No one said performance measurement was easy. Done well, it can help management teams prioritize, communicate better, and match rewards with effort. Best of all, says Suzanne Tucker, it can be a crucial early warning system

“How is my company performing?” is the most important question for business leaders. In the past 20 years, performance measurement has shifted from an emphasis on financial results to a more all-encompassing approach. Quality, customer perspectives, innovation, and other factors are now considered as important as the traditional bottom line. This has led to new theoretical models, such as the balanced scorecard and dashboard reporting.

Despite this transformation, performance measurement (and management) is still a challenge to many companies. Why? With technological advancements and best practices, why can’t we create and implement a “one size fits all” model for an organization? In my view, there are four major reasons why performance measurement remains a challenge:

1. Each company is unique. While a theoretical model of performance measurement can be applied to most business situations, the measures themselves are as unique as the companies. Different markets, products and services, competitive competencies, and environments require different measures. Identifying the right measures can be a challenge for managers.

2. Limited resources. Someone must be accountable for the implementation, information management, and presentation of a measurement system. In large organizations, entire departments can be assigned to that task. In small companies, managers have limited capacity outside of their main responsibilities. Without close attention, performance measurement becomes simply another data-gathering tool and quickly loses its appeal.

3. Rewarding the right behaviours. Success is contingent upon metrics that encourage the right actions for an organization. Most people are familiar with the saying, “If you can’t measure it, you can’t manage it.” Performance measurement adds a new twist—if you are measuring it, you can be sure that you are going to have to manage it! By its nature, performance management encourages specific behaviours. People work on what they think is important, and if the company is focused on measures, people will focus accordingly. Companies need to be careful, though. If management promotes the measure of production, for example, quality may suffer if employees adopt a “whatever it takes to get my quota” mindset. This could result in deteriorating customer service.

4. Getting results. Many companies embark on these systems hoping to realize immediate gains. The problem is that performance measurement systems are sometimes abandoned when results are slow. Many managers and CEOs think “why bother?” when they don’t see immediate improvement. Remember, performance measurement is intended as a long-term navigator, not an immediate bottom-line booster.

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Given these challenges, why would a small company want to put such a system in place? Opportunities to be gained make the effort worthwhile:

• Early warning systems. Performance-measurement systems provide a sense of how a company is doing in real time. Depending solely on financial measures to gauge their health is like driving while looking in the rear-view mirror. A lot of “stuff” happens before the numbers hit the balance sheet: How sales are made, how customers are treated, how products and services are delivered, employee skill sets—all of these factors impact results. A good performance measurement system alerts managers when something is going wrong, hopefully early enough to mitigate potential issues that can lead to poor financial results. Ultimately, the system becomes the focus of regular financial reviews and helps managers make better decisions with the entire organization in mind.

• Working on the same goals and being rewarded for it. Performance measurement systems encourage alignment; they help people in a company work toward common goals. People need to be sure how their role impacts the company and where they fit. When a performance measurement system is introduced (and is, ideally, tied to compensation), the company is saying three things: “This is what is important to us. This is what we want you to work on. This is how it will be used to reward you.” The link to compensation is critical. Generally speaking, people focus on what they are going to be rewarded for. Performance measurement systems can be particularly effective when a company wants to develop a bonus program.

• Throw me a lifeline. While a performance measurement system may not help improve the financial results of a company, there is good evidence that it can help slow or stop the decline of an organization. It can also be a proactive way for start-up companies looking for something to help them in the crucial early years.

Let’s face it—performance measurement is not easy. Still, it offers significant benefits for any organization seeking to learn and understand how to prioritize, to communicate what is most important, and to reward effort as well as results. It also helps managers respond early to emerging events and provides good information that can improve a company’s direction and success.

Suzanne Tucker is the comptroller for Saint John–based Mariner Partners Inc. She wrote her MBA thesis on performance management.