The Five Traps of Performance Measurement

Do you remember the sitcom, Frasier? If you do, you’ll know how downbeat and, frankly, grumpy he could be. Faced with “yet another” task to please his dad, he shouted, “Difficult and boring – my favourite combination!

Now … if I was to say to you, are you up for the challenge of improving the measurement of your organisation’s performance … would this be “difficult and boring” for you too? Over the years we’ve found senior executives prefer to delegate the “improve measurement” task … and who can blame them?

Trouble is, they put analysts in charge… you know, they’re the ones who speak “spreadsheet” and “Housemark”. You probably already know what happens then … enthusiastic statisticians present death by powerpoint, yet give no insight, and the problem hasn’t been solved.

And that’s a problem … because it means your main role – making (informed) strategic decisions – becomes little more than well-intentioned guesswork … unless you have the time, inclination and, frankly, the energy to really get to the heart of the matter. And as we all acknowledge, life’s too short … so we stick with gut feeling; hoping that our experience won’t let us down. We also play the game of reporting what the regulator wants to hear.

Listed below are the five most common traps that we see in measuring performance. These 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 your peers? 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 organisation. 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 peers 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.

Trap 2: Looking Backward

Along with budget figures, your performance assessment package almost certainly includes comparisons between this year and last. If so, watch out for the second trap, which is to focus on the past. Beating last year’s numbers is not the point; a performance measurement system needs to tell you whether the decisions you’re making now are going to help you in the coming months.

Look for measures that lead rather than lag the profits in your business. The quality of managerial decision making is another leading indicator of success. Boards must assess top executives’ wisdom and willingness to listen. Qualitative, subjective judgments based on independent directors’ own experience with an executive are usually more revealing than a formal analysis of the executive’s track record.

Trap 3: Putting Your Faith in Numbers

Good or bad, the metrics in your performance assessment package all come as numbers. The problem is that numbers-driven managers often end up producing reams of low-quality data.

Numbers-driven companies also gravitate toward the most popular measures. If they’re looking to compare themselves with other companies, they feel they should use whatever measures others use. The question of what measure is the right one gets lost. Take Frederick Reichheld’s widely used Net Promoter Score which measures the likelihood that customers will recommend a product or service. The NPS is a useful indicator only if recommendations play the dominant role in a purchase decision;  customers’ propensity to switch in response to recommendations varies from sector to sector.

Trap 4: Gaming Your Metrics

You can’t prevent people from gaming numbers, no matter how outstanding your organisation is. The moment you choose to manage by a metric, you invite your managers to manipulate it. Metrics are only proxies for performance. Someone who has learned how to optimize a metric without actually having to perform will often do just that. To create an effective performance measurement system, you have to work with that fact rather than resort to wishful thinking and denial.

It helps to diversify your metrics because it’s a lot harder to game several of them at once. Metrics should have varying sources (colleagues, bosses, customers) and time frames.  You can also vary the boundaries of your measurement, by defining responsibility more narrowly or by broadening it

Finally, you should loosen the link between meeting budgets and performance; far too many bonuses are awarded on that basis. Managers may either pad their budgets to make meeting them easier or pare them down too far to impress their bosses. Both practices can destroy value. Our suggestion would be, to offer scope for budget revisions during the year, usually in months three and six. Another way of providing budget flexibility is to set ranges rather than specific numbers as targets.

Trap 5: Sticking to Your Numbers Too Long

As the saying goes, you manage what you measure. Unfortunately, performance assessment systems seldom evolve as fast as businesses do. Smaller and growing companies are especially likely to fall into this trap. In the earliest stages, performance is all about survival, cash resources, and growth. Comparisons are to last week, last month, and last year. But as the business matures, the focus has to move to profit and the comparisons to peers.

It’s easy to spot the need for change after things have gone wrong, but how can you evaluate your measures before they fail you? The answer is to be very precise about what you want to assess, be explicit about what metrics are assessing it, and make sure that everyone is clear about both.

Why do organisations that excel in so many other ways fall into these traps? Because the people managing performance frameworks are generally not experts in performance measurement. Finance managers are proficient at tracking expenses, monitoring risks, and raising capital, but they seldom have a grasp of how operating realities connect with performance. They are precisely the people who strive to reduce judgments to a single ROI number. The people who understand performance are line managers—who, of course, are crippled by conflicts of interest.

A really good assessment system must bring finance and line managers into some kind of meaningful dialogue that allows the company to benefit from both the relative independence of the former and the expertise of the latter. This sounds straightforward enough, but as anyone who’s ever worked in a real business knows, actually doing it is a rather tall order.

How we have helped to clear the Traps 

We were recently asked us to help an organisation.  They wanted to change their performance but were stuck in the data. They couldn’t identify priorities so they could move forward with confidence.Using our tools, they saw how they compared with their peers and they focused on the comparisons with the high performing peers. From our analytics they could see the future as well as the present.

Armed with these insights they decided where to focus, where to prioritise and who’s going to do what. We’ll see what happens over time, of course, but they’re clear where they want to be in the comparison rankings. They’re likely to get there because what they’re focused on is crystal clear. It’s real strategic leadership in practice. It’ll be very valuable … for everyone involved.

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