chapter  12
24 Pages

Establishing Performance Measures

Overview Performance measures are needed at three levels, each with a different focus, and this makes it virtually impossible for any single measure to work effectively in all these roles. A wide range of performance measures can be used in most businesses; some should be externally focused and may require the objective and consistent application of managerial judgement. A hierarchy of performance measures is required so that each level in the

organisation is given specifically relevant measures; it is critically important that such a hierarchy is internally consistent, so that everyone is aiming at the same set of objectives. Economic performance measures are very important to shareholders as they

indicate whether shareholder value is being created. However they are not normally a good indicator of managerial performance; this requires a relative performance measure. At the very top of a company, e.g. the main board of directors, it may be reasonable to use primarily economic performance measures but, even here, they should be placed in an appropriate context by referencing them against a peer group of other companies, or the stock market in total, etc. As you go lower down the organisation, there are greater restrictions on

managerial discretion and it is important that there is a direct linkage between effective managerial control and the performance measures used. It may seem more efficient to use the same performance measure (e.g. ROI) for all managers, but it normally has a dramatically adverse impact on the effectiveness of the performance measures in influencing managerial behaviour. Managerial performance measures require the true cost driver for all costs to be identified and the accountability should stay at this level of the organisation. Far too often this identified cost driver is then used as the basis for apportioning the total costs across lower levels in the organisation, thus destroying the direct accountability/controllability linkage. Key performance indicators (KPIs) are leading indicator measures of per-

formance that focus on the key strategic thrusts at the particular level of the business. There should be a limited number (maximum of five) of KPIs for

each manager because no one can focus on a vast range of measures. The challenge for the organisation is to develop an interlinked set of KPIs for each level in the business so that each set is consistent with the overall objectives of the company but relates to decisions and actions relevant to each managerial level. Products, customers and brands all follow some form of life cycle and

different performance measures may be needed for each stage. These tailored performance measures should include both financial and non-financial measures that should be clearly linked to the key strategic thrusts at each stage. If all these different ways of looking at the business are put together,

a unique set of performance measures can be developed for each business. However this set fits the current strategy and the current business environment; if either of these changes significantly the set of performance measures should be reviewed and modified if necessary.