Nearly every company and organisation I know is spending more time and effort on measuring and managing performance. It is also consistently among the issues top of mind for finance directors, but when I ask management teams “why do you measure performance?” there is usually a deafening silence.

Organisations are all trying to improve their performance but performance doesn’t improve simply by measuring it. However, performance can be improved if you measure it for the right reasons and use performance measurement judiciously to manage your organisation.

You will also need to create the right organisational climate for measurement to really succeed – that way everyone can contribute to the success of the organisation. And there are plenty of ways to get things off to a good start (see below).

1. Establishing position

At the most basic level, performance measurement is about knowing where you are. Are you solvent? Are you profitable? Establishing position is the baseline from which everything is built. Before you can compare performance between this year and last, between different departments within a company or as a basis for benchmarking, you will need to measure accurately and consistently. It is the stake in the ground that allows you to take your performance measurement journey forward.

2. Communicating direction

Having established where you are, you will need to communicate where you want to go. People usually think that this is in the strategic plan and it often is, but performance measurement is a much more effective way to communicate direction. By setting objectives you will start to articulate what you are trying to achieve; by making these objectives measureable you will give clear direction, and by establishing targets you will communicate what is to be achieved by when. This measurement is very powerful.

3. Influencing behaviour

As soon as you measure something, people take notice of what you are doing. This influences their behaviour. You may wish to motivate people to achieve the goals you have set and to encourage them through recognition and reward schemes. These may or may not help you in improving the performance of the organisation, but what you will definitely get is influenced behaviour. People will quickly respond and adjust to what is being measured, reported and talked about.

4. Stimulating action

The difference between the goal set and where you are will tell you whether you are delivering or not. At a simple level, this feedback should stimulate appropriate action. The difference between planned and actual isn’t always a trigger for action, because normal variation in data between one period and the next will create noise. However, when the planned and actual consistently diverge, this should be the stimulus to act. Remember performance measurement is an expensive process. If you don’t act on signals, you will reap no reward for all that measurement expense and activity.

5. Facilitating learning

Measuring your performance is an opportunity to learn. Questions to ask include, are you missing your targets because you haven’t implemented what you planned to do, or because the environment has changed? If you have implemented plans, and targets are still not being reached, is this because you don’t fully understand how your business works? Are your plans and targets still appropriate? Reflecting on what your system is telling you should enable you to adapt as things change.

So what does this mean for the design of your performance measurement systems and what does it mean for how you use measures to manage business?

1. You need a set of robust measures you can rely on. When you review performance you want to have confidence in the information and not spend your time arguing about the accuracy of the measurement. Make this first step an essential building block.
2. You need to carefully choose what you measure. These will rapidly become the de facto strategic direction for the organisation. They are visible and discussed long after the strategic plan has been filed away. Measures have to accurately reflect your strategy, and if it changes you should change your measure to communicate the new direction to the whole of the organisation.
3. Think very carefully about how you influence behaviour. Focusing people’s attention on what really matters to the organisation is critical for success, but rewarding people for hitting specific measurement targets changes the whole nature of your measurement system. Goals and targets then become a matter for negotiation, as the organisation wants them to be stretching while the employee wants to make sure he or she meets the target and gets their reward. Getting this wrong can mean you have staff highly motivated to hitting a target number by any means, while you lose your ability to discuss what the target should be because this is subject to negotiation.
4. You will need to create appropriate review mechanisms to manage performance and to take corrective action. Ideally this should be done in a team setting where performance is visible, those knowledgeable about the operation are present and someone has the authority to act. This environment should enable discussion to create understanding about what is happening before interventions are made. Making decisions in a group setting also enables wider communication of what is to be done and why.
5. You will need to create the space for people to reflect and learn. This means not rushing to make a judgement, asking questions and testing your colleagues’ assumptions about how they read the data and what they are concluding from what they see. We all have different backgrounds, professional qualifications and personal experiences, and if we can create some space we can have a better conversation about performance, the business and its future. To quote Darwin, “it is not the strongest species that survives, nor the most intelligent that survives. It is the one most adaptable to change."

What does good and bad practice look like? Good practice is when everyone knows what the key measures are and how current performance stacks up against them. People know what they are trying to achieve and how their efforts contribute. There is a culture of mutual support and openness, so problems can be identified early and action quickly taken. There is a pride in the organisation and a culture where people strive to do their best. This is a questioning and challenging culture where no stone goes unturned to get at the real reason things happen as they do. This is a place where you want to work; it is challenging and rewarding.

An organisation with bad practice is a different world. People work in the dark, unclear about their targets. There are regular arguments over the measures and what has been agreed. Staff work in their silos and do their best to look good even if this is detrimental to the wider organisation. The reward system favours ‘yes men’ and instructions are dispatched from senior management without any real discussion or understanding. People are rewarded for fire fighting rather than planning to do things better. The culture is dominated by big egos and those not at the top are either keeping their heads down or looking for another job. This is a place where people come just to pay the bills.

Creating the right environment for your performance measurement system to flourish is as more about the softer side of managing your business than it is about the hard systems and measures. It is not so much about the information you have available, but about how it is used to make decisions. Creating an open performance culture is easier to describe than do. It needs trust and can only be be built over time. But the results are worth it.

• Measure by measure
  Finance & Management Magazine, Issue 217, January 2014

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