Monday, 16 November 2009

Measuring and managing performance

Why measuring financial performance matters
Business performance is financial performance, make no mistake about it. The companies with the largest turnovers, the biggest market capitalisations, highest profits are the most successful. These are the companies that make good strategic decisions and create value for their customers, as well as ensuring their shareholders are financially rewarded.

The business of business is business, and unless a company generates sufficient profit there is no opportunity to achieve softer objectives such as creating a good working environment for staff, or being a good corporate citizen.

Not-for-profit organisations also have important financial considerations. Whether financed by grants, taxes or charitable donations there is a duty to provide value for customers and stakeholders. At the very least not-for-profit organisations must demonstrate good financial control and appropriate use of funds.

So if finance is the overriding consideration for most organisations – why measure anything else?

The answer is simple. Excellent financial performance is the result of good decision making and creating value for customers, not the cause. Financial performance is a measure of how well a company has done from a number of different viewpoints: marketing, production, financial control, research & development, training, etc.

Unless financial results are measured, however, there is no objective way of assessing how effective an organisation is. It is clear that sound measurement and management of business activities such as marketing campaigns, new product development, improving productivity, or training staff are the way to achieve better financial performance.

So the burning questions remain – how do you measure and manage the performance of all these constituent parts in order to create value for customers? How do you ensure these initiatives reap the appropriate financial returns?

Why measuring non-financials matters more
As far back as the 1950’s major corporations were realising that measuring the financials was essentially a backwards looking activity. For organisations to perform better, they had to look forwards and measure the full range of activities that contribute to their success.

Perhaps the most influential writers on the subject in recent years have been Robert Kaplan and David Norton. In 1992 they published an article in Harvard Business Review called The Balanced Scorecard in which they argued that four key aspects of a business must be measured and managed in relation to the organisation’s strategy:

  1. Financial performance

  2. Customer focus

  3. Internal business process

  4. Learning and Growth.

This has been an enormously influential model – not least because it links measurement and management to strategy. Since their ideas were first published it has been adopted to a greater or lesser extent by many leading organisations.

There are undoubtedly other ways to divide up the activities of businesses and organisations, but the four quadrants of the Balanced Scorecard provide an excellent start.

Even with such a framework there are a host of possibilities, initiatives, projects and measurements to consider. Once decisions have been made as to what to progress and what to discard initiatives then have to be managed, monitored and evaluated to assess their success.

Performance management, measurement, and evaluation is a rich and varied set of disciplines that enable organisations to put a framework on the complex business of improving performance.

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