Performance measurement is the process whereby an organization establishes the parameters within which programs, investments, and acquisitions are reaching the desired results.^[1]

This process of measuring performance often requires the use of statistical evidence to determine progress toward specific defined organizational objectives.

Contents 1 Overview 2 Performance Measurement topics 2.1 Challenges in Performance Measurement 2.2 Performance Measurement Guidelines 2.3 Organizational Performance Targets 2.4 Performance Targeting Pitfalls 3 Practice 4 References 5 Further reading 6 External links

[edit] Overview

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 book challenged industrial managers’ actions and attitudes, and inspired researchers and scholars to further pursue the theory of high performance – key to 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.in the same time

[edit] Performance Measurement topics

[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 organizations are re-shaped into flat multi-functional hierarchies. Performance measurement will get tougher with globalization and increasing complexity of organizations’ business models, teams’ roles and responsibilities.

Diversity of organizations and professionals 

A huge variety of organizations 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 organization to keep track of the huge diversity of skilled professionals and ensure alignment to its mission and values.

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.

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.^[3] 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 ^[4] 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 ^[5] 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.

Change management practices 

As with any other organizational change management program, implementing a performance measurement system will encounter resistance especially in large bureaucratic organizations. 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 organizations, 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

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.

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 organization’s strategy. This empowerment should not be limited to management level or the finance department, but be extended to every single individual in the organization. Everyone contributes and owns the Performance Measurement system. Everyone plays a part.

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 a car is driven in a city, there are big meters on the dashboard that indicate the speed, amount of fuel, engine temperature and so on. They are sufficient for one 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 organization. It should allow different individuals to trace their measurements to the management and organization goals; or allow different departments to cross-reference their priorities and targets using the same language.

Forward Looking 

Unlike financial measurements that often record past accounting numbers, a good Performance Measurement system should also capture its relevance to the organization 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 organizations 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.

Optimization 

Will improvement in one area of the organization be achieved at the expense of another? If it does, how much sacrifice or risk should the organization 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?

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.

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] Organizational Performance Targets

Setting organizational performance targets is a natural sequel to the implementation of a performance measurement system. If an organization were to decide to measure its performance against (let's say) the number of clients served in a year, then it would not be surprising if the organisation were to establish a target related to that measure. The organization might set a target of, say, "service provided to 50,000 clients in 2008". This target (together with, presumably, a number of others) would become a basis for assessing the quality of the performance of the organization as a whole, or of a unit within the organization, or even of particular employees. The implication of setting a performance target is that failure to meet the target implies substandard performance unless a satisfactory explanation can be provided as to why the target was not met.

Performance targeting has an important place in the organizational manager's toolkit. There is no reason to doubt that, when used properly, targeting can make a positive contribution to organizational performance. However, the assumption that organizations will indeed make proper use of performance targets is not always well founded. Designers of performance targeting schemes -- if they wish to add value to their organisation's performance -- must bear in mind the limitations of performance targeting, and the potential of targeting schemes to cause significant and unintended perverse outcomes. Experience has shown that when targeting schemes are not carefully designed and implemented, they risk causing more harm than good.^[6]

[edit] Performance Targeting Pitfalls

What follows is a discussion of the significant pitfalls to be avoided when establishing a set of organizational performance targets. Many of the issues raised here are likely to be felt most acutely in public-sector and quasi-public-sector organizations because of the special conditions related to oversight and accountability in the public as opposed to the private sector.^[7] Nevertheless, the underlying analysis is relevant to both the public and the private domains.

The intention behind the establishment of performance targets is to focus organizational attention on particular outputs and outcomes, and to align the behavior of individuals with overall organizational goals and the expectations of stakeholders. However, as is the case with virtually every scheme designed to influence human behavior, performance targeting systems are subject to the law of unintended consequences. In many cases, unintended behaviors induced by performance targets are perverse, leaving organizations and their stakeholders worse off than before the introduction of targets.^[8] A common manifestation of this is where individuals focus more on meeting targets themselves than on the products, services or benefits that their organization is supposed to be delivering. Targets, if badly used, can cause organizations to focus on the trees rather than the forest. Examples are legion.

Many ... negative consequences occur because a strong feature of the justifications for the use of [performance measurement] is the assumption that the process of measurement does not influence the behaviour of individuals and institutions involved. This assumption ... is questionable. ... (P)erformance assessment does indeed affect behaviour, and such side-effects are often counter-productive. Thus, among cardiac surgeons in New York whose individual unadjusted patient death-rates have been published regularly, there has been a tendency to avoid taking on high risk cases with a subsequent increase in mortality of Medicare patients at risk for cardiac surgery. In the State of Texas a programme of rewarding schools and teachers based upon published test scores has been shown to have produced dubious results, despite apparently very rapid increases in test scores overall as a result of ‘teaching to the test’.^[9]

Other well documented hazards of introducing performance targets include:

• Cheating. Biased manipulation, as well as outright fabrication, of performance data in order to create an appearance that targets are being met, is a common phenomenon.^[10] This raises the question of the need for external validation of reporting against performance targets. Experience from the United Kingdom (UK) has revealed significant variation across government departments in how progress against targets is reported. Not surprisingly, departments have been found to be more forthcoming about targets that have been met than about those where “slippage” had occurred. When the UK National Audit Office validated departmental performance reports, it found in over 80 percent of its investigations that departments had materially misstated their achievements or failed to disclose potentially material weaknesses in their data.^[11] Organizations are therefore well advised to provide for independent validation of internal reporting against performance targets.

• Blaming. There is a marked tendency for organizations, especially in the public sector, to regard performance measurement systems as a basis for finding fault and laying blame, rather than a basis for organizational learning. This has proven to be a major obstacle to successful implementation of performance targeting schemes. Performance targets are unlikely to have a meaningful positive impact on organizational performance when the corporate culture emphasizes fault-finding over learning.

• Proliferating. The ostensible purpose of targets is to focus attention on things that matter most to the organization, to its clients and to other stakeholders. Even so, many organizations introduce large numbers of targets that end up defeating this purpose by diffusing rather than focusing attention. The UK government originally introduced 366 government-wide performance targets in 1998, but found it necessary to reduce the number to 123 by 2002. In the United States (US), the state of Oregon was a pioneer in the creation of social and economic performance indicators and targets to assess progress toward the achievement of broad policy goals. Oregon's "Benchmarking" initiative was launched in 1989 with 158 indicators, or "benchmarks" and accompanying targets. By 1993, the number of benchmarks had increased to 272. To be sure, Oregon's approach to social and economic benchmarking and targeting has been widely praised, and, since its introduction, has been adapted by other states and municipal governments. But an early criticism of the Benchmarks project was its unwieldiness due to the high number of indicators and targets. Over the years the number of indicators was pared back from the high point of 272 to 90.^[12] The "keep it simple" rule applies with considerable force to performance targeting schemes. The larger and more complicated they are, the less likely it is that they will make a meaningful, positive contribution to organizational performance.

• Groping in the Dark. It is not uncommon for organizations to set performance targets without first assessing the practicalities of implementing a system for performance monitoring. Targets may be set in the absence of adequate information about: (i) what constitutes a reasonable target figure; (ii) the availability and/or costs of obtaining data required to monitor performance in relation to targets; and (iii) the level of administrative effort (likely to be considerable) that may be required in order to support the performance monitoring system. The implication for designers of performance targeting schemes is that these practical issues must be assessed up front, at the time when performance targets are being selected.

[edit] Practice

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.

[edit] References

[edit] Further reading

• Gamble, J., Strickland, A., Thompson, A. (2007). Crafting & Executing Strategy. (15th Ed.) New York, McGraw-Hill
• Simon Briscoe. 2005. The trouble with targets. OECD Observer, no. No. 246-247.
• Kaplan, Robert S. and David P. Norton; "Putting the Balanced Scorecard to Work", Harvard Business Review, Sep/Oct 1993.
• Hutton, C.R.; Performance Measures Briefing Paper.
• Ittner, Christopher D. and David F. Larcker, "Coming up Short on Nonfinancial Performance Measurement", Harvard Business Review, November 2003.
• Kaplan, Robert S. and Norton, David P; "The Balanced Scorecard: Measures That Drive Performance", Harvard Business Review, Jan/Feb 1992.
• Kaplan, Robert S. and Norton, David P; "Using the Balanced Scorecard as a Strategic Management System", Harvard Business Review, Jan/Feb 1996.
• Kirby, Julia, "Towards a Theory of High Performance", Harvard Business Review, Jul/Aug 2005.
• Mendibil, Kepa and Macbryde Jillian; "Designing effective team-based performance measurement systems: an integrated approach", Centre for Strategic Manufacturing, University of Strathclyde, James Weir Building, March 2005.
• Meyer, Christopher, "How the Right Measures Help Teams Excel", Harvard Business Review, May/June 1994.
• National Partnership for Reinventing Government, USA; Balancing Measures: Best Practices in Performance Management, August 1999.
• Rohm, Howard; Overview of the Balanced Scorecard, US Foundation for Performance Measurement, June 2000.
• Schacter, Mark. 2002. Not a Tool Kit. Practitioner's Guide to Measuring the Performance of Public Programs. Institute On Governance. http://schacterconsulting.com/docs/toolkit.pdf.
• Schacter, Mark. 2008. When Performance Targets Miss the Mark. The Globe and Mail, March 31. http://schacterconsulting.com/documents/targets.pdf.
• Van de Walle, Steven and Roberts, Alasdair, "Publishing Performance Information: An Illusion of Control?" PERFORMANCE INFORMATION IN THE PUBLIC SECTOR: HOW IT IS USED, Van Dooren, W., Van de Walle, S., eds., Houndmills: Palgrave, pp. 211-226, 2008.
• Bacon, Carl, "Practical Portfolio Performance Measurement and Attribution" September 2004, 240 pages

[edit] External links

• Performance Measurement
• Measuring the Performance of Public Programs
• Risk-adjusted Performance Measures