A performance measurement is a numeric outcome of an analysis that indicates how well an organization is achieving its objectives. These measurements can be used to examine the performance of all aspects of a business, including the accounting, engineering, finance, marketing, materials management, production, research, and sales departments. Examples of performance measurements are:
- Tracking the ability of the accounting department to collect overdue accounts receivable
- Tracking the speed with which the engineering department can design new products
- Tracking the liquidity of funds administered by the finance department
- Tracking the amount of inventory maintained by the materials management department
- Tracking the amount of scrap produced in the production department
- Tracking the ability of the sales staff to bring in new sales from existing customers
Performance measurements are typically compiled into a summary sheet that is distributed to the management team on a regular basis. Any measures falling below a trend line or not meeting a standard will be subject to enhanced management attention.
Another form of performance measurement is the use of revenue centers, profit centers, and cost centers to report the results of business segments. A revenue center is responsible solely for the amount of revenue it generates, while a profit center is responsible for both the revenues it generates and the costs it incurs. A cost center is only responsible for the costs it incurs. Nearly all parts of a business can be broken down into one of these classifications.
Performance measures can be grouped into two basic types: those that relate to results (outputs or outcomes such as competitiveness or financial performance) and those that focus on the determinants of the results (inputs such as quality, flexibility, resource utilization, and innovation). This suggests that performance measurement frameworks can be built around the concepts of results and determinants.
Measures of performance of a business usually embrace five fundamental, but interlinking areas:
- Money, usually measured as profit
- Output/input relationships or productivity
- Customer emphasis such as quality
- Innovation and adaptation to change
- Human resources
Within the operations area, standard individual performance measures could be productivity measures, quality measures, inventory measures, lead-time measures, preventive maintenance, performance to schedule, and utilization. Specific measures could include:
- Cost of quality: measured as budgeted versus actual.
- Variances: measured as standard absorbed cost versus actual expenses.
- Period expenses: measured as budgeted versus actual expenses.
- Safety: measured on some common scale such as number of hours without an accident.
- Profit contribution: measured in dollars or some common scale.
- Inventory turnover: measured as actual versus budgeted turnover.
While financial measures of performance are often used to gauge organizational performance, some firms have experienced negative consequences from relying solely on these measures. Traditional financial measures are better at measuring the consequences of yesterday’s actions than at projecting tomorrow’s performance. Therefore, it is better that managers not rely on one set of measures to provide a clear performance target. Many firms still rely on measures of cost and efficiency, when at times such indicators as time, quality, and service would be more appropriate measures. To be effective, performance yardsticks should continuously evolve in order to properly assess performance and focus resources on continuous improvement and motivating personnel. In order to incorporate various types of performance measures some firm’s develop performance measurement frameworks. These frameworks appear in the literature and vary from Kaplan and Norton’s balanced scorecard to Fitzgerald’s framework of results and determinants.