You can’t turn on CNBC or read the Wall Street Journal without hearing someone talk about the performance of this business or that. If you really listen, however, the criteria used to define performance can vary greatly. Airlines look at the number of paid passengers per available seat. Social media companies look at the number of subscribers. Insurance companies look at things like payouts over a given period of time. The ways that organizations define performance can vary greatly.
Now some will read this and ask why money isn’t considered the common denominator in determining business performance. After all, a company that takes in less money than it makes is not performing. Isn’t that right? Many times, it is, but sometimes it isn’t. For example, an insurance company may pay out more than it took in over a given year, but if those payouts are significantly less than it anticipated paying that year it may still be considered successful. Some hospitals may have less reimbursement revenue than their cost of care, but are still able to function due to community donations and government support. Some start-ups, particularly in the technology domain, may go for years without positive cash flow. If these trends continue for too long the organizations may be in trouble, but the way to make sure that doesn’t happen is for the management of these companies to focus on what does matter from day one.
Going back to our hospital example, they need to focus on things like quality care and clinical outcomes. Looking at our technology companies, they need to focus on quality innovations and meeting some defined need in the market in a new and unique way. Insurance companies need to make sure that they write enough new policies to make up for the additional pay outs that they know they will have to make somewhere down the road.
This understanding of what drives the long-term positive results is what business performance is all about. It is about identifying and measuring the inputs and outcomes of these processes so that we know how well our organizations are doing. This is the idea behind the Balanced Scorecard that Kaplan and Norton popularized in the 1990’s (1996). It was quite revolutionary at the time because up until then businesses had only looked at accounting sheets to understand that had happened in the past. With the Balanced Scorecard, businesses began looking at what is happening in terms of both their leading and lagging indicators. Obviously, this is a much more effective way to manage.
While it is movement in the right direction, what managers really need is some way to know what will happen. If we pull value lever X, what will happen to performance measure Y? Is it worth the investment to expand into some new market? Will discounting our products result in enough increased sales volume to justify the margin hit? These are the question managers ask daily. There was a time where these decisions were made based on gut feel and best guesses. Now, however, with more active performance measurement we can use various statistical analyses to make reasonable predictions based on the available data (Davenport & Harris, 2007). This of course is what many people refer to as analytics and this is what we’ll talk about in our next few posts.
Davenport, T.H. & Harris, J. G. (2007). Competing on analytics: The new science of winning. Boston: Harvard Business School Press.
Kaplan, R.S. & Norton, D.P. (1996). The balanced scorecard: Translating strategy into action. Boston: Harvard Business School Press.
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About the Author
Jimmy Brown, Ph.D. is a senior level management consultant with eighteen years of experience leading efforts to develop and implement practical strategies for business performance improvement. Dr. Brown has held senior level consulting positions at leading firms such as Booz-Allen & Hamilton, Accenture, and Hewlett-Packard.