The Five Traps of Performance Measurement
by Andrew Likierman
In an episode of Frasier, the television sitcom that follows the fortunes of a Seattle-based psychoanalyst, the eponymous hero’s brother gloomily summarizes a task ahead: “Difficult and boring—my favorite combination.” If this is your reaction to the challenge of improving the measurement of your organization’s performance, you are not alone. In my experience, most senior executives find it an onerous if not threatening task. Thus they leave it to people who may not be natural judges of performance but are fluent in the language of spreadsheets. The inevitable result is a mass of numbers and comparisons that provide little insight into a company’s performance and may even lead to decisions that hurt it. That’s a big problem in the current recession, because the margin for error is virtually nonexistent. So how should executives take ownership of performance assessment? They need to find measures, qualitative as well as quantitative, that look past this year’s budget and previous results to determine how the company will fare against its competitors in the future. They need to move beyond a few simple, easy-to-game metrics and embrace an array of more sophisticated ones. And they need to keep people on their toes and make sure that today’s measures are not about yesterday’s business model. In the following pages I present what I’ve found to be the five most common traps in measuring performance and illustrate how some organizations have managed to avoid them. My prescriptions aren’t exhaustive, but they’ll provide a good start. In any event, they can help you steal a march on rivals who are caught in the same old traps. Trap 1: Measuring Against Yourself
The papers for the next regular performance assessment are on your desk, their thicket of numbers awaiting you. What are those numbers? Most likely, comparisons of current results with a plan or a budget. If that’s the case, you’re at grave risk of falling into the first trap of performance measurement: looking only at your own company. You may be doing better than the plan, but are you beating the competition? And what if the estimates you’re seeing were manipulated? To measure how well you’re doing, you need information about the benchmarks that matter most—the ones outside the organization. They will help you define competitive priorities and connect executive compensation to relative rather than absolute performance—meaning you’ll reward senior executives for doing better than everyone else. The trouble is that comparisons with your competitors can’t easily be made in real time—which is precisely why so many companies fall back on measurements against the previous year’s plans and budgets. You have to be creative about how you find the relevant data or some proxy for them. One way is to ask your customers. Enterprise, the car-rental company, uses the Enterprise Service Quality Index, which measures customers’ repeat purchase intentions. Each branch of the company telephones a random sample of customers and asks whether they will use Enterprise again. When the index goes up, the company is gaining market share; when it falls, customers are taking their business elsewhere. The branches post results within two weeks, put them next to profitability numbers on monthly financial statements, and factor them into criteria for promotion (thus aligning sales goals and incentives). Of course you have to make sure you don’t annoy your customers as you gather data. Think about how restaurant managers seek feedback about the quality of their service: Most often they interrupt diners’ conversations to ask if everything is OK; sometimes they deliver a questionnaire with the bill. Either approach can be irritating. Danny Meyer, the founder of New York’s Union Square Hospitality Group, gets the information unobtrusively, through simple observation. If people dining together in one of his restaurants are looking at one...
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