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22 September 2009 • 7:00 am

Five Traps of Performance Measurement


Sir Andrew Likierman

Sir Andrew Likierman

An unusually practical article appears in the October issue of Harvard Business Review on the topic of performance measurement. I regret that I can’t share a link with you, because HBR content is not available online, except to subscribers of the magazine (perhaps the folks at Harvard haven’t yet read about the idea of Free). No matter. Though I can’t share the article itself with you, at least I can summarize it here.

Entitled The Five Traps of Performance Measurement, Andrew Likierman’s article is concise and valuable. Sir Andrew Likierman is no less than the Dean of the London Business School, a non-executive director of Barclay’s Bank, and Chairman of the UK’s National Audit Office. He knows of what he writes.

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18 September 2009 • 7:00 am

Leading Questions

At the center of the balanced scorecard concept is the observation that measures of organizational performance have traditionally been lagging indicators; measurement of actual performance after the fact. Management accounting is focused on describing performance during a time period that has ended – last quarter, last year, year-to-date, etc. And while there is nothing inherently wrong with lagging measures, they are of limited use to an organization’s leaders. All they do is tell what has already happened.

The ‘balance’ in balanced scorecard refers to the ideal of providing leaders with a balanced portfolio of lagging and leading performance indicators. Leading indicators are valuable because they help managers form an expectation of what will happen, and enable testing of the cause-and-effect hypotheses that are at the core of the strategic planning process. But identifying candidate leading indicators and selecting from among them requires careful consideration and a healthy skepticism of apparently easy answers.

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16 September 2009 • 7:00 am

Innumeracy and The Flaw of Averages

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A classic example of the Flaw of Averages involves the Statistician who drowned crossing a river that was on average 3 ft. deep.

Desperately casting around for a topic to write about today, I was grateful to see a link to an interview in the San Jose Mercury News with Stanford professor Sam L. Savage about his book, The Flaw of Averages (great title!). I’ve not read the book yet, but the review has certainly piqued my interest:

How does General Motors, Sam L. Savage wonders, explain the pathetic performance of its crystal ball? When Americans started driving hybrids, GM was still pushing Hummers. Executives at the giant carmaker — fully aware of union contracts, presumably prepared for rising gasoline prices and economic uncertainty — drove straight into the ditch of bankruptcy.

“Probability management” is often mismanaged by business leaders, says Savage, a consulting professor of management science and engineering at Stanford University and a fellow at the Judge Business School at the University of Cambridge. Savage, who has performed probability studies for Royal Dutch Shell, set out to right statistical wrongs in his book “The Flaw of Averages.”

The Information Age has transformed statistics into a vital field of study, yet Savage says many habits and practices have been slow to change from the “steam era statistics” of the Industrial Age.

Written for a business audience, “The Flaw of Averages” leavens the math with levity, even the occasional cartoon.

Well alright then. Working with business executives and their measures for so many years, I continue to be amazed at how easily decisions are made on the basis of numbers with little consideration for the risks and consequences of those decisions. I’ve been meaning to write at some length about the need for the discipline of risk management in change programs, but before doing so, we all need to take a deep breath and consider the magnitude of our collective innumeracy.

The topic has been covered before. I just pulled Innumeracy: Mathematical Illiteracy and its Consequencesby John Allen Paulos from my bookshelf, and thumbing through it, I remember how much I appreciated the book, but that is wasn’t the easiest read. From the back cover description:

Why do even well-educated people understand so little about mathematics? And what are the costs of our innumeracy? John Allen Paulos, in his celebrated bestseller first published in 1988, argues that our inability to deal rationally with very large numbers and the probabilities associated with them results in misinformed governmental policies, confused personal decisions, and an increased susceptibility to pseudoscience of all kinds. Innumeracy lets us know what we’re missing, and how we can do something about it.

Sprinkling his discussion of numbers and probabilities with quirky stories and anecdotes, Paulos ranges freely over many aspects of modern life, from contested elections to sports stats, from stock scams and newspaper psychics to diet and medical claims, sex discrimination, insurance, lotteries, and drug testing. Readers of Innumeracy will be rewarded with scores of astonishing facts, a fistful of powerful ideas, and, most important, a clearer, more quantitative way of looking at their world.

SinceI found that Innumeracy was not especially accessible, I haven’t yet found occasion to use examples from it. Perhaps The Flaw of Averages will be better. It looks promising. From the interview with Savage:

Q. What are the most common ways people foolishly apply the law of averages? Is it the faith placed in “average returns” on retirement portfolio?

A. Plenty of people have been caught off base by the Flaw of Averages in investing, but here is an example that is closer to home. Imagine that both you and your wife are right on time for appointments, on average.

When you go somewhere together, however, you will be late, on average. Why? If we model being early or late for each of you by flipping a coin (heads is early, tails is late), then the only way you will not be late as a couple, is if neither of you is late. This is like flipping two heads in a row, or one chance in four. Now expand this to a big industrial project with thousands of tasks, and you can imagine the implications.

We don’t have to imagine the implications – we live with them every day. More to come (soon, I hope), on the topics of innumeracy and strategic risk management.

4 September 2009 • 7:00 am

Perception Is Reality: Why Subjective Measures Matter, and How to Maximize Their Impact – Part III

This series of posts (in three parts) is adapted from an article of the same name that appeared in Harvard Business Publishing’s Balanced Scorecard Report in 2006.

In Part I, I asserted that perception matters very much to the strategy of an organization. Perception of external stakeholders, of customers, and of employees. Often, the change program requires measurements of customer and employee perceptions. How organizations go about gathering these perceptions is a key factor in the success of the change program. In Part II, we examined the challenges of survey design, and its impact on the effectiveness of the strategy-driven perception research. Here, we conclude with consideration of alternatives to surveys, and an examination of how to use perception data in the context of the change program.

Consider Focus Groups or Interviews

While most perception measures come from surveys, focus groups and interviews are also valuable tools. Focus groups can be a component of a survey (answering the complex question, “why are employees unhappy?”), or can simply serve as a way of capturing the perceptions of a small group when surveys would not be effective or practical. A focus group can reveal complex root causes for perceptions that may not be anticipated in a set of multiple choice responses.

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3 September 2009 • 7:00 am

Perception Is Reality: Why Subjective Measures Matter, and How to Maximize Their Impact – Part II

This series of posts (in three parts) is adapted from an article of the same name that appeared in Harvard Business Publishing’s Balanced Scorecard Report in 2006.

In Part I, I asserted that perception matters very much to the strategy of an organization. Perception of external stakeholders, of customers, and of employees. Often, the change program requires measurements of customer and employee perceptions. Here, we consider how organizations go about gathering these perceptions, which is a key factor in the success of the change program.

Ensuring Survey Success: Skillful Research Design is Vital

A survey program is the best way to regularly monitor stakeholder perceptions. E-mail and Web-based survey tools enable faster design, execution, and analysis, and have reduced the cost considerably. Many enterprises already have e-mail address lists from the Web sites and customer databases they maintain for direct communication and marketing purposes. Wireless telephony and text messaging enable nearly real-time data collection and analysis. Technology, however, is no substitute for good research design, and in amateur hands, such tools amplify the risk of getting unactionable results or even causing adverse consequences.

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2 September 2009 • 7:00 am

Perception Is Reality: Why Subjective Measures Matter, and How to Maximize Their Impact – Part I

This series of posts (in three parts) is adapted from an article of the same name that appeared in Harvard Business Publishing’s Balanced Scorecard Report in 2006.

When helping organizations design measures for their change programs, the moment comes when I float the idea of surveying employees or customers. Invariably, there is an uncomfortable silence, followed by protests that surveys are expensive, that they don’t tell them anything new, and that a steady diet of them annoys people and thus defeat their purpose. An unspoken source of resistance is leaders’ fear that survey results will challenge the comfortable fictions they may be sustaining to support their decisions.

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17 July 2009 • 7:00 am

Scorecard Blues (plus Three Other Colors)

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To my chagrin, the term ‘scorecard’ is widely used in both the disciplines of performance management and strategy execution, and without further qualification, has an imprecise variety of meanings. To some, it may mean a large collection of indicators of operational performance. To others, it is an ambiguous shorthand for ‘balanced scorecard,’ which is a well-developed set of related ideas and practices around strategy management and execution. Ambiguity comes from the fact that to some, the term ‘balanced scorecard’ means simply a collection of measures that has been balanced according to some real or imagine scheme. On far too many occasions, I’ve been approached by a conference attendee with a request to review and comment on his so-called ‘balanced scorecard,’ only to find that the proud offering is a only collection of operational measures with no connection to strategy. This is the basis of my Scorecard Blues. So let me be blunt: if a set of measures has been selected without the prior development of a strategy map, it cannot be properly called a balanced scorecard.

Even without the qualifier of ‘balanced,’ a ‘scorecard’ is seen as a group of measures, and / or the visual representation of those measures, and / or the tool for managing measurement data. Many software tools called ‘scorecards’ have been developed to facilitate the collection, analysis, and presentation of scorecards, both for operational and strategic use. Because the term ‘scorecard’ has so many diverse meanings and uses, it simply cannot be used alone without further explanation. But there is one trait that attaches to nearly every individual’s own definition of the term ‘scorecard.’

The lowest common denominator of nearly all ‘scorecards’ is the ubiquitous red – yellow (amber in Europe) – green summary indicator scheme (hence RYG). more

9 July 2009 • 7:00 am

Performance Advocates Lead Strategy Execution

Much has been written about the process of creating a balanced scorecard (BSC), and much more has been written about the overall process of strategy management that the BSC facilitates. Far less had been written about best practices for strategy review meetings in 2005 when my colleague Jay Weiser and I wrote an article on the topic that has been especially helpful in organizations getting started with BSC strategic management. In this and future posts, I’ll touch on some of our key points.

Strategy review meetings are the necessary venue in which leaders periodically evaluate the progress of the change program. more