Introduction to Management

Fourth edition

by Richard Pettinger

Measuring business and managerial performance

The basis of effective performance measurement

Introduction

In general terms, all organisations in every sphere of activity are concerned with the same thing.

  • Maximising customer, client and user satisfaction of their products and services over the long-term.
  • Maximising the confidence of everyone involved or affected by the organisation over the long-term.
  • Maximising long-term owner/shareholder value - i.e. getting the best possible return on investment over the long-term (and this applies to public services as well as commercial undertakings).
  • Securing the long-term future and well-being of the organisation.

This all applies to private and commercial companies, public sector and service organisations, and the not-for-profit sector. These are the basics against which all performance needs to be measured. Measuring and assessing performance on a more limited basis is normally inadequate.

For example, people buy cars from a garage on the basis that any faults can be put right in the future; and that the garage will maintain and service the car during the period of ownership. People buy groceries from a supermarket on the basis of its reputation for selling good food; and if for some reason an item is not good, it can be taken back and replaced. People would not buy from either the garage or the supermarket if they knew or perceived that neither would last long into the future, or if they had no general feeling of confidence in their ability to sustain themselves.

The same applies to public services. People do not send their children to school where there is no confidence in the quality of education being offered. If it is announced that a school is to close, even if this is not to take place for a year or two, there is a rush to find alternatives with a more secure future. If there is not confidence that a hospital can treat a particular condition effectively, or if there is to be a long wait before it is able to do so, people will again seek alternatives - as witness the burgeoning UK private health care sector.

This is also found in the not-for-profit sector. People give to the causes represented by individual charities because they want their money to go to those whom it represents, or in whose interest it operates. They find other outlets for their giving if they have no confidence that particular charities have a future, or that their money is not being spent directly on the cause or client group. This is reflected in the ways in which the larger charities - Oxfam, NCH, NSPCC, RSPCA - have spent large amounts of resources on strengthening their institutions and identity (and not always to the satisfaction of long-term regular supporters). Nevertheless, they are securing their long-term existence in order to be able to operate more effectively in the future.

All of this is only achievable if some basic elements are present, as follows:

  • Clearly stated aims and objectives: nothing can be measured or assessed at all unless the original purpose is known and understood
  • Clarity of overall purpose and direction: knowing where you are going and how to get there; and understanding the full implications and commitment necessary to achieve this.
  • Adequate levels of resources: investment; information; technology; staff capability and expertise.
  • Knowledge and understanding: of the markets in which activities and operations are to take place and what customers and clients want and expect from them; of what the organisation's total capacity is; what it can and cannot achieve; and any operational implications arising; and of the total environment in which activities are to take place.

This gives the broad context in which performance is measured. Again, performance cannot be measured effectively if this is not fully understood.


The Basis of Successful and Effective Performance

In the above context, organisational and managerial performance is measured in the following areas.

Market standing: overall organisational reputation; reputation of products and services; reputation of staff and expertise; size of market served; location of market served; specific needs, wants and demands.

Market position: actual market position in relation to desired position; the costs and benefits of maintaining this; opportunity costs; returns on resources; returns on investment.

Innovation: capacity for innovation; desired and actual levels of innovation; time taken for new products and ideas to reach the market; attitudes to innovation; percentages of new products and ideas that become commercial successes.

Creativity: expertise of staff; versatility and ability to diversify; capability for turning ideas into commercial successes; new product/service strike rates; attitudes to creativity; other related qualities, above all flexibility and responsiveness.

Resource utilisation: efficiency and effectiveness; balance of resources used in primary and support functions; wastage rates; resource utilisation and added value.

Managerial performance: total managerial performance; performance by function, department, division, group; performance at different levels of management - director, general manager, senior, middle, junior, supervisory, first line.

Management development: areas of strength and weakness; progress and improvement; desired expertise and capability; actual expertise and capability; development of specific skills and knowledge; desired and actual attitudes and behaviour; priority of training and development.

Staff performance: areas of strength and weakness; progress and improvement; desired expertise and capability; actual expertise and capability; development of specific skills and knowledge; desired and actual attitudes and behaviour; attention to work patterns; commitment; extent and priority of training and development; targeting of training and development; attitudes to staff suggestions; specific positive and negative features.

Workforce structure: core and peripheral; flexibility in attitudes and behaviour; multi-skilling; work patterns; general employability; continued future employability; relations between organisation and workforce; relations between managers and staff; length and strength of hierarchies.

Wage and pay levels: relationships between pay and output; relationships between pay, profits and performance; local factors and conditions; industrial factors and conditions; relationships between pay and expertise.

Organisational culture: the extent to which this is positive/negative; identifying and removing negative factors; accentuating the positive; motivation and morale; staff policies; industrial relations; staff management.

Key relationships: with backers; with staff; with suppliers; with distributors; with customers; with communities; with lobby groups and vested interests

Public standing: the respect and esteem in which the organisation is held in its markets, the community, among its staff, customers and suppliers; confidence and expectations; general public factor coverage.

Profitability: levels of profits accrued; timescales; means of measuring and assessing products; scope for enhancement and improvement.

Other factors: general efficiency and effectiveness; product and service quality and value; areas for improvement; areas where complaints come from; opportunities and threats.

Many of these areas overlap. In some cases the same phrases are used under different headings. Without doubt, different words and phrases could be used to convey the same meanings. The mix and balance varies between organisations. However, every element is present in all situations to a greater or lesser extent. Initial lessons can therefore be drawn.


Initial Lessons

There is no single effective measure of performance in any situation or organisation. Above all, it should be clear form the above that 'profitability' is only one measure, even if attention to each of the rest needs to result in long term profitability, viability and effectiveness. Also, even if a supervisor is working to a single daily production target, he/she must have the right staff, adequately trained and motivated, the right volume and quality of components; and somewhere to put the finished items. And given the normal nature of work - all work - all this has to be available on a steady and continuous basis.

A large proportion of the elements indicated are qualitative not quantitative. The main qualities necessary to evaluate such factors properly are therefore judgement and analysis. Success and failure are value judgements placed on events and activities based on high levels of knowledge and expertise. Seldom, if ever, is success or failure self-evident except in the immediate or very short-term.

It follows, in turn, that the main attributes of those who measure business and managerial performance have knowledge, expertise and understanding: of results; of the environment; of people; of customers and the market; of the product/services offered; of the organisation's general position.


The Need for Accurate Information

None of this is possible without full, or at least adequate, information covering each of these areas and this must be constantly gathered and evaluated. Markets, technology, expertise are all constantly changing and organisations that do not respond have at the very least, to recognise the effects that such a lack of response will, or may, have.

Full information enables organisations and their managers to reduce uncertainty, analyse levels of risk, maximise chances of success, minimise chances of failure and assess the prospects and likely consequences and outcomes of following particular courses of activity. It enables projections to be made for the organisation as a whole and for each of its activities. Summary positions are often established under the headings of strengths, weaknesses, opportunities, threats; and these are most effective when related to the organisation as a whole, to its markets, to its backers and stakeholders, and to its competitors.

Effective planning is also based on full information. The value of planning is at its greatest when it allows organisations:

  • to see the future as it unfolds, recognising possible, likely and (more or less) certain developments;
  • to assess the continued performance of all activities and operations;
  • to assess the ways in which other people and organisations, especially competitors are operating.

Effective planning is a process, the purpose of which is to arrive at and retain continued clarity of direction. It involves the analysis of the information; thinking it through, testing ideas; examining what is possible and what is not.

More specific schedules, practices, operations, activities, aims and objectives all then come from this body of knowledge and the understanding which arises from analysing it. Implementation and execution are then handed on to different people, functions, divisions and departments within the organisation.

There is, however, a world of difference between effective and expert planning and the production of rigid plans. Dwight D. Eisenhower, the United States General and President, once said 'Planning is everything, the plan is nothing.' At their best, corporate and organisational plans are statements of what is now proposed as the result of information available; and subject to change, modification and, when necessary, abandonment as and when circumstances change.

At their worst, they are detailed statements covering the way that the world is certain to be extending into the far distant future. No such position is sustainable now - indeed, it probably never was in the past. This does not prevent large corporations, both public and private, and the policy units of public services drawing these up. At best, they are an irrelevance. More usually, they constitute a waste of organisational resources that would be better used elsewhere. At worst, they are indeed slavishly followed in the teeth of a changing world and competitive environment with immense adverse consequences for the organisation.


Responsibilities

Organisational responsibilities

Specific organisational responsibilities exist in the following areas.

  • Anticipating the future in terms of the changing environment; anticipating changes in customer demands and perceptions; recognising changes in the nature of competition; recognising changes in production and service technology; recognising and anticipating changes in the nature of people attracted to work for the organisation and the sector; recognising and anticipating changes in the customer base.
  • Investment as a continued commitment: in the areas of product development; quality improvement; management and staff training and development; production and service technology; the well-being of the customer.
  • Organisation development: in terms of its skills, knowledge, capabilities, attitudes and expertise; in terms of customer awareness and satisfaction; in terms of processes and procedures; in terms of supplier and distributor relations; in terms of its culture and structures.
  • Training and development: of both management and staff in the skills, qualities, attributes and expertise necessary to secure the future; and in the key attitudes of flexibility, dynamism, responsiveness, willingness and commitment.
  • Recognition of the fact that all organisations currently operate in a changing and turbulent environment; that historic and current success, efficiency, effectiveness and profitability is no guarantee that this will extend into the future. From this comes an obligation to ensure that all staff are capable of existing in this environment and that they are equipped with the resources and capability to do so.
  • Openness: people respond to uncertainty and turbulence much better if they understand its extent and why they must constantly, update and develop. Organisations therefore have a clear duty to inform, consult and provide detail on all aspects of performance in general; and in more detail, concerning things which directly affect specific members and groups of staff.
  • Ethics: long-term existence, the ability to secure the employment of staff, and establishing a regular and profitable customer base are enhanced by taking, accepting, and understanding a view of the world as it really is. There is therefore, a moral, as well as commercial, commitment.

Managerial responsibilities

Specific managerial responsibilities exist in the following areas.

  • To develop (and be developed in) capabilities and expertise required by the organisation; required by the nature of professional management as it develops; and which involvement in the particular business, industry or service requires.
  • #To take a personal commitment to organisational success as well as that of the department, division or function for which the individual is responsible. High levels of personal commitment are required of all professions and professionals, in all spheres of activity and expertise and this is also true of management and managers.
  • #To develop the full range of managerial skills and qualities required by the profession of management. This currently means being able to solve problems; manage people; set standards of performance; understand where the manager's domain fits into the wider scheme of things and total organisational performance; use resources efficiently and effectively; set and assess budgets; recognise the constraints under which operations have to be carried out; and generate a positive, open and harmonious culture and attitudes.

At the heart of all organisational and managerial responsibility is the need to produce goods and services in the required volume and quality, at the right price, in the right place. This can only be achieved through having top quality, expert and highly motivated staff. This is the critical factor in which the long-term future of the organisation is secured and all effective measures of organisation and managerial performance have this at their core.

Wider considerations

Both organisations and their managers have to recognise that their performance is going to be measured and assessed by a variety of different people and in a great range of different ways. Everyone who comes into contact with an organisation assesses it in one way or another. They may be summarised as:

  • the staff: everyone who works for, and in, the organisation and who is therefore dependent upon it for their income and spending power; this also applies to subcontractors and other retainers and potential staff;
  • the customers: for continued satisfaction and service;
  • the communities: in which staff and customers live and work, and in which the organisation operates;
  • social customers: for example, charities, schools and hospitals which may approach the organisation for sponsorship and support;
  • backers: shareholders, contributors, bankers, loan makers, venture capitalists, sponsors, city institutions, stock markets, and public funds;
  • suppliers of components and raw materials: who have a vested interest in the success of the organisation in terms of their own continuity of activity and profitability;
  • the community sectors and markets: in which the organisation offers its products and services for sale and consumption;
  • distributors: relying on their own position between the organisation in question and the end users of the products or services for their continued existence;
  • trade unions, market and employers' federations and associations: that are active in the particular field;
  • competitors and offerers of alternative products and services: as part of their own quest for knowledge and expertise in the given field;
  • lobbyists and vested interest groups: related to the location of activities, the nature of activities and the ways in which those activities are carried out.
What is measured?

Performance is measured by each of the above groups according to their own particular interest. For example, brilliant commercial performance may be rated very highly by consumers, but not by shareholders if this brilliant performance does not result in rises in the share prices.

Performance is assessed quantitatively and qualitatively by each of these groups. Each group at different times will look at finances, numbers and statistics from their own partial point of view; and some of the groups will look additionally at a broader range of measures, or even at the total picture.

When is performance measured?

Business and managerial performance is measured continuously by each of the groups indicated. It is punctuated by formal and semi-formal events: annual reports; interim reports; staff performance appraisal; production and sales figures; pay rises and pay rounds; activity levels; budget efficiency and effectiveness.


Aims and Objectives

All performance has to be measured against something and this is the reason for setting aims and objectives. Aims and objectives occur at different levels.

  • Corporate: reflecting the overall scope of the organisation; how it is to be run in structural and financial terms; how resources are to be allocated.
  • Competitive/business level: how the organisation is to compete in its different markets; which products and services should be developed and offered; the extent to which these meet customer needs; monitoring of product performance.
  • Operational: how different functions of the organisation contribute to total organisational purpose and activities.
  • Behavioural: related to the human interactions between different parts of the organisation; and between the organisation, its customers and the wider community.
  • Confidence: the generation of confidence and reputation among all those with whom it comes into contact.
  • Ethical: meeting specific standards that may be enshrined in policy; the ability to work in certain activities, in certain locations; the attitude taken towards staff, customers and others with whom the organisation comes into contact.

Aims and objectives should be a combination of the specific and precise, with the contextual. Aims and objectives should also be both flexible enough to respond to changing circumstances.

Aims and objectives need to be open to constant review to make sure that they are not followed slavishly, purely and rigidly if circumstances do change.

Provided that the context and flexibility issues are acknowledged, it is usual to write aims and objectives as precisely as possible, as follows:

  • specific: dealing with easily identifiable and quantifiable aspects of performance;
  • measurable: devised in ways so that success and failure can be identified;
  • achievable: striking a balance between maximising/optimising resources and output without setting standards so high that targets are unattainable and therefore unvalued;
  • recognisable: understood by all concerned;
  • time constrained: so that a continuous record of progress and achievement may be kept and problem areas identified.

Whatever is determined, has therefore to be capable of reconciling differing and often conflicting pressures; and attending to all aspects of organisational performance. This si the basis on which performance is then to be addressed in terms of success and failure. Distinctive measures of success and failure are essential, as is attention to enhancing the total performance of the organisation.

It is also essential to attend, where necessary, to reconciling the different and conflicting demands of particular stakeholders and interested parties.

No single set of generic objectives therefore exists. All aims and objectives must be drawn up against the organisation's specific context and background if they are to have any meaning. Whatever they refer to, they must reflect the following questions.

  • What contribution does this activity/set of activities make to total organisational performance; where does this fit into the broader objectives of the department, division or function concerned? Where does this fit into the wider purpose of the organisation?
  • What resources, equipment, information, technology and expertise are needed to carry it out successfully?
  • What specific restraints are there - for example: can it be done straight away; are there other things that must first be done; how long does it/will it/must it take?

Aims and objectives therefore need to attend to both the broad and the precise in all organisations in all locations and sectors, whatever their size or nature of activities.


Conclusions

The purpose of this short paper is to set the context for measuring all aspects of organisational and managerial performance and to introduce the means by which this is to be done. It is not possible to do this effectively or successfully in isolation - and the fact that some organisations nevertheless attempt this, does not make it right. Without this basis, both quantitative and qualitative performance measures have no meaning to those who are allocated more specific performance targets. Lack of any contest is also one of the main reasons why performance appraisal schemes directed at human resources fall into disrepute. Whatever is done must be understood and acceptable to those involved. Acceptability springs from understanding and this is based in turn, on the effective communication of the right and required information to those involved. This applies to everything except cases of unethical or criminal activities.

This approach to knowing and understanding the broader context enables specific problems and blockages to be identified early. These may be operational, behavioural, procedural or political. Each becomes more likely, the larger and more sophisticated the organisation and its managerial and administrative systems.

Finally, the greater the understanding of this background and context, the greater the level of true assessment of organisation capacity and potential. Total performance can then be measured against this; and department, division or functional group and individual aims and objectives may be set much more precisely.