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25 CHAPTER 2 Performance Measurement Lessons from the Private Sector The following chapter examines the private sector's use of The review of the private sector's literature reveals a con- performance measures, and how that use has evolved over the tinuous path of development and evolution as measures preceding five decades. The evolution of the private sector's mature and evolve to address shortcomings perceived in use of measures was examined to anticipate how a national earlier generations of measures. The literature reveals that reporting system may need to be structured to meet evolv- the individual measures used in the private sector may have ing measurement needs. For instance, a key lesson from the little direct relevance for national freight performance mea- private sector is that lagging measures alone soon prove to sures. However, the process by which private-sector decision be inadequate for decision making. Therefore, the proposed makers identify, collect, and assess measures holds significant framework includes a strong component of leading indica- relevance for the public-sector decision makers who want to tors. That and other private-sector findings are described. create a set of national freight performance measures. The Evolution of Private- From Lagging to Leading Indicators Sector Measurement Peter Drucker1 wrote that 70 years ago General Motors The development of performance measures for the national pioneered modern cost accounting systems and used its freight network is belated in comparison to the extensive performance output for important resource-allocation and development of performance measures at state departments decision-support performance measures. The "Manage- of transportations. The transportation agencies, in turn, ment by Objective" that Drucker popularized arose from his were belated in comparison to the private sector. Business 1954 book, The Practice of Management. In later years after literature extensively discussed performance measures in the decades of observation, Drucker wrote that it is possible to 1950s. By 1993, the Government Performance and Results Act define predictable evolutionary paths in organizations that (the Results Act), required federal departments and programs have embraced performance measures. Initially, organiza- to adopt goals and performance measures to track progress tions embraced financial measures, such as Internal Rate of toward those goals. By the late 1990s, transportation agencies Return, Cash Flow, Liquidity, Return on Assets, and other were regularly developing performance metrics. similar measures. He labeled these "foundational" measures. This late development of measures for the freight sector He noted that they are inherently "backward looking" and has one significant advantage. It allows the nascent effort to lacking in granularity. They may tell if the firm is performing benefit from the evolution, mistakes, missteps, and lessons poorly or well but not why. The lack of specific performance of several generations of performance measure development insight led to the next evolutionary stage of measurement, in other sectors. The research effort examined private-sector which was "Productivity" measurement. These measures were performance management for two reasons. First, the research intended to "drill down" into productivity within an organi- statement called for performance measures that would be zation and date from approximately the WWII era. The third of interest to the private sector. Second, the lessons learned set of measures evolved in the 1990s and are what Drucker during the long evolution of private-sector performance described as "Competency" or "Innovation" measures. These measure ment provides insights into how to approach the are most common in the private sector and relate to whether development of measures for this project. a company possesses "best in class" or unique skills that dif-