Performance measurement

DOUGLAS MACBETH: In this video we’ll look at performance measurement.

Measurement and control is fundamental to all management processes. Of course, sometimes we are not in the position to control directly by issuing instructions which must be obeyed for example. And then we must try to influence another to move in our desired directions. But the general principles are the same. Measurement is important to recognise and decide on actions needed. The essence is that we need a lot of data as information. We need decision processes and time to act and a capability to take the desired remedial action. The list of questions in this slide covers these features. Sometimes variations are normal and should not be reacted to, for example somewhat oversteering the car.

But the trick is to monitor the trend to see if the variation cancels itself out or is dangerously amplified over time. We measure for different reasons. Classic control is what our room temperature thermostat does to switch heat on if the temperature’s lower than was set or switch off the heat if the temperature is already above the chosen value. The whole process of identifying– and in contract terms– agreeing what the key performance indicators are and then measuring against them falls into this category of classic control. Stakeholders want to know how we are performing against their expectations.

So we measure in order that we can present the data in a suitable form for their agendas, for example, tax payments to government treasury functions or profit forecasts for investors. This demonstrates that we are still fit to operate. These can be actual licenses. For example, for transportation services, the airline is safe to fly with. Or intangible, for example, after a major contract failure, are we happy to award business to the company that failed to control another contract? Measurements also should be used to check that what we thought were the right ways to achieve some goal are actually delivering, and if not, to reconsider strategies and objectives.

Measurements are also used to encourage or compel renewed efforts at meeting the set objectives. And this can be more or less firmly presented. For example, annual personal appraisals can demonstrate these features. In the business relationship and contract management process, we need all parties to actively measure and challenge each other against the promises and commitments made in the contract and to look for continuous improvement. Ideally, we want everything to go as planned without the need for extra measures and discussions or disputes for in that direction, my increased costs and decreased output performance and overall unsatisfactory contract management. We should never disappoint a partner and never be afraid to publicly celebrate successes. There’s always a social side to business relationships.

And we need to pay attention to these dimensions, alongside quantified financial performance indicators.