The five traps of performance measurement

Abstract

Evaluating a company's performance often entails wading through a thicket of numbers produced by a few simple metrics, writes the author, and senior executives leave measurement to those whose specialty is spreadsheets. To take ownership of performance assessment, those executives should find qualitative, forward-looking measures that will help them avoid five common traps: Measuring against yourself. Find data from outside the company, and reward relative, rather than absolute, performance. Enterprise Rent-A-Car uses a service quality index to measure customers' repeat purchase intentions. Looking backward. Use measures that lead rather than lag the profits in your business. Humana, a health insurer, found that the sickest 10% of its patients account for 80% of its costs; now it offers customers incentives for early screening. Putting your faith in numbers. The soft drinks company Britvic evaluates its executive coaching program not by trying to assign it an ROI number but by tracking participants' careers for a year. Gaming your metrics. The law firm Clifford Chance replaced its single, easy-to-game metric of billable hours with seven criteria on which to base bonuses. Sticking to your numbers too long. Be precise about what you want to assess and explicit about what metrics are assessing it. Such clarity would have helped investors interpret the AAA ratings involved in the financial meltdown. Really good assessment will combine finance managers' relative independence with line managers' expertise.