Developing and implementing a performance measurement system

Welcome to the second talk on performance management. I'm Pietro Micheli, Professor of Business Performance and Innovation at Warwick Business School in the UK. The topic of the second talk is about how to develop and implement a performance measurement system.

As we mentioned in the first talk, organizations have three key elements that need to be aligned. Their aspirations, often expressed as mission, vision, and value statements, the strategy, which is a coherent set of choices that enables the organization to achieve the goals that are set to achieve, and then finally, a performance measurement system, which is what we are going to look into today, which typically comprises of indicators, targets, and rewards. These elements need to be connected because they move from aspirational to tangible, but also from something that is rather broad to something more specific. As we mentioned in the first talk, it's important that these elements lead to certain types of decisions, attitudes, behaviors, and actions. We're going to focus on the element there in the middle called the performance measurement system.

A performance measurement system, which in practice could be a scorecard or presented as a dashboard, often consists of four interrelated elements. The first element is indicators. Those indicators individually need to be sufficiently robust. In the next talk, we're going to talk about specific indicators and I'm going to show you examples. But for now, robust indicators mean indicators that give us information that is relevant, that is accurate, and that is precise. We then have performance targets. Levels of performance that we want to or have to achieve. It's important to remember that some of these targets may be imposed on us for contractual reasons, certification reasons, or regulation, sometimes these targets may be introduced by ourselves, and so we may want to increase performance or increase employee motivation, and so on and so forth. What is important here to remember is that we talk about performance measurement systems, not just a list of indicators and targets. The third characteristic if you want, of performance measurement systems, or PMS, is the fact that they need to combine. It's important that we have this combination because, at the organizational level, we want to try to understand the performance of the whole organization. Then down to business unit levels, or teams, or individuals, we want to have indicators and targets. They give us a sense of the performance of such levels. Very often instead, we tend to measure what is easy to measure, and so that combination is not necessarily as strong. Sometimes, we also forget to think that some of those indicators and targets may be in conflict. A simple example is if you think about sales, of course, you can measure the volume of something being sold. But if your salespeople are only measured according to volume, is likely that they will decrease the price of what they're selling, and so that would then impact the margins that the company makes on the sales. Volume and margin tend to be often seen in combination or should be seen in combination, otherwise, we may have detrimental effects. The fourth element that is important to consider when we talk about performance measurement systems is the fact that we need to have an infrastructure and resources that enable us to do the measurement and management of performance, so acquiring, collating, sorting, and so on of information. That infrastructure can be an information system, an enterprise resource planning system, or your P, and so on, but also the capability that people need to develop to do this, and we're going to see this in more detail in the next talks. Overall, a performance measurement system has got three main aims. The first one is to acquire data, so we need to get data that is relevant to what it is that we're interested in, enables us to analyze such data, and also represent it in the form of information, and so what it is that it's important for us to then make decisions. The most commonly used performance measurement system is the balanced scorecard.