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26 ferentiate it from the competition. In the public sector, these The first questions some managers ask when embarking on a sets of measures may be similar to benchmarking measures performance measure initiative are "What should we measure?" or "How should we measure performance in a given area?" In with other comparable organizations. The fourth and final fact, these are the last questions management should focus on. evolution of private-sector performance measures relates Strategic performance measurement systems, like the balanced to "Resource Allocation." Those measures evaluate different score card, are first and foremost about strategy. sets of potential investments to determine which provide the Strategic performance measurement begins with a sound optimum return. philosophy pertaining to and a sound judgment surrounding To restate, Drucker described four types of private-sector how strategic decisions will be made and how performance mea- surement will be used to make decisions and execute strategy. performance measures, which evolved in approximate Management must be vigilant in aligning performance measures order of: with the strategy of the organization. . . .4 Foundational or basic financial measures; Wade and Recardo5 described the common reaction of sea- Productivity or internal performance measures; soned corporate managers who quickly grew disenchanted Competency or innovation measures comparing to exter- with performance measurement systems in the 1990s: nal performance; Resource allocation or investment-tradeoff allocation Traditional corporate-level performance measures--financial measures. and gross productivity results--have failed most corporations. Managers have become disillusioned with these "trailing" per- formance measures, because they have not helped them run the Drucker and others have noted that this evolution is the business. Savvy companies have learned that performance mea- result of trial and error over decades of well-intentioned sures, used diligently, significantly affect organizational align- efforts by decision makers to understand which measures ment. CEOs want performance measures that offer predictive provide critical insight into their companies. In reviewing power and provide a better understanding of the real costs asso decades of private-sector performance measure develop- ciated with each process. ment, Drucker, Porter (2002), and Frigo (2002) stressed the need for performance measures to be properly aligned Authors describe at least four crucial strategy-development with the strategic direction or desired strategic outcomes steps that need to precede the identification of measures so of the organization. All three noted that organizations that the measures do more than only look backward. First, have developed performance measures only to be frus- identify proper goals that serve the customer. Second, identify trated that they did not provide true insight, they created the different aspects of the organization or system and have unintended disincentives, or they failed to measure cus- goals and strategy for each. Third, understand how the orga- tomer satisfaction. nization serves its industry. Fourth, understand that many Drucker's findings that executives quickly grow dissatisfied discrete activities must work in harmony to create an organi- with backward-looking, or lagging, indicators influenced the zation's success.6 By having predictive measures that provide development of the Freight System Report Card. The report's insight as to whether the organization's current activities are inclusion of predictive indicators is a direct result of the leading it to future success has improved the usefulness of Drucker finding. many organization's performance measurement systems. These writers conclude that more than five decades of Performance Measurement in the private sector led prac From Measuring Process to titioners to reach three overriding conclusions. First, truly Measuring Strategic Outcomes sound and effective measures must relate directly to cus- That strategy and performance measurement are insepa- tomer satisfaction. Measuring success of processes and sub- rable2, 3 is another lesson from the private-sector experience processes that do not directly relate to satisfied customers with performance measurement. Because performance does not guarantee success. Only satisfied customers guar- measures drive organizational behavior, a clear linkage antee an organization's success. Second, measures need to be between the organization's goals and the activities the balanced. That is they need to allow a holistic understanding organization encourages is critical. Several private-sector of financials, processes, comparisons to peers, and customer authors emphasized the need to first conduct a strategic satisfaction. Third, measures must capture an organization's planning exercise to clarify organizational goals before ability to learn, innovate, and improve the quality of its identifying measures to gauge organizational effectiveness. products. "Quality measures represent the most positive step Effectiveness should be considered in terms of achievement taken to date in broadening the basis of business performance of institutional goals. measurement," was one typical conclusion.7