There is no doubt that the new markets and new strategies that have emerged over the last few years demand new and different performance measures.

Effective performance measurement is important in ensuring the successful implementation of an organisation's strategy. It is about monitoring an organisation's effectiveness in fulfilling its own pre-determined goals or the requirements of stakeholders. In order to be successful, today's company must perform better not simply in terms of cost but also in other dimensions such as quality, flexibility, value and so on.

A performance measurement system that enables it to meet these demands successfully is essential as it helps ensure that decision-making at strategic and operational level is better informed and more effective. Comparison of outcomes against objectives enables the identification of problems so that timely corrective action can be taken.

Above all, measuring performance is an important tool of strategic analysis. Stakeholders will get a better indication of an organisation's strategy from observing what it measures and does than from its declared goals or what it says it does.

Success Factors

If performance measurement system is to work successfully in an organisation, it is necessary to understand the factors that need to be in place.

It must be integrated with the overall strategy of the business.

All approaches to performance measurement emphasise the alignment of objectives, measures, strategic decision-making and rewards. This is crucial, as it is not possible to measure performance unless it is clear what an organisation is trying to achieve.

A sound performance measurement system will cascade down the organisation. It will be integrated with the overall business strategy and so ensure that all stakeholders are working together in the same direction. Following the identification of strategic objectives, an organisation should agree the key factors and activities that are critical to achieving the objectives and those areas in which the organisation must excel in order to ensure success. Underpinning the critical success factors will be activities or competencies that are essential to outperform the competition. Performance targets can then be developed for the activities. For example, customer care may be identified as a critical success factor. In turn, a fast response to complaints may be essential to achieve competitive advantage - and a performance measure such as response time can be established.

There must be a system of feedback and review

For performance measures to be useful, there must be a continuous cycle of comparison of actual results with the original plan. This then has to be fed back into the decision-making process. If for example, service quality is identified as a key factor to be measured, there must also be mechanisms in place to identify variances from target, understand the causes of those variances and know how to correct them. If performance targets do not lead to action, there is no management control.

In addition, performance measures should be reviewed over time. In the light of results obtained, it may be appropriate to modify targets, either up or down, change the activities being measured or even modify the objectives. The information from the performance measures must be a stimulus to action.

In deploying a performance management system, organisations are enabling a single learning loop. In creating single-loop learning, organisations have an assumption of what their business is and go about improving their routine functions, i.e. running the business as well as it can be run today. In such a scenario, if profits are not as expected, an organisation may take various paths to remedy the situation, for example, changes in prices, more advertising, improve levels of customer service, etc. These actions fall within an organisation's basic assumption of what its business is and what it takes to succeed. In trying to execute today's strategy, organisations should not overlook double-loop learning. In this paradigm, managers can challenge existing assumptions and the current business model (without being in a situation of crisis). Such organisational learning enables managers to consider the possibility that its resources might, for example, be useful in other businesses.

It is important to distinguish between the two types of learning. Single-loop learning is necessary to build core competencies and double-loop learning is necessary to adapt to changes in its environment and can be a primary driver of sustainable competitive advantage. Typically, many executives pay most attention to operational health rather than strategic health. Good operating performance does not necessarily indicate the future strategic health of a business and organisational learning enables a company to change before they have to. In order to reach this state, executives need a shared understanding of the need for future change.

The performance measurement system must be comprehensive.

While the financial performance is clearly of the utmost importance, it represents only one dimension of value and as such is inadequate in evaluating the strategic performance of an organisation in its entirety. The problem with traditional accounting-based measures is that they are essentially backward looking and, in today's volatile equity markets, a poor predictor of future performance. Second, accounting measures take no account of the intangible value drivers which can make up a significant part of a company's market value, especially in knowledge-intensive companies that characterise the current economic environment. Third, the market's fixation on bottom-line profit as the only indicator of performance pushes many managers into making short-term decisions in order to boost their earning streams. Many companies, however, still continue to employ traditional accounting measures as opposed to any of the new approaches to performance measurement. Every performance measurement system should reflect the range of factors that contribute to success. To do this requires a range of financial and non-financial indicators.

The system must be owned and supported throughout the organisation.

If employees do not own the performance measurement system, it will not be used effectively. The implementation needs to be top-down so that those responsible for setting strategy can determine the objectives and develop appropriate top-level measures. However, where indicators are set for teams or individuals, they should ideally be involved with the process rather than have the measures imposed from above. A sense of ownership means that they are more likely to accept the targets and work towards achieving them. Being involved also has the added advantage of improving the understanding of the strategic aims throughout the organisation.

The American Institute of Certified Public Accountants’ survey highlighted the most frequent barriers to implementing and revising performance measurement systems and three out of four of the main ones are to do with people rather than systems of technology.

Measures need to be fair and achievable

Defined targets will generally encourage higher performance than where there are none. If accepted, the more demanding the target is, the resulting performance is likely to be better. Therefore, some adverse variances should be expected in a system that encourage improvements in performance. However, consistently punishing failures to meet targets is likely to lead to disillusionment and the building of slack into targets. Targets need to be sufficiently realistic to encourage performance but not so high as to become impossible to meet.

Measures also need to be seen as fair across the organisation. Where comparisons are made between different business units or departments, the equity of treatment becomes crucial.

The system needs to be simple, clear and understandable.

A system that is over-complex will lead to bureaucracy and confusion. Recent developments in technology have meant that IT systems are now able to provide a plethora of statistics but, without care, this can lead to an overload of data with little meaningful information. For this reason, it is important to focus on what is key for the business in strategic terms rather than introducing indicators for everything which can be measured. There is a need for prioritising and discipline. Where a new issue arises and further indicators are developed, these should replace those that have become less important rather than adding to the existing set.

The measures need to be understood by, and communicated to, everyone in the organisation, which is another reason for keeping the system simple and straightforward to communicate. The reporting of results must also be clear and understandable.