Measuring a company’s performance and its business strategy go hand in hand. Or it ought to. Nonetheless, as I’ve observed firsthand over an extended period, organizations in all industries struggle to align their strategy design and performance measurement.
This is hugely essential because it’s almost impossible to track the success of a business strategy if there are no reliable key performance indicators (KPIs). Inversely, inadequate performance measurement can result in misdirected strategic objectives. Both can result in repeated failures to make sound decisions.
Explain how to avoid three common pitfalls that managers encounter when measuring the performance of their strategy.
1. Incompatible frameworks
Roger is the chief executive officer of a state’s primary transportation department. When he was appointed, he implemented his preferred framework for strategizing based on “areas.” These were referred to as KRAs, or key result areas. Therefore, he organized the strategic plan for the main roads into sections such as energy reduction, governance, and material procurement.
It did not align with the existing performance measurement framework for major roadways, which was structured around programs such as road safety, road efficiency, and road maintenance.
A great deal of executive time and effort was expended attempting to make the disconnect functional. One executive remarked wryly, “It was like attempting to put Ford parts in a Mercedes-Benz. They simply did not suit.”
Stakeholder-based organization is the answer
Marjorie is the leader of a non-profit organization that cares for autistic individuals. When she became CEO, she encountered what she characterizes as “a disconnect between our strategic planning framework and how our KPIs were assembled.”
The organization’s strategic plan was organized around critical issues such as budget overruns, grant acquisition, and staffing. The KPIs were a mishmash of metrics culled from a variety of sources, such as human resources, accounting and finance, and operations, such as operational expenses and the number of staff training courses conducted.
Her solution was to refocus the organization’s strategy and key performance indicators (KPIs) on its key stakeholders. This included individuals with autism and their families, government officials, donors and supporters, and staff.
In the case of the stakeholder staff, for instance, Marjorie’s organization desired to increase innovation in regards to the services provided to people with autism and their families. This necessitated enhancing the organization’s employment conditions to attract top-tier clinicians. An increase in the number of job applications from appropriately qualified psychologists was one indication of success. “Finally,” she says, “our organization’s strategic plan and scorecard are able to communicate with one another.”
2. Activity monitoring
In my seminars with groups of managers, I illustrate this issue as follows. I propose that my performance for today will be measured by the number of transparencies I use. And if I’m extremely exhausted at the end of the day, I’ll know I’ve performed well. Would you be satisfied with those as performance indicators?”
My audience is always negative. “Why?” I ask. “Because they are activity measures, not outcome measures,” they say. “Who determines these outcomes?” I wonder. “We certainly do,” is the universal response. At that precise instant, my audience “gets it.” I can tell from their expressions.
Focusing on results is the solution
Angelo is in charge of the national office of a well-known construction tool brand. Regarding the evaluation of his company’s performance, he explained, “We would get together and concentrate on what we do. Our KPIs were invariably related to procedures.” They broke this fixation by focusing on the outcomes his organization produced for its main stakeholders – customers, suppliers, employees, and the parent company.
This performance measurement is a two-way street, with outcomes for both the organization and its stakeholders. Angelo and his team refrained from speculating about the outcomes for their stakeholders. Instead, they conducted interviews with key stakeholders to determine if the desired outcomes had been identified. In addition, the interviews disclosed new KPIs that Angelo and his team had never considered.
Sebastian serves as the Chief Executive Officer of a suburban council. He desired to create a scorecard for the performance of the council that was tied to the strategic plan that the council had developed. Therefore, in order to establish a composite list, he started by collecting metrics from departments that reported to him, such as community development, environment and planning, and corporate services. He felt unfulfilled after looking over this lengthy list. The goals of the council did not appear to be addressed by a good number of the initiatives at all.
The solution is to cascade your measurements instead of consolidating them
Helen is the newly appointed head of a large, prestigious, and extremely costly private girls’ school. She collected data from academic departments such as science, English, and mathematics in order to create a scorecard for the school. As with Sebastian, however, the composite set of KPIs failed as performance indicators for the school.
She remedied this by beginning again. This time, instead of combining measures from bottom to top, she devised key performance indicators from top to bottom. According to her, the procedure “allowed me to kill two birds with one stone.” It revealed gaps in the school’s KPIs and provided a match between the school’s strategic plan regarding students, parents, instructors and staff, government, and the community… In addition, [it] provided an efficient scorecard based on the outcomes for the same groups.”
Helen had acquired an essential performance measurement concept: level of analysis. Measures applicable at one level, such as profit at the corporate level, are not applicable at another level, such as an internal department such as Human Resources. Similarly, measures that are suitable for a department are not suitable for the enterprise.
If you do not regularly use a framework across both your strategic plan and your key performance indicators (KPIs), it is simple for gaps to develop between the two, and if this has occurred to you, you are surely not the only one in this situation. However, while you work to repair the gaps, the most important thing to keep in mind is that assessing performance is, at its core, about gauging the connections you have with the key stakeholders in your business. Your key performance indicators (KPIs) ought to be fashioned, as a result, by what those stakeholders anticipate from you rather than by what you believe you ought to be doing.