Be careful what you chose to measure

The ongoing public furore around the behaviour of some of our financial institutions has shone a light on the issue of performance measures, reward systems and the resultant organisation cultures. As last month we looked at culture and the contribution it makes to achieving long term success, in this article we will look at the role of performance management in our quest for both good governance and organisational sustainability.

Performance evaluation has long been the cause of much discussion and debate at the board level of non-profit organisations. The reason is quite simple – what the board and the CEO agree on what will be measured determines what the organisation, management and staff will focus on during the year. Consequently, the establishment of a performance management system is of utmost importance in the governance of all NFP and commercial organisations.

Whilst the commitment to an organisations performance management system generally requires a considerable commitment of resources and in many cases, some trial and error, there are some general guidelines that will assist the process:

• Context: The measures chosen must be aligned to the organisation’s mission, goals and strategy. As a guide, a board member should be able to look at the performance report (we will refer to this as KPIs) and understand how the organisation is tracking against its strategic plan. As such, the starting point is a clearly articulated strategic plan that is understood by all working in the business;
• The organisation’s values: The foundations for an effective performance management system are alignment between the measures chosen and the values of the organisation. For example, if the only definition of success is determined to be a specific financial result, without consideration or reference to the values of the organisation, then it is highly likely that management and staff will see this as acquiescence to all sorts of behaviour, irrespective of the non-financial implications. It is noteworthy here that our leading financial institutions are reviewing their short term incentives to senior management for this has been deemed to focus management just on this outcome to the detriment of many other aspects of the business;
• The Mission: The 1st step is to agree on what your mission is, i.e. what are you trying to achieve? This needs to be well defined and concise and for everyone in the organization, from the board to service delivery, to have a very clear understanding of both the words and the intent. This is the reference point for the organisation’s KPIs
• Strategies/Initiatives/Actions: What are we going to do to achieve our mission? This incorporates all aspects of the business, including service delivery, business development, human resources, administration and financial management. These initiatives must be within the capacity and capability of the organisation to deliver within the resources allocate to the strategies
• Outputs / Outcomes / Impact: What are we going to measure? There are 3 measures of performance that relate to a non-profit organisation, namely:
  • Outputs – what did the strategies produce – for example, workshops delivered, participants attending an activity, programs delivered. An output is a raw number that enables some degree of performance evaluation and is usually relatively simple to tabulate and report;
  • Outcomes – as a result of the initiative, what did participants achieve - for example, an education qualification, an employment position, an improvement in health standards? Outcomes are the next level of performance evaluation as these focus on achievement rather than participation/delivery.
  • Impact – the highest level and much more difficult to determine. Impact refers to changing the cause rather than addressing the result i.e. rather than investing in providing short term shelter for homeless people, the strategy and therefore the performance evaluation focuses on addressing the issues that create the homeless status in the 1st Whilst the need for short term shelters will still be there, over the medium to long term the strategy should be to reduce the need for short term initiatives by addressing the initial causes.

Furthermore, a performance management and evaluation system requires a benchmark or target to enable effective assessment – an isolated number means nothing, it only comes to life when compared to pre-determined target and subsequently a trend. The benchmark/target should therefore contain the following key characteristics, the SMART principles:

S – specific, nothing vague

M- measurable and the information relatively easy to collect

A – achievable, within the capacity and capability of the organisation

R – realistic , some degree of stretch but not so that it demotivates

T – time bound , not open ended

The discussion on KPIs should be around the results achieved, not the interpretation of the words.

And this is the area of biggest risk – if we choose the wrong KPIs, we will focus the organisation on the wrong outcomes. Organisations must implement a balanced approach to their performance management responsibility and next month we will discuss in greater detail the concept of “the balanced scorecard”

In summary, most non-profit organisations are about affecting some degree of change, for the better, in the areas in which they operate – whether it is education and training, mental health, the justice system or homelessness to name just a few. With the ever increasing demands on the public purse and private contributions, those organisations that can demonstrate that their initiatives are delivering quantifiable results in terms achieving real and positive change in their area of operations are in a much better position to retain and attract funds to continue their work.

The challenge then is not only in service delivery, but just as importantly, in the performance management and evaluation systems we have in place to demonstrate the results we achieve through the investment of our resources. The KPIs chosen should be relevant to both internal management and external assessment of performance and add value to the overall management of the organisation at both board and operational level. If your performance management system does not provide this level of value, then it’s time to review , update and implement a new approach . The investment will be worth it.

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