Performance Measurement: Selecting Measures That Matter

You’ve decided you’re finally ready to really transform your organization using performance measurement. You’ve thought about your business, and what you’re really trying to achieve. Now you’re prepared to select some performance measurements.

You consult a few resources. Transforming Performance Measurement, an excellent book by Dean Spitzer on creating an effective measurement environment, lists 34 categories of measurements that can be truly transformational. Each category has multiple measures.

Then you see a major marketing firm lists 100 measurements in its marketing metrics toolkit. You try to imagine the time it must take to gather and input the data required to feed all those calculations – just for marketing. Then, you try to imagine having the time to do anything about the results after you absorbed what those hundred numbers mean. Your brain can’t really process more than four chunks of information at once. Is this possible?

Talk about transformation. Initially it seemed like a great idea to have a process customized to measure what’s really important for your business. Now, the cookie cutter approach, or doing nothing at all, is showing far greater appeal.

Sorting through the possibilities to select the handful of measures most meaningful for you can seem daunting. But it doesn’t need to be. Answering some key questions about your business can help you rapidly narrow down the list.

Using Strategy to Determine Focus Areas

Some organizations have a clear, succinct version of their strategy that unifies everyone’s activities across all functions and areas. Unfortunately, most don’t. If this describes you, you’re not the exception. However, to have a productive discussion about which measures will help your team the most, you’ll need to have that clarity. So first let’s make sure your vision is clear.

Internal vs. External

Business strategies generally have two components:

  • External: Where you compete
  • Internal: How you compete

The external element addresses the business that you’re in, the customers you’re targeting, and therefore the needs you’re satisfying. Conversely, the internal element addresses how you choose to fulfill your customers’ needs. So measuring your internal elements identifies whether you’re doing the right things and doing enough of them. Meanwhile, measuring external elements determines whether your actions are having the desired affect on your customers and the corresponding financial results.

For your system to be successful, you’ll need to have a balance of both internal and external measures. To determine which categories of these measurements provide your best candidates, take a look at these success factors for your strategy type.

What’s Your Strategy?

There are a number of approaches to effectively defining strategy, but most businesses settle on one of four general approaches.

  1. Low Total Cost
  2. Product Leadership
  3. Complete Customer Solutions
  4. System Lock-In

Low Total Cost

This approach, also broadly referred to as Operational Excellence, is exemplified by companies such as Southwest Airlines, Dell, Ikea, Target, or McDonald’s. Businesses pursuing this strategy are known for being the best buy or having the lowest total cost. If this represents your organization, you’ll probably choose measurements that emphasize the elements you need to deliver the experience customers expect:

  • Consistent quality
  • Price
  • Lead times / inventory
  • Purchase convenience
  • Delivery speed
  • Selection

Product Leadership

Do your products and services provide superior functionality or performance in exchange for above-average prices? If you offer particular features or leading-edge functionality that makes your customers willing to pay more, you’ve chosen the path of companies like Apple, Cirque du Soleil, Mercedes, Starbucks, and Intel as product and innovation leaders. Your measures are likely to emphasize elements that give you the edge in product leadership, such as:

  • Innovation of valued features (e.g., speed, size, accuracy, or power consumption)
  • Speed to market with new features and functionality
  • Core competencies for crossing into new markets (e.g., Apple’s iMac, iPod, iTunes, and iPhone)
  • Intangibles supporting brand prestige, image and “it” factors leading to early adoption
  • Speed of competitor imitations

Complete Customer Solutions

When IBM dominated the computer industry, it didn’t offer the lowest prices, cutting-edge technology or the greatest computing power. But what it did offer was complete solutions designed for each customer’s business: hardware, software, installation, training, maintenance, repair, etc.

Ritz-Carlton Hotels offers completely, personalized care for their customers’ every need while away from home. You’ll notice that even strategies emphasizing high-touch customer intimacy and customized customer solutions like Ritz-Carlton, however, are relying ever more heavily on technology to help them identify individual customers and propose custom solutions to meet their needs.

Another example, Netflix, deploys custom recommendations and platform-independent services to deliver your experience wherever you are, on any device, at any time, whether on your laptop in the coffee shop or your surround-sound theater at home.

If you offer your customers an end-to-end solution that makes them feel like you know them and truly care about them, your measures are likely to emphasize the following components:

  • Quality and reliability of solutions
  • Purchasing bundles or number of products / services per customer
  • Before- and after-sale service
  • Customer relationship quality (retention, referral, and lifetime value)

System Lock-in

Let’s play Monopoly! This strategy locks in customers with its dominance. Exchanges requiring a critical mass of mutually interested parties, like eBay, the Yellow Pages, Facebook, or the old Blue Chip Stamps (showing my age!) are system lock-in plays. So are operating systems and tools or complementors linked to them like Microsoft’s Windows and Office software dominating the business market – although lately less so.

This strategy seeks to dominate an industry and create high barriers for competitor entry and/or customer switching. If this is your intent, your measures are likely to emphasize:

  • Your degree of dominance (e.g., share of buyers and sellers)
  • Barriers to new entrants and switching costs for customers
  • Unique or proprietary functionality

Identify which of these four strategies most closely matches yours. Then use the emphasis checklists to trigger ideas about what factors are critical in your business.

Balancing the Big Picture

Once you’ve defined the broad categories, you should next review them for balance. Have you identified the factors that have the most influence on your team’s ability to deliver the results you desire? What are the most crucial inputs and processes, and what are the key customer and financial outcomes? Are you striking an appropriate balance between short- and long-term goals, especially for low cost strategies? Have you found dual-purpose measures – lagging indicators for one activity, but leaders for the next? Are you also measuring the things you can’t touch, the intangible elements that typically exert the most influence on your results?

From Questions to Measures

Most teams, once provided a framework, have little difficulty identifying hot spots for measuring, if asked in a penalty-free environment. Often the most effective way to develop a focused set of measures, representing the greatest opportunities, is to perform a series of anonymous, one-on-one interviews with key stakeholders. From these one-hour interviews with executives, managers and selected team members, a clear and consistent view of the results emerges, including:

  • The most important inputs
  • The crucial process breakdowns
  • The highest tension or trade-off areas
  • The internal customer knowledge and customer satisfaction
  • The internally identified gaps (inputs + process ≠ expected results)

Feeding back these results, especially when coupled with customer feedback, provokes stimulating, engaged discussion about the real measures of organizational success. There is often a sense of relief as disconnects that have been frustrating delivery teams and executives alike are revealed, along with miscommunication and unintended effects that aren’t given voice until accumulated privately. Symptoms are then explored to reveal the underlying issues affecting the performance the team wants to achieve. The feedback is the foundation for dialog that transforms individual visions into a shared future.

The Journey Is The Destination

A performance management system helps you transform your data into wisdom that informs your actions. Converting your data into performance measures creates the information you need to ask questions and gain knowledge. Considering and testing the implications of your knowledge, you gain wisdom informing your actions.

Notice that developing and reviewing the performance measures represents less than 50% of the transformation process. The conversation, the questions, the exploration: together, they’re more than half.

What Makes The Biggest Difference

Don’t get me wrong. Selecting the right measures is important. The measures you select focus your dialog; they define the activities you’ll be focused on. You don’t want to leave gaping holes or overwhelm the prep team or yourself with more measures than you can digest. You do want to focus on what makes the biggest difference.

But if you’re a little off, don’t sweat the small stuff. Gaining wisdom requires learning. You’ll figure it out, continue to choose better measures, and move on to gain more wisdom. 80% wiser is certainly better than no wiser at all. Besides, if one thing is certain, it’s that what you need to measure, and what you need to discuss, will be changing too.