Performance management vs. performance measurement

20th September 2010

Many organisations believe they have implemented a performance management system when in reality they have actually installed a performance measurement system. There's a world of difference between the two - and only one will help the organization achieve its strategic goals.  In this article, Michael Coveney, FSN senior writer and author of “Strategy to the Max” published by FSN , looks at the attributes of performance management and the capabilities that a supporting system needs.

It’s the 2012 Olympics. How do you think performance is going to be measured at the games by the teams involved?  The number of gold medals?   The number of world records?  Their position in the medals table?

Now come back to the present day as teams are preparing for the games. How do you think performance is being managed?  One thing is for sure, it won’t involve counting the number of medals they hope to win.  Instead the focus will be on the type of training being given, the diets being prepared, and the way in which equipment and facilities are being used.  

To ensure these can take place, budgets and other resources will be allocated to the most appropriate activities, while reporting will look at their progress and whether the athlete has achieved set milestones.  In short, performance management is all about preparing and monitoring the athlete, and not on measuring the outcomes they hope to achieve.

Now compare this approach to the way in which organisations typically plan and budget. Most tend to focus on outcomes – the ‘gold medals’ of profit to be made, the total amount to be spent - while the actions required to produce the ‘gold’ are left as a note in an operational plan document, only to be forgotten when actual results are produced.

The drawbacks of performance measurement

performance measurement.JPG

Performance measurement focuses on results and allows users to analyze those results through charts, grids, trends, and by drilling-down to even greater depths of detail.  However, what they don’t reveal is the process that individual managers went through in setting the initial targets; the actions that were going to be required; the anticipated state of the business environment for which those actions were conceived; whether or not the required actions were actually carried out; and whether those actions actually contributed to success.  Without this knowledge, measures are at best misleading, and in the worse case will promote responses that are ill considered and damaging to the long-term prospects of the organisation.

I recently saw an advertisement for a software product that analyses data.  The caption promised that users would be able to ‘discover innovative ways to increase profits, reduce costs, predict trends and turn information assets into true competitive advantage.’  This may well be true, but unless that data is analyzed in the context of actions, market activity, and the prevailing/future business environment, it will be hard to know what actions will be required in the future to realise that promise. 

But that’s just the start - to make a difference those plans need to be implemented.  However, research tells us that most action plans fail in their implementation due to a lack of resources, and from management being distracted by day-to-day issues.  Interestingly by issues surfaced through a measurement system (e.g. costs being 20% over budget) that doesn’t show the activities that caused the issue in the first place.

The same is also true with many so-called performance management systems that deal with the setting and monitoring of budgets or forecasts.  These systems tend to deal with just numbers – the measures – and as a result cannot ensure that any planned activities will be carried out, or gauge whether they are proving to be effective. 

Performance Management

Performance management by contrast is all to do with the business processes and day-to-day actions that lead to strategic goals.  This includes how management choose a particular course of action in a given business environment, as well as how those actions relate to other departments and the overall achievement of company strategy.

A true performance management system combines many processes.  It starts out by supporting the setting up of an operational plan that is tied to strategic goals. It allows managers to collaborate with others on developing initiatives to which resources can be allocated that will eventually form part of a departmental budget. 

Performance management systems allow these initiatives to be assessed in various combinations so that the best can be selected as part of an agreed plan.   The system will then go on to track the implementation of agreed initiatives and warn users and appropriate managers if activities have not been completed or if they are not having the desired effect on strategic goals.

Where goals are not being met or are being forecast to miss, a performance management system will allow mangers to propose changes and try out alternative scenarios to put the plan back on course.  Once these are agreed, the system will adjust any budgets, warn users of those changes and then track the new version.

What type of system do you have?

Performance management systems encompass performance measurement systems, but not the other way around.   To achieve effective performance management, systems must possess sophisticated process control capabilities that constantly track organizational activities and invoke user involvement as required. They combine strategy maps, dashboards and financial statements with the achievement of milestones and strategic goals.  They direct users via automated ‘To do’ lists according to their individual roles and responsibilities, and provide automated escalation paths when targets look as though they will be missed.

So do you have one?   Is your planning system a ‘measurement system' or a 'management system'?   Oh - and in case you were wondering, the image at the start of this article is definitely from a performance measurement system.  It turns out that there are very few performance management systems on the market today.