WHAT IS BUSINESS PERFROMANCE MEASUREMENT?
Organizations today operate in an environment of increased competitiveness and change. Successful organizations are those that are effective at change, either through creating new markets or meeting new goals for existing products. Yet many companies are ineffective at change and hampered by poor control of their product development operations.
Many companies are unable to accurately estimate, control and improve specific product or contract profit margins, product ship dates, or product quality. Companies know that they need to improve, but with inadequate data they often find themselves unable to prioritize problems, leading to excessive improvement initiatives performed in an unfocused manner.
Companies are left either spending very little money on improvement because they're unsure how to best allocate the money, or are spending a lot of money very ineffectively on numerous improvement efforts going in 20 different directions.
Performance Measurement can be best understood through considering the definitions of the words "performance" and "measurement" according to the Baldrige Criteria (NIST, 2001):
Performance refers to output results from processes, products and services that permit evaluation and comparison relative to goals, standards, past results, and other organisations. Performance might be expressed in non-financial and financial terms.
Measurement refers to numerical information that quantifies input, output, and performance dimensions of processes, products, services, and the overall organisation (outcomes). Performance measures might be simple (derived from one measurement) or composite
The challenge for organisations today is how to match and align performance measures with business strategy, structures and corporate culture, the type and number of measures to use, the balance between the merits and costs of introducing these measures, and how to deploy the measures so that the results are used and acted upon.
To address this challenge organisations are advised to devise a performance measurement system that provides a set of rules or guidelines for selecting and deploying performance measures.
Who uses Performance Measurement?
All organisations measure performance to some extent. However, there is a large disparity among organisations in terms of which performance measures are used with many primarily focussing on financial measures.
There has however, been a general move away from financial measurement since the early 1980's. This was accelerated, in the 1990's, by the worldwide acceptance of business excellence models and performance measurement frameworks that addressed all stakeholders' needs.
Performance measurement is one of the cornerstones of both the Malcolm Baldrige and the EFQM business excellence models. Both models encourage the use of performance measures, but in addition and more importantly, they consider the design of performance measurement systems to ensure that measures are aligned to strategy, and that the system is working effectively in monitoring, communicating, and driving performance.
A recent report presented by the Performance Measurement Association (PMA) on one of the new performance measurement frameworks, the Balanced Scorecard, demonstrated the popularity of this particular method.
The PMA presented evidence from Tonge (2000) that 39% of FTSE 100 companies were actively using the scorecard, and from Gartner (2001) that by the end of 2001 between 40% and 60% of Fortune 1000 companies will have attempted to implement the Balanced Scorecard. With the movement away from financially based measurement systems only gaining momentum in the early 1990's this represents a significant change in organisational practices in such a short space of time.
What are the common challenges associated with the Performance Measurement approach?
The performance measurement revolution, as it has been described by Neely (1998), has seen a move away from the problems of past measurement systems. Five common features of out-dated performance measurements systems were, according to a 1995 Renaissance Solutions/Harvard Business School/Business Intelligence survey of over 200 organisations (cited by Kaplan and Norton, 1996):
1) Dominant financial or other backward-looking indicators
2) Failure to measure all the factors that create value
3) Little account taken of asset creation and growth
4) Poor measurement of innovation, learning and change
5) A concentration on immediate rather than long-term goals
The focus in performance measurement is now on achieving a balanced framework (Ashton, 1997, and Centre for Tomorrow's company, 1997) that addresses the issues described above. Examples of these new frameworks are Kaplan and Norton's Balanced Scorecard (1996), Skandia's navigator model (Measuring Business Excellence, 1997) and the Performance Prism (Neely and Adams, 2001). Others, such as Bititci et al (1997), and Lascelles (Ashton, 1997), recommend that the results sections of business excellence models should be used to generate a balanced set of performance measures.
There are a number of challenges that are faced when designing an effective Performance Measurement System, these include the following; 1) How to measure non-financial performance
2) What measures to choose and why
3) How to use them - what to do with the results
4) Who should be responsible for using the results
5) How, and to whom, to communicate the results
6) The resources needed to consider the above and design and deploy the measurement system
There are other major requirements that an organisation needs to consider before an effective performance measurement system can be designed or installed. Apart from lower level measures that may be vital for the operation of processes, all measures need to be chosen to support the attainment of specific performance or behaviour identified by the organisation's leaders as important or necessary to work towards the organisational goals.
This being the case, there must be clearly defined goals/objectives and strategies chosen to reach them before measures can be chosen to support their attainment. Similarly the key processes, drivers of performance, and the core competencies required by employees need to be identified before effective performance measurement can be achieved.
How can the BPIR help?
The BPIR can assist in understanding non-financial performance measurement by the clearly categorised structure of the measures database. Business excellence models are used to categorise the measures into the generic business drivers of an organisation. Hundreds of examples of non-financial measures are provided, many include a commentary or synopsis of the reasons why the measure should be used, and describe the relationships between different measures.
This database of performance measures can potentially save time involved in selecting appropriate measures and offers many performance measure formulae that are commonly used among organisations, this also builds provision for performance benchmarking to be carried out at a later stage when a Performance Measurement System has been successfully deployed.
To help organisations to learn how to develop and implement an effective performance measurement system/framework, the BPIR provides a list of sources where knowledge of these systems can be gained. These sources may include books, websites, Centres of Excellence, individuals, or even organisations that have successfully adopted performance measurement frameworks.
What is the track record of Performance Measurement use?
Performance measurement is fundamental to organisational improvement. The importance of performance measurement has increased with the realisation that to be successful in the long-term requires meeting (and therefore measuring performance against) all stakeholders' needs including customers, consumers, employees, suppliers, local community stakeholders, and shareholders.
While the importance of performance measurement is difficult to quantify it is evident that in virtually all texts, research, and case studies on organisational improvement, that performance measurement plays a central role. It is worth noting that performance measurement is a requirement for benchmarking and business excellence.