Management is obsessed by performance; but why is it so difficult for some organizations to measure performance?



There is not one company that does not use “KPIs” - Key Performance Indicators - of some sort. There are many of those; and almost no universal agreement on what really matters, except maybe for ROI. Why is it so difficult to measure performance?


That is one of the challenges.

“Productivity” is actually easy to measure, if you consider the canonical definitions of output over input, or output over time. Often these simple concepts get interpreted in various ways, and companies often invent metrics which are very much unrelated to the effective business results that they should really aim for.

Many of these metrics might also be of that kind which (as first popularized by the Lean Startup approach) are known as vanity metrics. Those metrics give managers good feelings about delivering things, but effectively they are not delivering anything worthwhile at all.

What can we do about that?

We should always go back to the basics.

If we want to compare different organizations, there is always a place that is comparing them, all the time. And that is the market. Financial metrics are the key in measuring organizational performance; even in the field of software development, where we have seen a number of metrics, which often are of a mere technical nature. Unless you can relate the development effort to the business impact on the bottom line effect, then any improvement in productivity is vain.

The difficult part becomes how to translate the technical things we are measuring (in software) into bottom line results. If we are able to do that, then we can resort to typical return on investment calculations.

Alternatively, and more attuned to the theme of measuring flow, you can resort to throughput metrics as it is considered in the Theory of Constraints.

For instance, Throughput over Operating Expense (as defined in TOC) is an interesting productivity ratio. It is a simple ratio that will faithfully represent your performance: the financial throughput over the financial operating expense. That is simple, and it can be used very effectively. And it is hard to debate against, so it helps in establishing Unity of Purpose too!

Transcribed and adapted from the SPaMCast #269 podcast.