In the previous post Why Performance Measurement is Key to Organizational Success , I wrote on Why performance measurement is powerful. Measurement done right can transform your organization.
Not only can it show you where you are but can also get you to wherever you want to go. In this article I will look at When Performance Measurement Goes Bad.
Achieving and sustaining success in today’s hyper-competitive environment is the ultimate challenge for any company and business leader. Everything seems to be moving at the speed of lighting. Unprecedented change, complexity, volatility and risk are all threatening the competitive advantage of the organization.
To survive in this environment, organizations should not just perform excellently but perform excellently consistently. There is very little room for error.
Successful organizations have managed to capitalise on the powerfulness of performance measurement. They are using performance measurement to manage their strategy, systems, processes and resources more effectively and more consistently and ultimately improve their competitive advantage.
Performance measurement is the lens through which the organization views its strategies, processes and results. Since business is so dynamic these days, focusing on the wrong measures will result in the organization missing on its critical success factors.
Transformation will only come when people begin to see the organization through a new lens. Because measurement is the lens through which most performance is viewed, if your lens is out of focus or focused on wrong things, then bad things are guaranteed to happen.
It is therefore imperative that organizations do not take their performance measurement systems for granted.
In some organizations, the leaders are aware that certain problems exist within their measurement systems but are doing nothing about it because they are failing to pinpoint the root causes, much less the solutions. In other cases, a complete lack of understanding of the measurement system itself has led to dysfunctional measurement systems.
Managers of these organizations spend considerable amounts of time and resources trying to fix what they don’t know is broken and then find that the problems are never solved which eventually leads to ignorance and a defective measurement system. You cannot fix something that you don’t understand.
“Measurement dysfunction” occurs when the measurement process itself contributes to wrong behaviour that is contrary to what is in the best interests of the organization.
For example, an accountant performing some sort of cowboy accounting to hit the bottom line target so as to earn a bonus or salesman exploiting a customer to hit sales target also to earn a fat pay cheque.
Although specific numbers might improve, the actual performance that is really important will worsen. Take for example Lehman Brothers, Enron, WorldCom and Tyco. These companies had some of the most egregious examples of dysfunctional measurement systems in the history of the business.
You might think that these companies are the only fallen giants. Think twice because there are still a dozen companies around the globe who are still manifesting the same practices on a daily basis. Their measurement systems are self-promoting and self-protecting; used to justify pet projects or to maintain status quo; and measurement used to prove rather than improve.
To avoid falling victim of dysfunctional measurement systems, managers should be able to identify the root causes of dysfunctional performance measurement systems within their organizations.
How you use your measurement system sometimes determines the nature and extent of the problem. There are two major types of measurement, based on how they are used: (1) Informational measurement, and (2) Motivational measurement.
Usually, when measurement is used as a source of information to improve management and the work that is done, it is enormously beneficial.
However, problems begin when measures are tightly linked with rewards or threats of punishment. In this case, the informational value of the measurement system is completely lost.
For example, explicit or implicit statements such as “If you do this or achieve this, you will get this” tend to normally drive inconsistent behaviours and results because of varying rewards/punishments.
Tying rewards to measurement systems, if not done correctly, has the potential to cause more dysfunction. This is because pay is pegged on results that are easy to measure rather than on the right results.
Measuring too much as well as measuring too little can cost the organization in the long run. This is because too often, measurement becomes an end in itself and is disconnected from the larger purposes of the organization. Measurement is about measuring that which matters only and not everything just for the sake of measuring.
Some organizations are still making the mistakes of making every function, team or area have its own scorecard or measures of success. This automatically results in the organization having literally hundreds of different sets of measures which become increasingly difficult to monitor and improve.
Also, as a result of today’s Big Data and data mania collection, some companies have become buried in their own “data mines”. Much of this data collected is never acted upon because the company don’t know what to do with it, and don’t have the right capabilities and resources to analyse it and deliver meaningful insights that can aid decision making.
The implications of this uncontrolled data collection is higher costs of measurement. Organizations should therefore assess the high costs of measurement, both in terms of actual cost and opportunity cost before embarking on a data collection frenzy.
In conclusion, although organizational performance measurement is a powerful force used for creating and delivering value, without a vision for both the positive and negative sides of performance measurement, management might be lulled into a false sense of complacency, thinking that any problems can be taken care of through routine maintenance.
It is therefore a big mistake for them to take their eyes off the measurement system. Doing so would be like going on a very long road trip but without a map to guide you until you reach your final destination.