Measuring the performance of a business goes hand in glove with its business strategy. Or it should. But surprisingly, as I’ve witnessed firsthand over an extended period, organizations in all sectors struggle to match their strategy design with their performance measurement.
This is hugely important because it’s almost impossible to track the success of a business strategy if there are no reliable key performance indicators (KPIs). Conversely, poor performance measurement can encourage misdirected strategic targets. Both can lead to repeat performances of the same failed decisions.
Here I explore three common traps that managers fall into when measuring their strategy’s performance and explain how to avoid them.
1. Non-matching frameworks
Roger is the CEO of a state government’s main roads department. When he was appointed, he installed his favored strategy framework based on “areas.” These came with their own acronym – KRAs, key result areas. So, he organized the main roads strategic plan under items such as energy reduction, governance, and material sourcing.
The trouble was that it didn’t match main roads’ existing performance measurement framework, which was organized around programs such as road safety, road efficiency, and road maintenance.
The disconnect was hugely dysfunctional with much executive time and energy expended trying to make things work. As one executive wryly observed, “it was like trying to put parts of a Ford into a Mercedes Benz. They just wouldn’t fit.”
How to fix it: Organize around key stakeholders.
Marjorie heads up a not-for-profit entity which looks after people with autism. When she joined the organization as CEO, she was faced with what she describes as “a disconnect between our strategic planning framework and how our KPIs were assembled.”
The organization’s strategic plan was structured around “key issues” like budget overruns, obtaining grants, and hiring staff. The KPIs were a hotchpotch of metrics drawn from a variety of sources including HR, accounting and finance, and operations including operating expenses and the number of staff training courses run.
Her solution was to refocus both strategy and the KPIs around the organization’s key stakeholders. These were people with autism and their families, government, donors and supporters, and staff.
For example, in the case of the stakeholder staff, Marjorie’s organization wanted to ratchet up innovation around the services they provided for people with autism and their families. This required attracting first-rate clinicians by boosting the organization’s position on employment conditions. One indicator of success was an increase in the number of job applications from suitably qualified psychologists. “At last,” she says, “our organization’s strategic plan and scorecard can speak to each other.”
2. Measuring activity
Here’s how I illustrate this problem to groups of managers at my workshops. I say to them: “I propose to measure my performance today by measuring the number of slides I use. And if I’m really tired at the end of the day I’ll know I’ve done a good job. Would you be happy with those as measures of my performance?”
My audience always says no. “Why?” I ask. “Because they’re measures of activity, not of results,” they say. “And who decides on those results ?” I inquire. “We do,” comes the universal response. In that moment my audience “gets it.” I can see it in their faces.
How to fix it: Focus on outcomes.
Angelo heads up the national office of a well-known brand of construction tools. When it came to measuring the performance of his business, he explained: “We would get together and focus on what we do. The KPIs we produced were invariably about processes.” They broke this fixation by focusing on the outcomes his organization produced for its key stakeholders – customers, suppliers, employees, and the parent company.
Measuring this performance involves a two-way street with outcomes going both ways – for the business and for stakeholders. Angelo and his team avoided making assumptions about what the outcomes would be for their stakeholders. Instead, they interviewed key stakeholders to learn if the outcomes important to them had been identified. The interviews also revealed new KPIs that Angelo and his team would never have thought of.
3. Lack of focus
Sebastian is CEO of a suburban council. He wanted to develop a scorecard of the council’s performance linked to the council’s strategic plan. So, he collected measures from departments below him, such as community development, environment and planning, and corporate services, and he created a composite list. This list was long and left him dissatisfied. Many of the measures didn’t seem at all related to the council’s objectives.
How to fix it: Cascade rather than amalgamate your metrics.
Helen is a newly installed principal of a large, prestigious, and very expensive private girls’ school. To develop a scorecard for the school, she gathered measures from academic departments such as science, English and mathematics. But, as with Sebastian, the composite set of KPIs didn’t work as measures of the school’s performance.
She fixed this by starting again. This time, rather than amalgamating measures from bottom to top, she developed KPIs in the reverse order — from top to bottom. The process she says, “allowed me to kill two birds with the one stone. It uncovered gaps in the KPI set for the school and provided a fit between the school’s strategic plan around students, parents, teachers and staff, government, [and] the community… [It also] provided an effective scorecard based on the results for these same groups.”
Helen had learned a fundamental concept in performance measurement – level of analysis. Measures that apply at one level, e.g., profit at the corporate level, don’t apply at another level, e.g., an internal department like HR. Similarly, measures that are apt at a department level are not appropriate at the corporate level.
. . .
It’s easy for gaps to develop between your strategic plan and your KPIs if you don’t apply a framework consistently across both – and you’re certainly not alone if this has happened to you. As you close the gaps, however, remember above all that measuring performance is fundamentally about measuring your relationships with your organization’s key stakeholders. Your KPIs, therefore, need to be shaped by what those stakeholders expect from you and not by what you think you should be doing.
“Harvard Business Review is a general management magazine published by Harvard Business Publishing, a wholly-owned subsidiary of Harvard University. HBR is published six times a year and is headquartered in Brighton, Massachusetts.”
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