Performance Indicators and Performance Indicator Systems: „ Performance indicator systems are well suited to evaluate the performance of a company. Please, explain what performance indicators and performance indicators systems are and comment on the initial statement. “

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Performance Indicators and Performance Indicator Systems
1. Introduction As evaluation and optimization of processes becomes more and more important in todays globalizing economy, companies are in need of tools to evaluate and optimize their performance because as Robbins & Coulter stated: „what does not get measured does not improve.“ (Robbins & Coulter, 2009). To do so organizations use performance indicators and performance indicator systems which are used to evaluate its relative success. This relative success can vary from making progress towards a strategic goal to achieving an operational goal like customer satisfaction. With this said it is clear that these performance indicators are often associated with performance improvements and are most important to the controlling department of an organization to investigate the accomplishments and efficiency of separate projects, departments or even the whole organization. In this essay I will explain and define these performance indicators and performance indicator systems as well as determine if performance indicator systems are well suited to evaluate the performance of a company.

2. Performance Indicators To see what a performance indicator actually is, a proper definition is essential. Young, P.R. and the University of Newcastle, Australia defined them as „ a particular value or characteristic used to measure output or outcome. [They are] measures of service quality, performance efficiency and customer satisfaction.“ (Young, P. R. (2001).) According to this and concomitant with the statement in the introduction performance indicators have a large range of appliance because the different areas of application demand different indicators to guarantee a solid result. In general performance indicators are defined with respect to cost, time, and/or quality and can be separated into qualitative indicators and quantitative indicators. „Qualitative performance indicators

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often measure intangibles such as people's opinions and perceptions. Quantitative indicators involve numbers and hard facts.“ (Ciaran John, n.d.) Both kind of indicators are mostly visualized by a numeric value and are based on a business goal. These business goals are always quantifiable, measurable and outputdriven. An example for a basic performance indicator would be the average response time for a customer query. With the help of these indicators organizations can compare themselves internally but also compare themselves with their competitors. Within the company they are used to see which departments are slacking and where they need to improve, the progress and regress within the company but also as a tool to motivate employees - for example - with incentives which depend on these indicators. This might seem like a great idea but can also lead to quite the opposite of the desired, as employees might not do their job in the way that benefits their company the most but in the way that the indicator of their individual work is the highest. Also organizations need to keep in mind that if performance indicators for their employees are set too low, people will get lazy and if set too high people will get demotivated. Furthermore companies must carefully use performance indicators because even though once an indicator is set and history of that measure is build, adjusting that indicator when business is undergoing a change can lead to useless history data and therefore expensive costs of setting up and implementing new performance indicators. Therefore to optimize the use of these performance indicators it is necessary that they are evaluated frequently and updated regularly.

3. Performance Indicator Systems

The first popular indicator system was the DuPont analysis, which originated in 1919 and was the first of its kind. It was invented by the american chemical company DuPont de Nemours Co. and is still in use today. This system was developed to take a look at the return on investment and therefore has the goal to maximize the returned results per used unit of money rather than a basic maximization of profits. Basically all performance indicator systems have their origin in this DuPont analysis.

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So performance indicator systems are systems which measure the effects which the the single indicators have on each other. These systems also give a good overview because they focus on specific performance indicators which influence each other naturally. Subsequently there are a huge number of different performance indicator systems which developed over time. Important to remember when deciding for a system or developing a system on your own is that you only use those indicators which are actually relating to each other in some way. Furthermore one should minimize all the indicators which relate to each other to only the really important ones to get results which are meaningful but also to cut costs as „every indicator has cost and work implications. [...] Therefore, indicators should be chosen carefully and judiciously.“ (Jody Zall Kusek, Ray C. Rist, n.d.) As mentioned above you can separate the performance indicators into qualitative and quantitative indicators and their attributes. „If you want to look beyond hard facts and get an insight into how people's thoughts and actions can impact the process you are measuring, you can develop an evaluation system that involves both quantitative and qualitative measures. If you use both types of performance indicators you must develop a way to successfully integrate the two different types of data.“ (Ciaran John, n.d.) 4. Conclusion In the globalizing world we live in today, some sort of controlling and performance monitoring is essential and therefore every company will have to find a way to do so. Performance Indicators and more importantly the performance indicator systems that companies choose will determine whether their evaluation on the basis of the chosen system is accurate or not. In my opinion performance indicator systems are very helpful and can improve businesses a lot if they are implemented and used properly. To do so it is crucial that „you [...] use performance indicators that are clear and easy to measure [...] [and] are most appropriate for the process you are measuring.“ (Ciaran John, n.d.)

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Of course it is obvious that „the appropriate choice of performance indicators differ for different countries, times, and sectors.“ (Jody Zall Kusek, Ray C. Rist, n.d.) Concluding I would advise any company to at least start using performance indicator systems with a small investment to see if their system works out economically as „it does not make financial sense to spend $10,000 on an evaluation process if you are implementing the process so that you can cut $9,000 from your budget.“ (Ciaran John, n.d.)

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References: • Ciaran John, Demand Media, Performance Indicators in Evaluation Systems (n.d.) from Website: http://smallbusiness.chron.com/performance-indicators-evaluationsystems-31376.html • Jody Zall Kusek, Ray C. Rist, The World Bank, Ten Steps to a Results-Based Monitoring and Evaluation System (n.d.), Page 70 • Young, P. R. (2001). Electronic services and library performance measurement: A definitional challenge, page 21. • Robbins & Coulter (2009). Management (10th ed.), Page 411-433