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.

The Vision Thing

Why a defined strategy is crucial to performance management

I’m about to give a speech at my local Toastmasters club and I have chosen a rather controversial topic. I will argue, fairly or unfairly, that Barack Obama didn’t have enough of The Vision Thing in his inauguration speech. I have no doubt this will be deeply unpopular.

Obama is remarkable in many ways – not least in his ability to deliver a mighty fine speech. And right now what America needs most is a visionary president.

Part of my reason for choosing this subject wasn’t because I thought Obama needed a bit of help, but that it reminded me just how important vision and strategy is to performance management.

Without a strategy you cannot compare performance, good or bad, to anything. In fact, without a strategy you don’t really know what you should be doing when you get out of bed in the morning.

The ubiquitous scorecard has become a powerful way of monitoring performance in companies and public sector organisations alike. And many have implemented the Balanced Scorecard, created by Kaplan and Norton during the 1990’s.

The Balanced Scorecard is remarkable for two reasons.

1. It monitors four areas of a business: financials, customer focus, internal focus and learning & growth.
2. It encourages measures to be derived from strategy.

I often wonder whether what gets remembered most from their work is the four quadrants, and not the link to strategy. Yet it is the latter which is the more powerful, and at the time was the most ground breaking.

When a company first starts to implement the Balanced Scorecard they often find that their strategy isn’t defined as well as they thought. It prompts debate, arguments, refinements, and more debate. In fact some companies purposefully bypass the strategy step because they know it will be difficult. But once strategy is agreed there is a forward motion that almost takes on a life of its own. Good measures become easier to identify, and performance management becomes a whole lot easier.

I still don’t think we had enough of the Vision Thing in the inauguration speech and shall argue my case despite any frosty looks. But my personal silver lining was that it prompted me to look at my own company’s vision statement and make some necessary revisions.

That Vision Thing matters.