Performance measurement

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Performance measurement is the use of statistical evidence to determine progress toward specific defined organizational objectives.

There are many types of measurements. In school, exams are graded to establish the academic abilities; in sports, time is clocked in split seconds to verify the athletic abilities. Similarly in teams and organizations, there are various tools and measurements to determine how well it performs. Gamble, Strickland and Thompson (2007, p. 99) provide a comprehensive method for measuring performance of organizations. How well each company performs is dependent on the strategic plan. Some of the measurements include basic financial ratios such as debt-to-equity ratio and if the levels are an issue with creditworthiness.

The daunting task of measuring performance for organizations across industries and eras, declaring the top performers, and finding the common drivers of their success did not occur to anyone until around 1982, when Tom Peters and Bob Waterman got down to work researching and writing In Search of Excellence. This publishing sensation challenged industrial managers’ actions and attitudes, and inspired researchers and scholars to further pursue the theory of high performance – the holy grail of any competitive business organisation. This task becomes more complex as corporations diversify into multiple industries. A researcher must take this into consideration when conducting a comparative analysis of companies.

Several performance measurement systems are in use today, and each has its own group of supporters. For example, the Balanced Scorecard (Kaplan and Norton, 1993, 1996, 2001), Performance Prism (Neely, 2002), and the Cambridge Performance Measurement Process (Neely, 1996) are designed for business-wide implementation; and the approaches of the TPM Process (Jones and Schilling, 2000), 7-step TPM Process (Zigon, 1999), and Total Measurement Development Method (TMDM) (Tarkenton Productivity Group, 2000) are specific for team-based structures. With continued research efforts and the test of time, the best-of-breed theories that help organizations structure and implement its performance measurement system should emerge.

Although the Balanced Scorecard has become very popular, there is no single version of the model that has been universally accepted. The diversity and unique requirements of different enterprises suggest that no one-size-fits-all approach will ever do the job. Gamble, Strickland and Thompson (2007, p.31) list ten financial objectives and nine strategic objectives involved with a balanced scorecard.

1 Purposes
2 Challenges in Performance Measurement
3 Performance Measurement Guidelines
4 References
5 Further reading
6 External links

[edit] Purposes

[edit] Challenges in Performance Measurement

The traditional control-oriented performance measurement system in the industrial era is losing its relevance in today’s fast changing environment where organisations are re-shaped into flat multi-functional hierarchies. Performance measurement will get tougher with globalisation and increasing complexity of organisations’ business models, teams’ roles and responsibilities.

[edit] Diversity of organizations and professionals

A huge variety of organisations exist today. For example, there are government, education, financial services, manufacturing, retail, non-profit, food and beverage. Then, there are sub-industries. In financial services, we can break down into the banks, insurance, exchange and so on. And in each, we can for example break down a bank into deposit, loan, credit card, investment departments. In deposit department, we have savings, current and fixed accounts. This break down goes on until we have an individual that performs a task that is unique. If the bank example has 10,000 staff, are we going to have 10,000 different performance measurements? It will be a challenge for an organisation to keep track of the huge diversity of skilled professionals and ensure alignment to its mission and values.

[edit] Intangible and non-financial measurements

Traditionally, accountants play a major role in measuring an organisation’s success. Unfortunately, annual reports do not allow managers to monitor the progress to build capabilities and acquire the intangible assets needed for future growth. Non-financial measurements will be required to link a company’s long term strategy with its short term actions.

Unlike financial measurements which are straight-forward and certain, non-financial measurements will require more judgement and justification. For instance, how would a private banker translate the bank’s mission of ‘To be the preferred bank in Asia’ into actionable and measurable tasks? When two private bankers achieved the same sales revenue, how will the manager measure who is more motivated, hardworking, responsible or trustworthy? Furthermore, unlike financial measurements which are governed by accounting standards and principles, non-financial measures will be more susceptible to misuse and manipulation. There are no direct answers because not everything can be measured objectively and there will be a threshold before measurements become counter-productive.

[edit] Relationship with evaluation

Performance measurement is conceptually related to other evaluation approaches. There tends to be something of a professional and conceptual divide between performance managers and evaluators, with evaluators criticizing some performance measurement approaches as being too simplistic.^[1] In particular there is the problem of attribution which is usually not dealt with well in performance measurement systems. This relates to the discussion in the previous paragraph on intangible and non-financial measurement. Put in its simplest form, the mere measurement of changes in outcomes over a period of time does not establish attribution. Even if an actor (organization, policy or person) takes action over the period of time in which measured outcomes improve this, in itself, does not say anything about whether such measured changes can be attributed to the actions of the actor rather than to any other factor. Evaluation [1] as a discipline puts a major focus on attempting to establish attribution by using various experimental and other methods which make claims about attribution by controlling for other factors ^[2] The performance measurement movement, on the other hand, can challenge evaluators over the fact that their designs often involve extensive and costly studies which are not feasible in the vast majority of cases where performance needs to be measured quickly and cheaply for pragmatic management reasons.

[edit] Change management practices

As with any other organisational change management program, implementing a performance measurement system will encounter resistance especially in large bureaucratic organisations. First of all, nobody likes to be measured. Self-serving managers who are experts in their field may have the freedom to choose and manipulate measures for their own benefit. Further in large, global organisations, consistency in implementation across departments may be a problem if communication and coordination is not executed well. Lastly, inexperienced managers may not know what they want to find out and collect data and statistics which may not be that useful. This will cause frustrations and unnecessary effort for staff at the working level to prepare additional data and reports which adds no value.

[edit] Performance Measurement Guidelines

[edit] Process Improvement

Throughout the implementation of a Performance Management system, which may span from months to years, there is a need to constantly focus on the critical goals that can bring visible progress and enhancement. Otherwise, there is a tendency for busy employees to lose sight of the ultimate objective of performance measurement, and treat its implementation as a mere data collection exercise for management. Teams must create measures that support their mission, or they will not fully exploit their ability to perform the process faster and more responsive. In addition, to remain competitive and relevant, the measures need to be continually reviewed and revised as the environment and economy changes.

[edit] Employee Involvement

A truly empowered team must play the lead role in designing its own measurement system as it will know best what sort of measurement it needs to align with the organisation’s strategy. This empowerment should not be limited to management level or the finance department, but be extended to every single individual in the organisation. Everyone contributes and owns the Performance Measurement system. Everyone plays a part.

[edit] Reportable

There is no value for measurements that cannot be put into a simple and clear report. Measurements must focus on most the critical items and not sacrifice quality for quantity. Too much measurement may mean that teams end up spending too much time collecting data, monitoring their activities, and not enough time managing the project outcome.

For example when we drive a car in a city, there are big meters on the dashboard that tells the speed, amount of fuel, engine temperature and so on. They are sufficient for us to get from one place to another safely. We do not want the engineers to spend time designing a dashboard that crowd us with unnecessary technical information such as atmospheric pressure, air flow speed, engine or exhaust noise level.

A well implemented Performance Measurement system should eventually be a tool that allows a consistent language to be used within the organisation. It should allow different individuals to trace their measurements to the management and organisation goals; or allow different departments to cross-reference their priorities and targets using the same lingo.

[edit] Forward Looking

Unlike financial measurements that often record past accounting numbers, a good Performance Measurement system should also capture its relevance to the organisation vision, validate its strategies and chart new directions. It should not dwell in the past but focus on measurements that impact future deliverables.

Unfortunately, enduring goals require more effort and many organisations prefer to focus on initiatives that promise short-term financial results even though other initiatives may have higher long-term payoffs. A possible reason is the increasing competitiveness and high staff turnover. This builds a culture of short-term permanent employment, where employees do not foresee themselves to stay on with any organisation long enough to see any long-term plans bear fruit.

One possible solution for such long-term goals which cannot be realised for many years (such as in the case of government initiatives), is to identify meaningful output-oriented milestones that lead to achieving the long-term outcome.

[edit] Optimisation

Will improvement in one area of the organisation be achieved at the expense of another? If it does, how much sacrifice or risk should the organisation take? The Performance Measurement system should cover a comprehensive range of measures and offer perspectives that provide an understanding of cause-effect relationship to rearrange resources or priorities effectively. This usually requires a balance of financial and non-financial measures. For example, should a manufacturer delay production dateline because a new supplier is coming with cheaper alternatives to save cost? Or should an estate investor forgo the stringent, time consuming regulatory and compliance checks before making the hot, time-sensitive deal that has the potential to bring in millions in profit?

[edit] Realistic

The measures agreed by the employer and employee have to be ambitious and challenging, and at the same time, be realistic and attainable. Too little means employees fall into complacency; too much and they start to rebel or leave. This requires a careful balance and is the manager’s call and responsibility if there are disagreements.

[edit] Management Commitment

Before anything can be done, senior managers need to buy-in to the change management philosophy and adopt the performance-based management principles. There must be management endorsement at company wide level to ensure consistency with other existing initiatives such as cross-functional integration, customer-supplier partnership, continuous improvement, and team, rather than individual accountability.

The focus should be on strategy and vision, and not day-to-day operational controls. Managers should dictate strategic goals, ensure that each team understands how its job fits into the strategy, and provide training so that the team can devise its own measures. The ownership and accountability for performance remains with the teams, and managers should allow the teams to decide which measures will best help them perform their jobs. Managers should not make the mistake of thinking that they know what is best for the team. If they do, they have crossed the line, returned back to the command-and-control ways, and render their empowered teams powerless.

[edit] References

^ Greene, J. C. (1999). The inequality of performance measurement. Evaluation, 5(2), 160-172.
^ Shadish, W. R., Cook, T. D., and Campbell, D. T. (2002) Experimental and quasi-experimental designs for generalized causal inference. Boston: Houghton Mifflin �Company.

Gamble, J., Strickland, A., Thompson, A. (2007). Crafting & Executing Strategy. (15th Ed.) New York, McGraw-Hill

Robert S. Kaplan and David P. Norton, "Putting the Balanced Scorecard to Work", Harvard Business Review, Sep/Oct 1993.

Christopher Meyer, "How the Right Measures Help Teams Excel", Harvard Business Review, May/June 1994.

Robert S. Kaplan and David P. Norton, "Using the Balanced Scorecard as a Strategic Management System", Harvard Business Review, Jan/Feb 1996.

Balancing Measures: Best Practices in Performance Management, by National Partnership for Reinventing Government, USA, August 1999.

Overview of the Balanced Scorecard, by Howard Rohm, Founder & Director, US Foundation for Performance Measurement, President, Howard Rohm Consultants, LLC. June 2000.

Christopher D. Ittner and David F. Larcker, "Coming up Short on Nonfinancial Performance Measurement", Harvard Business Review, November 2003.

"Designing effective team-based performance measurement systems: an integrated approach", by Kepa Mendibil and Jillian Macbryde, Centre for Strategic Manufacturing, University of Strathclyde, James Weir Building, March 2005.