Performance Measurement Promotes Effective Management
Effective management is based on a foundation of effective measurement, and almost everything else is based on that. Bain & Company director emeritus and customer loyalty expert Frederick Reichheld unequivocally put it this way: "Measurement systems create the basis for effective management."[7]
As Figure 1-1 illustrates, measurement determines what management does, and it works—through management—to touch every part of the organization, including compensation and rewards. Figure 1-1: MEASUREMENT: THE MOST FUNDAMENTAL MANAGEMENT SYSTEM.
Organizations are conglomerations of many systems. Measurement is actually the most fundamental system of all. When the "measurement system" works well, management tends to manage (and reward) the right things—and the desired results will occur. The measurement system—for good or ill—triggers virtually everything that happens in an organization, both strategic and tactical. This is because all the other organizational systems are ultimately based on what the measurement system is telling the other systems to do. Unfortunately, as we will see, most organizations do not have one integrated measurement system, but rather many measurement systems located in functional "silos" and not well interconnected.
I am continually amazed how many leaders pursue the wrong things— and it almost always comes down to what is being measured. The wrong measures tend to trigger the wrong activities—because they represent what people "see." Then these wrong activities generate the wrong results—no matter how well-executed the activities are. Most individuals and organizations don't get what they want because they don't measure what they really want!
If your measurements are out-of-whack, everything else will be as well. This is a real problem, because no organization can be any better than its measurement system. Here is just a small sample of bad things that happen to good companies that don't measure well:
 Strategy isn't well executed, because managers and employees don't know what the strategy means for their jobs.
 Operational performance can't be appropriately managed, because management becomes (at best) a set of educated guesses.
 Priorities are vague and conflicting, and goals can't be set because goals require the right measures.
 People don't understand what's expected of them, and when they do figure it out, it's often too late.
 Managers don't really know how well their functions, their people, and their initiatives are performing.
 There's frenetic behavior, lots of activity, but little seems to get accomplished, and nobody really knows what is paying off, and what isn't.
 There are Herculean efforts at problem-solving and performance improvement, but problems don't really get solved and nobody really knows which improvements are working or what caused the problem in the first place.
 The wrong things are rewarded, and the things that should be rewarded are not.
Do any of these symptoms sound familiar?
Nothing is more frustrating and futile to observe than the chaos and waste that proliferates in a poorly measured organization.
[7]Frederick Reichheld, The Loyalty Effect, Harvard Business School Press, 2001, p. 246.

The Functions of Performance Measurement
Even if we don't always measure well, we tend to measure often. That's why this book is about how to measure both often and well.
You would be amazed to know how many times on an average workday you are involved in some form of measurement. It is the ubiquity of measurement that makes it almost invisible, and we have come to think of it as routine—as part of the standard infrastructure of the organization—and it has been allowed to evolve. But this is a mistake. Organizational performance measurement is much too important to leave to chance and evolution. Measurement at work serves a great many vital purposes, and the extent to which it serves those purposes is the extent to which organizations like yours will realize its true value.
Let's look at some of the major functions of performance measurement:
 Measurement directs behavior. According to Eliyahu Goldratt, author of the business classic, The Goal, all behavior can be predicted by what is being measured: "Tell me how you measure me, and I will tell you how I will behave."[8] The most frequent question I get from clients is: "What can we do immediately to improve performance in our company?" My response is invariably: "Change one key measure that is currently driving the wrong behavior."
 Measurement increases the visibility of performance. You can't manage what you can't measure. Because most of what happens in organizations (processes, capabilities, and performance) is not directly visible, measurement then becomes "our eyes." This book will show you how to measure anything—even those difficult to measure intangibles like innovation, relationships, and knowledge—so that everything important in your organization can be effectively managed. In our far-flung and virtual enterprises, where onsite managing is becoming increasingly difficult, measurement is what makes the "virtual organization" and self-management possible.
 Measurement focuses attention. Because people are faced with so many competing demands on their time and resources, what is measured tends to get their attention—particularly when what is measured is linked (even tangentially) with the reward system. Furthermore, in the absence of good measurement, it is human nature to pay attention to the unusual or the annoying. That's why the squeaky wheel often gets the grease—even if it's the wrong wheel.
 Measurement clarifies expectations. One of the most important roles of management is to communicate expectations to the workforce. It is well known that people will do what management inspects (measures), not necessarily what management expects! Too often management is vague about what it expects, resulting in considerable confusion:
"We want our supply chain to be more agile!"
"We are committed to being the most innovative company in our industry!"
"We aim for maximum customer service and total customer satisfaction."
What do these statements mean? Twenty people will interpret them in twenty different ways. Some people are adamant that "I'll know it when I see it!" But, will they really? As we will see, well-defined measures cut through the layers of vagueness, and get right to the point.
 Measurement enables accountability. Accountability is really nothing more than "measurable responsibility." Measurement tells you how well you and your employees are performing against commitments—the essence of accountability. Without measurement, it's difficult to hold yourself—or anyone else—accountable for anything, because there's no way to determine that whatever it is you're supposed to do has actually been accomplished. Unfortunately, accountability traditionally has negative associations. In this book, I will differentiate between "positive accountability" (an opportunity to perform and improve) and "negative accountability" (merely doing what is necessary to get rewards or avoid punishment).
 Measurement increases objectivity. One of the major points of this book is that people actually like measuring and even like being measured—but they don't like being judged, especially based on subjective opinions. How measurement is experienced depends on its purpose—and the highest purposes of measurement are to learn and to improve. As measurement expert Bob Frost has explained, objective measurements "enable you to manage by fact; without them, you're left to lead with charm and personality."[9] Few employees appreciate that kind of "charm and personality!"
 Measurement provides the basis for goal-setting. Everybody knows that goals are the means by which most organizations define success. The goals that a company sets will depend on what the company measures. However, few people realize that a goal is really nothing more than a "target value" established on a particular measurement scale. But, first you must define that scale. The measurement scale can be net profits, customer satisfaction, sales, productivity, etc. Most people are familiar with the SMART acronym for the qualities of good goals—Specific, Measurable, Actionable, Relevant, and Timely. They are all important, but the most crucial one is the "M"— Measurable. Remember: You will get what you measure!
 Measurement improves execution. You won't be able to reach your goals—whatever they are—without good execution. And you won't be able to execute well, consistently, without measurement. Even the greatest plan in the world can be ruined by poor execution. If you doubt the importance of measurement in execution, consider what execution guru Larry Bossidy says about those who don't do it: "When I see companies that don't execute, the chances are that they don't measure."[10]
 Measurement promotes consistency. Above, we talked about the imperative to manage well, consistently. Inconsistency (high variability) is a characteristic of unmeasured and poorly measured systems, and it is the antithesis of true quality. Outstanding performance is not about success in a quarter or year; it's about consistent success over the long-term—and this requires more than occasionally pulling a rabbit out of a hat or making a single hole-in-one. Examples from both business and sports show us that winners don't just win: They win consistently, and they use effective measurement to do so.
 Measurement facilitates feedback. You won't be able to execute anything or reach the goals you set consistently without good feedback. Feedback is the basic navigational or steering device of any individual or organization. Remember the childhood hide-and-seek game when you were blindfolded? "You're cold!" "Now you're getting warmer." "You're hot!" You had to depend on others for feedback. When you received clear and timely feedback, you could usually reach the hidden object very quickly and minimize zigzagging and frustration—but when feedback was not given, or was inaccurate or late, you were in trouble.
Similarly, without good measurement your organization is flying blind, and it will take a lot of good luck to take you anywhere near your destination. Many organizations, like ships or airplanes with faulty instruments, gradually—often imperceptibly—drift off-course. A missile can be only a fraction of a degree off-course and miss its target by hundreds of miles. Ask any of your employees about the quality of feedback they receive from your measurement system, and I think you will be surprised at how low they rate it. Quality expert H. James Harrington describes it this way: "Measurement is the lock, feedback is the key. Without their interaction, you cannot open the door to improvement."[11] Great measurement-based feedback might even be the key to unlocking high performance in your organization.
 Measurement increases alignment. Consistent behavior and performance across any organization is impossible without an aligned measurement system. I'm sure you have noticed the amount of self-interested behavior in organizations today. In fact, some organizations appear to be composed of a collection of functional silos that operate so independently that there seems to be little connection among them at all. That doesn't mean that people aren't trying to do a good job—but they define a "good job" as maximizing their own functional measures of success. The key to making self-interest coincide with organizational interest is the kind of fully-aligned, holistic measurement system you will learn how to develop in this book.
 Measurement improves decision making. As Bain & Company consultants Paul Rogers and Marcia Blenko say, "The hallmark of any highly effective organization is making good decisions and making them better, faster, and more consistently than their competitors."[12] Unfortunately, few managers have ever formally learned how to make decisions, much less to make data-based decisions. This is why Dr. Paul Nutt, author of Why Decisions Fail, contends that two out of three managers use "failure-prone" decision-making practices, and that as many as 50 percent of all managerial decisions fail.[13]
One of the major reasons for failure-prone decisions is over-reliance on intuition, that is, on an individualistic combination of experience, opinion, mythology, power, politics, and probability, all of which are highly susceptible to bias and personal blind spots. In the absence of data, anyone's opinion is as good as anyone else's—but usually the highest ranking opinion wins! We would be wise to remember the proverb: "One accurate measurement is worth a thousand opinions." Intuition is good, but by itself, it isn't good enough. Among other things, this book will show you how measurement can improve your business intuition and significantly increase your "decisionmaking batting average."
 Measurement improves problem-solving. According to Will Kaydos, "It's not the 95 percent that's right that makes something work; it's the 5 percent that's wrong that messes everything up."[14] If you don't have ways of finding that 5 percent, then the 95 percent that you and your people do well can be undermined—but if you do, then the full potential of that 95 percent can be realized. When people do see "problems," most of what they are really seeing are just "symptoms," because, in most organizations, only the obvious symptoms are being measured. To make matters worse, because of time delays built into organizational systems, it often takes a long time for the symptoms to manifest themselves.
Peter Senge cautions us to "beware of the symptomatic solution," because you cannot solve a problem by merely removing a symptom.[15] When a serious-enough problem is identified, the root causes need to be diagnosed and validated by collecting actual performance measurement data using a disciplined process. If you are already systematically measuring performance, problems will be much easier to discover, prioritize, and solve.
 Measurement provides early warning signals. No matter how right the solution, what good is a problem that's solved too late? Many people don't recognize a problem until it reaches a crisis level. This is the same situation with a business. If crucial problems are not identified and addressed early on, the longer-term consequences can be quite severe. Companies need to calibrate their measurement systems for both their internal and external environments to recognize changes. Sometimes small but significant changes, which normally might be overlooked, can become visible with the right measurement. For example, companies that fail to keep monitoring their customers in new and innovative ways are those most likely to be asking, "What the heck happened?" as they watch their stock prices fall. The sooner problems can be diagnosed the better. Good measurement is a lot less expensive in the long-run than major overhauls, business recovery, or bankruptcy.
 Measurement enhances understanding. Quality guru W. Edwards Deming based much of the methodology he used to help transform Japanese industry on deep understanding through systematic process measurement, which he called "profound knowledge." Measurement can provide a deeper understanding of virtually anything. Quality expert James Harrington has said, "If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it."[16] Famous physicist Lord Kelvin was well known for saying that if you can't measure something, your understanding of it is "meager."
In any area of an organization, without good measurement, it is impossible to know what is working and what is not. If used appropriately, "properly socialized measurement" (the kind this book is about) will provide you, your employees, and your partners with the kind of growing understanding essential to managing the difficult-to-measure sources of real value creation in your organization—and, in the process, help you to be a much more effective manager and a better leader. What is most remarkable is that the mere effort to measure a difficult-to-measure construct can lead to a much deeper understanding and more effective management of that dimension or asset.
 Measurement enables prediction. There is an adage that states, "Looking back is helpful, but looking forward is essential." In The New Economics, W. Edwards Deming pronounces unequivocally that "management is prediction."[17] Of course, prediction is not entirely new to management; companies make predictions regularly. What I am talking about in this book is how good "predictive measurement" can be used to lead an organization, not just attempt to extrapolate data for spin or reporting purposes. This book will show you how you can use dialogue to improve predictive measurement, including estimating and forecasting accuracy. While no prediction is ever certain, using predictive measurement appropriately by building, and continually refining, measurement models or frameworks can make your organization's management more proactive, forward looking, and much more effective.
 Measurement motivates. Measurement tends to make things happen; it is the antidote to inertia. We have all experienced, for example, how milestones in a project plan get people moving energetically toward a goal, while open-ended timeframes inevitably lead to complacency and low energy. Measurement also helps people see their progress, which is highly motivating. Give people measurable goals (even ambitious ones), in a relatively nonthreatening environment, help them track their progress, and they will be strongly motivated. On the other hand, when improvement goals are vague, unmeasurable, and cannot be objectively tracked, people often lose interest and disengage from the improvement efforts—in favor of what can be measured.
In addition, measurement releases powerful motivational forces— including initiative, pride in accomplishment, peer pressure, and competitiveness. One of the most remarkable examples of the motivational function of measurement is how dedicated athletes use measurement to motivate themselves to ever higher levels of performance. You can mobilize that same kind of dedication in your organization.
However, despite its enormous potential to motivate intrinsically, measurement is often linked with rewards that are so powerful that they overpower the value of measurement. As we will discuss in Chapter 2, while the alignment of measurement and external consequences—both rewards and punishment—is desirable, linking performance measurement too tightly with rewards and punishment is one of the contributing factors to measurement dysfunction and undesired behaviors. This is just one of the many problems that organizations face "when measurement goes bad"—and what keeps organizations from fully realizing the positive power of performance measurement.
[8]Eliyahu M. Goldratt, The Haystack Syndrome: Sifting Information Out of the Data Ocean, North River Press, 1991, p. 26.
[9]Bob Frost, Measuring Performance: Using the New Metrics to Deploy Strategy and Improve Performance, Measurement International, 2001.
[10]Larry Bossidy and Ram Charan, Execution: The Discipline of Getting Things Done, Crown Business, 2002.
[11]H. James Harrington, Total Improvement Management: The Next Generation in Performance Improvement, McGraw-Hill, 1994.
[12]Paul Rogers and Marcia Blenko, "Who Has the D? How Clear Decision Roles Enhance Organizational Performance," Harvard Business Review, January 2006.
[13]Paul C. Nutt, Why Decisions Fail, Berrett-Koehler, 2002.