When we assess an organization’s performance measurement system as it relates to the overall strategy, execution, and performance management, what we typically find is a disconnected set of goals, measures, initiatives, monitoring methods, and management review. This explains why many senior executives express frustration with their organization’s ability to execute strategy and improve performance. Among other challenges, this problem originates from a fundamental misapplication of performance measures as they contribute to the achievement of the purpose of the organization.
Performance Measurement That Matters.
When assessing organization performance, there are five broad measurement areas that contribute to driving improved organization results.
Customer Value Effectiveness.
First and foremost, the organization should measure its ability to create and serve a loyal customer. A winning value proposition includes knowing the perfect customer, their important problem that the organization solves, and the unique and valuable way that it does so. Measuring and evaluating customer value effectiveness is essential and we find that very few organizations adequately address this need.
Along with building and serving a loyal customer, the organization must deliver a return on invested capital that delivers a successful economic outcome for stakeholders. As they say... No Margin, No Mission. Measurements here include products and services costs and margins, operating and support costs found in the income statement, and investment effectiveness of balance sheet assets.
An organization should understand the efficiency with which it converts its inputs to valuable products and services that customers desire. Less efficient organizations operate at a competitive disadvantage that manifests itself in many ways, including higher costs (often leading to non-competitive prices), less reliable and dependable solutions, and slower response times. Efficiency measures include areas such as process reliability, first-pass yield, throughput, value-added ratios, and cycle time.
Organizations acquire assets with the express purpose of using them to produce profits. Few actually measure the extent to which these assets successfully achieve their intended purpose. Assets include people, tools and equipment, facilities, information technology, and intellectual property. Assets productivity should be evaluated on the economic value provided versus the cost of acquisition and operation.
Although an organization may effectively serve its customer at an attractive level of financial and operating performance, it must also measure that it is doing so in a responsible and sustainable way. Organization governance includes areas such as compliance with regulatory requirements, protection of the entity’s intellectual property, risk mitigation, and active management of the business systems and processes that produce the winning performance.
Performance Measurement with a Purpose.
Every performance measure should have a purpose that contributes to an essential improvement in the business. While there are a variety of approaches to achieve this, we suggest the following simple GMOST framework.
Goal – the long term aim.
Measure – how to know if the goal is being attained.
Objective – the one-year performance target for the goal
Strategy – what will change or improve to attain the objective
Tactics – how the organization will implement the strategy
By carefully integrating performance measurements with goals, objectives, strategies, and tactics, the organization can be confident that measurements enable performance improvement that makes a positive difference to the organization’s outcomes.
Every performance measure should have a specific role in furthering the organization's purpose. Many organizations measure what is easy and not what is strategically important. By broadly determining the most essential elements and then aligning the performance measures with strategic purpose and intent, the organization leader can drive best in class organization performance that provides a sustainable competitive advantage.
Further Reading: THE PERIGON METHOD