Performance Measurements

Organizational control deals with direction. It is goal oriented in that it pertains to an end, not the means to get there. It deals with expectations and is concerned with what ought to be. To state that an organization is in control is to indicate that it is not only is an appropriate position at the present time (the static component), but also that it is moving in the direction (the vector component) of its organizational vision at a given velocity as represented by the measurable goals it has established. It is important to under­stand that control can only be defined in terms of both the static and the vector measurement components.

Controls, which in this context is not the mere plural of control, are the devices used to determine whether an organization is in control and, as such, must have both static and vector components to be effective. Because the only true measures of reality that exist are in the past and present, controls deal with facts and events of the past. They are concerned with history, what was and is. Although successful organizations forecast and plan for the future, it is incorrect to consider an organization in control just because it has a forecast or a plan.

Successful execution is the only measure available and any analysis of deviation must consider both the questions of failure to perform and of incorrectness of the plan. Too often managers assume the plan was infallible and performance was deficient, when, in fact, the plan is at best a scientific guess and at worst a wish list.

If a system of controls is to measure the degree of organizational control, it is necessary that this system contain three elements:

1. Measures of the static component or where the organization is with respect to its plan.

This is the efficiency measure.

2. Measures of the vector component, or whether the organi

zation is moving toward or away from its measurable goals and at what velocity.

This is the effectiveness measure.

3. Because most measures will be indirect, pertaining to the means being used to attain the goals and not the goals themselves, the system must provide as much assurance as possible that the controls being used and the facts being measured do indeed relate to the goals being pursued by the organization.

Traditional controls are focused on the first of these elements because it is the most quantifiable. Measurement against budgets, standards, plans and schedules fall into this category. While these measurements are necessary they are not sufficient.

The vector component is contained in most traditional measure­ment systems, but only to the extent that the system takes sequential measures of static components. The focus is still on efficiency factors that are more easily measurable.

Because of the focus on measurable factors, the relationship of the measurement system to organizational goals was often not the primary consideration of the traditional measurement system. Of course, many measurements were focused on goals and, in many cases, goals were designed to complement the measurement system. Profitability, growth and return on investment were often considered goals of an organization, when they were actually measurable surrogates that represented market, product, quality or customer success.

Drucker, in his classic Management Tasks, Responsibilities, Practices, identified seven characteristics of controls that deter­mine their success in identifying control or lack of it in an organization. He states that controls must be:

• Economical: The cost of the control should not exceed the benefit derived. This represents a considerable potential risk as our ability to collect and analyze information increases. Excessively costly controls are often found in highly bureau­cratic organizations.

• Meaningful: Those to whom the controls apply and those who use them for decision making must understand what the result means to organizational effectiveness. For example, most people on the shop floor think in terms of units and hours and are little benefited by reports using dollars as the unit of measure. In addition, this understanding must extend to both the static and vector components of the measurement.

• Appropriate: This refers to the level of detail reported and in this level of information technology, many reporting systems believe that more is better. On the contrary, more often obscures the significant and helpful measures in an ocean of detail, facts and statistics. In addition, the detail must match the operating situation. For example, a JIT cell requires far less detailed labor reporting than a traditional function opera­tion.

• Congruent: Since most measures are indirect, it is important that the variation of the measure agree with the actual perfor­mance of the system it is measuring. Too many measures indicate success (machine utilization percentage comes to mind) when the actual performance indicated by the measure (too much inventory, not the right inventory) may be deterio­rating.

• Timely: Information has time value. As it ages, its usefulness diminishes rapidly. Too many measurement systems don't get information to decision makers in time for it to have any value other than to satisfy curiosity or for fault finding.

• Simple: Controls must be such that they are understandable by those who use them. The right unit of measure, the right level of detail and a clear understanding on the part of the decision maker of the relationship between the measure and the goal to which it relates is critical to success.

• Operational: Because vector and velocity are critical charac­teristics of controls, it is important that the data on which measurements are based is continually and reliably available. Special studies and analysis, while providing valuable supple­mentary information, cannot be the basis of progress meas­urement toward organizational goals.