- Measurements assist in making decisions and understanding the progress in meeting the strategic and tactical plan.
- Measurements drive behavior. What gets measured gets done.
Organizations must be able to measure their performance in order to improve it. This is a vital element of any strategy, as it allows organizations to understand how they are performing against their objectives. It also helps them identify where they need to make changes to achieve better results.
The following sections will provide you with an overview of organizational performance measurement. We'll start by examining what makes up an effective measurement system; then we'll look at the two most common measurements approaches that can be used for this purpose.
Characteristics of an Effective Measurement System
- Measurements should be simple and easy to use.
- Have a clear purpose.
- It is aligned with the firm's strategy.
- Cover all the appropriate elements (internal, external, financial and non-financial). BSC*
- Relate to performance improvement, not just monitoring.
- Relate to both long term and short-term objectives of the organization.
- Focus on what is important to customers.
- Establish specific numeric standards for most goals.
Two commonly used Measurement Approaches
For strategy deployment there are the two most popular measurement approaches are:
1. Benchmarking - Measurements for comparison with other organizations to gain perspective on organizational performance.
2. Balanced Scorecard - Focuses on four perspectives customer perspective, internal business processes, learning and growth and financials. It combines financial and non-financial aspects of the business into one integrated framework.
Leading vs Lagging Indicators
In short, a leading indicator is anything that tells us something about what's going to happen next. Leading economic indicators are often used by management to forecast future trends.
Sometimes leading indicators are called inputs. They lead organizations to meet their overall business objectives successfully.
Lagging Indicators measure output that has already happened. These are usually measures of past performance. Lagging indicators are sometimes called outputs or results.
- Lagging are easy to measure
- Lagging indicators are post-event (output)
- Leading are predictive measures (inputs)
- Leading indicators are not guaranteed, and it is difficult to decide which one to select.
- A mix of both leading and lagging is good.