The Perils of Performance Measurement

Abstract

Interest in performance measurement grows daily but the state of the art leaves much to be desired. To promote performance leadership, one must examine both its shortcomings and its pernicious effects.

In a Word Interest in performance measurement grows daily but the state of the art leaves much to be desired. To promote performance leadership, one must examine both its shortcomings and its pernicious effects.

The Simple Intent of Performance Measurement

The use of yardsticks to measure performance needs no arguing: one cannot improve what one cannot measure. More emphatically, in the words of Joseph Juran,¹ “Without a standard there is no logical basis for making a decision or taking action.”

I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.

—Benjamin Franklin

Performance measurement, a key driver of the Plan–Do–Check–Act iterative cycle that W. Edwards Deming² promoted, is the process of gauging achievements against stated goals. A major determinant of sustainable competitive advantage, it hangs on the development of SMART³ indicators—customarily in a results chain linking activities, inputs, outputs, and outcome to impact—that one should track to reliably verify and promote organizational success. Pre–post comparisons can then be made to assess the relevance, efficiency, effectiveness, sustainability, and impact of endeavors (at least in the case of larger scale ventures).

A Grain of Salt

Today, performance is appraised the world over: in academia, the arts, business, entertainment, government, news, politics, schools, science, sports, and war, among others. In the public sector, the need to sell the idea that management is improving means that indicators proliferate, on the whole, without regard for unintended consequences from the practice. Performance indicators are simultaneously misunderstood, overpromoted, and accordingly misused.

It is hard to go beyond your public. If they are satisfied with cheap performance, you will not easily arrive at better. If they know what is good, and require it, you will aspire and burn until you achieve it. But from time to time, in history, men are born a whole age too soon.

—Ralph Waldo Emerson

• First, conflicting definitions of performance indicators abound. In their shortest yet most stringent expression, they are a numerical measure of the degree to which an objective is being achieved. (From this interpretation, indicators are prone to merge with objectives and effectively become targets.) Others (Bakewell et al. 2004) consider them an observable change or event that provides evidence that something has happened, be that an output delivered, an immediate effect occurred, or a long-term process observed. To such discerning interpreters, indicators do not offer proof so much as reliable clues that the change or event being claimed has actually happened or is happening: rather, evidence from several indicators will make a convincing case for claims being made.

• Second, complex issues of cause-and-effect are seldom considered. Obviously, performance indicators can only pertain to matters that an agency controls.⁴ But agencies never command much and usually settle for subprime indicators that afford enough control for their purposes. This reality is intrinsic to all human endeavors, especially those that touch political decision-making or aim to spark social change.⁵ (Never mind that outcomes will in many cases emerge long after the effort—to which other agencies or even units in the same agency may have been unknown parties—has been deployed.) Consequently, interest has grown in approaches to planning, monitoring, and evaluation of outcomes and their metrics that consider actor-centered development and behavioral change, continuous learning and flexibility, participation and accountability, as well as non-linearity and contribution (not attribution and control).⁶

There are two possible outcomes: if the result confirms the hypothesis, then you’ve made a measurement. If the result is contrary to the hypothesis, then you’ve made a discovery.

—Enrico Fermi

• Third, the dimensions of performance mentioned earlier—namely, relevance, efficiency, effectiveness, sustainability, and impact—intimate that there can be no single assessment of accomplishments overall. Performance is an amalgam of dimensions, some of which may conflict. Measuring it calls for an appropriate basket of benchmarks developed with full knowledge of their interrelationships.

• Fourth, performance measurement must have a purpose—it can never be an end in itself. According to Behn (2003), the separate reasons for engaging in it are to evaluate,⁷ control, budget, motivate, promote, celebrate, learn, and improve. (The list could be shorter or longer: shorter in that the genuine purpose of measuring accomplishments is the last; longer in that the seven others, to which more could be added, can perhaps be considered as some important means for achieving the first.) Manifestly, no single metric is appropriate for all eight objectives. Therefore, practitioners had better consider the managerial purpose(s) to which performance measurement might contribute—these, alas, being ordinarily to control and budget—and how they might best deploy an informative⁸ blend of measures anchored in context. Only then will they be able to select valid yardsticks with the characteristics necessary to help meet each purpose, directly and indirectly, concentrating on what matters most.

• Fifth, many other things besides performance indicators are needed to ameliorate achievements (after the indicators have been recognized for what they are, namely, individual links in a results chain). The other requisites include Board, Management, and staff who are focused on meeting the explicit and latent needs of client, audiences, and partners; leadership and commitment to developing and extending products and services; and a culture of openness in which personnel are encouraged and willing to question why they do what they do.

… And Some Pernicious Effects

Cynics might argue—thankfully, perhaps, given the state of affairs—that performance measures are seldom used to make decisions.⁹ Yet, they do have effects from the suspicion that actions, e.g., sanctions or rewards, might be based on such information. True to form—be they people, rats, or monkeys—organisms compete for scarce resources. They will also naturally search what behaviors and related activities are recompensed and then endeavor to perform these, often to the exclusion of things not rewarded.

In the public sector, but likely elsewhere too, sanctions or rewards can therefore pay off for behaviors other than what they seek. Grizzle (2002) identifies numerous unintended consequences of attempts to measure outcomes, gauge client satisfaction, calculate the quantity of work performed, and introduce efficiency measures. She thinks that, as a general remedy, moral codes and professional standards should normally suffice to prescribe right action.¹⁰ Naturally, specific remedies should be applied to specific problems, most of which ought to be built into the measurement process itself.

Since the principal managerial purposes to which performance measurement contributes are control and budget—control more often than not exercised by means of the budget, it pays to examine the counterproductive effects associated with the crude use of budgets in (much of) the private sector (but in other sectors, too). In Jensen’s (2001) opinion, for instance, traditional budgeting processes in corporations waste time, distort decisions, and turn honest managers into schemers. Quoting,

Corporate budgeting is a joke, and everyone knows it. It consumes a huge amount of executives’ time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages managers to lie and cheat, lowballing targets and inflating results , and it penalizes them for telling the truth. It turns business decisions into elaborate exercises in gaming. It sets colleague against colleague, creating distrust and ill will. And it distorts incentives , motivating people to act in ways that run counter to the best interests of their companies.

Earnings can be pliable as putty when a charlatan heads the company reporting them.

—Warren Buffett

To be sure, Michael Jensen agrees that the budget process itself is not the root cause of counterproductive actions; rather, it is the use of budget targets to determine compensation.¹¹ Comparing traditional,¹² curvilinear,¹³ and linear¹⁴ compensation plans, he argues that only by severing the link between budgets and bonuses—in brief, by rewarding people purely for accomplishments , not ability to hit targets—will organizations remove the incentive to cheat. (Since many public sector organizations now have pay-for-performance plans, seeing how the three types might impact behavior there will not stretch imagination.)

Apply yourself. Get all the education you can, but then, by God, do something. Don’t just stand there, make something happen.

—Lee Iacocca

As though the situation was not complicated enough, moving from individual to divisional performance measurement , Jensen (Jensen and Meckling 2009) explains elsewhere that performance indicators should reflect the functions of different business units—that is, most large organizations adopt divisionalized structures , frequently categorized as cost, revenue, profit, investment, and expense¹⁵ centers. Here, an intuitive issue of performance reporting is whether divisional managers should be held accountable for things they cannot influence. Therefore, the manner in which divisional performance is measured, monitored, controlled, and reported on—typically at the behest of, sometimes directly by, higher levels in the hierarchy and often by means of budgets—is particularly important. Should different performance measures and associated decision rights closely relevant to the functions fulfilled not be used more often, certainly in the public sector,¹⁶ to evaluate the performance of divisions? In matters of budgeting, managerial flexibility, decentralization, and devolution would go a long way to offset the perils of performance measurement . As things now stand, the budget too often stands as the de facto strategy.

Transforming Performance Measurement

How many cares one loses when one decides not to be something but to be someone.

—Coco Chanel

What is important cannot always be measured and what can be measured is not necessarily important. These days, what matters most in organizations are intangible sources of value—such as human and customer capital—and their measurement and management challenge traditional, “technical” approaches. Reverting to Behn (2006), it is therefore a matter of helping managers manage, not making or letting them manage. Good performance cannot be compelled, commanded, or coerced.

It is not so difficult: most professionals are self-motivated but intrinsic drive must be channeled skillfully to excite, engage, and energize. (Therefore, performance measurement must restrain demotivators , such as office politics, and build motivators , such as fairness , that make people strive to do the best they can.) In an environment of positive accountability, collaboration, truth-telling, and learning would be rewarded, not just hitting all-too-often senseless targets.

The better practices that Robert Behn recommends relate to creating the performance framework, driving performance improvement, and learning to enhance performance. Dialogue about measurement is what will turn data and information into knowledge. Right? Only then will you use performance indicators wisely.