How do you define and measure performance?



Businesses measure performance in a variety of ways. How do you measure performance in TameFlow?

What challenge do you encounter when measuring performance via financial throughput?
What challenge do you encounter when measuring performance via financial throughput?

That question has many many implications that relate to cultural aspects of an organization. Before you start measuring performance, you must have a very clear idea of what it is you are striving to achieve with all your efforts. So what is the Goal of the organization, and in what units can you express this goal. When you have clarity about where you want to go, then you can also define which metric to use.

However, there is an interesting twist with measurement of performance. It relates to social and psychological aspects. Two of the founding patters for reaching hyper-performance are Unity of Purpose and Community of Trust. These are two patterns which should permeate the entirety of an organization; from the CEO to the latest junior hire. Often when you start using metrics you end up using ones that are of a local nature and they work against these patterns.

For instance a traditional measure of software productivity is “lines-of-code.” Notwithstanding that it is not a good metric to begin with, the major problem is that it is a metric that only a software developer can relate to and understand. An accountant or a sales person doesn’t have a clue about what is being measured.

When you resort to such local metrics, you are effectively setting up different views about the very purpose of the organization and the very way you intend to measure progress and achievement. That sort of metrics is undermining the founding patters of Unity of Purpose and Community of Trust. Therefore it will invariably be counter productive.

Instead, you should strive to find and adopt a global, system-wide metrics so that you can apply systems thinking. You want a metric which can be shared and understood by anybody in the organization.

Initially, it might not be easy, because such a metric might not be accepted or approved of; but the key point is that it can be understood and reasoned about in the same way by all. It is a metric that represents a shared mental model of what should be happening in the whole organization.

The Theory of Constraints has many good ideas about how to achieve this objective. In particular by measuring the organization’s performance with the notion of financial throughput. Throughput is simple revenues less all totally variable costs. Then performance can be measured in terms of net profit, which is calculated as throughput less operating expenses.

Why is this relevant? Because throughput is a global, system-wide metric. It is very unlike other kinds of local metrics which invariably create silos, and generate hidden agendas and unstated conflicts.

As an example of such dysfunctions, suppose you were to ask anybody to decide which product to sell. The “politically correct” answer is that you should always sell the product that gives the “greatest unit profit.” So you compare products in terms of th “unit profit” that they might contribute. It makes sense. You want the company to make money; so you go for the product that sells with the greatest profit. But does it make sense?

Even in such a deceptively simple question, where the metric is money per unit (of sales), you will have diverse and conflicting points of view. Because that unit means different things to different people.

For instance, you might have sales people who, on the surface, will comply with the politically correct answer stated by the accountants, but in reality they are motivated to sell the product that gives them the highest commission. It might not be the same product as the one that bears the highest profit.

Or you might have a production manager who is motivate to produce the item that gives the highest utilization figures of the company’s resources; because a production manager is measured on how “efficiently” those resources are put to work.

So even with such a simple question, you will have diverse points of views which often produce unexpressed conflicts. Such conflicting priorities are never explicitly exposed because they would contradict the “politically correct” dogma; that of selling the product with the highest profit.

Whenever you have conflicts, whether exposed or under cover, you will never have hyper-performance.

On the other hand, if you look at something like financial throughput, you will find it is a metric that all the parties involved in the company can agree on. When you have agreement you don’t need to fight about finding the congruence between differently stated goals, measured by different metrics.

In fact, there will be no different goals. You have one metric, and one goal. You are supporting the fundamental pattern of Unity of Purpose. And also the pattern of Community of Trust because you can trust that your peers will be working towards the same goal as you, and not some other hidden goal of theirs.

So that is how you should measure performance: you should use a system-wide global metric that every body agrees to use. With the wrong metric you will be undermining the Unity of Purpose and the Community of Trust patterns, and your performance will be just like that of any other average company. Or less.

Transcribed and adapted from the SPaMCast #258 podcast.

Does each organization have to find its own way to hyper-performance?