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Measuring performance is more than just an exercise if you use the numbers as a tool to improve profits. There are two schools of thought on the subject, and both stress that nonfinancial measures (or metrics) are just as important as financial measures.
The first school, discussed in Steven Hronec’s book Vital Signs, says the "vital few" metrics are concerned with cost, quality, and time. These measures are taken at organizational, process, and individual levels. The second school advocates the balanced scorecard approach developed by Robert Kaplan and David Norton. They say companies need to monitor four key interrelated measures in finance, customer satisfaction, employee satisfaction, and innovation. By reporting the cost and performance of these measures, people and teams responsible for goals have a "scorecard" that shows the results of their labor. What to Measure Not all metrics are created equal. Choosing the ones on which to spend time and money is the most difficult decision in this process. You must balance the summarized comprehensive financial measures top management needs with the operational information required by line managers. And metrics should be directly related to your company’s strategy. If a metric passes those two tests and is easy to understand, calculate, and explain to employees, keep it. Usually no more than 25 will make the final cut. Think through your performance targets. Most companies set arbitrary performance targets without considering the costs to reach them. Set targets consistent with the resources you’re willing to allocate. Metrics aren’t viewed in isolation and shouldn’t conflict with each other. Instead, each should be viewed in relation to its impact on the others. Power to Change Behavior Be prepared for a fight to implement a new measurement system. Those who benefited from the old one will resist the new. Others will fear that a new system will highlight poor performance. Still others will be afraid of failing. Give your employees the time, training, and other resources they need to deal with the changes. Lastly, you can measure as much as you want but if you don’t tie compensation to performance metrics, it won’t influence employee behavior.
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| The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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