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



In the answer to an earlier question — How do you measure and define performance? — it was suggest to use the metric of financial throughput to measure the performance. How well accepted is that? And what challenges come with it?


It is a challenge in more than one way.

The idea of using financial throughput as a metric to measure performance, is often not welcome. Typically it is not welcome by people on the operational side of organization (say like software developers), because those people are accustomed to reason about performance through different terms and different metrics.

This is a challenge whenever you encounter the resistance of any individual or team who are already using and accustomed to their own “local” metric.

With reference to that earlier reply, such instances are represented for example by the utilization figures that motivate the production manager, or the sales commission figures that motivate the salesman. So it takes quite a bit of effort to, not so much “convince,” but to make people “understand” that if they are all “rowing” in the same direction, then they will get to there faster rather than if they are pulling in different directions.

The financial throughput metric will also encounter objections and reservations from the people who usually are in charge of finance, like accountants and CFOs.

Finance people are not accustomed to reasoning in terms of financial throughput. Any throughput metric represents a rate or a velocity, and hence implies the presence of the time dimension. Finance people are not really accustomed to considering time. Time needs to be considered beyond mere impact on cash flows or the so called “time value for money.” Instead time needs to be considered as a constraining dimension that prevents you from doing things concurrently, and forces you to do things in a certain sequence or another. It is that kind of physically constraining impact of the time dimension that escapes the experience and analysis of finance people.

Furthermore you have to tread very carefully, because the finance people are actually those who are in charge of investments — investments that you might actually need to sustain your performance improvement initiative.

The challenge doubles. You do not only have to make finance people comfortable with the idea of throughput, and understand why you are proposing these metrics, but you must also make the case that it is worthwhile to invest money to go in this direction. In other words, you must be able to make a substantiated economic argument.

Of course, if you are able to follow through the whole reasoning around financial throughput, at the end you will be able to show that it bears a significant impact on the bottom line.