Setting performance measures: A formula that works

In any endeavour, measurement is critical. It enables comparison. It makes it possible to set benchmarks. It defines standards. It tells us where we stand in the engagement.

Measurement provides us with the clearest of hints as to what our next course of action should focus on. But that is only true if the measurement is correct.

In an organisational setting, performance measures grade how well or badly the key objectives are being implemented. They tell the management, employees and other stakeholders where more effort must be put to place the organisation firmly on the path to growth and success.

But it is not easy to create performance measures. This is because different people have varying perceptions and expectations of performance. In a study by the American Institute of Certified Public Accountants, about 27 per cent of the respondents confirmed that agreeing on measures was the most difficult part of implementing a performance measurement system.

Well, there is a formula that works, especially when applied within the Balanced Scorecard framework.

To measure performance, you need indicators – the facts that guide you on picking out what to measure. But what are performance indicators and how are they identified? There are two types, best explained through an analogy.

Picture a sparsely populated lecture hall with bored students ‘texting’ on their mobile phones while the class is on. The lecturer notices that the students are not paying attention, and concludes they are not enjoying the class.

The next day, the lecturer tries a different approach and the students appear more focused. They are taking down notes fervently and engaging with the lecturer. None of them is on the phone. This time, the lecturer concludes that the students are enjoying the class.

The taking down of notes and engaging with the lecturer during class are indicators of a good lesson in progress. On the other hand, getting busy on the mobile phone when class is in session suggests that the students are not interested in the lesson. These are referred to as lead indicators. Thus, paying attention in class or not is a lead indicator to the likely performance in exams. The grade that is ultimately scored by the student confirms their level of attention in class. The grade the student scores at exams is referred to as the lag indicator. It confirms that the student paid attention.

To put it differently, a lag indicator is the consequence of an event. The lead indicator is the action that leads to the consequence. Ordinarily, the lead indicators can be used to predict the lag indicators. When the lead indicator is acted upon as necessary in time, the lag indicator can turn out as desired.

An understanding of these indicators is thus important in defining relevant performance measures; those that serve the best interest of your organisation. Knowing your lead and lag indicators will enable you to identify performance measures that will give you the best account of the status of performance in your organisation.

For ease of management, breaking down the organisation’s performance measures along the lines of the four organisational functional pillars (financial, customer focus, internal process and employee knowledge) always works. The key is in creating indicators and then measures for the objectives under each of the functional areas. This is the Balanced Scorecard approach to defining performance measures

 

Defining measures under the financial perspective

Let’s assume that some of your financial objectives include growth of revenue and enhancing shareholder value. When making your financial measures, focus on these objectives.

Your core business is to sell doughnuts and you want to increase your revenue. What are your most sensible lead indicators? The trend in the number of clients is one of them. The other would be the average purchase volumes per client even if the total number of customers hasn’t changed. These will indicate to you if you are on track or not. The lag indicator would be the actual sales volumes.

Your performance measures under this pillar will include the number of doughnuts sold to indicate how you are doing towards achieving higher revenues.

 

Defining measures under the customer perspective

Under this perspective, performance is measured through the fulfilment of customer value propositions. The most common of these relate to customer intimacy, product leadership and operational excellence.

Customer intimacy is about being sensitive to client needs and fulfilling their expectations. This breeds loyalty. It requires a deep understanding of your customers to get a clear picture of the things you must do to impress them. Those things will provide leads as to the most relevant performance measures under this focus.

Operational excellence focuses on customer service. This starts with the removal of all forms of inefficiencies, followed by quick response to clients’ needs. To design performance measures for operational excellence, several factors come into focus:

  1. Expediency: Your performance measures should include a way to determine convenience. Establish systems for recording waiting time, response time, and any other time-related issues when handling customers.
  2. Price: The prices at which you sell your products or services often generate immediate response by clients. Know the highest and the least prices that you can charge for your products or services, based on market average. The market average will particularly enable you to benchmark how you are performing against competitors, on the pricing aspect.
  3. Expansion: You want your business to expand. To understand how you are performing in this area, include measures for determining growth or lack thereof, in your client base.
  4. Defects: Your performance measure in this aspect should be around a threshold that enables you to gauge the extent of defects or variations in your products or services.
  5. Product leadership: This concerns finding opportunities to innovate and to improve on products or services. Performance in this area is worth measuring to inspire improvement. Performance measures here will generally focus on level of commitment to product functionality and marketing.

 

Defining measures for learning and growth

The key factors to consider so that you may effectively measure performance in this area include:

  1. Information capital: Measures here should establish the general level of access to relevant information and the effectiveness of the modes or channels of communication in use.
  2. Managerial capital: Your measures under this sub-category should answer questions such as: Do your company objectives give employees space to develop individually and advance in their careers? Are your employees happy? These questions suggests the need for a survey to measure performance under this category.

 

Measures under internal processes

The performance measures under this perspective are aimed at assessing how well the organisation’s internal practices help in the achievement of the specified objectives under this category. To establish what measures to be keen on, it is important to break down internal processes into the two most important operational categories.

  1. Operations management: This refers to the daily activities that are necessary to keep the organisation running, such as purchase of raw material, manufacturing, marketing, sales, distribution or delivery, customer service etc. The measures you develop will have to focus on the events that directly influence the performance of the organisation.  For example, if you are managing a restaurant, how long does it take for a waiter to spot and serve a new customer? What’s the cycle time from order placement to the delivery of the food or drink on the table?
  2. Customer management: This involves the following key activities: 1). Identifying the desired customers; 2). Winning them over through value proposition; 3). Appreciating their demands; 4). Keeping them on your side; and 5). Entrenching a lasting relationship. Each of these functions will require a measure to assess performance. For instance, the type of customers you attract will tell if you positively identified the right customers according to your classification. The number that you win over will speak about the effectiveness of your value proposition.

 

Finalising your performance measures

At the last stage, you will have to make other measures that do not fall under any category. You can also add more to the categories that you have. It is from this list that you can then choose the best measures that will work for you. How do you do that? As a guide, measures should have the following features:

  1. Are linked to your company objectives and goals
  2. Can be answered by simple yes or no
  3. Are achievable within a short time
  4. Will motivate action and be easy to understand
  5. Should not hinder you in any way even if it solves a nagging problem
  6. Must be relevant to the strategy.