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Intangible resources in performance measurement systems of the hotel industry

Krystin Zigan
Jacobs University, Campusring, Bremen, Germany, and

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Received July 2009 Accepted April 2010

Dia Zeglat
AL-Hussien Bin Talal University, Maan, Jordan
Abstract
Purpose The purpose of the paper is to demonstrate the value of intangible resources and, consequently, the importance of their integration into performance measurement systems applied in the hotel industry. Design/methodology/approach Based on a thorough literature review, arguments draw on relevant theories in performance measurement in the hotel industry and the concept of intangible resources. Merging these two different concepts reveals new research areas. Findings The literature review shows that even those integrated performance measurement systems that aim to include non-nancial measures do not necessarily capture intangible resources. Based on this nding, suggestions for extending performance measurement systems are made. Practical implications This paper has signicant implications for hotel managers, as it will allow them to broaden their perspective and include important performance drivers (i.e. intangible resources such as knowledge, motivation and social capital) in their performance measurement systems. Originality/value The paper highlights the need for a comprehensive performance measurement approach that comprises indicators for measuring intangible resources and suggests tools that better capture the contribution of these important performance drivers. Keywords Performance measures, Intangible assets, Hotel and catering industry, Financial management Paper type Conceptual paper

Introduction Systems to measure the performance of organisations (PMS) are one of the most important topics discussed in the eld of business management and they are on the agenda of many organisations (Neely, 1999). Their importance emerged from the assumption that a performance measurement system is an essential tool that enables a company to achieve and control its desired objectives and goals. In addition, such techniques allow managers to balance growth and control, short-term and long-term performance, as well as opportunities and threats (Simons, 2000). For these reasons, several practitioners and researchers have devoted many years of research to this topic. Relevant elds such as accounting, business strategy, operations management, marketing, and organisational behaviour have all discussed and contributed to this eld at length (Neely, 1999; Marr and Schiuma, 2003). The current situation in the hotel industry is characterised by increased competition and consequently demands effective operational decision-making processes based on

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sufcient performance information. As a result, all the different services that play a crucial role in hotel organisations should be analysed and their performance measured. This is as true for front-stage services such as direct customer relationship management as it is for back-stage services, such as facility management, which take place without direct interaction with the customer but are of the same importance (Gomez et al., 2008). In any case, there is an increased need for performance measurement and management tools that facilitate the development of organisational strategies and the assessment of the success of organisational objectives (Cruz, 2007). To measure the performance of hotel organisations, traditional measures such as nancial statements have been valued as an important control tool (Brander Brown and Atkinson, 2001). In these traditional measures, tangible resources are well recorded because they meet criteria such as the ow of benets to the company and the accurate determination of historical costs (Zambon, 2002). Considering the limitations and weaknesses of traditional performance measurement systems, studies have turned their attention toward developing integrated approaches that can also capture non-nancial aspects of performance. Such balanced PMS is thought to gain a comprehensive and multi-dimensional view of the companys performance (Ghalayini and Noble, 1996; Mills et al., 2000). Examples for integrated systems for measuring performance are the performance pyramid system (Cross and Lynch, 1989), performance measurement system in the service industry (PMSSI) (Fitzgerald et al., 1991), the performance prism (Neely et al., 2001) and others. One of the most popular integrated systems is the balanced scorecard (BSC), developed by Kaplan and Norton (1992). Despite the broadened view on non-nancial performance drivers, many of these integrated systems lack an adequate consideration of resources such as social competence, knowledge, motivation as well as internal and external relationships (Usoff et al., 2002). Skyrme (1998) argues that by including such intangibles, researchers can gain insights into causal links between inuential factors and the performance of the organisation. Furthermore, this allows investors and capital markets to gain more complete information about the organisations performance drivers. Their identication and measurement enables the organisation to get a holistic view on their overall resource pool (Krambia-Kapardis and Thomas, 2006). The objective of focusing on intangible resources is to gain a comprehensive insight into the capacity of these resources to improve performance (van der Meer-Kooistra and Zijlstra, 2001; Bygdas et al., 2004). As a result, several models and frameworks have been developed using integrated and balanced methods. In general, these approaches aim to explain business performance by developing metrics for visualising intangible performance drivers (Petty and Guthrie, 2000). The development of such frameworks may support the formulation and implementation of organisational strategies and the benchmarking of performance (Marr et al., 2003). The current literature discussing the topic of performance measurement systems, however, demonstrates that the importance of intangible resources is often neglected and not fully understood (Usoff et al., 2002). Accordingly, this paper aims to analyse common performance measurement systems of the hotel industry in terms of their consideration of intangible resources. We rst look at existing performance measurement systems, both nancial and non-nancial. Two non-nancial PMS are analysed in terms of the integration of intangibles. Since empirical studies that analyse

the integration of intangible resources in PMS of the hotel industry are scarce, we then discuss the application of systems that measure intangible resources, based on research in other industrial sectors. Finally, the ndings are reviewed and conclusions drawn. The paper closes by proposing further areas of research. Background on performance measurement systems The measurement of performance has become established as an important tool that supports an effective and efcient organisational management; consequently many performance measurement systems and frameworks have been developed (Pun and White, 2005). Kollberg et al. (2005, p. 98) dene that performance measurement is a process of collecting, computing and presenting quantied constructs for the managerial purposes of following-up, monitoring and improving organisational performance. The concept of performance measurement is highly diverse and lacks consensus as many perspectives have been taken on this subject (Franco-Santos et al., 2007). Olve et al. (1999) as well as Burgess et al. (2007) categorise PMS into two groups; the rst group adopts historical nancial measures of performance extracted from accounting and nancial sources, while the second group includes contemporary integrated systems that combine nancial with qualitative, non-nancial measures such as such as the balanced scorecard system (BSC), SMART, PMSSI, etc. Franco-Santos et al. (2007) summarise the functions of PMS into ve main areas. The rst area is that of measuring business performance, specically, monitoring the progress of performance achieved. The second area involves introducing and deploying strategic management philosophies in a company by developing, formulating, and implementing strategies and providing alignment between processes and objectives. This can help coordinate, control, and improve organisational activities (Kollberg et al., 2005). The third area involves facilitating communications within the company as well as with parties outside the company (i.e. internal and external communications), and benchmarking with different criteria. Martinez et al. (2004) state that externally provided information on organisational performance can enhance the reputation of the organisation and the satisfaction of customers. The fourth area involves inuencing behaviour through deciding and monitoring rewards and compensations and the fth area is learning and continuous improvement function, which is accomplished by conducting feedback processes in order to improve future performance. Financial performance measures in the hotel industry Otley (1999) considers nancial performance as the ultimate objective and outcome for any organisation, since any business should deliver perceived value in exchange for money invested in the business by its owners and shareholders. Financial performance measures offer valuable information about the condition and status of a business in nancial terms. According to Keown et al. (2008), one of the best ways to measure nancial performance is to use nancial ratios or metrics. Such ratios should reect standardised accounting data in order to allow managers and nancial analysts to identify the weaknesses and strengths of a companys performance. These accounting data include the Prot and Loss Account (Income Statement), the Balance Sheet

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Statement, and the Cash Flow Statement (Mills and Robertson, 2000; Wheelen and Hunger, 2004; Ward, 1989). The hotel industry has used the traditional and nancial analysis approach extensively; and this requires calculating the relationship between gures derived from different accounting statements. In this regard, Banker et al. (2005), for instance, mention that nancial measures are used in the hospitality industry because of their ability to reect the effectiveness of current and former activities. Moreover, Cruz (2007) examined business performance measurements used in an international hotel industry and found that traditional measures form a popular tool for evaluating performance. In addition, Atkinson and Brander Brown (2001) explored and reviewed the current status and practices of PMS in the UK hotel industry. Their empirical study, based on a hybrid methodology (extensive survey and in-depth interviews with hoteliers), revealed that British hotels are monitoring and measuring their nancial performance dimensions (protability, turnover, and cost control) in signicant detail, while the non-nancial dimensions received little attention. Some authors, however, clearly identify problems and disadvantages of using only nancial measures. Ghalayini and Noble (1996) reviewed the most common limitations of using nancial measures for measuring business performance; they found that such instruments are not related to corporate strategy and are unable to quantify improvement efforts (e.g. time reduction, customer satisfaction). In addition, Ittner et al. (2003) found that nancial measures tend to be backward-looking, lack the ability to explain future performance and offer results about functions within the organisation rather than cross functions. Furthermore, nancial measures cannot represent resources such as knowledge and relationships that may very much inuence the performance of an organisation. In fact, research has shown that organisational performance is more and more related to such intangible resources (Pike et al., 2005; Zambon, 2002; Guthrie, 2000).

Integrated performance measurement systems A growing understanding of the limitations of nancial measures and changes to the internal and external environment has led to a revolution in the literature in the last 20 years; the development of integrated systems and frameworks for measuring performance has become far more prevalent. The main objective of these frameworks has been to help organisations identify a set of measures that better reect their objectives and assess their performance (Kennerley and Neely, 2004). The new objective has become the development of balanced frameworks that consist of both nancial and non-nancial measures and provide multi-dimensional perspectives on the performance of organisations (Martinez et al., 2004). This new development could also be realised in the hotel industry and new operational, non-nancial performance indicators were created that measure variables such as seat turnover, average stay per guest, occupancy rate, etc. (e.g. Banker et al., 2005). As a tool for measuring non-nancial performance, the balanced scorecard has found an application in the entire hospitality industry.

The balanced scorecard system (BSC) The balanced scorecard is one of the most inuential frameworks for organisational performance measurement (Evans, 2004). Kaplan and Norton (1992) introduced this tool as a PMS comprising a set of different perspectives to provide a comprehensive insight into organisational performance. The BSC measures nancial performance in conjunction with performance in relation to customers, performance on learning and growth and nally, the performance of internal business processes. Several industries and companies have adopted this performance measurement system thanks to its strategic and control functions that help organisations monitor their performance and its ability to facilitate the link between objectives and measures to strategies (Phillips and Louvieris, 2005; Israeli et al., 2006). The hotel literature highlights and appreciates the BSC system as a tool to measure the success of the organisation and to offer a road map that can tell managers how a strategic vision can be accomplished. Evans (2005), for instance, found that hotels use a wide variety of measures that represent and cover the four perspectives of the BSC system. Denton and White (2000) developed a BSC for the hotel industry. They applied the following indicators for measuring hotels performance: to review nancial performance, common indicators such as operating income, return on investment and revenue growth were regularly measured. In order to measure the performance in terms of customer management, indicators such as customer satisfaction, market segmentation and customer protability can be reviewed. Denton and White (2000), however, found that guest satisfaction scores could serve as sole customer-related scorecard measure. To measure the internal business processes in hotels, indicators to measure brand recognition, service errors and failure rate as well as the time required to complete core processes have been suggested. For evaluating performance in terms of learning and growth, the following indicators are possible: training levels, information technology use and strategic skills of managers. Denton and White (2000) prove that there is a cause-effect relationship between these perspectives. In general, several studies of the hotel industry have found the balanced scorecard to be a valuable measurement tool (e.g. Brander Brown and McDonnell, 1995; Hepworth, 1998; Harris and Mongiello, 2001; Phillips and Louvieris, 2005; Evans, 2005; Phillips, 2007). Performance measurement system in the service industry (PMSSI) Based on company characteristics in the hotel industry, Fitzgerald et al. (1991) developed a special system for the service context; this was created after examining a wide range of case studies in order to explore how managers in the UK service companies measure their business performance. Fitzgerald et al. (1991) claim that the dimensions and measures selected in this model reect the nature and characteristics of the service industry. Table I displays this system. As shown in Table I, this system links nancial and non-nancial measures as well as qualitative and quantitative measures in order to implement, control, and develop performance in a service organisation. The system categorises six dimensions into two groups: results dimensions, which include factors that reect the success of the chosen strategy (such as competitiveness performance and nancial performance), and determinant dimensions, which contain factors affecting overall performance, such as quality of service, exibility, resource utilisation, and innovation. Although resource

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Dimensions of performance Results 1. Competitiveness

Types of measures Relative market share and position Sales growth Measures of customer base Protability Liquidity Capital structure Reliability, responsiveness, aesthetics, appearance, cleanliness, tidiness, comfort, friendliness, communication, courtesy, competence, access, availability, and security Volume exibility Delivery speed exibility Specication exibility Productivity Efciency Performance of the innovation process Performance of individual innovations

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2. Financial performance Determinants 3. Quality of service 4. Flexibility 5. Resource utilization 6. Innovation

Table I. Performance measurement system in the service industry (PMSSI)

Source: Fitzgerald et al. (1991, p. 8)

utilisation is considered as one dimension, only their productivity and efciency are measured. Hudson et al. (2001) have criticised this system for not having any discussion or measures about customers (relational capital) or human resources (human capital) as key dimensions of performance in the service sector. Thus, it is logical that the demand for integrated performance measurement systems has grown as they help capture the contribution of intangible resources to organisational performance (Usoff et al., 2002). The concept of intangible resources Edvinsson and Malone (1997) explain that intangible assets are those that have no physical existence but are still of value to the company. Since the importance of intangible resources is discussed in various research disciplines, multiple terms, such as intangible assets and intellectual capital (IC), and taxonomies exist (Kaufmann and Schneider, 2004). The most common taxonomy for these resources is human capital, structural capital and relational capital (Zhou and Fink, 2003; Ordonez de Pablos, 2002; Stewart, 1997). In the hotel industry, all of these resources are crucial for achieving high performance. Human capital encompasses resources such as the knowledge, skills, qualication and education of employees and also the friendliness of staff. Structural capital strongly relates to facility management, as it ensures the functionality of everything that enables human capital to function, e.g. the organisational structure, business processes (e.g. supply chain management) and support infrastructure (Walsh et al., 2008). In particular, information and communication systems are highly important, not only for an optimal running of processes (e.g. online booking system) but also to achieve high satisfaction among customers (e.g. by internet provision) (Claver-Cortes et al., 2008). Relational capital refers to the relationship an organisation has with its internal and external

stakeholders. In the hotel industry, customer satisfaction and loyalty might be the main components of relational capital, or potentially hotels relationships to suppliers, their reputation and image (Walsh et al., 2008; Krambia-Kapardis and Thomas, 2006). According to Carmeli and Tishler (2004), intangible resources are more likely than tangible resources to produce competitive advantage, yet the measurement of these performance drivers is difcult. Due to the fact that intangible resources have no physical existence and no exact determinable market value, accountants argue that intangible resources should not be included in nancial statements since their purpose is not to represent highly subjective and speculative nancial data (which they would derive from intangible resources) (Zambon, 2002). Another problem is that the nancial accounting framework is based on an ex-poste perspective, whereas the value of intangible resources is mostly derived ex-ante and therefore is future oriented (van der Meer-Kooistra and Zijlstra, 2001). The limited recording of most intangible resources in nancial statements prevents most organisations from knowing their true performance drivers (Brooking, 1996; van der Meer-Kooistra and Zijlstra, 2001). Information about important resources such as human capital, customer relationships, and the company reputation is not included (Garcia-Meca, 2005). This results in a signicant information gap between the reported nancial data and actual performance drivers. More and more companies are realising that nancial statements provide an incomplete picture of organisational performance and its drivers. The positive (direct or indirect) effect of intangible assets and performance, measured, e.g. at protability, productivity and market evaluation has been proven (Kamath, 2008; Walsh et al., 2008). Carmeli and Tishler (2004) measured the positive impact of intangible resources such as human capital, organisational culture and reputation on organisational performance, measured by collecting efciency ratio, municipal development, self-income ratio, and employment rate. As more and more researchers measure a positive effect of intangible resources on organisational performance, it is imperative that performance measurement systems capture these resources. Managers want to understand how to manage and measure their intangible assets (Marr and Spender, 2004). Through the integration of tools that measure intangible resources, hotel managers gain knowledge and insights into these organisational performance drivers. This knowledge can be used to identify corporate resources and competence to evaluate business opportunities (Marr et al., 2003). Consequently, it facilitates the formulation of corporate strategies and communication to external stakeholders. By reporting on intangible resources, new customers and employees can be attracted and existing ones retrained (Mouritsen et al., 2004). As a consequence, this paper recommends that performance measurement systems be extended in order to support the focalisation on intangible resources and, by doing so, achieve a higher degree of control (Zambon, 2002). Examples of measurement systems considering intangible resources In order to nd instruments that can capture the intangible assets of an organisation, many academics and practitioners have started developing measurement models (Banegil Palacios and Sanguino Galvan, 2007). Indeed, the literature in the eld of intangible resource measurement and the number of measurement frameworks are steadily increasing (Marr et al., 2003). Sveiby (1997) identied than 30 different tools for the measurement and reporting of intangible resources.

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The developed approaches follow different objectives and, based on this, they have been categorised by Luthy (1998) and Williams (2000) into return on assets methods, market capitalisation methods, direct intellectual capital methods and scorecard methods. The measurement models belonging to the groups of return on asset methods (e.g. economic Value Added, Stewart, 1997) and market capitalisation methods (e.g. Market-to-book alue, Stewart, 1997) are strongly based on accounting rules and are not particularly designed for measuring intangible resources (Pike and Roos, 2004). The direct intellectual capital methods (e.g. Technology broker, Brooking, 1996) allow the evaluation of single components of intangible resources, but also attempt to put monetary value on them. Scorecard methods such as the Skandia Navigator (Edvinsson and Malone, 1997) and the Intangible Asset Monitor (Sveiby, 1997) identify the various components of intellectual capital without putting a monetary value on them. The scorecard methods and the direct intellectual capital methods seem to be applicable to the hotel industry as they allow insights into single intangible resources. The balanced scorecard is one of the scorecard methods. It considers some intangible resources, although it was not particularly designed for measuring such. This means, however, that a great range of key intangibles (such as relational capital) are not taken into account (Kaufmann and Schneider, 2004). In fact, the consideration of external stakeholders is limited to customers, and many others, such as suppliers, are not considered (Bontis et al., 1999). However, their consideration is crucial in the hotel industry. In comparison to the tripartite taxonomy that is applied in intellectual capital research, a clear human resource element is not included in the BSC, which might considerably inuence the consideration of the meaning of innovativeness and talents of employees (Kong, 2007). In sum, the BSC is an important tool for the strategic management of organisations, yet intangible resources are integrated only to a limited extent. The Skandia Navigator, developed by the Swedish Insurance Company Skandia, aims at providing a balanced picture of nancial and intangible resources. The model is based on the BSC but broadens its perspective to intangible assets (Edvinsson, 1997). To this end, it extends the four perspectives of the BSC and covers the nancial, customer, process, renewal and development and human perspective (Edvinsson, 1997; Marr et al., 2004). A number of indicators can be applied to each of these perspectives. Indicators that evaluate the customer performance include, for example, market share, number of lost customers and number of accounts. Key indicators of process performance include number of accounts per employee and administrative costs per employee. Indicators that measure human performance are personnel turnover, proportion of managers, proportion of training and/or education costs per employee, satised employee index, marketing expense/customer (Edvinsson and Malone, 1997). These indicators seem to be applicable in measuring performance in hotels. Yet, when testing the applicability of this approach to the hotel industry, some issues raised by researchers have to be taken into account. The Skandia Navigator is based on the assumption that the value of intangible resources is represented by the difference between the market and book value of a company. Therefore, this approach seems to be difcult to apply to organisations that are not listed on the stock market and for which a market-based value cannot be determined. A further issue relates to the lack of

an adequate system that monitors the efciency of activities performed by employees. Therefore, it cannot be measured whether value is created or destroyed (Zambon, 2002). These two examples illustrate that measuring intangible resources is not an easy endeavour. In any case, applying a performance measurement tool to hotels means that a broad range of measures, i.e. both qualitative and quantitative indicators, should be applied. One problem that might occur here is that it may be difcult to convince hotel managers of the appropriateness of qualitative measures and their meaningful interplay with quantitative measures. From an intangible resource perspective, qualitative measures can provide more important information (Dumay, 2009). Narratives, stories and sketches might be more useful in providing true and meaningful information on intangible key performance drivers (Habersam and Piper, 2003). However, in most cases, these indicators will be company specic and very subjective in nature. Since quantitative information is perceived as more objective, van der Meer-Kooistra and Zijlstra (2001) suggest that information on intangible assets should be quantied as much as possible; they recognise, however, that this is often impossible. Indeed, in many cases managers and researchers are tempted to measure ibano what is easy to measure and therefore miss important performance areas (Can and Sanchez, 2003). Cinca et al. (2003) argue that intangible assets are often associated with more than one measurable variable. The workforce stability in hotels, for example, is associated with staff turnover and staff years of service or a satisfaction service. In any case, the selected performance measure should be aligned to the strategic intentions of the organisation with the aim to improve its overall performance (Fitzgerald et al., 1991). Conclusion and further research The purpose of this research has been to increase the understanding of the meaning of intangible resources for the hotel industry and of the importance of developing and applying performance measurement systems that capture these resources. The current research uncovered numerous insights into this new and unexplored area. The literature review has shown traditional nancial data are no longer leading indicators of the performance of an organisation in the hotel industry, and that some progress has been made in terms of using integrated systems to measure also non-nancial performance drivers. Still, these performance measurement systems do not fully consider intangible resources, which have been identied to signicantly inuence the performance. Applying non-nancial performance measures does not necessarily mean that intangible resources are fully covered. Consequently, it is imperative for hotel organisations to be aware of the impact of intangible resources on their performance and to overcome the shortcomings of previously described models. Including intangible resources in PMS would allow managers and stakeholders to better evaluate the performance of the entire organisation. Not considering intangible resources might prevent performance measurement frameworks from being an effective control and prediction mechanism (Tan et al., 2004). So far, a diverse set of tools has been developed for the measurement of intangible resources (Dumay, 2009). Some of them have been discussed in this paper with application to the hotel industry. Further research is necessary, however, to determine which of the existing approaches

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is most appropriate for hotel organisations. To this end, key intangible resources have to be identied as not all of them contribute to the same extent to high levels of performance (Walsh et al., 2008). This also means that the organisation has to be clear about its strategic objectives as intangibles differently contribute to their achievement. Further, it is crucial that indicators be found that reect and measure these key resources. Once these steps have been undertaken, performance measures can be analysed and, if needed adjusted, in order to capture intangible resources. The benets of measuring these performance drivers must be empirically proven. The Skandia Navigator has been introduced as an example for the further development of the balanced scorecard which is already being applied in the hotel industry. It is therefore recommended that hotel managers extend their view on important intangible resources and apply the extended approach to their organisations. In addition, much more research is needed on the relationship between intangible assets and organisations performance.
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Walsh, K., Enz, C.A. and Canina, L. (2008), The impact of strategic orientation on intellectual capital investments in customer service rms, Journal of Service Research, Vol. 10 No. 4, pp. 300-17. Ward, K. (1989), Financial Aspects of Marketing, Heinemann Publishing, Oxford. Wheelen, T. and Hunger, D. (2004), Strategic Management and Business Policy, International Edition, Pearson Prentice Hall, Upper Saddle River, NJ. Williams, M. (2000), Is a companys intellectual capital performance and intellectual capital disclosure practices related? Evidence from publicly listed companies from the FTSE 100, paper presented at McMasters Intellectual Capital Conference, Hamilton, pp. 1-41. Zambon, S. (2002), Accounting, intangibles and intellectual capital: an overview of the issues and some considerations, University of Ferrara, Italy, 23 April. Zhou, A.Z. and Fink, D. (2003), The intellectual capital web a systematic linking of intellectual capital and knowledge management, Journal of Intellectual Capital, Vol. 4 No. 1, pp. 34-48. About the authors Krystin Zigan graduated with a PhD from the School of Management, University of Surrey, UK. Before starting her PhD, Krystin worked in national and international companies in business administration and the eld of accounting. Her research interest is in intangible resources and their consideration in performance measurement systems. In particular, she focuses on the impact of contextual factors, such as sector specic regulations, on the management of intangible resources. She has presented parts of her work at international conferences and was nominated for a best-paper award. Krystin Zigan is the corresponding author and can be contacted at: k.zigan@jacobs-university.de Dia Zeglat is Assistant Professor at the AL-Hussien Bin Talal University, Jordan. He holds a PhD from University of Surreys School of Management, UK. Dia conducted his PhD research project on the relationship between service quality and protability in the budget hotel sector. His research interests are in performance measurement systems and service quality programs in the hospitality and service sector. Dia worked in the Ministry of Administrative Development (MOAD) in Jordan as a researcher for two years before doing his PhD. He presented some parts of his research in several international conferences in UK, France and USA.

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