To the uninitiated, business performance measurement sounds like child’s play. You decide your goals, choose suitable measures, then track them. Because what gets measured gets managed, achievement follows automatically, right? Sadly, no. Those who have tried it know it’s not that simple.

There has to be a story behind the measures for this to work. This story describes how your organisation is going to achieve its objectives – and the key things you have to accomplish in order to do so. The story has to be easy to follow and plausible. If it’s done right, the performance measures will follow naturally.

But does your organisation have such a story and can you put your hand on the document that tells it? Is it easy for everyone to understand, can they tell the story unprompted, do they believe it?

Unless you can answer “yes” to these questions… why should people strive to achieve the measures by which you judge them? Without their active agreement you have to resort to hoping that they do what you tell them.

My firm has come across many FDs, and their departments, who are desperately seeking the magic measures that will make the massive difference to performance.

But whatever carrots or sticks finance uses, the rest of the organisation seems impervious to its engagement. The nub of the problem (see figure 1, overleaf) is that people’s behaviour is driven by two forces:

• What the organisation tells them to do – the “plans” route on the left.
• What they think is important and what they want to do – the “values” route on the right.

If people don’t understand the plans – or don’t agree with them, or don’t think the measures reflect the plans – the two routes conflict. The bad news is that the “values” route usually wins hands down. If your plans are so far removed from what other people in the organisation think should be done, you have a problem. It’s likely people simply do not know what the plans are, or the reasoning behind them, or think that the measures are wrong or unfair. This is where the story comes in.

So what is the role of finance here? A narrow view is that finance reports the financial numbers of costs and revenues by whatever categories the chart of accounts and the ledger codes dictate. In these circumstances management reporting might only consist of budget variances by budget line, supported by explanations that give varying levels of insight.

Anyone who has endured this approach knows how futile and unrewarding it can be. A typical bad example is a narrative that amounts to something like: “The negative variances occur because the wishful thinking about sales and cost efficiencies we used in the budget hasn’t been realised, but fortunately these are offset by positive variances due to our being unable to realise our plans and spend as quickly as we had hoped.”

Finance should have a much wider remit in the field of performance measurement: no one else offers a logical case for taking the role. Under this remit, you are responsible for:

• writing the story describing how your organisation is going to achieve its objectives;
• creating a model that projects the financial results from pursuing the story successfully;
• telling and selling this story so that everyone understands and agrees with it – or modifying it until they do;
• identifying the measures, financial and non-financial, that underpin the story;
• presenting these measures along with explanations of why they differ from forecast; the likely outcome if nothing is done to change matters; the options that exist for changing course; what the likely outcome of pursuing these options would be; and
• designing and owning the process by which measures are decided, measured, presented and acted upon.

This is a tall order coming on top of an already full workload, but don’t dismiss it out of hand. Finance staff justifiably claim they are already overstretched, but what about ditching some of the current workload? I know that the rest of the organisation insists that everything you currently do is vital, but often they are wrong and it is worth a challenge.

For instance, the responses of 123 large UK organisations in a 2004 survey revealed they take on average 3.7 months to create their budgets. Half the respondents said budget figures become outdated and ignored before year end: the average time into the year when the budget figures become outdated is 4.25 months (just 16 working days longer than it takes to produce the budget in the first place). You can’t deny there is a great deal of wasted finance effort reporting and explaining monthly variances in these circumstances. Similarly persuasive arguments can be advanced about many of the reports that are produced.

I am not suggesting these activities don’t add any value, merely that, given a finite resource, one has to prioritise. The benefits of an effective performance measurement system that helps you achieve corporate objectives outweigh the benefits of detailed ledger line variance analysis done by rote.

Another bullet point in the list above, setting out finance’s role in performance measurement, relates to creating a financial model of the organisation. Such a model (illustrated diagrammatically by figure 2) is important because it can provide the acid test for the plausibility of the story. If you can use such a model to win over the sceptics, you are home and dry.

The role of finance in performance measurement outlined above is sketchy. The remainder of this article will endeavour to put some meat on the bones. Let’s start with the story sitting behind the measures. One approach – and it is only one – is to use the balanced scorecard, which is popular but often misapplied.

The balanced scorecard proposes four perspectives: financial; customer; internal; learning and growth. For each perspective a set of appropriate measures is selected. What isn’t always made clear is that these perspectives are interdependent. They build upon one another in a specific sequence (see figure 3).

The underlying rationale is that to achieve your financial measures, such as greater asset utilisation or increased revenues, you need to set and achieve a ‘customer value proposition’ – your proposal to customers of the value you will deliver to them.

In order to do this, you need to get your internal delivery mechanisms – or business processes – working effectively, and to do that you need to grow appropriate capabilities: of your people; your IT; and your organisational structures and ways of working.

You can work on achieving your measures in each perspective at the same time, even though the measures in the lower perspectives support those higher up. The important point is that the chosen measures must be related to one another in the linked sequence: your learning and growth measures must be ones that support the attainment of your internal measures, and so on in a chain up the structure.

While the name “balanced scorecard” implies that what is needed is a balance of the four perspectives, it doesn’t imply as clearly that the measures need to link to one another, which is key. Without the links between specific measures in the different perspectives, you run the risk of ending up with four boxes full of any old important-sounding measures.

You will probably find that piecing together the key elements of each perspective into a coherent, sound structure that delivers the objectives of the organisation is not easy. But the effort is worthwhile because out of it will come the story and the associated measures.

If the balanced scorecard is out of favour in your organisation, and you desperately want to get away from reporting a mass of ledger line variances, I offer the following approach to generating a basic set of performance measures.

Choose measures that answer the following set of questions:

1. Strategic:
   Is each product/market segment behaving as we expected (competitor activity; market size; prices; market share)?
2. Plans for change:
   Is implementation going according to planned timescale and cost?
   Are the effects of implementation as forecast (eg better customer service; growth in customers; lower unit costs)?
3. Business-as-usual:
   How are key measures of customer service moving, particularly in relation to competitors?
   How are unit costs moving?
   How are revenues moving compared to forecast?

This approach has the benefit of providing a range of measures from the strategic to those that track business-as-usual performance. It encourages you to pick a set of measures that is vital to your business and so forces you to focus on what is important rather than the humdrum.

The purpose of performance measures isn’t only to measure performance but also to explain why actual performance differs from forecast or target. In providing this explanation, performance measures can answer one of two questions:

• Have we done what we planned to do?
• Has our plan achieved what we forecast?

There is an obvious distinction between these two questions – one relates to an outcome that fails because we haven’t done what we said we would; the other to one that fails because our judgement about the results of our actions was wrong. It is important to have both types of measure in your mix.

However, while a mixture of both types of measure will usually give a satisfactory explanation when you haven’t done what you said you would, it may fail to do so when you have done what you planned and yet the result isn’t as predicted. In the latter case there is a danger that people abandon the whole performance measurement system as being unhelpful.

If this happens, resist. There will always be a reason for outcome differing from forecast and it is essential that you nail down this reason in order to do something about it. Don’t abandon your measures because they initially send confused signals – persevere with them and dig for the answers, which will probably lie in one or more of the following areas:

• insufficient time for your efforts to bear fruit;
• a missing element to your plans;
• a flawed judgement about how the market would react to your proposition; or
• an unnoticed competitor move.

Performance measurement isn’t simply the task of making measurements and publishing them. It is a cyclic process that starts with deciding appropriate measures, moves on to deciding what actions to take as a result of the measurements obtained, and ends with implementing these actions. Different players do different things at various points in the process. Map your process, and ask yourself whether each stage is fit for purpose.

To ensure you have good measures, and to weed out unnecessary ones, ask questions about each one, for example:

• What is the purpose of the measure, and does the purpose justify the effort?
• Should there be a target, and if so what is the planned achievement date?
• Who is accountable – named person – for the measurements?
• Who will assess performance?

These might sound obvious questions, but it is surprising how often performance measurement systems degrade into a data collection and presentation task for finance, the product of which no one heeds (see illustration in figure 4).

In the field of performance measurement, finance should have a bigger role than line-by-line budget variance analysis and reporting. Challenge the value of what you currently do. Replace it with identifying, measuring and reporting the key measures that, if achieved, will enable the organisation to meet its objectives.

The difficult bit, as always, is getting the rest of the organisation to follow your line. To do so, provide a story that describes and explains what people must accomplish to meet the overall goals, and the measures that will track progress. Create a model that demonstrates how the financial results follow from making the story come true. Lead the way!

• Tales of the expected, Finance & Management Magazine, Issue 204, November 2012

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