Step 1: Deciding What to Measure
In the first step of the performance measurement process, you decide which aspects of your group’s performance you want to measure. You define your objectives, critical success factors (CSFs), and performance metrics.
If your company uses a formal performance measurement system, senior managers in the organization or the unit supervising the PA system may already have defined one or more of these elements for your group. The performance data you gather must then be in a form that’s compatible with the companywide system.
If your organization does not have a formal PA system and you want to track performance on important business activities, you’ll need to generate your own objectives, CSFs, and metrics.
Defining your objectives
Your objectives represent what you want to accomplish in order to improve various aspects of your group’s performance. To brainstorm ideas for objectives, meet with colleagues and direct reports in your group and ask the following questions:
- What does our group hope to accomplish by measuring performance? For instance, does your group hope to identify solutions to recurring problems? Improve overall process efficiency? Determine rewards for particular levels of employee performance?
- What must our group do to help carry out our company’s strategy? For example, if your company’s strategy centers on operational excellence (improving efficiency), you might set objectives for your group such as “Increase sales revenue per employee,” “Lower indirect costs,” or “Reduce workplace accidents.”
- How might we better serve our customers? Whether your group serves internal or external customers, think about how you can provide them with greater value. For instance, if you lead an HR group, your objectives might include “Develop future leaders in the organization,” “Help managers retain talented employees,” and “Foster a collaborative culture.” If you lead a product development group, your objectives might include “Increase innovation,” “Update products more frequently,” and “Make products easier to use.”
- How might we improve our work processes? Sometimes process problems can be translated into ideas for objectives. For example, suppose you lead a group in the accounting department and your direct reports tend to have difficulty meeting deadlines. In this case, you might define objectives such as “Complete accounts receivable reports on time,” “Pay vendors according to their terms,” and “Process employee expense reimbursements on schedule.”
- What new skills or knowledge do we need to excel? Objectives for improving your employees’ skills and knowledge might include “Take advantage of more training opportunities,” “Improve knowledge sharing,” and so forth.
After brainstorming ideas for objectives, review your list and identify the most important ones: those objectives that most directly affect company and unit strategy or that will help you solve serious performance problems. Try to whittle your list down to five to seven objectives.
Defining critical success factors
For each objective in your final list, decide which two or three actions would best enable your group to accomplish that objective. These become your critical success factors. Table 2 gives some examples.
Measure what you want, not want what you can measure.
—Robert S. Kaplan and David P. Norton
Examples of critical success factors
| Objective | Critical success factors | |
|---|---|---|
| “Reduce workplace accidents” | • | “Train employees on proper use of equipment” |
| • | “Provide appropriate safety equipment and apparel” | |
| • | “Regularly inspect workshop for compliance with safety rules” | |
| “Improve knowledge sharing” | • | “Improve new-hire mentoring” |
| • | “Establish rewards for sharing or accepting new ideas” | |
Defining performance metrics
Your performance metrics indicate how you’ll determine whether you’ve carried out the critical success factors you’ve identified and indicate the kind of data you’ll need to gather. You can translate each CSF into one or more metrics, as shown in table 3.
Examples of performance metrics
| Critical success factor | Performance metric | |
|---|---|---|
| “Train employees on proper use of equipment” | • | “Number of employees who complete training course with passing grade by end of quarter” |
| “Establish rewards for sharing or accepting new ideas” | • | “Number of new ideas adopted across business units” |
| • | “Number of best practices posted to company’s knowledge management system” | |
Tips for defining performance metrics
- Start with your objectives and critical success factors. For each objective you define, list two or three actions that would best enable your group to achieve that objective. These actions become your critical success factors. Translate each CSF into one or more performance metrics. For example, the CSF “Improve retention” could be translated into the performance metric “Percentage of new hires who stay beyond their first year.”
- Look beyond financial measures. Ensure that your set of metrics reflects the nonfinancial as well as the financial aspects of your group’s performance. For example, do you have metrics for nonfinancial matters such as process efficiencies, employee knowledge, and customer experiences?
- Identify cause-and-effect linkages. Examine your set of metrics for cause-and-effect connections. For example, how will good performance on the metric “Number of order-processing errors” affect performance on the metric “Customer satisfaction” or “Employee morale”? What’s the strength of these relationships? For instance, will you need just a small improvement in error reduction to generate a large improvement in customer satisfaction? The more cause-and-effect linkages between your metrics—and the deeper your understanding of the relative strength of these linkages—the more comprehensive a picture you’ll have of your group’s performance.
- Examine your lagging/leading mix. Review your set of metrics. Ask whether they show a mix of lagging (backward-looking) and leading (forward-looking) indicators. Your set of metrics should contain both lagging and leading indicators.
- Strive for a balance of subjective and objective metrics. Determine whether your metrics reflect both subjective (such as customer satisfaction) and objective (for example, revenues) indicators. If not, revise your metrics so that they show a mix of these two types of indicators.
- Consider availability, validity, and reliability of data. For each metric, ask yourself whether data exists to track performance on that metric, and whether the data will be reliable. A performance metric is useless if you can’t gather the required data or depend on the data to be up-to-date and accurate.
- Draw on internal and external data. In addition to analyzing information within your organization (such as sales figures), examine data outside your company (such as third-party rankings of companies’ performance against competitors’).
- Use clear, accessible language. Phrase your performance metrics in specific, concrete, and easy-to-understand language—such as “Number of late deliveries per month” instead of “Service quality.”
Evaluating data sources
In defining metrics, the kind of data you’ll need and the sources of data you’ll use become important considerations. Ask yourself these questions to evaluate your data sources:
- Where will you get the needed data? In some cases, your organization may already collect data that you can use—such as employee participation in certain training programs. In other cases, you’ll need to gather the data yourself, which may require you to set up new processes and systems. Data may also come from external sources. For example, your company may have hired a vendor to track the number of employees enrolled in benefits programs.
- How will you gather subjective data? Performance metrics can require objective or subjective data. For example, to track the metric “Percentage increase in sales revenue,” you’d gather objective data (changes in sales revenue over a specific period of time). But how would you collect information to track the metric “Percentage increase in customer satisfaction”? In this case, you’d need to gather subjective data, such as comments or ratings from customer surveys. Even subjective data must be quantified, for example, expressing customer satisfaction ratings on a scale of 1 to 5 to enable comparison and highlight opportunities for improvement.
- Should you use composite data? If you want a big-picture view of your group’s performance, consider using metrics that require composite data—data from numerous sources aggregated into one number. Well-known examples include the S&P 500 stock market index and the J.D. Power index of customer satisfaction with new cars and ratings of new-car quality. An example of composite data a company might use to measure performance would be a “brand index,” which might combine, say, advertising budget, percentage of target audience reached, and brand impression (what people think of the company’s brand, measured in a survey). Because the component measures are dissimilar, they would need to be mathematically adjusted to weight them properly.
- Will your data be reliable? While defining metrics, do everything you can to ensure the reliability of the data you’ll need to gather. For example, will the data be up to date? Sufficiently detailed? Accurate? Auditable? Will the data be available frequently enough for you to reliably track performance on your metrics?