Better Performance Measurement

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ACKNOWLEDGEMENT

This article was published in the New Straits Times on January 15, 2005
as a CIMA Business Talk article.

Reproduced here with permission from
The Chartered Institute of Management Accountants (CIMA Malaysia).
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The processes used in designing, implementing, using and updating your performance measurement system are crucial to its success.

Most of the literature on performance measurement has focused on frameworks such as the balanced scorecard or the performance prism. Although these frameworks suggest the dimensions of what a business should measure, they do not say what they should measure. For this you need a management process so that you can translate your business objectives into meaningful measures, which are used throughout the organisation.

Over the last 10 years, members of the Cranfield Centre for Business Performance, UK, have been sponsored by the Engineering and Physical Science Research Council to look at the processes for designing, implementing, using and updating performance measurement systems. Here are some of the key findings.

Designing Measures

Designing performance measurement systems is all about deciding which measures to select and which to ignore. The principle behind the balanced scorecard and performance prism is that the number of measures should be limited to give clarity to what the organisation is trying to achieve. This first process is all about selecting the key objectives for the organisation over the next period and designing appropriate measures to track improvements.

When management teams do this together, they find that it clarifies their thinking on what is important. Having a debate refines thinking and makes each manager's beliefs about how the organisation works explicit. This process is beneficial even if the measurement process does not progress further.

Ideally the output should be two-fold – a “success map” and a set of performance measures.

The success map should show all the key objectives for the organisation over the next period on a single sheet of paper. They are linked showing the main cause and effect relationships between objectives. This map is an extremely good communication tool both for the management team and for communicating objectives throughout the organisation.

The second aspect is the design of the performance measures. Measures drive behaviour, so it is important to translate the objectives into appropriate ones, paying attention to precisely how they are calculated.

Implementing Measures

The implementation of the performance measurement system needs to be considered as a process in its own right. Many companies have failed to recognise this and adopted a very laid back approach. They are then surprised when the implementation does not happen. Besides all the political problems with implementing a new measurement system, the sheer logistical problems of collecting the data, putting it in the right format and distributing the material to those that need it in the organisation takes more time and effort than most organisations allow.

Project planning and allocating resources are critical here; so is the need to be persistent and hold regular follow-up meetings to monitor progress, as many people in the organisation may be hoping the whole project will go away.

Implementation takes time – for the information to be collected, the new programmes to be written and the surveys to be designed and implemented.

Using Measures

The whole reason for designing and implementing a performance measurement system is to use the measures in the organisation to manage the business. The measures should:

• Establish position – identifying current levels of performance


• Communicate direction – telling everyone what the organisation is trying to achieve


• Influence behaviour – so that people take note of the performance measures in everything they do


• Stimulate action – so that people automatically take action when the performance is not moving in the expected direction


• Facilitate learning – so that people get feedback from the performance measures and learn from their experiences

The ideal use of measures occurs when individuals act on the measures themselves without prompting or supervision. Performance measurement is not about reporting what is happening up through the organisation, although many organisations use the system for just this purpose.

Refreshing Measures

Finally, the measurement system needs to be refreshed. This should happen either when the external environment changes and the organisation needs to adapt, or when the measures become tired.

If the external environment changes, the organisation will face new challenges. These challenges can result in a change of direction and emphasis. Changing the measures is a good way of signalling that things will have to be done differently in the future.

Measures should also be changed when they become tired. New measures stimulate behaviour but, after time, people get used to them and find ways of achieving the numbers without the system actually working better. It is therefore useful to review and refresh the measurement system on a regular basis to make sure that this does not become the norm.

Written by Mike Bourne. He is a director of Cranfield Centre of Business Performance, United Kingdom. This article first appeared in Insight, an online newsletter for management accountants published by The Chartered Institute of Management Accountants (CIMA). Insight is accessible at www.cimaglobal.com/newsletters.