This is the second column in the Corporate Performance Management (CPM) series.
We hear about a lot of methodologies like balanced scorecard, economic value-added (EVA), activity based costing, and many others. All these methods are useful and can be used to good advantage but there is no universal method to provide the kind of comprehensive measurements that modern corporations need.
Long-term strategic plans usually call for a set of measures to mark progress toward goals, and these measures need to be expressed as business unit and divisional goals in a company’s planning. Use balanced performance metrics to mark progress toward goals.
Performance measures are the “vital signs” of an organization. They quantify how well the activities within a process or the outputs of a process achieve a specified goal. When a comprehensive system measures at all levels, employees know what and how they are doing as part of the whole.
Performance measures must be quantified to be meaningful. This requires measurements that can be performed reliably and consistently with a basis in fact, not opinion or hunch or gut-feel. “Good” and “fast” are not adequate performance measures. “Number of defects” and “time for order processing” are acceptable measures if they are controllable — that is, if the people performing the work can affect the output.
In addition to being quantifiable and controllable, to be truly effective performance measures must also be:
Performance measures are typically cost-based, quality-based, or time-based. Cost-based measures cover the financial side of performance. Quality-based measures assess how well an organization’s products or services meet customer needs. Time-based measures focus on how quickly the organization can respond to outside influences, from customer orders to changes in competition.
Focusing attention simultaneously on cost, quality and time can optimize performance for an entire process and ultimately an entire organization.
Modern metrics must include the following features:
Financial and Non-Financial
In some situations, a company may focus only on financial measures like profit or return-on-assets. But best-practices companies know that long-term health depends on other factors, too. Factors such as customer retention, product or service quality, product development speed, market penetration rate, employee turnover rate, etc. all contribute to long-term health (change in these factors can be measured).
But what if the really important measurement of how a new process is making your customer happy or unhappy? You need to know this so you can either optimize or repair the experience before you start losing customers and money — without a clue why. Non-financial measures are more effective in pointing the way to specific problem areas than are financial measures.
Short and Long Term Balance
Companies that excel in resource allocation have long-term strategies that override the potential negative short-term impact of major investment decisions. In fact, many experts consider investment over the long term as the key to sustained competitive advantage, yet it remains a persistent problem for American businesses.
For example, European and Japanese companies have considerably more long-term projects in their R&D portfolios than American companies. Scholars such as Michael Porter argue that the external capital markets that fund them force American businesses to focus on short-term earnings at the expense of long-term investment. The measurement system is therefore skewed to the short-term as opposed to longer-term metrics.