Key Terms

Balanced Scorecard. A performance measurement system that assumes that financial performance is just one part of the larger picture of organizational performance. The system seeks to balance a company’s financial perspective with three additional perspectives: customer, internal processes, and workforce learning and development. See also performance measurement system.

Baldrige National Quality Program. A quality-improvement performance measurement system that defines criteria for high-quality business performance in areas such as leadership, strategic planning, customer focus, and knowledge management. The Malcolm Baldrige Award, along with its European equivalent, is a prestigious annual award that recognizes organizations for achievement in specific categories: manufacturing, small business, education, and health care. See also performance measurement system.

benchmarking. Using information from trade associations, industry publications, or the Internet, data from other groups in your company, and information from other sources to compare a group’s, unit’s, or company’s performance data and metrics with those of other business entities. Many managers who use benchmarking do so in order to identify best practices that they want their group to emulate. Benchmarking is also helpful for creating performance metrics and setting targets. See also performance metric and target.

cockpit. See dashboard.

critical success factor (CSF). A key activity that a group, unit, or company must carry out to achieve its objectives. See also objectives.

dashboard. A performance measurement system that combines a company’s metrics, targets, and performance data into one online or printed document, such as a spreadsheet, that is prepared on a regular basis. Also called cockpit. See also performance measurement system.

data validity. The quality of performance data. Valid data can be checked for its accuracy and reliability. For example, revenue data can be confirmed by tabulating invoices generated.

economic value added (EVA). An output KPI that expresses the value of a business activity that is left over after you subtract from it the cost of executing that activity and the cost of the physical and financial capital deployed to generate the profits. EVA can be expressed as net operating profit after taxes minus net operating assets multiplied by the weighted cost of capital. See also output KPI.

external data. Performance results generated outside a company, such as a third-party organization’s rankings of companies’ performance against competitors’. See also internal data.

financial performance. Business results related to a company’s financial health, such as revenues, expenses, and profits. See also nonfinancial performance.

input KPI. A key performance indicator that measures the assets and resources a company has invested in or used to generate business results. Examples include dollars spent on research and development, funding for employee training, and quality of raw materials. See also key performance indicator.

internal data. Performance data generated within a company, such as sales, customer satisfaction, and number of new hires. See also external data.

key performance indicator (KPI). A measure reflecting how an organization is doing in a specific aspect of its performance. A KPI is expressed as a critical success factor—the key determinant of success in achieving any given strategic objective. See also critical success factor, input KPI, output KPI, and process KPI.

lagging indicator. A metric that looks “backward” in time at what a company has already achieved in the past, such as sales. See also leading indicator.

leading indicator. A metric that looks “forward” in time, suggesting the results a company may expect to see in the future. For example, customer-satisfaction ratings suggest how customers may buy from a company in the future. See also lagging indicator.

market share. The percentage of sales in a given industry segment or subsegment captured by your company. See also output KPI.

metric. See performance metric.

minimum target. The lowest point in a three-point target range that a group, unit, or company sets for a performance metric. See also performance metric and target.

moderate target. The midpoint in a three-point target range that a group, unit, or company sets for a performance metric. See also performance metric and target.

nonfinancial performance. Business results related to aspects of a company’s health other than financial performance, such as employee knowledge, information systems, and customer relationships. See also financial performance.

objectives. Goals that a group, unit, or company wants to accomplish in order to improve performance. Objectives may be related to strategy, to customer service, to business processes, and so forth.

objective data. Performance data that is easy to quantify, such as revenues, expenses, and workforce head count.

output KPI. A key performance indicator that measures the financial and nonfinancial results of business activities. Examples include revenues, number of new customers acquired, and percentage increase in full-time employees. See also key performance indicator.

performance measurement system. A set of strategic objectives and performance metrics (including KPIs) applied throughout an entire enterprise.

performance metric. Indicators of a group’s, unit’s, or company’s ability to carry out the critical activities needed to achieve its objectives. For example, the performance metric for the critical activity “Train employees on proper use of equipment” might be “Number of employees who complete training with passing grade.”

Plan-Do-Check-Act. A quality-improvement performance measurement system comprising four steps: (1) Plan—Identify a performance problem and the processes affecting it; (2) Do—Explore potential solutions and implement one; (3) Check—Assess how well your solution worked; (4) Act—If your solution worked well, institutionalize it and look for another improvement opportunity. See also performance measurement system.

process KPI. A key performance indicator that measures the efficiency or productivity of a business process—for example, product-repair cycle time, days to deliver an order, or time to fill vacant positions. See also key performance indicator.

return on investment (ROI). An output KPI that represents the benefits generated from the use of assets in a company, unit, or group, or on a project. ROI is expressed as net income (revenues minus expenses and liabilities, such as taxes) divided by total assets. See also output KPI.

Six Sigma. A quality-improvement performance measurement system that stresses the continual improvement of business processes through reduction of errors. See also performance measurement system.

stretch target. The most ambitious point in a three-point target range set by a group, unit, or company for a performance metric. See also performance metric and target.

subjective data. Performance data that is difficult to quantify, such as customer satisfaction, employee morale, and product innovativeness. Leading indicators often require subjective data. See also leading indicator and objective data.

target. The performance that a group, unit, or company wants to achieve on a performance metric. Targets are often expressed as three-point ranges. For example, for the metric “Percentage of employees who complete training with passing grade,” the target may be “80 percent minimum, 90 percent moderate, and 100 percent stretch.” See also minimum target, moderate target, performance metric, and stretch target.

trend. Changes in performance data that form a pattern over time. For example, average error rate declines over six months. Managers examine trends to decide how to respond to gaps between target performance and actual performance.