»Managers who don’t know how to measure what they want settle for wanting what they can measure.«
— Russel L. Ackhoff
Seeing the Forest for the Trees in Performance Management
„Costs down, revenue up“ – managing a company might well be a rather dull affair for rather simple minded people were it not for numerous constraints and regulations. With such limitations management turns into a complex balancing act between
- Performance in its narrow definition, e.g. shareholder value, and
- Viability and sustainability
The nature of its environment or ecosystem confronts any organization with six main challenges that it has to meet:
- The organization must be compatible with the normal state of its environment to guarantee its existence, e.g. liquidity, profitability.
- Scarcity of resources forces the organization to use them effectively which will include efficiency (effectivity).
- To meet the variety and complexity of its environment the scope of what the organization can do must guarantee sufficient freedom of action.
- There is fluctuation around the normal state of affairs and extreme conditions, thus the organization needs security, including safety and stability.
- Other actors (stakeholders) in its periphery have interests of their own – the organization must decide how to coexist and interact (coexistence).
- Finally there is change in the environment which has to be met with adaptability.
- Next to the six environmental challenges there are psychological needs of humans within any organization that cannot be neglected.
While these orientors have some similarity to the well known perspectives of a balanced scorecard, in their sound systemic grounding they quite surpass the still narrow perspective of most management tools.
Any organization interested in viability would be well advised to choose relevant performance indicators (PI) for all performance dimensions (PD) as defined by the orientors above. It should do so for all of its relevant subsystems, e.g. business units, as well. Indicators can then be connected and aggregated thus forming trees of indicators leading to a single key performance indicator for any dimension. These indicator trees mathematically are a forest, then.
Risk-analysis by necessity must be a multi-dimensional affair: A red flag in any single orientor dimension cannot be compensated by green ones. Given a sufficient score on the basic orientor dimensions then allows the organization to optimize its indiviual performance goals. Here management may freely set their own priorities according to an overall strategy.
A value-driven performance measurement will thus be coupled with a multi-dimensional and balanced risk-assessment.
We would be happy to support your organization in switching to a more sustainable performance management regime.