Measuring Performance

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• Publisher: Harvard Business Review Press
• Year: 2009
• Print ISBN: 9781422129708
• eBook ISBN: 9781422155530
• Topic: Business
• Subtopic: Management
• Index: Business

Organizations want--and need--to track the changes in their overall performance. And the divisions, units, teams, and individuals within these organizations engage in similar success measurement. Performance Measurement explains the importance of regularly monitoring your group's performance and introduces formal measurement practices. You'll learn to Apply a disciplined process to performance measurement Set targets and communicate data effectively Use performance management as a coaching and development tool Meet Your Mentor Robert S. Kaplan is Baker Foundation Professor at the Harvard Business School and Chairman of the Practice Leadership Committee of Palladium, Executing Strategy. He has authored or coauthored 14 books, 18 Harvard Business Review articles, and more than 120 other papers.The Pocket Mentor series offers immediate solutions to the challenges managers face on the job every day. Each book in the series is packed with handy tools, self-tests, and real-life examples to help you identify strengths and weaknesses and hone critical skills. Whether you're at your desk, in a meeting, or on the road, these portable guides enable you to tackle the daily demands of your work with greater speed, savvy, and effectiveness.

Measuring Performance: The Basics

An Overview of Performance Measurement

Do you jog, play basketball, ride a bike, or participate in some other team or individual sport? If so, you likely keep track of your performance, even if it’s as simple as “I ran that eight-mile loop faster than ever” or “I scored four more points during this game than I did in the last one.”

Why do you keep score in these ways? Like many people, you’re probably performance-driven or achievement-oriented—or maybe just naturally competitive. You want to know whether your performance is improving or declining and how your latest achievement compares with your personal best. You crave feedback on how you’re doing.

In much the same way, organizations want—and need—to track the changes in their overall performance. And the divisions, units, teams, and individuals within them engage in similar scorekeeping.

Let’s take a closer look at this desire to measure business performance.

Why appraise business performance?

Organizations measure their performance for numerous reasons. Here are just a few:

• Improvement: By tracking performance, companies can spot—and promptly address—problems such as declining customer loyalty, flattening profits, or defections of talented employees.
• Planning and forecasting: Performance measurement serves as a progress check, enabling organizations to determine whether they’re meeting their goals and whether they need to revise their budgets and forecasts.
• Competition: When companies compare their performance against their rivals’ and against industry benchmarks, they can identify weak areas and address them to sharpen their competitive edge.
• Reward: By knowing how much employees have excelled in achieving goals, managers can distribute performance-based incentives and rewards fairly to their direct reports.
• Regulatory and standards compliance: Many companies measure performance in order to comply with government regulations (such as antipollution laws) or international standards (for instance, ISO 9000).

You can’t manage what you can’t measure.

—Peter Drucker

What is performance measurement?

In its simplest terms, measuring performance means assessing business results to: (1) determine the effectiveness of a company’s strategy and the efficiency of its operating processes, and (2) make changes to address shortfalls and other problems.

Companies take stock of their performance using different methods and criteria. However, in many organizations, performance measurement entails examining the results generated by key business activities, using specific performance metrics (also known as measures). For each business activity, there are numerous possible metrics. Table 1 shows just a few examples.

Many organizations use a coordinated system, or framework, to appraise business performance across their functions. The best performance measurement systems demonstrate balance:

• They assess a company’s financial performance (such as revenues, expenses, and profits) and nonfinancial performance (for example, employee knowledge, information systems availability, and quality of customer relationships).
• They draw on internal data (such as process quality) and external data (for example, third-party rankings of companies’ product performance against competitors’).
• They examine lagging (backward-looking) indicators and leading (forward-looking) indicators. For instance, sales figures show you what your company has achieved in the past and thus are a lagging indicator. By contrast, customer-satisfaction ratings suggest how your customers may behave in the future; thus they constitute a leading indicator.
• They weigh subjective (difficult to quantify) aspects of performance (such as customer satisfaction and employee capabilities) and objective (easy to quantify) aspects (for example, revenues and return on invested capital).

TABLE 1

Specific performance metrics

Business activity	Possible performance metrics
Finance	•	Profit margin (percentage of every dollar of sales that contributes to the company’s bottom line)
	•	Revenues
	•	Return on invested capital
Marketing	•	Market share
	•	Customer loyalty
	•	Customer profitability
Production	•	Number of units manufactured within a specific time period
	•	Number of items shipped on time
	•	Machine change-over time
Sales	•	Percentage of customer visits or phone calls that generate sales
	•	Percentage increase in sales over previous quarter or year
	•	Percentage of customers retained this period
Customer service	•	Number of customer complaints
	•	Service-call response time
Purchasing	•	Vendors’ ability to provide services or materials on time
	•	Defect rate of vendors’ products
Quality	•	Product yield: ratio of good products produced to total products started into production
	•	Defect rates of a key process
Human resources	•	Workforce turnover
	•	Employee skills
	•	Employee motivation

By striking a balance in its performance measurement system, a company compiles a more complete picture of how it’s doing. This comprehensive picture enables executives and managers to learn from mistakes, constantly improve, and make the smartest possible decisions.

Indeed, some managers draw an analogy between effective performance measurement and the operation of an airplane: to fly a plane, a pilot must look at many instruments—airspeed indicator, fuel gauge, altitude indicator, GPS map, and so forth—rather than rely on a single instrument that provides just one piece of information. Similarly, organizations seeking to navigate through a complex environment need a range of “instruments” to evaluate how they’re doing. Effective performance measurement provides that comprehensive range of information with which a company can gauge its performance.

Who uses performance measurement data?

Many people inside and outside a company use performance measurement data. For instance, executives use the data to review how well corporate strategy is being implemented and whether major corrective actions need to be taken. Unit managers and group leaders use performance data to motivate and evaluate employee performance and productivity. Shareholders, industry analysts, customers, media, and government regulators use data to make choices such as whether to invest in or buy from a company, or to determine whether an organization is operating with efficiency and integrity. And employees learn whether they and their teams are contributing to company goals.

Does your boss require you to track specific aspects of your group’s performance? If not, should you still take time to learn about performance measurement and assess your group’s business results? The answer is yes! Why? Assessing your group’s results—and understanding the value of performance measurement in general—enables you to:

• Determine whether you and your direct reports are helping your company to achieve its goals.
• Correct any missteps or flaws in order to improve your group’s performance.
• Understand how your behavior and choices affect your employees’ performance.
• Identify new opportunities for your unit or group to improve its effectiveness or even extend its contribution to the company’s success.
• Build your business knowledge and professional credibility—and thereby further your career.

Understanding Key Performance Indicators

Some companies have formal, enterprisewide performance measurement systems in place (such as Six Sigma, the Plan-Do-Check-Act methodology, or the Balanced Scorecard). Such systems enable executives to look across the organization’s business activities to gain a holistic view of the company’s performance. Other companies use a simpler approach, appraising the performance of one or more discrete aspects of the business.

Regardless of the system a company uses, all organizations use key performance indicators to assess their performance.

If you’re not keeping score, you’re only practicing, not playing.

—Vince Lombardi

What is a KPI?

A key performance indicator (KPI) is a measure reflecting how an organization is doing in a specific aspect of its performance. A KPI is one representation of a critical success factor (CSF)—a key activity needed to achieve a given strategic objective. Organizations that measure performance identify the handful of critical success factors that comprise every strategic objective.

For example, depending on a company’s strategy, the organization might have a KPI for the percentage of income the organization derives from international markets. Another KPI might be the number of customer complaints about orders filled incorrectly. Some organizations use many KPIs for all their different areas of operation. Other enterprises’ KPIs may focus on a specific area. For instance, a social service nonprofit may focus all its KPIs on the amount of aid that is granted to different entities.

Typically, each unit within a company also has a set of KPIs that supports the company’s goals. Performance data for a unit’s KPIs can be rolled up into the company’s KPIs to reflect total organizational performance in any given area being measured.

As a manager, you probably won’t participate in developing KPIs at the corporate level. However, you may be involved in creating KPIs at your unit’s level, especially if your unit was recently acquired or has been associated with a new product, process, department, or line of reporting. Regardless of your situation, you should be aware of the KPIs that are in place in your organization. With this awareness, you can appraise your group’s progress toward corporate and unit goals.

Three types of KPIs

Key performance indicators come in three types: First, process KPIs measure the efficiency or productivity of a business process. Examples include “Product-repair cycle time,” “Days to deliver an order,” “Number of rings before a customer phone c...

Table of contents

• Pocket Mentor Series
• Title Page
• Copyright Page
• Table of Contents
• Mentor’s Message: Why Measure Organizational Performance?
• Measuring Performance: The Basics
• Tips and Tools
• How to Order