What are the types of performance measurement?

Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component (is this wrong?) .[1]

Definitions of performance measurement tend to be predicated upon an assumption about why the performance is being measured.[2]

Moullin defines the term with a forward looking organisational focus—"the process of evaluating how well organisations are managed and the value they deliver for customers and other stakeholders".[3]
Neely et al. use a more operational retrospective focus—"the process of quantifying the efficiency and effectiveness of past actions".[4]
In 2007 the Office of the Chief Information Officer in the USA defined it using a more evaluative focus—"Performance measurement estimates the parameters under which programs, investments, and acquisitions are reaching the targeted results".[5]

Performance Reference Model of the Federal Enterprise Architecture, 2005.[6]

Beyond a simple agreement about it being linked to some kind of measurement of performance there is little consensus about how to define or use performance measures. In the light of this what has happened is the emergence of organising frameworks that incorporate performance measures and often also proscribe methods for choosing and using the appropriate measures for that application. The most common such frameworks include:

Balanced scorecard—used by organisations to manage the implementation of corporate strategies[7]
Key performance indicator—a method for choosing important/critical performance measures, usually in an organisational context

Operational standards often include pre-defined lists of standard performance measures. For example EN 15341[8] identifies 71 performance indicators, whereof 21 are technical indicators, or those in a US Federal Government directive from 1999—National Partnership for Reinventing Government, USA; Balancing Measures: Best Practices in Performance Management, August 1999.

Defining performance measures or methods by which they can be chosen is also a popular activity for academics—for example a list of railway infrastructure indicators is offered by Stenström et al.,[9] a novel method for measure selection is proposed by Mendibil et al.[10]

Academic articles that provide critical reviews of performance measurement in specific domains are also common—e.g. Ittner's observations on non-financial reporting by commercial organisations,;[11] Boris et al.'s observations about use of performance measurement in non-profit organisations,[12] or Bühler et al.'s (2016) analysis of how external turbulence could be reflected in performance measurement systems.[13]

The use of performance measurement system in company is very important, but is rarely used by Small and Medium Enterprises.[14]

^ Behn, Robert D. (2003). Why measure Performance? Different Purposes Require Different Measures.
^ Moullin, M. (2007) 'Performance measurement definitions. Linking performance measurement and organisational excellence', International Journal of Health Care Quality Assurance,20:3,pp. 181-183.
^ Moullin, M. (2002), 'Delivering Excellence in Health and Social Care', Open University Press, Buckingham.
^ Neely, A.D., Adams, C. and Kennerley, M. (2002), The Performance Prism: The Scorecard for Measuring and Managing Stakeholder Relationships, Financial Times/Prentice Hall, London.
^ Office of the Chief Information Officer (OCIO) Enterprise Architecture Program (2007). Treasury IT Performance Measures Guide Archived 2008-12-10 at the Wayback Machine. U.S. Department of the Treasury. May 2007
^ FEA Consolidated Reference Model Document. whitehouse.gov May 2005.
^ Kaplan, Robert S.; Norton, David P. (September 1993). "Putting the Balanced Scorecard to Work". Harvard Business Review.
^ CEN (2007). EN 15341: Maintenance – Maintenance key performance indicators. European Committee for Standardization (CEN), Brussels.
^ Stenström, C.; Parida, A.; Galar, D. (2012). "Performance Indicators of Railway Infrastructure". International Journal of Railway Technology. 1 (3): 1–18. doi:10.4203/ijrt.1.3.1.
^ Mendibil, Kepa; Macbryde, Jillian, Designing effective team-based performance measurement systems: an integrated approach, Centre for Strategic Manufacturing, University of Strathclyde, James Weir Building, March 2005.
^ Ittner, Christopher D; Larcker, David F. (November 2003). "Coming up Short on Nonfinancial Performance Measurement". Harvard Business Review. 81 (11): 88–95, 139. PMID 14619154.
^ Boris, Elizabeth T.; Kopczynski Winkler, Mary (2013). "The Emergence of Performance Measurement as a Complement to Evaluation Among U.S. Foundations". New Directions for Evaluation. 2013 (137): 69–80. doi:10.1002/ev.20047. S2CID 154575475.
^ Bühler, Andreas; Wallenburg, Carl Marcus; Wieland, Andreas (2016). "Accounting for external turbulence of logistics organizations via performance measurement systems" (PDF). Supply Chain Management. 21 (6): 694–708. doi:10.1108/SCM-02-2016-0040.
^ Garengo, Patrizia; Biazzo, Stefano; Bititci, Umit S. (2005). "Performance measurement systems in SMEs: A review for a research agenda". International Journal of Management Reviews. 7 (1): 25–47. doi:10.1111/j.1468-2370.2005.00105.x.

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Performance Measurement can be best understood through considering the definitions of the words ‘performance’ and ‘measurement’ according to the Baldrige Criteria:

Performance refers to output results and their outcomes obtained from processes, products, and services that permit evaluation and comparison relative to goals, standards, past results, and other organisations. Performance can be expressed in non-financial and financial terms.
Measurement refers to numerical information that quantifies input, output, and performance dimensions of processes, products, services, and the overall organisation (outcomes). Performance measures might be simple (derived from one measurement) or composite.

The challenge for organisations today is how to match and align performance measures with business strategy, structures and corporate culture, the type and number of measures to use, the balance between the merits and costs of introducing these measures, and how to deploy the measures so that the results are used and acted upon.

All organisations measure performance to some extent. However, there is a large disparity among organisations in terms of which performance measures are used with many primarily focussing on financial measures. There has however, been a general move away from financial measurement since the early 1980’s. This was accelerated in the 1990’s and 2000’s by the worldwide acceptance of business excellence models and performance measurement frameworks that address all stakeholders’ needs. Today due to the advances of technology there are no limits in terms of the data that can be obtained for the use of performance measurement with the opportunities for analysing real-time data through performance dashboards.

Whilst data is more readily available, it is critical that the design of a performance measurement system is appropriate otherwise the data and information can be overwhelming or unhelpful and lead to poor decision making. Measures to be useful need to be aligned to strategy, and be effective in terms of monitoring, communicating, and driving performance.

A good overview of the different types of performance measures is provided by David Parmenter in his book Winning KPIs which describes three types of performance measures:

Key Result Indicators (KRIs). These include measures like customer satisfaction, net profit before tax, profitability of customers, employee satisfaction, return on capital employed. The common characteristic of these measures is that they are the result of many actions. They give a clear picture of whether you are travelling in the right direction. They do not however tell you what you need to do to improve these results. Thus, KRIs provide information that is ideal for the governance board, therefore to those not involved in day to day management.
Performance Indicator (PI). These tell you what to do. PIs lie beneath KRIs and could include: profitability of the top 10% of customers, net profit on key product lines, % increase in sales with top 10% of customers, no. of employees using a suggestion scheme.
Key Performance Indicators (KPIs). Key performance indicators are a set of measures focussing on those aspects of performance that are the most critical for the current and future success of the organisation. They have six characteristics:

measured frequently e.g. daily or weekly
acted upon by CEO and senior management team
all staff understand the measure and what corrective action is required
responsibility can be tied down to an individual or team
significant impact (on more than one objective)
has a positive impact (on other performance measures

What are the common challenges associated with the Performance Measurement approach?

What are the common challenges associated with the Performance Measurement approach? The performance measurement revolution has seen a move away from the problems of past measurement systems. Five common features of out-dated performance measurements systems were:

Dominant financial or other backward-looking indicators
Failure to measure all the factors that create value
Little account taken of asset creation and growth
Poor measurement of innovation, learning and change
A concentration on immediate rather than long-term goals

The focus in performance measurement is now on achieving a balanced framework that addresses the issues described above. Examples of these frameworks that support this are Kaplan and Norton’s Balanced Scorecard, Skandia’s navigator model and the Performance Prism. Others recommend that the results sections of business excellence models should be used to generate a balanced set of performance measures.

There are several challenges that are faced when designing an effective Performance Measurement System, these include the following:

How to measure non-financial performance
What measures to choose and why
How to use them – what to do with the results
Who should be responsible for using the results
How and to whom, to communicate the results
The resources needed to consider the above and design and deploy the measurement system

There are other major requirements that an organisation needs to consider before an effective performance measurement system can be designed or installed. Apart from lower level measures that may be vital for the operation of processes, all measures need to be chosen to support the attainment of specific performance or behaviour identified by the organisation’s leaders as important or necessary to work towards the organisational goals. This being the case, there must be clearly defined goals/objectives and strategies chosen to reach them before measures can be chosen to support their attainment. Similarly, the key processes, drivers of performance, and the core competencies required by employees need to be identified before effective performance measurement can be achieved.

The BPIR.com will help you to understand and select the most appropriate performance measures for your organisation.

The BPIR.com’s database, accessible to members only, contains almost ONE THOUSAND financial and non-financial measures. However, do not be daunted! – you can sort these by commonly used processes and the categories of business excellence models. This means that you will be able to quickly select appropriate ones for your organisation. Not only do we provide examples of the measures but for the most popular we provide a commentary on how to use them and for all measures we provide examples of formulae used to calculate performance.

In addition, linked to some measures we provide performance benchmarking data showing how organisations perform relative to the measure. Such data will help your organisation to improve once you have established a performance measurement system.