Performance Measurement is the process of developing indicators to assess progress towards predefined goals and reviewing performance against these measures. It can be applied to the whole organization or specific departments, branches, or individuals. Various measures can be used, both financial and non-financial, to evaluate performance comprehensively.
Historical Context
The concept of performance measurement dates back to ancient times, where records of accomplishments and efficiencies were maintained for rulers and empires. The evolution of performance measurement in the industrial age gave rise to systematic approaches and tools, culminating in modern frameworks like the Balanced Scorecard.
Types/Categories
Financial Measures
- Return on Capital Employed (ROCE): Measures the profitability and efficiency with which capital is employed.
- Residual Income: Measures the net income after deducting the cost of capital.
- Economic Value Added (EVA): Calculates the value created above the required return of the company’s shareholders.
Non-Financial Measures
- Delivery Time: Assesses the efficiency of the supply chain and logistical processes.
- Customer Retention: Indicates the company’s ability to retain customers over a period.
- Employee Absenteeism: Measures the frequency of staff absence.
- Staff Turnover: Monitors the rate at which employees leave the organization.
Key Events
- 1980s: Introduction of Total Quality Management (TQM) and a focus on continuous improvement.
- 1992: Creation of the Balanced Scorecard by Robert Kaplan and David Norton, integrating financial and non-financial measures.
Detailed Explanations
Balanced Scorecard
The Balanced Scorecard connects non-financial and financial performance measures to a company’s overall strategy, creating a more comprehensive approach to performance measurement. It typically includes four perspectives:
- Financial: Profitability and growth.
- Customer: Satisfaction and retention.
- Internal Processes: Efficiency and quality.
- Learning and Growth: Employee development and innovation.
graph TD
A[Balanced Scorecard] --> B[Financial]
A --> C[Customer]
A --> D[Internal Processes]
A --> E[Learning and Growth]
Importance and Applicability
Effective performance measurement helps in:
- Strategic Alignment: Ensuring all parts of the organization are working towards common goals.
- Behavioral Influence: Understanding and managing how different measures impact manager and employee behaviors.
- Decision-Making: Providing critical data to support informed decisions.
Examples and Considerations
- ROCE might encourage managers to reduce investments to improve short-term performance, possibly harming long-term growth.
- Improving delivery times might meet targets but increase costs, highlighting the need to balance efficiency and financial performance.
Related Terms
- KPI (Key Performance Indicator): Specific measures that help quantify performance in key areas.
- Benchmarking: Comparing performance metrics to industry standards or best practices.
Comparisons
- ROCE vs. ROI: While both measure profitability, ROCE specifically looks at the capital employed, making it more relevant for assessing long-term investments.
Interesting Facts
- The Balanced Scorecard was initially seen as a mere measurement tool but has evolved into a strategic management system.
Inspirational Stories
The adoption of the Balanced Scorecard transformed companies like Mobil North America Marketing & Refining, which significantly improved its customer service and financial performance by aligning its strategic objectives with balanced performance metrics.
Famous Quotes
“What gets measured gets managed.” — Peter Drucker
Proverbs and Clichés
- “Measure twice, cut once.”
- “You can’t manage what you can’t measure.”
Jargon and Slang
- Dashboards: Visual representations of key performance metrics.
- Scorecards: Tools that consolidate performance metrics.
FAQs
Why are both financial and non-financial measures important?
How can performance measurement influence behavior?
References
- Kaplan, R. S., & Norton, D. P. (1992). “The Balanced Scorecard: Measures that Drive Performance”. Harvard Business Review.
- Drucker, P. (1995). “The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management”.
Summary
Performance Measurement is an indispensable tool for assessing and improving organizational effectiveness. By integrating financial and non-financial metrics through approaches like the Balanced Scorecard, organizations can ensure alignment with strategic goals, drive desired behaviors, and make data-driven decisions for sustained growth.
