What is Performance Measurement?
Performance Measurement can be best understood through considering the definitions of the words ‘performance’ and ‘measurement’ according to the Baldrige Criteria:
- Performance refers to output results and their outcomes obtained from processes, products, and services that permit evaluation and comparison relative to goals, standards, past results, and other organisations. Performance can 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.
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 and 2000’s by the worldwide acceptance of business excellence models and performance measurement frameworks that address all stakeholders’ needs. Today due to the advances of technology there are no limits in terms of the data that can be obtained for the use of performance measurement with the opportunities for analysing real-time data through performance dashboards.
Whilst data is more readily available, it is critical that the design of a performance measurement system is appropriate otherwise the data and information can be overwhelming or unhelpful and lead to poor decision making. Measures to be useful need to be aligned to strategy, and be effective in terms of monitoring, communicating, and driving performance.
A good overview of the different types of performance measures is provided by David Parmenter in his book Winning KPIs which describes three types of performance measures:
- Key Result Indicators (KRIs). These include measures like customer satisfaction, net profit before tax, profitability of customers, employee satisfaction, return on capital employed. The common characteristic of these measures is that they are the result of many actions. They give a clear picture of whether you are travelling in the right direction. They do not however tell you what you need to do to improve these results. Thus, KRIs provide information that is ideal for the governance board, therefore to those not involved in day to day management.
- Performance Indicator (PI). These tell you what to do. PIs lie beneath KRIs and could include: profitability of the top 10% of customers, net profit on key product lines, % increase in sales with top 10% of customers, no. of employees using a suggestion scheme.
- Key Performance Indicators (KPIs). Key performance indicators are a set of measures focussing on those aspects of performance that are the most critical for the current and future success of the organisation. They have six characteristics:
- measured frequently e.g. daily or weekly
- acted upon by CEO and senior management team
- all staff understand the measure and what corrective action is required
- responsibility can be tied down to an individual or team
- significant impact (on more than one objective)
- has a positive impact (on other performance measures
What are the common challenges associated with the Performance Measurement approach?
What are the common challenges associated with the Performance Measurement approach? The performance measurement revolution has seen a move away from the problems of past measurement systems. Five common features of out-dated performance measurements systems were:
- Dominant financial or other backward-looking indicators
- Failure to measure all the factors that create value
- Little account taken of asset creation and growth
- Poor measurement of innovation, learning and change
- A concentration on immediate rather than long-term goals
The focus in performance measurement is now on achieving a balanced framework that addresses the issues described above. Examples of these frameworks that support this are Kaplan and Norton’s Balanced Scorecard, Skandia’s navigator model and the Performance Prism. Others recommend that the results sections of business excellence models should be used to generate a balanced set of performance measures.
There are several challenges that are faced when designing an effective Performance Measurement System, these include the following:
- How to measure non-financial performance
- What measures to choose and why
- How to use them – what to do with the results
- Who should be responsible for using the results
- How and to whom, to communicate the results
- 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.com help?
The BPIR.com will help you to understand and select the most appropriate performance measures for your organisation.
The BPIR.com’s database, accessible to members only, contains almost ONE THOUSAND financial and non-financial measures. However, do not be daunted! – you can sort these by commonly used processes and the categories of business excellence models. This means that you will be able to quickly select appropriate ones for your organisation. Not only do we provide examples of the measures but for the most popular we provide a commentary on how to use them and for all measures we provide examples of formulae used to calculate performance.
In addition, linked to some measures we provide performance benchmarking data showing how organisations perform relative to the measure. Such data will help your organisation to improve once you have established a performance measurement system.