Are you wasting time and money tracking the wrong performance in the wrong ways?

Posted by on May 29, 2011

Measurement matters. It can help managers to allocate resources, identify emerging problems, make decisions, and focus effort on the right problems and opportunities.

But accurate and reliable measures of performance are few and far between. It seems we always have metrics – just not the right ones. Albert Einstein summed it up neatly when he said: “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted”.

Measurement usually focuses on traditional “countable” value – revenue, profit, ROI, etc. These are both vitally important and relatively easy to measure, which explains why they’re so common.

Unfortunately, there aren’t many established metrics that focus on important inputs or processes that drive the creation of profit and ROI. This includes factors such as customer management, process management, quality, core capabilities, innovation, and human resource capabilities.

One of the more glaring measurement omissions is whether the brand promise or value proposition at the heart of your strategy is being effectively delivered, noticed, and appreciated by customers. This is a serious deficiency considering its importance to growth, profit and ROI.

The reasons it is often omitted shouldn’t surprise anyone. It’s expensive to measure factors like customer satisfaction in a consumer or mass market business. And it’s even more expensive if you insist on statistically valid and reliable metrics. But even when measuring internal factors, it’s devilishly difficult to develop reliable, trustworthy metrics for “soft” factors of organizational performance.

In the absence of reliable metrics, managers can be ingenious in finding indicators which, while they aren’t true measurements, provide information about the direction and magnitude of changes in important variables. We strongly support the drive to find and use such indicators, provided users understand the inherent defects of such indicators and their potential to mislead.

It is well known that performance indicators (as opposed to true performance measures) sometimes send false signals. They may indicate a change when there isn’t one. And they may mislead about the direction of change by pointing up when the real change is down, or vice-versa.

And when it comes to tracking rare occurrences like quality defects or accidents – both very important in performance measurement – random fluctuation may signal false positives or false negatives that are due only to chance, and not to an underlying change.

“Black Box” Management
Without metrics to manage value creation, organizations function somewhat like the proverbial “black box” of electronics. We can measure the outcomes and the inputs. But we can’t track what happens inside the black box to produce the outcomes. This makes it very difficult to manage it.

True measurement of what happens “inside the box” can be costly – so costly that it outweighs the benefits it produces. That’s a good reason to work out “cheap and cheerful” ways to track what’s important without the costs and rigor of true measurement, and to perfect them over time.

One company we read about found a simple way to track employee satisfaction. They placed three bags containing green, yellow and red marbles beside an opaque vase at the office exit door. They asked employees to deposit one marble in the vase every day to indicate how their day had gone (green=good, yellow=typical, red=bad). The marbles were collected, counted and recorded daily. The totals provided a rough but immediate indicator of how employee satisfaction was trending. This is much less expensive than employee satisfaction surveys. It won’t provide an indication of what to do about a problem, but it’s fairly effective at indicating whether or not there is a trend, and it provides managers with prompt feedback rather than waiting for up to a year for the results of the next expensive employee satisfaction survey.

You’ll find seven other interesting ideas for tracking hard-to-measure value creators here:

There’s no formula for what each individual organization should measure or track “inside the black box”. What you should measure depends on your business model and your strategy.

But you must take the time to determine what really creates value within your organization, and start finding ways to track it. If tracking key value generators isn’t a part of your strategy, get tracking! Doing it well could really improve your growth, profit and ROI.

Copyright 2011 Knowlan Consulting Group Inc.