The Grey Chronicles

2010.October.29

Do Metrics Really Matter?

Filed under: Commentary,Long Grey Notes,Management,POM,Production,Readings — reyadel @ 23:59
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Ever remember the lines of the promotional jingle, such as: Subtract 32 from degrees Fahrenheit [background: why?] … multiply it by five over nine …?

In the ’70s, the Philippines adopted the use of International System of Units, (abbreviated as SI from the French Le Système International d’Unités). The world’s most widely used system of measurement both in everyday commerce and in science, SI is the modern form of the metric system devised around seven base units and the convenience of the number ten.

Within that decade, Presidential Decree No. 187 prescribed the metric system as the sole standard of weights and measures to be used throughout the Philippines starting January 1, 1975 for all products, commodities, materials, utilities, services and in all business and legal transactions. On 16 July 1975, Presidential Decree No. 748 extended metrication efforts in the Philippines. Furthermore, through Batas Pambansa Bilang 8 issued on 02 December 1978, the Philippines officially adopts the metric system effective 01 January 1983, as the sole measurement system. On 13 April 1992, Article 63 of Republic Act 7394, The Consumer Act of the Philippines, reinforced the metrication in the Philippines.


In the same vein, performance metrics started its history even prior to the start of the Information Age in the late 20th century. In 1950’s, W. Edwards Deming, along with Japanese managers such as Genichi Taguchi, introduced the modern emphasis on quality, innovation, and employee empowerment, as well as feedback and measurement-based management (Arveson, 1998).

A performance metric is a measure of an organization’s activities and performance. Traditionally, many metrics were financed based, inwardly focusing on the performance of the organization. Soon, with automation, Management Information Systems became available.

In a 1958 article, IBM researcher Hans Peter Luhn used the term Business Intelligence, defined as: the ability to apprehend the interrelationships of presented facts in such a way as to guide action towards a desired goal (Luhn, 1958). Thirty-odd years later, in 1989, a research analyst at Gartner, Howard Dresner, re-popularized Business Intelligence [BI] as an umbrella term to describe a set of concepts and methods to improve business decision-making by using fact-based support systems. Today, Business Intelligence is becoming the art of sieving through large amounts of data, extracting useful information and turning that information into actionable knowledge.

Douglas W. Hubbard (2007), How to Measure Anything - Finding the Value of Intangibles in BusinessOne criticism of performance metrics is that when the value of information is computed using mathematical methods, some choose measures that have little value. Doug Hubbard introduced the term Measurement Inversion, wherein the economic value of measuring a variable is usually inversely proportional to how much measurement attention it usually gets. Or more simply, the more something matters the less we tend to measure it and the less we know about it (Hubbard, 2007). In applied information economics, the Value of Information Analysis tries to correct for the measurement inversion by focusing on high-value measures.

Organizations react differently to the results of monitored performance metrics, which should usually encourage improvement, effectiveness and appropriate levels of control. In a 2001 survey by the American Institute of Certified Public Accountants [AICPA] (Maisel, (2001) itemized the drivers of change whereby companies revise its performance measures. e.g., decrease in profitability, change in strategy, enhance shareholder value, redesign of business processes, new technology, new competition or attract/retain people.

In private companies, measurements provide a rational basis for decisions. Performance metrics are often linked in with corporate strategy. “If you don’t have a goal, you can’t improve an organization,” claimed Jac Fitz-Enz (1993), and explained:

“Measurement of any work process or practice is more than possible. It is imperative. It applies in both routinized process work and in individual professional practices. Whether we are talking about a benchmarking project or just tending to day-to-day management, without number we don’t really know what we are doing. If managers do not know [measurements], I have only one question: What do you think they are managing? Without metrics, managers are only caretakers. They are administrators of processes.”

Robert Kaplan and David Norton (1996), The Balanced Scorecard: Translating Strategy Into ActionRobert Kaplan and David Norton’s book, The Balanced Scorecard: Translating Strategy Into Action (1996), demonstrates how to measure corporate performance in a more balanced way, rather than relying on just the financial metrics that aligns everyone in the corporation to its strategic direction.

Stacey Barr (2007), Performance Measure Specialist, argues that Balanced Scorecard is not a measurement tool, largely because it has well-known implementation problems; aside from not having enough emphasis on results versus strategies, it offers neither some definitive steps to measure design nor it shows the process of measure implementation.

Andrew Neely, Chris Adams, Mike Kennerley (2002). The Performance PrismThe Balanced Scorecard approach, moreover, ignores the role of suppliers and employees in an organization’s performance (CIMA, 2002). The Performance Prism was thus developed by Cranfield University (2002) to integrate five related perspectives: stakeholder satisfaction, stakeholder contribution, strategies, processes and capabilities. A fundamental difference offered in this approach is that the performance measures are not simply derived from strategy. According to the authors, to derive measures from strategy is to misunderstand fundamentally the purpose of measurement and the role of strategy.


In contrast to the metric system, there are still prevailing issues, as shown above, on corporate performance metrics. Companies choose their own tool to measure corporate performance. Each of these respective tools is contained within their pros and limited by their respective cons, as well as their own shares of advocates and critics. The probability of seeing in the near future of an integrated framework of corporate performance metrics—encompassing all the tangibles and intangibles—short of an international standard just like the metric system of measurement, might not be far.

Well, only three nations out of 203 have not officially adopted the International System of Units as their primary or sole system of measurement: Burma, Liberia, and the United States of America. Thus, «The Grey Chronicles» can dream, or can it?


Notes:

Arveson, Paul 1998. Background and History of Measurement-Based Management. Cary, NC: Balanced Scorecard Institute, 1998. back to text.

Barr, Stacey (2010). Why Balanced Scorecard is not a Measurement Tool. ArticleBase, 06 November 2007. back to text.

The Chartered Institute of Management Accountants [CIMA] (2002). Latest Trends in Corporate Performance Measurement. Technical Briefing. London: The Chartered Institute of Management Accountants, July 2002. p. 11. back to text.

Fitz-Enz, Jac (1993). Benchmarking Staff Performance: How Staff Departments Can Enhance Their Value to the Customer. Jossey Bass Business and Management Series: Pfeiffer & Company, 01 September 1996 (1st ed.: August 1993). 218pp. back to text.

Hubbard, Douglas W. (2007). How to Measure Anything – Finding the Value of Intangibles in Business. Place: Wiley, 03 August 2007, 304pp. 2nd ed. April 2010, 320pp. back to text.

Kaplan, Robert and David Norton (1996). The Balanced Scorecard: Translating Strategy Into Action. Harvard Business Press, 01 September 1996. 322pp. back to text.

Luhn, Hans Peter (1958). A Business Intelligence System. IBM Journal of Research and Development, October 1958. pp. 314-319. Also available at IEEEXplore Digital Library. back to text.

Maisel, L. S. and AICPA (2001). Performance Measurement Practices Survey 2001. Washington, D.C.: The American Institute of Certified Public Accountants [AICPA], 2001. back to text.

Andrew Neely, Chris Adams, Mike Kennerley (2002). The Performance Prism: The Scorecard for Measuring and Managing Business Success. Place: Pearson Education, 27 June 2002. 377pp. back to text.

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 LicenseDisclaimer: These posts do not necessarily represent any organization’s positions, strategies or opinions; refer to this blog’s self-imposed rules: A New Year; New Rules. Unless otherwise expressly stated, posts are licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License. Comments are moderated to keep the discussion/s relevant and civil. Readers are responsible for their own statement/s.

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