Performance Management Measuring Performance
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This document discusses various approaches to measuring organizational and individual performance. It begins by explaining that performance management involves defining expectations, targets, and standards. It then examines issues in measurement, noting that what is measured often differs from what is truly meaningful. Several models for measuring performance are introduced, including the balanced scorecard, EFQM, and economic measures like EVA. A variety of financial ratios and individual performance metrics are also outlined. The document emphasizes the importance of selecting measures that are aligned with strategy and creating objectives within a person's control.
Performance Management Measuring Performance
- 2. MEASURING PERFORMANCE Managing performance begins by defining expectations in terms of targets, standards and capability requirements. Brings improvements to performance and personal development programmes. It identifies strengths to be enhanced as well as weaknesses to be overcome.
- 3. MEASUREMENT ISSUES In some jobs what is meaningful is not measurable and what is measurable is not meaningful. Often what is easy to measure is what gets measured. What should be measured? Be clear about what is important and relevant before defining what measures should be used. Organizations should be value-driven, not cost-driven (Hope 1998) Understand what creates value in an organization and then to develop measures that are aligned to the business strategy.
- 4. MEASUREMENT ISSUES Hope (1998) points out the following measurement problems: there are sometimes too many measures; measures do not relate to strategy; measures are results-biased and do not tell managers how the results were achieved how they got there; reward systems are not aligned to performance measure measures do not support a team-based management structure
- 5. MIXED PERFORMANCE MANAGEMENT MODEL Output Measures Measure of delivery of service Measure of quality delivered Volume, throughput, sales etc. Input Measures What people bring to their roles Knowledge, skills and capabilities
- 6. CRITERIA FOR PERFORMANCE MEASURES Performance measures should (Armstrong and Baron, 1998): be related to the strategic goals and measures; be relevant to the objectives and accountabilities of the teams and individuals concerned focus on measurable outputs, accomplishments and behaviours that can be clearly defined and for which evidence can be made available; indicate the data or evidence that will be available as the basis for measurement; be verifiable information that will confirm the extent to which expectations have been met; be as precise as possible in accordance with the purpose of the measurement and the availability of data; provide a sound basis for feedback and action; be comprehensive, covering all the key aspects of performance.
- 7. CLASSIFICATION OF METRICS Metric Includes Finance income, shareholder value, added value, rates of return, costs. Output units produced or processed, throughput, new accounts. Impact attainment of a standard (quality, level of service, etc.), changes in behaviour (toward both internal and external customers), completion of work/project, level of take-up of a service, innovation. Reaction judgement by others, colleagues, internal and external customers. Time speed of response or turnaround, achievements compared with timetables, amount of backlog, time to market, delivery times.
- 8. TYPES OF MEASURES ORGANIZATIONAL Different approaches to measure performance in an organization are: 1. Balanced scorecard; 2. The European Foundation for Quality Management (EFQM) model; 3. Economic value added (EVA) and other economic measures of value; 4. Traditional financial ratios
- 9. BALANCED SCORECARD Developed by Kaplan and Norton (1992). Can be developed on a corporate level, business unit/dept. level or team/individual level. Benefits: It gives top managers a fast but comprehensive view of their business of both financial and operational measures. Puts strategy and vision at the center. Not focused solely on control. Link company’s financial budgets with its strategic goals Align employees individual performance with the overall strategy Used as a performance management process at individual, team, unit and corporate levels.
- 10. BALANCED SCORECARD The scorecard requires managers to answer four basic questions Financial perspective How do we look to shareholders? Innovation and learning perspective Can we continue to improve and create value? Internal Perspective What must we excel at? Customer Perspective How do customers see us?
- 11. EXAMPLE OF BALANCED SCORECARD – CLOTHING STORE Perspective Objectives Performance Measures Customer (How do customers see us?) • right product, • Image, • ideal shopping experience • average annual purchase growth, • premium on branded items, • customer surveys. Internal (What must we excel at?) • brand dominance, • sourcing and distribution, • shopping experience, • market share, • out-of-stock incidence • sales per square foot Financial (How do we look to shareholders?) • profitable growth, • increased penetration • improved productivity • operating-income growth, • sales per store, • expenses as a percentage of sales Innovation and learning perspective (Can we continue to improve and create value?) • developing strategic skills • providing strategic information • Periodic survey of skills developed • Annual reports
- 12. THE EUROPEAN FOUNDATION FOR QUALITY MANAGEMENT (EFQM)
- 13. THE EUROPEAN FOUNDATION FOR QUALITY MANAGEMENT (EFQM) Benefits to performance management: 1. Develops a fuller understanding of how business results are achieved and processes continually improved; 2. Offers mechanisms for tackling problems in the workplace’s system; 3. It promotes performance management as a two-way dialogue; 4. Provides a positive and universal framework for the description of jobs and roles; 5. Aligns individual and business objectives; 6. Pointing the way to identifying, defining and building the capabilities that the organization needs its people to demonstrate.
- 14. ECONOMIC VALUE ADDED EVA is the difference between a company s post-tax operating profit and the cost of the capital invested in the business The cost of capital includes the cost of equity what shareholders expect to receive through capital gains
- 15. OTHER ECONOMIC MEASURES OF VALUE Other economic measures focus on the shareholder value and are not concerned with other performance measures of the organization. 1. Added value: the difference between the market value of a company’s output and the costs of its inputs. 2. Market value added the difference between a company’s market capitalization and the total capital investment; if the result of the subtraction is positive, it will indicate the stock market wealth created. 3. Cash-flow return on investment (CFROI) a comparison between inflation-adjusted cash flows to inflation-adjusted gross revenues to find cash- flow return on investment. 4. Total shareholder return what the shareholder actually gets, i.e. changes in capital value plus dividends.
- 16. TRADITIONAL FINANCIAL RATIOS return on equity, return on capital employed, earnings per share, price/earnings ratio, return on sales, asset turnover, overall overheads/sales ratio, profit or sales or added value per employer, and output per employee (productivity).
- 17. TYPES OF INDIVIDUAL MEASURES Measure Example quantity unit sales, contribution, new accounts quality the level of service provided to customers in terms of response to requests for after-sales service productivity sales and contribution per sales representative timeliness achievement of delivery deadlines, order processing times cost control ratio of selling costs to sales/contribution
- 18. DEFINING PERFORMANCE MEASURES FOR INDIVIDUALS The following are guidelines for defining them: Measures should relate to results and observable behaviours. The results should be within the control of the team or individual and be based on agreed targets. Behavioural requirements should be defined and agreed. Data must be available for measurement. Measures should be objective.
- 19. THE END
Editor's Notes
- #4: Value-based management is a philosophy of improvement while cost-based management is a philosophy of control.
- #10: Exponents of the balanced scorecard approach see it as a way of implementing strategy, linking strategy to action, and making strategy understandable to those on the front line as well as to senior managers. Links human capital to other business measures.
- #15: The theory of EVA is that it is not good enough for a company simply to make a profit. It has to justify the cost of its capital, equity included.