Defining Business Performance Measurements
Every organization is in a different business- they're a manufacturer, distributor, financial institution, professional services organization, support provider, or countless other variations- yet they all need to measure how well their business is performing. While the focus, frequency and system used may differ, effective business performance measurements share many of the same characteristics.
Clear Reason for the Measurement
Most measurement systems aren't free- measures should never be collected just because they're easy to do but not relevant, or because they've always been collected. Many measurements are mandated- by the SEC, auditors, financial backers, FDA, government agency, trade group, etc.; collecting these involves only following the rules provided. Internal measurements for tracking employee performance, forecast accuracy, supplier performance, etc. provide the most leeway in definition and the most danger in collecting inaccurate or misleading data, and making wrong business decisions.
Data collection and reporting for measurements mandated by a third party is a cost of doing business; the cost of any other data collection efforts must be balanced against the usefulness in achieving company business goals. Many business application development efforts end up being abandoned because the sheer volume and cost of data collection outweighs an intangible or inadequately defined benefit.
Predictive of Future Events
The best measurements highlight a potential status or problem before it occurs, allowing time for corrective action. Creating predictive measurements may involve the use of custom analytics, warning signals and tolerance limit definitions based on a knowledge base of previous experience. Factory process control systems can track instances where the production measured is currently acceptable but trending in an undesirable direction, and can sometimes be compared to previous occurrences of the same readings for corrective action if data on past history has been retained. Similar signals can be created for order, inventory, and financial systems when the data measured is consistent, can be frequently collected, and is retained for comparison to previous readings. Defining tolerance levels to generate warning signals before the condition becomes unacceptable provides time to take corrective measures.
Measurements are often accurate but not timely- they provide a true status report on an after-the-fact basis too late to research the events that led up the undesirable condition (ex.- the annual physical inventory that correctly reports an accuracy level of 74% but is of no use tracking what caused that level). Recreating all the transactions or data points that created a yearly, or even quarterly or monthly report can be impossible to review to take corrective action. When a status report is provided 3 months after the date being measured, conditions have often changed in the interim and the tendency is often to wait until the next status report, which prolongs any error conditions. Timely measurements are reported on a recurring basis, as soon as possible after the events being measured, and provide the background data to easily trace the sources of the measurement.
Alignment of Department and Organization Goals/Measurements
Individual personnel and department measurements and goals must directly support the overall organization measures, especially when used in reward and appraisal systems. A departmental measure that encourages maximum production may contradict the overall organizational goal of a target inventory level. If an action is being measured, an employee will naturally assume it's important both to his or her department and the company and the tendency is to maximize (up or down) the action unless clearly told the target and reason for the measurement.
A common reason for misleading performance measurements is a lack of consistent baseline data and gathering methods. Business conditions are continually changing, yet true progress can only be measured by identifying and filtering unusual events, and correctly identifying trends. A company that sells Halloween candy will always show higher sales in the October quarter, and measuring the percent increase over the previous quarter is not helpful. Measuring against the previous year October quarter means retaining data in the same format and adjusting for customer and channel definition changes year-to-year in measuring true sales growth. Retail chains report same-store sales totals to accurately portray the performance of the existing business vs. the gains from the separate process of adding additional outlets. The effects of one-time events must be filtered from the base data to use that data on a consistent basis in the future- the sale of obsolete inventory at a reduced price should not be used by the forecasting system as demand that will also occur in the future.
Another challenge in maintaining consistency lies in aggregating data from multiple sources- a common situation in any large organization. Reporting an overall customer order fill rate of 95% is accurate only if all reporting entities use the same terminology and data-gathering techniques and 'adjustment' policies are clearly spelled out.
Automation and Visibility
What number do you want? is an old accounting joke that still rings true in many measurement situations. Ideally, measurements should be an automatic byproduct of the process being measured and not require an additional manual reporting activity. Human nature leads to not reporting data or incidents that reflect negatively against performance unless the process provides automatic visibility, or methods to highlight inconsistencies or data elements that don't aggregate to expected totals.
Measurements that are taken but never included in reports, posted on a wall or otherwise made visible soon lose any sense of importance or urgency. Manual reporting steps done to create the measurement may soon stop 'just to see if anyone notices'. In general, if it's worth collecting and measuring, it's worth reporting and creating visibility.
Comparison to the Competition
Creating accurate measurement systems that report fiscal year sales growth is important; equally important is knowing how the competition is doing. While many companies consider themselves unique to some extent, they usually have a set of peer group companies that sell many of the same products and services. It may be premature to hand out management bonuses for increasing top line growth to 7% from 5% if the competition consistently generates 20% growth.
Benchmarking and best practices provide targets and operational methods for business performance improvement; it's up to each organization to define what constitutes success (25% market share? Number 1 or Number 2 in each business segment? 15% operating margins? Winning the Big Ten, or just beating your biggest competitor?). First define the goal, then create the measurements and systems that monitor your internal status and progress against your competition.
Source: Bridgefield Group Copyright©2013. All rights reserved.
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