On which business activities should my team and I focus our time? Which activities will best support our organization's goals — and keep us ahead of our competition? And, once we have chosen the
activities to pursue, how can we define and encourage a high level of productivity? When managers ponder questions such as these, they often have no measurements available to help them make decisions. A performance measurement system, such as the Balanced Scorecard, can supply the data that enables managers to make better decisions. If you don't track performance internally and benchmark yourself against external standards, you'll be making decisions in the dark — a situation a
manager can ill afford!
Establishing performance metrics for your group is crucial. Performance measurement systems can help you and your organization measure and track progress. For example, clear metrics can motivate a good sales team to land even more contracts. Defining standards will also help you with your annual employee evaluations. And measuring activities that haven't been tracked before might surface some surprises. For instance, you could end up uncovering the root of a problem, such as an inventory shortage or persistent delays in processing customer orders.
In practice, performance measurement consists of three phases:
Deciding what to measure
Setting targets and collecting data, and
Assessing performance against metrics
Start the first phase with the question: What should you measure? With your team, generate the
objectives, critical success factors, and metrics that your system will monitor. Business objectives are the broad goals you want to achieve. Critical success factors are the specific actions you need to take to realize those objectives. And metrics are the measures that will indicate whether those actions are on track or not.
Let's look at an example. Morgan manages the sales department at a regional clothing manufacturer. The CEO has just announced a long-term strategy to expand nationally. Clearly Morgan's salespeople have a new objective: to develop relationships with retailers outside their current territory. To achieve this objective, Morgan and her sales group determine a critical success factor of increasing the number of visits to new geographic territories. But this raises the issue: Which new regions should Morgan's salespeople tackle first? So another success factor might be increasing the department's in-house capacity to analyze market research.
Next, Morgan needs to translate the critical success factors into metrics. In other words, by what quantitative — or qualitative — measure can she track progress on each activity? Morgan's sales team might define a financial metric such as "contracts generated per month from new client visits." But her colleague, the marketing manager, might choose a metric more difficult to measure, such as "awareness of brand in new regions."
After you have determined the objectives, critical success factors, and metrics to measure performance, check for three things. First, does your list contain only financial metrics? If so, you may want to define some metrics that promote "softer skills," such as collaboration across departments. Second,
ask yourself: "To achieve our objectives, do I need to promote any specific employee behaviors?" Finally, be sure to ask colleagues from other departments: "Do any of our department goals work at cross-purposes?"
Once you have decided what to measure and defined your metrics, it's time for the second phase of
performance measurement: Setting targets and gathering performance data. During the
target-setting process, you set standards by benchmarking competitors and using your organization's historical performance as a baseline.
Start by setting your targets. Targets represent the performance you want to see on each of your metrics. When setting targets, you are defining what you think is an "acceptable" versus a "poor" level of achievement. Setting targets often involves subjective judgment on your part. A target might vary according to the level of the person being measured or according to the time available. Instead of using a single number, consider a range for each target. Ranges can define levels of performance from "minimum" to "satisfactory" to "exceeding expectations." Ranges can also be used to adjust targets for level and ability.
For example, because their firm only makes money for the time they charge to the client, engineers building a dam measure success by "how busy we are." But how busy should each engineer be? This varies by level. Junior engineers may have a target of spending 85% of their time working on the dam project — while senior engineers may have a utilization target of only 50%, because management expects senior people to spend the rest of their time developing new business.
Should you adjust your metrics to industry norms? Use benchmarking to "reality check" your targets. Take into account the historical performance of your sector and the economy at large. For example, can your company really grow sales by 15% next year if your competitors squeaked out only 4% growth the previous year?
As appropriate, set a baseline. It's often fine to use your group's historical performance — or an
industry average — as the minimum standard. But be careful. For example, each quarter, an athletic footwear company automatically "ratchets" sales targets up a fixed percentage from the previous quarter's actual performance. But then a competitor goes out of business and the company has an exceptional quarter. Managers worry: "Will the next quarter's target be too high?" Sometimes a baseline target needs to be adjusted because of an event over which employees have no control. To complete the second phase of tracking metrics, you need to collect and communicate the data. Be sure your organization has clear forms, an easy submission process, and an identified person to compile and share the information. Back to our engineering firm: Each engineer enters billable hours into a weekly timesheet. The accounting department calculates the actual utilization against target. Managers then receive a summary in a monthly report.
Once you've set targets and collected data, you are ready for the third phase of the performance
management cycle: Interpreting the information you've collected.
Although financial staff often analyze the raw data, managers with a strategic perspective should decide what the information really means. How should you factor in changes in the organization and
competition? How should you view, and address, significant gaps between targets and actual results?
Don't focus too much on a single number. Instead, look for trends and for the causes behind the numbers. For example, if you uncover a quarter-to-quarter variation, your business may have seasonality that you did not suspect.
Let's return to the example of the engineering firm. Owing to the dam's success, the organization has taken on new clients. But junior engineers are overworked. To ease the workload, the department manager requests permission to hire more staff. Senior management, after looking at the performance metrics and seeing that the department is doing well on the utilization metric, approves the hiring request. Without the performance measurement system, the department manager might not have been able to convince senior management to approve the new hires.
Proceeding through the three phases of performance measurement, you can achieve and learn a great deal. By defining standards of performance, you will help your employees focus their work. By tracking activities, you'll uncover trends and their causes that might have remained invisible. And once you can measure your group's performance, you can better manage that performance — and thus add
value to your company's bottom line.