Measures are the vital signs of any organization and so it’s important to track the right ones. But what are the right ones? In this article, Michael Coveney, author of Strategy to the Max and senior FSN writer discusses the different types of measures required to manage performance.
A number of years ago I was contacted by a manager in the Health profession who asked me if I could tell him the top 25 measures they should be using to manage performance. I was a little surprised and thought to myself that if he, the person who worked in that industry, didn’t know, then what chance would I have in coming up with the right ones.
Of course I could have responded with the traditional set – Return On Investment, cash flow, debtor days, employee turnover and so on – but are these really the most important measures?
Well, it all depends on the question(s) they organisation is trying to answer.
Performance Management metrics
I was presenting at a seminar in Denmark and in order to get some audience participation I asked the question – “What is the most important thing your organisation needs to do in order to survive?” It is a reasonable question to which a lady on the front row responded with the answer “We have to make a profit”. I found out that she worked as an accountant in a private hospital, so I challenged her by asking “Is making a profit really the most important thing that the organisation needs to do?” On thinking about this she replied “Oh no – we have to keep people alive and give them the right care and attention while they are in hospital. We also have to make sure that the doctors are up to date with the latest treatment procedures.”
What I found interesting was that the focus switched away from the financial measures of her first answer, onto operational measures as being the most important. And I’m sure she was right.
The same is true for most organisations. The right measures from a performance management point of view, are always operational and have very little to do with finance. Financial measures do play a role as they help in the allocation of money to enable activities, and they are used to show the financial heath of an organisation. But when it comes to answering questions on the management of performance they often play a minor role.
Now think about the typical reports we give to our operational people. Are they financial or operationally based? As a manager of a department I was fed a regular diet of financial reports that showed how well or bad I was performing against a budget. But to be honest I spent very little time in going through them, as they didn’t relate to what my department was trying to achieve. Even when the systems allowed me to ‘drill-down’ to underlying transactions, I still could not get that excited.
Research conducted by Answerthink found that the average management report is 30 to 40 pages long, contains 12,000 to 15,000 data points, yet managers typically use less than 5% of the information contained in the report. The measures are patently not the right ones.
Getting the right metrics
Measures, like actions, cannot be just ‘plucked’ out of the air. You can’t have a general set for everyone, unless they are all doing the same job but you can have too many. Imagine trying to drive a car that has 35 dials and gauges that all need to be monitored. I was talking to a friend whose brand new Porsche car was being driven by his son. While driving down the road the son was trying to understand all the different warning lights and gauges that could be selected. Unfortunately for the car, he became distracted and forgot to look where he was going. The resulting crash was expensive in terms of both monetary value and in his paternal relationship.
To manage performance, a restricted set of measures are needed that focus on the role of the person or department, and the contribution they make to corporate strategy. There may be other measures but these are secondary and should only be analysed when they threaten to impact the primary measures.
Primary measures can be typically grouped into
- Success measures – i.e. those measures that denote the success of an objective or a strategy
- Implementation measures – i.e. those that monitor how far a strategic initiative has been implemented
- Assumption measures – i.e. those that denote the value of any assumption made in connection with the success of an objective or strategy
- Resource measures – i.e. those measures that are allocated to strategic initiatives
- Milestones – i.e. dates that are associated with the deadline of a strategic initiative
Putting metrics into context
Measures by themselves can be pretty meaningless. For example we may report that we exceeded the budgeted sales volume by 5%, which sounds good. But if this volume was based on the assumption that the market would grow at 5% when in reality it grew at 25%, then 5% over budget means we lost market share. Similarly if one client bought an extraordinary amount that month, or we are unable to produce planned orders, then any over budget performance is probably unsustainable.
All of which means that for a metric to be of real value and not to be misleading, it needs to be reported in the context of all of the groups mentioned above. i.e. what success was gained by the person/department; how did that success related to the implementation of any supporting strategic initiatives; whether or not the assumptions about the business environment were right; whether the cost involved in achieving success was worth while; and whether the dates set were achieved.
The same context is required when producing forecasts, as this will then give management an idea of what needs to change to keep everything on track.
In an article of this kind it’s not possible to go into more detail of how this can be done but it is covered in the book ‘Strategy to the Max’, published by FSN.
Identifying measure cost
The final thing to say about measures is that there is a cost in acquiring them, be that through data transfer, manual input or in creating a specific sub-system to hold them. Some may be easy and relatively straightforward to get hold of, for example those coming from an operational system. Others may not exist or be ‘expensive’ in terms of the manual effort or investment in systems required to obtain their values.
If the cost of obtaining a measure outweighs the value that the measure brings to the organisation, then it should be dropped or an alternative found. Measures that are valuable but require investment in an IT system should have their implementation prioritised.
In summary, don’t just choose any old measure because it’s available or use a measure because someone else is using it. Instead choose measures because of the value they bring to the management of performance.
