Integrated Performance Measurement
A fully integrated approach is now considered a standard approach to performance measurement; especially with the advent of the Balanced Scorecard. An integrated approach recognizes that measurement should be process oriented and cut across functional areas. It also recognizes that a balanced set of measures, both financial and non-financial, is needed for a complete picture of what is going on.
The best types of measurements provide more than score keeping; they help you understand what changes are needed to improve the score. Good measurements usually start with the core competencies of the organization. By focusing on core competencies, you are measuring the strategic areas that give the organization a competitive foothold in the marketplace.
Typically a set of performance measurements will rely on Key Performance Indicators (KPI's). The best KPI's tend to be simple. Here is an example of KPI's at General Electric:
Performance Area Key Performance Indicator
Profitability Residual Income
Human Resources Number of Promotable Employees
Market Position Market Share
As you can see from this example, the primary drivers behind performance are very visible within the performance measurement system. Areas that are selected for measurement are critical to the business. Therefore, the best place to start in the design of an Integrated Performance Measurement System (IPMS) is by simply understanding how the organization works. Based on this understanding, strategic themes emerge to help you identify what areas of the business should be measured. The objective behind the design phase of the IPMS is to come up with a set of KPI's that are both measurable and reportable.
The design phase of the IPMS should be both top-down and bottom-up. The top view is needed to help ensure that design is based on major strategic issues confronting the organization. The bottom-up view is needed since you need to identify barriers and issues that must be resolved for implementation of the IPMS. The preliminary design of the IPMS will often consist of eight steps:
- Executive Management buy-in and support for the IPMS.
- Forming the Design and Implementation Team(s).
- Developing a clear and concise set of strategies.
- Drafting a prototype model for testing and refinement of the IPMS.
- Defining the Critical Success Factors or Areas that need to be measured.
- Defining the Key Performance Indicators that will serve as the measurements.
- Finalize the Prototype Model.
- Develop a plan for full implementation.
The biggest reason behind failure of a performance measurement system is lack of senior management support. In order to gain management support, an "ABO" approach is sometimes useful:
- Awareness : Management shows an interest in the project, learns more, and becomes passively involved.
- Buy-In : Management now seeks more information, they commit time and money to the project, and they openly support the idea behind performance measurement.
- Ownership : Management assumes responsibility for success of the project, they recruit people to participate, and they sell others on the idea of performance measurement.
Once you have ABO from upper-level management, you can proceed to Step 2, forming a design and implementation team. Since the IPMS cuts across the entire organization, the team should have representation from areas that will be measured. For example, a beverage company has identified marketing and production as critical areas that need to be measured. The design team consists of five key people: Marketing Manager, Sales Manager, Operations Manager, Quality Control Manager, and Chief Financial Officer.
This article has touched on the very basics of trying to get a comprehensive performance measurement system started. A very important aspect with any project like performance measurement is to spend sufficient time with planning and design. One of the biggest mistakes with most projects is to move too quickly into implementation. A good IPMS should evolve through a process of planning and design. And don't forget to prototype test each and every idea within the IPMS. This will save a lot of grief down the road when it comes time to implement.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756