In very general terms, organisations process inputs received from resources into outputs delivered to their stakeholders. For business concerns the inputs are capital, labour, materials and technology. These are converted into products and services for customers and financial returns for investors and other financial stakeholders. Visit the url below for illustration.
Systematically Decide What to Measure:
The most obvious source of organisational performance measures are the stakeholders.
In staking out a position in the marketplace, responding to competition and the environment, the organisation crafts and attempts to implement a strategy. Thus organisational strategy, missions and goals are another source of performance measures.
The procedure is to determine the critical business issues that are relevant to the satisfaction of stakeholder needs or successful strategy implementation. For these business issues determine the critical success factors. Finally metrics are chosen to measure these factors.
A mechanic workshop might recognise customer service as a critical business issue. The critical success factors required for this business issue might include prompt attention, accurate diagnosis and repair and proactive service. Specific measures for accurate diagnosis and repair might include first pass yield (i.e. percentage of vehicles diagnosed and repaired “first time right” as opposed to those that have to be returned a second time).
Measures so derived are results based and can be used to report performance, align effort and manage accountabilities.
Internally, the business is organised by function but, as we have repeatedly stressed, carries out the conversion of inputs to outputs (i.e. creates value) through business processes. Since the effectiveness of the processes determine all future results, measures of process effectiveness are required.
Further leverage over future results can be gained by managing organisational capabilities since they determine the effectiveness of all future processes in the organisation. To do this requires that measures of these capabilities are tracked.
An entrepreneurial business school regarded as its main result measures the number of its graduates leaving school with a viable business plan and the number that established businesses that survived three years or more. For process measures, the number of open ended case studies solved, number of hours spent on interactive business simulations and number of internships were chosen. Capability measures included the number of active successful entrepreneurs, and board members on the faculty, and the number of businesses with which the school had a close relationship.
Visit the url below to see the image illustrating leverage.
Lastly, the organisation must maintain a certain level of environmental awareness to avoid surprise changes that may result in significant negative impacts, or in missed opportunities.
A bottle making company supplying the brewing and soft drinks sector with returnable packaging materials had been lulled into a false sense of security by consistently good financial results and a high customer satisfaction rating. It came as a shock to the CEO when demand flattened and then declined. If they had had measures for monitoring the external environment they would have noted two worrisome trends that converged to squeeze demand. (A.)The near total adoption among their customers of initiatives like lean, six sigma and TPM that drastically reduced breakages, and (B.) The growing preference for cans and cartons to bottles among their major customers.
Get a Balanced View with a Family of Measures:
There is an African proverb which says that you cannot watch a dancing masquerade from one spot. A family of measures reflecting the various areas of organisational performance should be chosen. The balanced scorecard approach advocates measures to track financial performance, customers, internal operations and learning and growth. For each area, measures that drive present performance should be balanced with those to guarantee future results.
Achieve Vertical Alignment with Measurement Hierarchies:
The concept of vertical alignment means that employees at different levels in the organisation are driven towards the same goals. For example, a measurement system which holds a production supervisor accountable for quality while his boss is rated only on production volume is not aligned and will drive inconsistent performance.
In order for performance measures to be vertically aligned from the level of individual jobs to the organisational level, different degrees of detail of a particular measure of performance must be made available at different levels of the organisation. For instance a hotel chain will have measure of customer satisfaction for each hotel, with results rolled up and summarised for the chain. It must be possible for someone at a higher level to drill down to view details, otherwise the measures will not be actionable.
Visit the url below to see the illustration of a hierarchy of measures.
Measures as a means of tracking performance, diagnosing performance problems or decision making can only be meaningful in the context of relevant references and comparatives.
Baseline measures refer to the starting point. These are the values of the variables at the point of setting up the system, at the beginning of an improvement project or some similar event.
Trending measures show the chosen variable as a time series. This makes it easy to see the direction – improving, worsening or stagnant.
Control measures, generally used in combination with trending measures show maximum and minimum allowable values for the performance variable.
All the above are internal comparatives.
External comparatives might involve comparing your performance with competitors, industry standards or theoretical benchmarks.
Effective performance metrics must be derived from critical business issues and their success factors.
A balanced set of metrics which together form a family of measure must be chosen to reflect the multidimensional nature the business.
The external environment must be tracked even if it does not currently affect the organisation’s performance
Achieve vertical alignment by creating a hierarchy of performance metrics
Make use of comparatives to put your measures in context