ....................................................................................................... 49

Sample...................................................................................................................... 50

Sample for Research Question 1 ....................................................................... 50

Sample for Research Question 2 ....................................................................... 50

Informed Consent and Confidentiality..................................................................... 52

Geographic Location ................................................................................................ 53

Instrumentation ........................................................................................................ 53

Validity and Reliability ............................................................................................ 55

Data Analysis ........................................................................................................... 58

Research question 1 .......................................................................................... 58

Joint hypotheses test. ................................................................................... 58


Summary .................................................................................................................. 60

Chapter 4: Analysis and Results .............................................................................. 62

Data collection procedure. ................................................................................ 63

Results for Research Question 1 .............................................................................. 64

Descriptive statistics ......................................................................................... 64

Hypothesis results for research question 1. ...................................................... 67

Results for Research Question 2 .............................................................................. 71

Demographics of the sample ............................................................................ 71

Descriptive statistics ......................................................................................... 72


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Hypothesis results for research question 2. ...................................................... 74

Summary .................................................................................................................. 76

Chapter 5: Conclusions and Recommendations ...................................................... 77

Research Questions and Hypotheses testing ............................................................ 77



Interpretation of the results. .............................................................................. 79

Limitations ............................................................................................................... 79

Implications.............................................................................................................. 80

Recommendations for Key Stakeholders ................................................................. 83

Recommendations for Future Research ................................................................... 84

Summary .................................................................................................................. 86

References ................................................................................................................ 88

Appendix A: Authorization Letter ......................................................................... 101

Appendix B: Informed Consent Form ................................................................... 103

Appendix C: Research Instrument ......................................................................... 107

Appendix D: Sample Performance Measurement Report ...................................... 120


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List of Tables

Table 1 Distribution of Key Word Searches ............................................................ 19

Table 2 Possible Choices in a Simple Signal Detection Case ................................. 28

Table 3 Summary Statistics of the Variables ........................................................... 65

Table 4 Predictors of Tax Revenue .......................................................................... 68

Table 5 Predictors of Tax Revenue in a Parsimonious Model ................................ 70

Table 5 Normality Tests ........................................................................................... 74


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List of Figures

Figure 1 . Graphical representation of Revenue and GDP variables. ....................... 65

Figure 2 . Graphical representation of independent variables. ................................. 66

Figure 3 . Distribution of QPM variable. ................................................................. 72

Figure 4 . Distribution of Leadership variable. ........................................................ 73


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Chapter 1: Introduction

Organizations perform in complex environments, and changes in these

environments may result in crises and disruptive events (Mitroff, 2004; Parskevas, 2006).

Use of early warning systems and signal detection theory in management and leadership

is an emerging managerial practice for increasing organizational agility and

responsiveness before and during crises (Mitroff, 2004). The purpose of this study was to

explore whether a properly devised balanced performance measurement system may be a

basis for an early warning system of an organization.

Chapter 1 discusses the importance of the problem from social context andresearch perspectives. Then, the general and specific problems of the study and the

general population for the study are defined. Afterwards, the research purpose is

discussed by explaining the research method and design and their appropriateness for the

study. The discussion goes on by explaining the significance of the study for research

and leadership, the nature of the study, research questions and hypotheses, theoretical

framework, assumptions, limitations, and delimitations.

Background of the Problem

Any discontinuity in the performance of a government agency responsible for

collecting taxes may harm the governments revenues and taxpayers rights. A

discontinuity in a revenue organizations performance may occur for various reasons, for

example, a terrorist attack, an earthquake, or a major failure of an organizations

computerized information system. Organizations need to have contingency plans for

mitigating possible and impossible crises; however, for this study, only discontinuities

that can result from misrepresentation of performance measures will be considered. Tax


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revenues may decrease if taxpayers become increasingly dissatisfied with the

performance of the tax agency and if voluntary compliance is reduced. The revenue

agency could have predicted a decrease in taxpayer satisfaction by measuring and

analyzing the taxpayer satisfaction level in a timely fashion (DBM Consultants, 2009).

To avoid discontinuities, a revenue agency needs to scan its external and internal

environments for the signals of potential major events that may cause discontinuity or

crisis. Deverell and Olsson (2010) suggested that detecting and reading early warning

signals might improve the quality and timeliness of organizational decisions.

Organizations need some tools for predicting and preventing events that may harm their performance.

The problem is important both socially and from a research perspective. As a

social concern, a disruptive event in the operation of a government agency of a

nationwide scale may negatively affect the lives of many citizens and organizations. As a

research focus, the problem is important because crisis leadership research is relatively

young, and theoretical and empirical research in this field may help develop the area by

incorporating other well-researched fields such as performance measurement.

Statement of the Problem

According to Mitroff (2004), early warning signals precede crises, and

organizations may sense these signals using signal detection mechanisms. The problem

is that the early warning signals are usually weak. In many cases, organizational systems

may lack proper detection mechanisms for sensing and transferring these signals to the

right people in the organization (Mitroff, 2004). If the government revenue organization

fails to predict early warning signals of the disruptions in the activities of the


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organization, the results may be decreased revenue to the state budget, poor taxpayer

services, increased tax burden on taxpayers because of the poor tax administration and

many other negative effects (U.S. Government Accountability Office (GAO), 2009a,

2009b, 2010).

Organizational decision-makers may use appropriate tools to detect the weak

signals about the opportunities and threats facing the organization (Mitroff, 2004). One

of these tools is the performance measurement system of the organization. The specific

problem is that performance measurement systems are useful as early warning systems

only if performance measures are balanced, appropriately designed, and aligned with thestrategy of the organization (Kaplan & Norton, 2007; Parida & Chattopadhyay, 2007).

The quantitative descriptive survey research was used to study the quality of the

performance measurement system of a government revenue organization as a tool for

detecting crises. The quantitative method and the survey research design were

appropriate for this study because the purpose of the study was to test the relationship

among variables identified before the study and not emerging during the study (Creswell,

2005). The study used two data sets. Managers of government revenue organizations

who participate in making decisions under uncertainty constituted the general population

for the survey. Tax revenue, gross domestic product (GDP), and performance scores on

core tax agency processes constituted the general population for the regression analysis.

The reason for selecting the Ministry of Taxes of the Republic of Azerbaijan (the

MOT) as the source of data was that performance measurement systems used across

organizations differ from one another that results in inconsistent performance

measurement data across organizations. Another reason was that access to detailed


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performance measurement results of many organizations was restricted. Obtaining

required data for this study from many organizations would be difficult.

Purpose of the Study

The purpose of the present study was to measure the relationship between the

application of the performance measurement system and the ability of the decision-

makers of a government revenue agency to detect potentially disruptive events or the

events that could harm the operations of the entire organization. The study may be

important for understanding the role of performance measurement as an early warning

system in the organization and how this phenomenon is accepted by the managers of theorganization. Quantitative research methods were used for the study because the

explanation of trends and relationship among variables was needed for exploring the

problem (Creswell, 2005).

The specific population for the correlational research design using multiple

regression analysis consisted of tax revenue and GDP data of the Republic of Azerbaijan

and performance measurement scores of the Ministry of Taxes of Azerbaijan. The

specific population for the survey design included 577 managers of the Ministry of Taxes

of Azerbaijan. The managers worked in different areas of tax administration that was

useful in gathering information from all functional areas of the organization. The

population for the survey study was geographically located in the territory of the

Republic of Azerbaijan.

Significance of the Problem

Fink, Siebe, and Kuhle (2004) indicated that organizations make decisions in the

presence of uncertainty, complexity, and rapid change. These three factors can produce


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unexpected disruptive events. Fink et al. suggested that some forms of weak signals

precede these events. Organizations need to use early warning systems to guide their

decisions.

From this perspective, the results of the current study may be useful to leadership

research by combining leadership theory and decision-making theory with signal

detection theory and by providing an empirical investigation about the usefulness of this

combination. The results of the study may contribute to government performance

measurement as part of ongoing efforts to modernize the activities of the government

sector and to make government agencies as effective as private organizations (Currie,Humphreys, Ucbasaran, & McManus, 2008; Wallis & McLoughlin, 2007). Although the

results of the study cannot be generalized to all government agencies in all countries, the

expectation is that the study results may be generalized to some extent to the government

revenue agencies operating in other countries with similar economic and social

conditions as the Republic of Azerbaijan. The results of the study may also contribute to

leadership research by providing an empirical investigation of using performance

measurement systems as early warning systems for predicting and leading crises and

disruptive events.

Nature of the Study

According to Creswell (2005), in quantitative research, the researcher conducts an

objective, unbiased study by asking specific questions, collecting quantitative data, and

analyzing these data using statistical methods. In qualitative research, the researcher

conducts a subjective study by gathering qualitative data in text, audio, video, and other

formats, asking non-specific questions, and analyzing the themes in the data (Creswell,


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2005). Creswell further indicated that the quantitative research method is required when

the relationship among variables needs to be studied, and the qualitative research method

is required when little-known or unknown problems need to be explored, or a central

phenomenon needs to be understood in detail. The purpose of this study was to explore

the relationship among the performance measurement indicators of future performance

and organizational crises; therefore, the quantitative research method was used.

Appropriateness of research method . McBurney and White (2009) argued that

in an ideal situation, the quantitative research, specifically a true experiment should be

selected as a research method because it offers a better degree of control over variablesand results that are more valid. However, carrying out true experiments on real-life

objects and in real-life situations is not always possible. Therefore, a degree of control

over research variables and settings may be lost in exchange for arriving at a better

description of reality (McBurney & White, 2009). The major rationale in selecting the

research method was that the research problem should match the selected research

method for the present study (Creswell, 2005).

The research problem for the present study consisted of the observations that early

warning signals preceding organizational crises were usually weak and that the

performance measurement systems used by organizations may not help them detect the

early warning signals if the performance measurement systems were not appropriately

designed and implemented. These general and specific problems were studied by

investigating the variables of performance results provided in performance measurement

reports, fulfillment of tax revenue forecasts, quality of the performance measurement

system of the organization, and capacity of the organization to forecast potential crises.


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The quantitative research method was appropriate for achieving the goals of this study

because the study explored known variables by explaining the relationships among these

variables (Creswell, 2005).

Appropriateness of research design. Because of the different natures of the

research questions, two quantitative research designs were used in the study. The

correlational research design was used to explore if the performance results predict the

fulfillment of tax revenue forecasts. The survey research design was used to gather

information systematically from the participants and quantitatively describe the

population to which the participants belonged (Groves et al., 2009) and explore there is arelationship between the quality of the performance measurement system of the

organization and the capacity of the organization to forecast crises. The experimental

design was not selected for the study because the researcher had no control over the

extraneous variables and did not give treatments to the participants (Creswell, 2005).

According to Creswell (2005), the correlational research designs are used to

predict the scores and explain the relationship among variables. Therefore, the

correlational research designs can be of two types: a prediction design and an explanatory

design (Creswell, 2005). The current study used the correlational prediction design to

answer the first research question because the first research question explored the

existence of a predictive relationship among scores of variables.

Sjoberg, Dyba, and Jorgensen (2007) argued that survey research is preferred

when the researcher cannot or does not want to control independent and dependent

variables, when the research has to be carried out in the natural setting of the phenomena

of interest, and when the research covers the events happening in current time or the


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recent past. The present study did fit the situation described by Sjoberg et al. (2007).

The variables of the second research question were out of the control of the researcher,

and the crises, detection of the early crisis signals, and performance measurement process

had been taking place in the recent past in their natural setting. Based on the described

features of the phenomenon of interest, survey research was an appropriate design for the

present study.

Research population and instrument . The source of the data set for the

correlational design was the performance measurement results obtained from

performance measurement reports and the reports on the fulfillment of tax revenueforecast by the MOT. The performance measurement reports provided numerical results

of the performance of the organization in the areas of tax return processing, tax audits,

cash operations control, enforced tax debt collection, and taxpayer services. The MOT

also produced statistical reports on fulfillment of tax revenue forecast by the organization

that also contained numerical data.

Data required for the survey design were gathered using a Likert-type scale

questionnaire distributed among 577 managerial-level employees of the MOT responsible

for making decisions in different functional areas. Searching for the existing survey

questionnaire for the purpose of the present study did not produce any results. A

questionnaire specifically developed for this research was used (see Appendix C). The

questionnaire contained questions about the quality of the performance measurement

system, crises the organization had faced, and the ability of the organizational leadership

to sense the early warning signals. The questionnaire did not contain questions that were

directly about the relationship among variables (de Vaus, 2002).


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Research Questions and Hypotheses

The MOT uses the performance measurement system for aligning organizational

strategy with the performance goals of the departments and individual employees. The

system is based on balanced measures covering different fields of organizational

activities and produces a broad picture of the organization in a simple and visual format.

The final report of the performance measurement system shows results in three colors.

Green means good performance, yellow means a near-critical situation, and red means a

critical situation. The performance measurement system contains lead indicators, so it

may point to potential future disruptive events.The MOT, as a major government revenue agency, is responsible for ensuring

timely inflow of tax revenues into the state budget. The amount of tax revenue that the

MOT ensures will enter the state budget is forecasted by the Parliament and the

government annually. The MOT reports to the government each year about tax revenue

forecast implementation. The major external indicator for assessing the performance of

the MOT is the forecast fulfillment, and under-achievement of the forecast is considered

a crisis in the MOT (A. A. Asadov, personal communication, December 10, 2009). The

research questions were focused on exploring whether the performance measurement

system was effective as an early warning system.

RQ1: How well do the performance results predict fulfillment of tax revenue

forecast?

H1 0: =0, no relationship exists between performance results and fulfillment of

tax revenue forecast.


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H1 a: 0 , a relationship exists between performance results and fulfillment of tax

revenue forecast.

RQ2: What is the relationship between the quality of the performance

measurement system of the organization and the capacity of the organization to forecast

crises?

H2 0: =0, no significant correlation exists between the quality of the performance

measurement system and the detection of crises.

H2 a: 0, a significant correlation exists between the quality of the performance

measurement system and the detection of crises.The variables used in the study to test the hypotheses were performance results

provided in performance measurement reports, fulfillment of tax revenue forecasts,

quality of the performance measurement system of the organization, and capacity of the

organization to forecast potential crises. In the first research question, the performance

results provided in performance measurement reports constituted a predictor variable, and

the fulfillment of tax revenue forecasts constituted a criterion variable. The null

hypothesis for the first research question was tested using a bivariate regression method.

For the second research question, the null hypothesis was tested by measuring the

correlation, and therefore, in the second research question, the quality of the performance

measurement system of the organization and the capacity of the organization to forecast

potential crises were not defined as either predictor or criterion variables.

Theoretical Framework

Signal detection theory. Signal detection theory provided the broad theoretical

framework for the study. Signal detection theory has long been used in technical fields


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such as radar and sonar signal processing and communication systems, and more

recently, in emerging applications using electronic sensors (Benjamin, Diaz, & Wee,

2009; Levy, 2008). From a pure mathematical statistics perspective, signal detection is

about selecting between the two alternative statistical decisions based on the likelihood

ratio exceeding or falling short of a certain value (Laming, 2010). The observer of the

state of nature is distanced from the state of nature and uses certain communication

channels to receive signals from the state of nature . The observers performance in terms

of understanding the likelihood of the signals representing the true state of nature and

making the right decisions (hits or correct rejections) or wrong decisions (misses or falsealarms) is limited to the capacity of the communication channel used (Laming, 2010;

Lerman et al., 2010).

For the present study, the communication channel was a performance

measurement system of a state revenue agency. A decision-maker of the organization

receives, through the performance measurement system, early warning signals about

possible events that may happen to the organization. The decision-maker needs to assess

whether the event is potentially disruptive to the organization and what the likelihood of

the event is and make relevant decisions. The decision makers ability to predict future

disruptive events is limited to the capacity of the performance measurement system used

as a communication channel.

Almost all decisions are made in the presence of uncertainty, and limitation of the

capacity of the communication channel to transmit useful information has important

implications for organizational leadership. Uncertainty implies that early warning signals

on which the decision is based are not strong and certain because useful information is


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mixed with non-useful information. The result is the noise associated with the signal.

The objective is to detect the signal and extract useful information from the noise that is

important for crisis leadership (James & Woten, 2010; Mitroff, 2004).

Performance measurement theory . An appropriately developed performance

measurement system may provide sound indicators about the past and future performance

of the organization in all fields of the organizational activity (Bhasin, 2008). Historically,

the first systematic study of performance measurement in the organization was done by

Taylor (1911). Taylor, in his Principles of Scientific Management , tried to align the

interests of employees and employers by proposing performance measures that wouldincrease the productivity of the employer and result in a higher salary for the employee.

After Taylor, the development of performance measurement research can be

divided into two major phases. In the previous phase, historical accounting measures of

organizational performance were researched, whereas in the later phase, balanced

measures, including lead indicators, are being researched (Kaplan & Norton, 1992).

Improving the performance measurement system by including the lead indicators of

future performance of the organization also meant that the capacity of the performance

measurement system as a communication channel in predicting the crises would improve.

Balanced performance measurement will also form the theoretical framework of the

study together with signal detection theory.

The study as a bridge between the framework theories . The two theories

constituting the theoretical framework of the present study were established at different

times and developed in different paths until they merged into the context of

organizational leadership. The research field devoted to using performance measurement


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as an early warning system is emerging (Andersen & Fagerhaug, 2002; Spitzer, 2007).

The increasing complexity of the environment of organizations, and the increased

possibility that organizations will face a crisis because of the changes in the environment

(Paraskevas, 2006), make environmental scanning, using different early warning

indicators, important for the organization. From this perspective, the study fits into the

research framework that attempts to combine developments in the fields of crisis

leadership, signal detection, and performance measurement research.

Controversies in the field . Performance measurement research is subject to

controversial ideas and concepts. One of the main sources of controversy isimplementation of performance measurement systems. According to Paranjape, Rossiter,

and Pantano (2006), examples of successful implementation of performance

measurement systems coexist with examples of failures. Certain researchers may argue

that failures in implementing performance measurement initiatives are the result of poor

implementation skills of the organizational leadership, whereas others may argue that

some internal flaws of performance measurement result in initiative failures (Paranjape et

al., 2006; Sptizer, 2007).

Examples of failures in implementing the performance measurement system

indicate that measuring organizational performance is difficult. Researchers do not

provide straightforward guidelines on developing performance measures that are

applicable across all organizations. Organizational leaders have to answer certain

questions about how to implement the performance measurement system in their

organization, including the design and selection of measures, their implementation in

practice, and updates of these measures based on organizational change (Paranjape et al.,


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2006). Different answers to these questions are another source of controversy in

performance measurement research (Paranjape et al., 2006).

Elg and Kollberg (2009) argued that supporters of performance measurement

focused on the technical side of performance measurement design and implementation of

performance measurement systems by accepting performance measurement as something

objectively given. Critiques of performance measurement accept it as being constructed

by certain people and being incomplete (Elg & Kollberg, 2009). To address the existing

controversy, Elg and Kollberg suggested analyzing performance measurement in a

broader organizational context, by accepting performance measurement as a part oforganizational design. The present study may be helpful in resolving the controversy in

performance measurement research by providing empirical results on the implementation

of performance measurement in an organization.

Definition of Terms

Crisis : A crisis is an event th at affects or has the potential to affect the whole

organization (Mitroff, 2004, p. 63). The result of a crisis may be a loss in the lives,

property, financial earnings, reputation, and general well- being of an organization

(Mitroff, 2004, p. 63). For the purposes of this study, the phrases a crisis and a

disruptive event are used interchangeably.

Performance measurement system : A performance measurement system is a

graphical and numerical information system (often referred to as a performance

dashboard or scorecard) used to monitor, assess, diagnose, and achieve desired

performance levels (Harbour, 2009, p. 10).


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Early warning signals : Early warning signals are any events or indications that

predict a possible crisis (Kappelman, McKeeman, & Zhang, 2006). An organization

needs to have a signal detection mechanism to sense early warning signals and act upon

them (Mitroff, 2004).

Transition economy : Countries moving from centrally planned to market -

oriented economies. These countries, which include China, Mongolia, Vietnam, former

republics of the Soviet Union, and the countries of Central and Eastern Europe, contain

about one- third of the world's population (Soubbotina, 2004, p. 132). Azerbaijan is a

former Soviet Union republic and a country with a transition economy.Assumptions

The assumption was that participants would answer questions honestly. For this

purpose, the questionnaire explicitly stated that the survey is confidential, and the

answers would not affect the participant professionally or personally. The questionnaire

also included a statement that honest answers to the survey would produce better results

that may be used to improve the performance measurement system of the organization.

Scope and Limitations

This study was limited to subjects who agreed to participate voluntarily. This

study was also limited to the number of subjects surveyed and the amount of time

available to conduct the study. Another major limitation was the possible bias in the

answers of the survey participants because of possible fear of retaliation.

Delimitations

The study was confined to surveying 577 tax administration managers at different

decision-making levels. The study focused on organizational performance data of the


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MOT of the Republic of Azerbaijan, including perceptions of managers of the

relationship between the performance measurement results of the organizational units of

the MOT and detecting disruptive events. The research was delimited with a government

organization operating in a transition economy.

Summary

Chapter 1 introduced the dissertation and the problem and purpose statements,

along with other elements of the research design. The problem is the inability of some

organizations to detect weak early warning signals that precede organizational crises

(Mitroff, 2004). The purpose of the study was to explore whether the performancemeasurement system of the organization can be used as an early warning system

(Andersen & Fagerhaug, 2002). Chapter 2 examines the literature on crisis leadership,

signal detection and early warning as important parts of crisis leadership and how

performance measurement might serve as an early warning system.


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Chapter 2: Review of the Literature

Crises are a part of everyday life. Though crises are low-probability events, the

consequences of a crisis for an organization can be devastating. One of the positive sides

of the issue is that weak early warning signals precede the crisis, and the organization

may sense these signals if it is equipped with appropriate detection mechanisms (Mitroff,

2004). According to the Organization for Economic Cooperation and Development

(OECD), tax administrations of countries can use performance measures in different tax

areas, such as costs of tax administration, staffing levels, the number of employees

devoted to taxpayer auditing, efficiency of tax audit activities, efficiency of tax arrearscollection, taxpayer satisfaction, and other areas (OECD, 2006). Each of these

performance measures can provide leaders with valuable information regarding possible

future problems.

A sudden increase in the costs of the tax administration compared with the tax

administrations of other countries may trigger political discontent in the country.

Understaffing of the tax administration compared with the tax administrations of other

countries may be a reason for unsatisfactory organizational performance and lack of

taxpayer satisfaction. The purpose of the research was to determine whether the

performance measurement system of a government revenue agency contained early

warning indicators to sense a crisis in advance.

The literature review starts with the history of performance measurement research

to reveal how developments in the field resulted in the inclusion of early warning

indicators in performance measurement systems. The crisis leadership concept and the

difference between proactive crisis leadership based on early warning signals and


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reactive crisis management dealing with the results of the crisis are discussed further.

The latest developments in the leadership research are analyzed from the perspective of

crisis leadership, and the implications of the literature for the present research are

discussed. Relevant literature about the variables and the methodology of the study is

discussed further, followed by the research gap in the literature.

Title Searches, Articles, Research Documents, and Journals

The search for literature on performance measurement, crisis leadership, signal

detection, and early warning signals provided abundant results. The literature on using

performance measurement as an early warning system was narrow. According to Mitroff(2004), the crisis leadership field is relatively young, and the literature on application of

early warning and signal detection theory to organizational leadership, especially to

performance measurement, may expand in the future.

The major source of information for the literature search was University of

Phoenixs online library, which provided access to databases of scholarly texts in

different areas. The databases included EBSCOhost, Gale PowerSearch, ProQuest, and

others. Other sources of information were government reports and reports of inter-

governmental organizations. Peer-reviewed literature constituted the major source of

information, though Internet search engine results were used as hints for forming

appropriate search strings.

The keywor ds searched for included performance measurement, signal

detection, early warning signals, crisis leadership, crisis management, and public

sector modernization. Table 1 documents the distribution of key word searches

according to the sources.


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Table 1

Distribution of Key Word Searches

Key Words Searched Peer-

Reviewed

Articles

Popular

Works

Germinal

Works

Books

Performance measurement 26 1 4 5

Signal detection 2 1 1 4

Early warning signals 3 3 1 2

Crisis leadership 6 2 1 3

Crisis management 13 1 1 1

Public sector modernization 6 3 1 1

The literature review included the study of 91 references, of which 86% were

published within the last 5 years and about 90% represented founding theorists, empirical

research, peer-reviewed articles, books, and journals.

Literature Review

A literature review of performance measurement and crisis leadership research

may be too broad. A crisis may occur in any or all spheres of human activity in which

complex relationships exist among people, organizations, and technologies (Mitroff,

2004). The crisis may involve separate organizations, different industries, a country, a

group of countries, and even the whole world, like the financial crisis of 2008. Theliterature review considered a particular form of crisis, namely the organizational crisis.

The organizational crisis is not the sole object of the literature review. The focus

of the review is the cross-section of research in the fields of performance measurement


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and crisis leadership. The review will start with a discussion of historical development of

performance measurement research that resulted in performance measurement systems

that allow detection of early warning signals. Then modern performance measurement

systems will be discussed. That will be followed by a discussion of the signal detection

mechanisms capable of sensing early warning signals for predicting crises. The literature

review will be narrowed to discussing how performance measurement systems may serve

as early warning systems in the organization and the research gap in the field.

Historical overview. The history of performance measurement and related

research is very interesting because it is rich and goes hand in hand with the developmentof management thinking. The history of measurement may be as old as the history of

humanity; however, systematic measurement of performance for management purposes

starts with the attempts of Frederick Taylor (1911). Taylor used different performance

measurement techniques to make employees work harder and be more productive

(Radnor & Barnes, 2007). From this perspective, productivity was the major

performance indicator for T aylors scientific ma nagement.

Scientific management represents the one-dimensional performance measurement

system that prevailed in performance research for a long time (Franco-Santos et al.,

2007). In one-dimensional measurement systems, the major indicators were financial

indicators used in both private and commercial organizations (Bhasin, 2008; Franco-

Santos et al., 2007; Kneiding & Tracey, 2009). If profit was the major financial indicator

for the private organization, saving taxpayers money and accountability were the major

indicators for government organizations (Yang & Hsieh, 2007). Financial measures are


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easily calculated and seem to be obvious indicators of efficient organizational

performance (Bhasin, 2008).

Financial measures remained dominant until the researchers started questioning

using only financial indicators for measuring performance (Franco-Santos et al., 2007;

Bhasin, 2008). One of the characteristics of the financial indicators is that they provide

the results of the past performance of the organization, and when the financial data

become available, making corrections to the past performance becomes impossible

(Marc, Peljhan, Ponikvar, Sobota, & Tekavcic, 2010). As strategic management became

popular, the managers of the organization wanted to manage future performance of theirorganizations, and that required applying lead performance indicators (Beamon & Balcik,

2008; Bhagwat & Sharma, 2007).

Although past financial data relate to future performance of the organization,

researchers have argued that lead indicators, like customer and employee satisfaction, are

also indicators of future performance (Kaplan & Norton, 1992; Parida & Chattopadhyay,

2007). Kaplan and Norton (1992) argued that operational performance measures such as

customer satisfaction, internal processes, and human resources indicators need to be used

together with financial indicators to arrive at a balanced picture of the organizations

performance. The logic behind this approach was that if an organization succeeds in

terms of operational performance, then financial success would inevitably follow (Davila

& Wouters, 2007; Kaplan & Norton, 1992).

As researchers began to understand the shortcomings of using only financial

performance measures, the number of new research papers proposing new performance

measurement systems increased considerably in the last two decades of the 20 th century


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(Radnor & Barnes, 2007). Even after this period, the pace of the revolution has not

slowed down, because some of the proposed measurement systems did not work in

practice. Developments in information and communication technologies permitted

improving previous measurement systems and supplying leaders with more performance

measures (Van Aken, Letens, Coleman, Farris, & Goubergen, 2005).

Although the number of research papers in the field has increased, the most

widespread performance measurement concept is still the balanced scorecard made

popular by Kaplan and Norton (1992). These authors developed the balanced scorecard

concept further and transformed it from a tool for measuring only performance to a toolfor linking organizational resources with the organizational strategy through strategy

maps (Kaplan & Norton, 2007). The use of balanced performance measures that put

strategy at the center of the measurement process was a major step toward using

performance measures as early warning indicators.

Performance measurement in the first decade of the 21 st century . After the

systematic account of performance measurement in organizational management was

started by Taylor (1911) at the beginning of the 20 th century, performance measurement

research has been expanded. A qualitative shift took place in the 1990s, when the focus

of performance measurement changed from internal organizational productivity to

external customer satisfaction (Ratnayake, 2009). The shift in performance measurement

research had implications for the purpose of performance measurement, led to certain

controversies in the field, and was evident in attempts by public sector organizations to

reinvent themselves by focusing on outcomes for society rather than just on


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organizational productivity. The next subsections will provide comparative discussion of

the relevant changes in performance measurement research.

The purpose of performance measurement in public organizations . One of the

major purposes of contemporary performance measurement is to provide a link between

organizational strategy and organizational outcomes (Antic & Sekulic, 2006; Kaplan &

Norton, 2007). From a performance measurement perspective, the measures of

organizational outcomes include financial and nonfinancial indicators to get a more

balanced picture of the organization (Antic & Sekulic, 2006; Burgess, Ong, & Shaw,

2007). The organization may have several strategic directions to meet the needs of andcreate value for different stakeholders, including shareholders, customers, employees, the

government, the community, and suppliers. Financial and non-financial performance

indicators may be assigned to the goals of creating value for all stakeholder groups (Antic

& Sekulic, 2006).

The goals of the stakeholders may differ; therefore, the purpose of performance

measurement for different stakeholder groups may differ (Bromberg, 2009). The

shareholders may be interested in financial dimensions of the performance measurement

system, whereas the community may be interested in corporate social responsibility

indicators. Encompassing different purposes of performance measurement for different

stakeholder groups the major theme seems to be ensuring organizational accountability in

all fields by providing information and increasing transparency. Accountability is

especially important in the case of public organizations (Bromberg, 2009; Dubnick &

Frederickson, 2010; Halachmi & Holzer, 2010; Taylor, 2009).


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Another purpose of performance measurement for a public organization is to

improve performance and organizational productivity. The stakeholders who expect

increased accountability from a public organization also expect better performance from

it. Bromberg (2009) argued that these two goals of performance measurement, namely

accountability and performance improvement, may be difficult to achieve at the same

time. Taylor (2009) argued that a performance measurement system might not produce

reliable information for performance improvement in line with accountability

improvement. Performance measures imposed in a public organization by stakeholders

may create an additional red tape for managers and reduce productivity; therefore, performance measures need to meet the needs of both stakeholders and managers by

providing them with useful information (Ammons & Rivenbark, 2008; Bromber, 2009).

Accountability and performance improvement assume sustainability in

organizational operations. No accountability or performance improvement can be

required of an organization that does not function for any reasons. The stakeholders are

interested in smooth and uninterrupted functioning of the organization. From this

perspective, another purpose of performance measurement is to serve as a tool for crisis

leadership in predicting early warning signals of a crisis (Bhasin, 2008). The leaders and

researchers of the 21 st century are challenged to develop and use multi-dimensional

performance measurement systems to serve different purposes of performance

measurement. The research focused on the third purpose of performance measurement as

an early warning system.

Performance measurement as an early warning system . Performance

measurement is closely related to early warning signal detection. Signal detection theory,


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in fact, is concerned with measuring performance of the observer in discriminating

signals from noise. If the observer is replaced with the organization, then on the

organizational level, signal detection theory deals with measuring performance of the

organization in detecting the early warning signals of the crises. Andersen and

Fagerhaug (2002) argued that performance measurement systems function as early

warning systems in the organization because a balanced performance measurement

system that includes lead indicators may point to potential problems in terms of market

performance or business processes.

Crises may strike organizations in different fields of activity (Paraskevas, 2006).Because all crises send early warning signals (Mitroff, 2004), the organization needs to

have detection tools in all activity areas. Balanced performance measures may serve as

early detection tools if the measures cover the four perspectives of finance, internal

processes, customers, and learning and development (human resources). The four

perspectives of the balanced scorecard cover both operational and financial performance

of the organization, and by tracking the indicators in these fields, the organizational

leader may sense the coming crisis (Fink et al., 2004; Spitzer, 2007). Fink et al.

suggested a modified version of the balanced scorecard that includes scenarios such as

tools for picking up weak early warning signals.

Andersen and Fagerhaug (2002) created a series of activities starting from

generating knowledge inside the organization, performing business processes based on

this knowledge, creating products and services based on these processes, and finally

arriving at financial results as these products and services are sold. According to

Andersen and Fagerhaug, the time difference between knowledge development and final


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financial results may be considerable. If only financial results are taken as performance

measures, many wrong and unsound decisions made during the stages before the

financial results appear will go unnoticed and uncorrected (Parida & Chattopadhyay,

2007). Andersen and Fagerhaug argued that using performance measures on market

performance, business processes, and knowledge development in the organization

provided the leader with effective early warning indicators.

Pride and Chattopadhyay (2007) and Iskandarani and Reifschneider (2008)

reported the importance of performance measures as early warning indicators. Hunter,

Le Menestrel, and de Bettignies (2008), Kneiding and Tracey (2009), and Plaza-Ubeda,Burgos-Jimenez, and Carmona-Moreno (2010) argued that key stakeholder attitudes

serve as early warning indicators of future organizational performance and reputation.

Bhasin (2008) also pointed out the importance of using performance indicators as early

warning indicators; however, he argued that only if all indicators are aligned could the

performance measurement system be effective in terms of strategy implementation. The

approach is not limited to theory. The performance management software developed by

Supply Chain Management (2006) contains a module on early warning indicators that,

based on considerable deviation of indicators from a historical mean, warns the user of

the possible problem.

Crisis leadership . The performance measurement system may allow

organizational leaders to deal with organizational crises proactively as part of crisis

leadership. No unified definition of crisis exists (Coombs, 2010). Braden, Cooper,

Klingele, Powell, and Robbins (2005) defined organizational crisis as an unexpected,


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dramatic, and often unprecedented event that forces an organization into chaos and may

destroy the organization without urgent and decisiv e action (p. 1).

Virtually all crises send early warning signals, and according to Mitroff (2004),

the best form of crisis leadership is the ability to detect these signals and avoid the crisis.

From this perspective, crisis leadership is proactive. Crisis management, on the other

hand, is active and becomes visible after the crisis happens.

Signal detection . Mitroff (2004) argued that signal detection is the most important

element of crisis leadership, and the new organizational structure dealing with crises

needs to include signal detection mechanisms. If early warning signals preceding thecrisis are detected and acted upon, the organization may avoid (the best form of crisis

leadership) or mitigate the crisis (Mitroff, 2004). Although signal detection is used in

organizational crisis leadership, the roots of signal detection stem from technical fields

such as reading signals on the radar screen to understand whether enemy planes are

approaching (Abdi, 2010), or in the mathematical statistics and electronic

communications fields (Levy, 2008). The major theme of signal detection in all fields is

that almost all decisions are made in the presence of uncertainty (Levy, 2008), and signal

detection helps managers to understand the dimensions and characteristics of the error in

decision-making under uncertainty (Cook, Noyes, & Masakowski, 2007).

Signal detection theory usually involves differentiating decision-making stimuli

created by known processes from accidental stimuli because of chance. The former

stimuli are called signal and the latter are called noise (Goldstein, 2009). A classical

example of the essence of signal detection in a simple matrix format is shown in Table 2.

The radar operator may see on the screen of the radar dots indicating that some flying


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objects are approaching the border (Cook et al., 2007). The dots may represent enemy

planes (signal) or a flock of birds (noise). The operator needs to decide whether the dots

indicate the enemy planes or not.

Table 2

Possible Choices in a Simple Signal Detection Case

Decision

Reality Yes No

Enemy planes (signal) Hit Miss

Other objects (noise) False Alarm Correct Rejection

In the case shown in Table 2, the objective is to maximize the proportion of hits

and correct rejections and decrease the proportion of false alarms and misses. The

easiness of the task and the strategy of the decision-maker will affect how the objective is

achieved (Abdi, 2010). If the noise level is lower, and distinguishing the signal from the

noise is easier, the proportion of hits and correct rejections will be higher. The

appropriate balance between hits and correct rejections is very important because if the

operator decides to say yes more often than no to increase the proportion of hits, he

or she will increase the proportion of false alarms as well. The result will be wasted

resources in terms of time, money, and fuel when planes are sent to fight non-existing

enemy planes (Cook, Noyes, & Masakowski, 2007).Table 2 can be compared to Type I and Type II errors in statistics. When making

inferences about the population based on a sample from this population, the researcher

needs either to reject the null hypothesis or not reject the null hypothesis (Creswell,


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2005). In this case, four outcomes are possible. The researcher may erroneously reject

the null hypothesis when the null hypothesis is true (Type I error) or may fail to reject the

null hypothesis when the null hypothesis is not true (Type II error). In other cases, when

the researcher rejects the null hypothesis when the null hypothesis is not true, and when

the researcher does not reject the null hypothesis when the null hypothesis is true, no

error is committed.

The signal detection theory example may successfully be applied to the early

warning systems of an organization, as well. Researchers have indicated the importance

of detecting early warning signals in dealing with organizational crises (Braden et al.,2005; Garcia, 2006; Mitroff, 2004; Paraskevas, 2006). Then organizations need

appropriate detection mechanisms to distinguish early warning signals from false alarms.

As in the radar example, responding to false alarms may waste valuable organizational

resources, while missing the true signals may damage the organization even more

(Mitroff, 2004).

Early warning signals of a crisis are usually weak and are mixed with noise. The

source of this noise may be both internal and external. If the people in the organization

do not possess the necessary skills to detect early warning signals, or the organization

does not have a mechanism for transferring the signal to the right people (Mitroff, 2004),

the internal noise will be present. External noise is the result of the complexity of the

environment in which the organization operates. Complexity of the external environment

increases the number of interrelated factors that the leaders need to take into account in

making decisions and makes it difficult to identify the factor or set of factors causing the

crisis (Fink, Marr, Siebe, & Kuhle, 2005).


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The organization needs to have mechanisms in place to scan the changes in

different environmental elements for improving organizational decision-making taking

into account early warning signals of the crises, (Mitroff, 2004). The complexity of both

the organization and the organizational environment makes signal detection even more

difficult (Lagadec, 2006; Paraskevas, 2006). In this case, removing all noise is not

advisable because the noise can carry some useful information (Aliev, 2007). Lagadec

argued that responding to contemporary crises with traditional reactive emergency

measures is not sufficient, and the new response strategy needs to address a very broad

circle of players.Crisis response . When a crisis occurs, a timely response to the crisis usually

becomes very important (Garcia, 2006). Garcia argued that a slow response to a crisis

sometimes becomes more dangerous to the organization than the scale and severity of the

crisis. Decreasing crisis response time depends on how well the organization is prepared

for the crisis, including the presence of an early warning system, the designation of a

senior official to deal with the crisis preparation, and speedy authorization of

organizational decisions during initial crisis detection (Garcia, 2006). Successful

responsive crisis management depends on effective pro-active crisis leadership (Wooten

& James, 2008).

The recent oil spill of the Deepwater Horizon oil rig of British Petroleum (BP) in

the Gulf of Mexico indicates how early warning signs can help an organization avoid

disaster (Gulf oil spill, 2010). According to the preliminary investigation of the

Committee on Energy and Commerce of the U.S. House of Representatives (Waxman &

Barton, 2010), the explosion on the oil rig that caused the death of 11 employees and a


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major oil spill in the Gulf was preceded by three major early warning signals. Fifty-one

minutes before the explosion, the amount of fluid pumped in started to outweigh the

amount of fluid coming out of the well; 41 minutes before the explosion, the well

continued to flow even though the pump was shut down; and 18 minutes before the

explosion, mud return increased, the pressure increased abruptly, and the pump was shut

down (Waxman & Barton, 2010). Nevertheless, company employees could not process

these signals appropriately, did not take enough preventive actions, and as a result, loss of

human lives and considerable damage to the environment occurred.

Crisis leadership is not easy. In theory, if crises are preceded by early warningsignals, a leader can detect these signals and prepare for the crisis in advance, manage

through the crisis, and deal with the following crisis in the same way. The theory may be

oversimplified when applied to real-life crises. Crises are not clearly identifiable through

space and time because the crisis may dynamically oscillate over considerable time,

sometimes scaling down, sometimes becoming severe (Boin & Rhinard, 2008;

Moynihan, 2008). If the conflict between the environment of the organization and

organizational values and belief system is not resolved, the crisis may continue until the

organization is obliterated (Braden et al., 2005).

The difficulty of crisis leadership and management is evident in examples of crisis

leadership failure. According to Jaques (2008), examples of badly managed crises

outnumber examples of well-managed crises in the crisis management literature. This

literature is still expanding for deeper analysis of the reasons and ways of better

managing the crises.


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importance of leadership communication during the crisis and afterwards in managing

relationships among the organization and stakeholders and the resulting reputation of the

organization.

Crisis communication and stakeholder theory of crisis management are closely

interrelated. According to Hunter et al. (2008), leadership communication affects the

feelings of the stakeholders about the organization. If the leader tries to take a defensive

position based on incomplete information instead of dealing with key stakeholder

concerns, the damage to th e organizations reputation may increase (Coombs, 2007;

Hunter et al., 2008). Woodward and More (2010) argued the ability to communicate attimes of volatility is a fundamental competency for contemporary leaders (p. 130). The

implication of crisis communication literature for the current study was that the research

instrument should contain questions about the organization-stakeholder relationships and

leadership s communication during crisis.

Organizational complexity . Organizations are complex systems working in

complex environments; therefore, crises may be of different kinds that reflect

malfunctions in various elements of complex systems (Paraskevas, 2006). Leaders

cannot be prepared for all kinds of crises; however, organizations may cultivate the sense

of crisis leadership through their strategic plans in all organizational activities

(Hawabhay, Abratt, & Peters, 2009; Jaques, 2007). Wooten and James (2008) argued

that for a long time, research on crisis management focused on communication issues

during the crisis, and little attention was paid to the leadership skills required during and

before the crisis. Wooten and James indicated that leadership competencies are required


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in all phases of crisis leadership, and one of these competencies is the ability to detect

early warning signals preceding the crisis.

Leadership in organizations as complex systems needs to consider the

interconnections among its elements and environment that requires reconsidering the

traditional reductionism and determinism approaches to analyzing the organization

(James, 2010). According to Scharmer (2009), traditional and modern industrial

structures or forms of thinking and operating (p. 3) were successful in the past; however,

they are not suitable for contemporary leadership and are the reason for failures of

leadership. Scharmer introduced Theory U, which aims to solve the core problems ofleadership practice and theory. If other leadership theories deal mainly with what leaders

do and how they do it, Theory U tries to address the source of leadership decisions as the

inner place from which leaders operate (Scharmer, 2009). According to Theory U, the

source of thinking is invisible to leaders, and therefore is called the blind spot

(Scharmer, 2009).

Scharmer (2009) approached crises from a different perspective in Theory U.

According to Scharmer, the crises of the contemporary world are not the results of the

failure of a leader, an organization, or a country. Crises happen because old social

structures are becoming broken, and simultaneously, norms or values are being lost. The

result is the chaos that produces crises in different areas of human life (Scharmer, 2009).

Scharmer (2009) argued that, when dealing with crises, experience is not useful

and coined the term presencing (a combination of the words presence and sensing),

which means that the leader needs to look at the future, see what the most potential future

state is, and change the current actions to bring that future into reality. Presencing is


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described by Scharmer (2009) as illuminating the blind spot (p. 17) of leadership.

Lowe, Aparicio, Galbraith, Dorman, and Dellert (2009) argued that performance

measures could be used to help practitioners understand their blind spots by comparing

their performance results with those of others. Fried and Orellana (2006), on the other

hand, argued that the way the performance measurement system is used in an

organization could create blind spots because this system cannot represent the entire

reality of the organization.

To illuminate the blind spots created by the use of the performance measurement

system and ensure that organizational reality is expressed, organizational leaders need toevaluate the effects of the performance measurement system on organizational practices

periodically and make appropriate changes to the system (Fried & Orellana, 2006). This

process of reevaluation has implications for the performance measurement system of the

organization as an early warning system. According to Scharmer (2009), an organization

may miss early warning signals because of its past successful experiences that are not

successful now. In some cases, organizational culture needs to change so that the

performance measurement system functions as an early warning system.

Organizational learning from crises . Dennis and Eliott (2009) identified three

types of relationships that differ between a crisis and learning: organizations can learn to

prevent a crisis; the learning process can trigger changes in the core beliefs by resulting

in a crisis within the organization, and finally, organizations can learn from the crisis.

According to Deverell (2009), a crisis can trigger different levels of organizational

learning based on the number of crises the organization has faced, single or double loop

learning that the organization engages in, and the presence of external critique and loss of


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credibility. Eliott (2009) argued that one reason for the repetition of crises is the

organizations failure to learn f rom past crises. Eliott asserted that after the crises, the

policy is changed and improved most of the time, whereas, practice in the organization is

not affected, and the lessons learned from the crises are not transferred into the practicing

organizations. The implication of this discussion for the current study is that the research

instrument should contain questions about what the organization learned from the crisis

to assess the efficiency of the crisis leadership system of the organization.

Variables

Research question 1. The first research question of the present study exploredhow well the performance results predict the fulfillment of tax revenue forecast or in a

broader sense is there a predictive relationship between the performance measurement

results and performance of the organization. The literature review provided mixed results

on this question. In the first research question, performance was a criterion or dependent

variable. For testing the relationship using quantitative techniques, performance should

be made operational or empirically testable (Neuman, 2003). Performance cannot be

observed directly; therefore, proxy variables should be used (Dant, Kacker, Coughlan, &

Emerson, 2007).

March and Sutton (1997), in their seminal article, argued that using organizational

performance as a dependent variable is problematic for several reasons. The first is that

performance improvements are quickly diffused across organizations in the industry, and

statistical techniques cannot reliably detect the relationship between the performance

improvement and the determinants of this improvement across organizations. The second

reason is that performance may affect its determinants, thus decreasing the predictive


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capability of the statistical models. The third reason applies to situations in which

performance is made operational through surveys by asking questions about past events.

In this case, the retrospective bias can be observed because the current performance of

the organization may affect how the participants comprehend its past performance

(March & Sutton, 1997).

The study used the tax revenue collection as a proxy for organizational

performance to overcome the problem with the variables of the first research question.

The data about performance of the organization were not collected through a survey

among employees to avoid the retrospective bias mentioned by March and Sutton (1997).The data came from tax revenue reports provided by government statistics and

represented a more objective basis for measurement than personal opinions.

Controlling confounding variables is v