The importance of measuring your business performance
A common quote about performance measurement states, “if it cannot be measured, it cannot be managed.” There has been much discussion about the accuracy of this quote attributed to Peter Drucker. Representatives of the Drucker argue that Mr. Drucker has a much broader view on the subject. Nonetheless, on the matter of the importance of measurements, Drucker wrote, “Work implies not only that somebody is supposed to do the job, but also accountability, a deadline and, finally, the measurement of results —that is, feedback from results on the work and on the planning process itself”[1].
Now let’s imagine boarding an airplane; when passing by the cockpit door, we notice that the aircraft has many indicators for altitude, temperatures, speed, pressures, fuel level, and many others. The pilots are going over some documents that suggest they have a flight plan to get us from our origin to the set destination, and it all looks very professional. Before taking off, and several times during the flight, the captain gives the passengers a brief report on what to expect and the flight’s status. With this, every time we take a breath of relief. We feel confident they are in control of everything necessary to take us to our destination. Now, imagine a first report from the captain, several hours into the flight, sounding something like, “Hi folks! We are flying over the Atlantic Ocean. We should be near the European coast, hopefully, Spain, within the next hour or so. I do not expect any problem with the fuel since we filled up the tanks before take-off. As soon as I have sight of our destination airport, I’ll let you know.” Terrifying!! Isn’t it. Well, more businesses than what we can imagine run as per the latter example.
Once you have your strategic plan in business, in which we’ve developed a vision, defined strategic goals, and strategies to achieve our vision and goals, how do we know we’re achieving such goals? In simple terms, through performance measurement, a process in which the manager measures and evaluates, in an objective manner, how you’re achieving your objectives, if your strategies are working as expected, moving you closer to the realization of your vision. Measuring performance in isolation is somewhat incomplete, to say the least. If you decide to measure some business variables, let’s say, your inventory rotation and cycle time to complete customers’ orders, your results should be compared with a reference value, let’s say, industry averages, or with the industry’s best practices. Even with that, some questions might be left unanswered: At what level should our business be performing now? Are these metrics improving as expected or deteriorating over time? What trends can we observe? What do these results tell us about the overall performance of my company? How do we link these with how I want my company to perform? These are the reasons why performance measurement should be a constant process and integrated with our business strategy.
Among the many advantages that business performance measurement offers, we could mention the following:
- It helps to identify and correct any deviation from the vision we have set for the company.
- It allows us to have comparative feedback of our achievements with some standards.
- It helps us communicate expectations to our staff, identify performance that we wish to motivate and reward, boost accountability for results and strengthen organizational learning.
- It helps us make investment decisions, plans, policies, programs, etc.
Business performance measurement is a critical process to manage any business. A well-designed dashboard, summarizing the key performance indicators in a graphical, simple, easy to understand way, provides management and shareholders with a holistic view of the company, enabling timely decision making, providing everyone with coherent and uniform information. All of this makes communication among partners and team members exponentially better.
Luis David Ramirez is an engineer and entrepreneur (Simon Bolivar University) with a Master of Business Administration (MBA) from the University of South Carolina. For the last 15 years he has been running the consultancy firm Scudo Consulting.
Social Media contact for Luis David Ramirez: Facebook: @SCUDOConsulting Instagram: @scudoconsulting
[1] Drucker, P. Management: Tasks, Responsibilities, Practices. Harper Business. 1993