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Many organizations are in a perpetual state of change. Changing markets, changing competition, changing orga­nization structures, total quality initiatives and reengineering are often the rule rather than the exception. Often these initiatives fail to yield the desired results or, in the extreme, fail entirely. The reasons for this failure, of course, can be many and multiple. However, one that often stands out is the lack of change in the performance mea­surement system as the needs for measurement change.

The recommended solution is often to establish new mea­sures appropriate to the new techniques employed and appending them to the existing measurement system with­out regard for the contradictory nature of the old and new measures and without any understanding of which mea­sures are more important. At worst, the organization continues to emphasize and use old "hard" measures, ignoring their negative effect on the new organizational initiatives.

What is at work here is a lack of basic understanding of what measurement is, what it is designed to accomplish and what its effect is on the behavior and culture of the organization. Therefore, the objectives of this paper are to 1) define what performance measurement is, 2) identify its characteristics, 3) analyze the requirements of an effective measurement system, 4) determine how it affects behavior and culture in an organization and 5) recommend a direc­tion toward improving performance measurement in the knowledge organization.

The Purpose of Performance Measurement

The traditional role of measurement in a business organi­zation was to answer questions of quantity—how many sales, how much cost, how much expense, how much profit, etc. People were expected to work as hard as management could make them and were replaced if it was felt that this was not so. Early in the 20th century, Frederick W. Taylor, by analyzing physical work, was able to measure performance of individuals against time and method goals called standards. Work methods ceased to the proprietary knowledge of Trade Guilds and became standardized, hence measurable.

The nature of work at the time and the lack of ready availability of measurable data defined the measurement system. The results of work were physical, identifiable and easily counted and could be compared against the time taken to accomplish the task. However, the ability to collect, manipulate, summarize and report measurement data was limited by the information processing tools avail­able at the time. Large masses of data were difficult, time consuming and expensive to collect and report. These factors resulted in a performance measurement system that 1) focused on the measurement of physical work accomplished by individuals or working in functional de­partments having common characteristics that could eas­ily be identified, counted and summarized and 2) because of the paucity of data available, tended to use whatever information was available to measure and manage the business.

Neither of these circumstances applies to most business organizations today. First, "make and move" work with an identifiable physical product involved is performed by less than 22% of the U.S. workforce, down from over 70% at the conclusion of World War II. The bulk of workers today are knowledge workers, hired for what they know, not what they can do and service workers, where work is less standardized and performance criteria more subjective. Second, there is no longer a shortage of data on the state of the organization. Indeed, the problem today is how to harvest useful information from the volumes of data available.

Unfortunately, many if not most organizations are still operating measurement systems as if pre-WW II condi­tions still existed. For example, many companies still support extensive direct labor reporting systems focusing on individuals by job, by task, by work center, by day, etc., when direct labor only constitutes 8-12% of product cost on average in the U.S. The bulk of the product cost goes virtually unanalyzed, thrown into an overhead pool and painted over all products in an arbitrary manner based on direct labor volume. In other words, the largest element of cost is allocated based on the smallest element of cost. In addition, organizations continue to measure individuals while trying to build teams on the shop floor, thus sending conflicting messages to employees.

The result is a measurement system that, at best, provides no useful information and, at worst, provides information that is often wrong, misleading and motivates employees to act in ways that are contrary to the needs of the changing organization. To solve this problem, a basic understanding of the characteristics of performance measurement and their effect on behavior must be gained. The following attempts to provide that understanding.

To be Continued