Just as students get their report cards, companies measure their performance to essentially know how they are doing in terms of where they are heading. Measuring business performance therefore usually involves identifying what to measure and collecting data, with the ultimate goals to:
- Pick up useful lessons and improve performance
- Comply with external and legal reporting requirements
- Control and motivate people
Measuring for learning and improvement is the most natural purpose. The aim is to provide employees with the information they need to make better informed decisions that lead to improvement. As such, a performance measurement system is used internally as the evidence to inform management decisions and to challenge strategic assumptions.
Another reason for measuring business performance is to inform stakeholders, regulatory bodies and the public about what is going on within the organisation. Such reports can either be produced on a compulsory basis such as annual financial statements, performance reports for regulators or on a voluntary basis such as environmental impact reports.
Finally, performance measures are used to direct people to certain desirable courses. That means the aim of measurement is to eliminate variance and improve conformity. As such measures are often tightly linked to reward and recognition structures.
However, in reality, performance measures may backfire due to two critical reasons. One is the measuring process is flawed in the first place. This could be that:
- A wrong method is used, i.e. counting activity is not measuring performance
- Chosen subjects for measurement are wrong
This point can be summarised in one of the management f-LAWs (2006) by Russell Ackoff: “Managers who don’t know how to measure what they want settle for wanting what they can measure”.
The second reason that performance measures may fail is to do with people. “Tell me what you’re going to measure; I’ll tell you how I’m going to behave” – this might well be how employers react to performance measures. Poor implementation can lead to an unhealthy culture where people focus on delivering the measures but not the performance, i.e. hitting the target but missing the point.
Stay tuned for the next blog post, where we uncover common misunderstanding about one of the most powerful performance measurement tools – Key Performance Indicator (KPI). This is the first article in our series of 5 on KPIs.