When going on a car journey you need to know how far you have travelled and how much fuel you have; but you also need to know whether your road will take you towards your destination. Performance measurement in most businesses is good at showing how things are going now but poor at showing how they will be in future. The reason is that two sorts of performance must be measured. One type, organisational performance, shows how the organisation is doing today and is analogous to speed, fuel consumption and the state of the car. Strategic performance measurement, however, is about how well the organisation will perform (whether you are on the right road). It is like knowing you need a new map before discovering you are lost. Research involving 27 UK-based companies such as BP, CGNU, Kingfisher and Vodafone, shows that many struggle to choose the right measures and targets and the right performance measurement and management systems (PMMSs). The study also shows failings in how organisations make use of what is measured. In the US study, 80 per cent of respondents believed PMMSs should help achieve results but did not, and 65 per cent rated their PMMSs as poor or merely ‘adequate’ for helping strategy deployment. There is no shortage of PMMS techniques. Half of our interviewees claimed to use at least 10 different approaches. There is no ‘silver bullet’ but some better practices are emerging. The Balanced Scorecard is an increasingly popular approach that goes beyond pure financial measurement to include such elements as customers, human resources and innovation. About half of our sample claimed to use it. Some forecasters believe more than 70 per cent of US-based companies will be using it within two years. Key performance indicators (KPIs) are also widely used. These are measures chosen to reflect performance in high-impact areas, especially in operations such as error rates. Balanced Scorecard gurus tend to be dismissive of KPIs, pointing out that using too many measures without any organising principle leads to ‘measurement paralysis’ 3 although this criticism can equally be applied to the way many use the Balanced Scorecard. Whatever the theory about balanced scorecards and KPIs, research shows that the practice often falls short of expectations. Also, most approaches fail to measure strategic performance. Another gap is the measurement of ‘strategy deployment’, i.e. how effectively you are progressing towards your strategic objectives. Organisational performance is no substitute because it measures this only after the fact. For example, sales growth is a good organisational measure of the success of a strategy to launch a new product or service. But it is not forward-looking. It could not predict failure to meet the target launch date, say. The remedies are not complex but they require sustained management effort. Aim to connect the way strategy is formulated with the way goals are set and communicated, with the choice and use of PMMS tools, with performance review and reward mechanisms. Emphasise getting things done. Lou Gerstner, when appointed chief executive of IBM, said: ‘This organisation had plenty of great strategies 3 it didn’t successfully implement any of them.’ A good strategy is insufficient 3 you need to manage its deployment and for that you need effective strategic performance measurement. Success comes not only from having a map but also making sure you follow the right roads.
1. What are the problems with traditional measurement metrics?
2. Why do companies struggle with performance measurement?
3. How should a business performance measurement system, such as the balanced card, be implemented?