Consider the following real-world examples:

  • The manager of a pharmaceutical packaging operation proudly announces another record production month, resulting in excess inventory of a product about to go off patent.
  • Service quality indicators for a logistics services provider show dramatic improvements over the last two years, yet a third-party loyalty study indicates that share of wallet has dropped substantially over the same time period.
  • A trader for a global investment bank is able to circumvent controls and make unauthorized trades totaling more than $60 billion undetected.

What these three examples have in common is that all of them are well-managed global companies and all are perfect examples for how the failure to manage what matters can lead to unintended consequences.

In a perfect world, an effective measurement system aligns the entire organization towards its objectives, enables executives to make good decisions, and facilitates organizational learning. In the real world, the rate of change is ever increasing, and the balanced scorecard metrics defined two years ago are no longer able to measure what really matters. The failure to measure the right things creates unproductive conflict, wastes scarce resources, hinders strategy execution, and rewards the wrong behaviors.

Developing and deploying a new system of metrics is typically a significant investment and time-consuming effort: Leaders need to be involved at every step along the way. Baselines and goals need to be established. Reward systems need to be aligned. Reporting formats and presentation templates need to be defined.

To ensure a maximum return on that investment, leadership teams at all levels (corporate, business unit, function, department, or business process) should periodically conduct a review of the current measurement system both at the system as well as individual metric level, addressing the following questions:

What matters most?

Over the last couple of decades, the rapid adoption of information technology has dramatically increased the ability of organizations to measure virtually every aspect of their business. More information however is not always better – just because you can does not mean you should. What are the vital few measures for the entire organization? How well aligned are local metrics with the overall objectives? Does everybody in the organization understand how their performance impacts the entire organization?

Retail companies are known for measuring sales per square foot, an overarching metrics that touches many aspects of a retailer’s business. What are the critical few, non-financial measures that your leadership team needs to manage well? Financial measures are always lagging indicators. Do you have leading indicators of performance? How reliable and predictive are these indicators? Leaders would be well advised to establish and communicate a clear hierarchy of metrics.

What has changed? What is missing?

If you are still using the same set of non-financial measures you defined fived years ago, you probably shouldn’t. Assuming you review your measurement system annually, what has changed over the course of the last twelve months? What have you learned? What assumptions have been proven wrong? What changes do you anticipate in the near or distant future? Has the strategy changed? The answers to these questions help a leadership team review the current inventory of metrics to identify gaps and revise priorities.

What should we stop measuring?

Given the abundance of information available to executives, the guiding principle is “if it does not help it probably hurts”. Often, one-time requests from senior executives turn into comprehensive monthly reports. Way too many metrics end up serving the same purpose as the “Door Close” button in most modern elevators, which for the most part don’t work at all but give the illusion of control.

The effort required to collect, review, analyze, present, and discuss measures that outlived their usefulness can and should be invested elsewhere. What happens if you stop measuring? Does this metric generate new insights? Where have you made enough progress to declare victory and move on to the next challenge? Keeping a measurement system healthy requires frequent pruning.

How do we resolve conflicts and contradictions?

Often, functional or departmental performance indicators are the root cause of frictions: Customer service is measured on perfect order rates and short lead times, but the pressure on the supply chain function to keep inventories low results in constant fire-fighting and fuels interpersonal tensions. What percentage of your organization’s momentum gets lost as a result of avoidable friction between groups just trying to ‘make the numbers’? Does our measurement system align with the needs and requirements of our customers? Mapping the departmental metrics against the overall key business objectives is a good way to highlight apparent conflicts between departments that need to get resolved or at least understood.

What should we reward?

The failure to align the reward and compensation system with the metrics used to drive the business is a frequent root cause of failed initiatives and companies: A new supply chain initiative is focused on reducing inventories but the management board refuses to change the way sales reps are compensated; as a result, the reps continue to stuff the retail channel and the leadership is forced to pull the plug on the project. How do we ensure the right behaviors and outcomes get rewarded? Have we considered unintended consequences? How do we prevent abuse and manipulation? Ensuring individual compensation and business performance are well aligned is a critical management responsibility that cannot be delegated.

The Measurement System Audit: An annual health check-up for your metrics

An annual audit of the entire system of measurements is an effective approach to maintain effectiveness. Depending on complexity and scope, such an audit can take from as little as two days for a department or function up to two weeks for a complex business unit. The first step is taking an inventory of all the current metrics used and review the current strategic plan. Interviews with a cross-section of managers provide users’ perspective and context. The emphasis of the audit is to test whether the metrics are aligned with the organization’s goals, to ensure a balance between efficiency and effectiveness measures as well as leading and lagging indicators, and to highlight measurement gaps, blind spots, and potential conflicts. At the individual measure level, the audit is concerned with whether it is still relevant, who owns it, whether it can be validated, who needs to have access to this information, and how to make the information more useful. The outcome of the audit is a list of key findings and specific recommendations, which is reviewed with the respective leadership team.

Ideally, the responsibility for the measurement system should rest with Finance. The CFO is a logical candidate to own not only financial but also non-financial metrics and serve as the overall measurement champion. Tactical responsibility for conducting the measurement system audit can be assigned to the controller. With respect to timing, the ideal time for reviewing whether the current metrics make sense would be during the annual planning and budgeting cycle.

Conclusion

Maintaining an effective measurement system is a prerequisite for executives and managers at all levels…after all, if you can’t measure it, how can you manage it? A measurement system audit provides a useful tool to ensure the system is capable of measuring what matters.