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Improving corporate performance measures to drive results. (Measurement).

When the Royal Dutch/Shell Group announced its plans some years ago to sink an oil platform in the North Atlantic, the oil conglomerate was vilified as an environmental scofflaw. Chastened by the public black eye, it set about rebuilding trust in its corporate behavior. A new model of performance measurement was needed -- one that looked beyond its financials.

Shell responded by setting standards for measuring environmental, social and economic factors, such as greenhouse gas emissions, and obtained independent verification for the reports. By applying non-traditional measurement methods and backing them with external audit approval, Shell moved to recapture public trust and positioned itself to better gauge future performance.

Like Shell, corporate board members need, besides traditional financial data, new and reliable measures that address future performance. And they need immediate response tools to help quickly cut through the welter of information to judge what is most valuable for making decisions.

Traditional measurement, centering on time-tested performance areas, tends to address financial, operational or functional efficiency. Such historical measurement systems may be suitable for maintaining business as usual -- managing daily activities and tallying past-performance figures for accounting and other purposes. In general, these measures are plentiful, exact, internally driven, quantitative and generated from operational accounting and information systems, but they are too slow to handle the increasingly complex task of guiding organizations in a quick-moving marketplace. They also usually present historical or "lagging" indicators of a company's health.

Organizations need to view performance measurement as a strategic activity, critical to attaining results, not just measuring them. This means understanding what should be measured, in lieu of what is being measured.

Needed: More Dependable Data

Accounting and tax firm KPMG LLP interviewed Fortune 1000 and premier public-sector executives from the U.S. and Europe to determine why and how existing business practices undermine measurement's impact on strategic implementation. The findings, included in a report, Achieving Measurable Performance Improvement in a Changing World: The Search for New Insights, support the idea that corporate and government leaders lack dependable information, and point to necessary improvements in providing the information needed to make strategic decisions.

The data also reveals that in organizations pushed to respond immediately to market conditions, leaders are not completely satisfied with traditional measurement tools -- often feeling swamped with data, but not with applicable performance information. As for the allocation and performance of tangible and intangible assets, executives say their decision-making must rely more on factual indicators and less on anecdotal factors.

Emerging Methods: To support organizational goals, leaders say that measures need to be balanced across multiple dimensions. They're also concerned with assessing future performance by using "leading indicators" and past performance (lagging indicators). They believe that effective measurement systems should include entity-level and process- or department-focused measures and should blend both traditional and emerging measures.

Non-traditional measures have generally been less well-defined. They pertain to intangibles and emerging areas such as an entity's marketplace, stakeholders, strategic implementation and resource management. Under ideal conditions, such measures can be predictive, but they frequently depend on partial, anecdotal and conflicting data that is gathered inconsistently.

Enterprise Measurement System: By instituting measurement systems aligned with their strategy and business model, organizations can help ensure that whatever performance measures are employed are measuring what is right for them.

This approach can help to convert measurement information into specific beneficial actions. For measurement to truly offer a competitive advantage, it needs to be thought of as a core organizational process consisting of many sub-processes: interrelationships among strategies and risks; measures, measurement objectives and measurement framework; and alignment, infrastructure, monitoring and reporting and continuous improvement.

Tying Measurement to Strategies and Risks: By linking measurement to strategy, leaders can identify and effect measures in light of a business's future direction (leading indicators), instead of simply its present status (concurrent indicators) or past performance (lagging indicators). This distinguishing feature is crucial as organizations look to rapidly modify their business models and strategies.

Further, enterprises that remain nimble and alert to altering their strategies (and thus their measures) to meet evolving needs are more likely to prosper in fast-changing marketplaces. Many entities' growing use of non-financial measures -- such as those related to health, safety, and environmental parameters and other social/ethical issues -- demonstrates their intention to reflect organizational value, improve corporate governance and meet stakeholder needs.

Too often, organizations charting new strategies do not review the relevance and adequacy of measures to gauge customer satisfaction, monitor the external environment, evaluate management and employee capabilities or assess why particular efforts succeed or fail.

Measurement alone is not a cure-all. It needs the steadying hand of seasoned leaders, who can make the proper decisions, put them in place swiftly and remain vigilant to ensure that continuing initiatives (and the appropriate measures) remain valid as the business climate changes.

Few Measure What Matters: The most compelling finding in KPMG's survey was the gap between the acceptance of measurement's impact and the broad dissatisfaction with existing applications. Ninety-three percent of those surveyed believe measurement was "very/somewhat" effective in influencing outcomes, but only 51 percent are "very/somewhat" satisfied with current measurement systems; just 15 percent are "very" satisfied. These findings hold true even though 87 percent rated good information as "very/somewhat" important to improvement.

Several reasons were cited for failure. Besides problems with technology, respondents say their current measurement systems are: not aligned with strategic business objectives; reliant on lagging performance indicators; poorly integrated with other information (internal and external); and far too dependent on financial measures.

Measurement Increases Transparency: By upgrading the quality and scope of performance measures, organizations can clarify and standardize internal and external messages, increasing transparency and enhancing corporate governance.

In this way, performance measurement systems help improve governance and accountability to stakeholders. Thus, organizations need to review their voluntary, internal and required communications and create a consolidated strategy for improving internal and external reporting.

Besides investors, regulators and key industry and professional standard-setting groups are also seeking more transparency and innovation in external reporting. An encouraging development in this area is the recent inauguration of an international institution, the Global Reporting Initiative (GRI), a group of non-governmental organizations and companies working with the United Nations. The GRI has proposed a set of voluntary, non-financial reporting guidelines encompassing more than 90 indicators of environmental, social and economic performance and being tested by over 100 companies worldwide.

A significant share of management's focus is occupied in areas that are hard to measure. Instinctively, leaders know where to invest time, but many organizations cannot adequately assign priorities and gauge the resulting benefits It's time to address these issues, as new, more incisive, forward-looking and timely reporting requirements are being developed.

Jack Miller is vice chairman of the Health Care & Public Sector practice of KPMG LLP, (jrmiller@kpmg.com). Eric Israel, a partner in KPMG's Assurance & Advisory Services Center (AASC), leads the firm's international R&D unit for non-financial assurance and attestation services (ericisrael@kpmg.com). The full report is available at: www.us.kpmg.com/RUTUS_prod/Documents/12/PM_External_pdf.
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Author:Israel, Eric
Publication:Financial Executive
Date:Jul 1, 2002
Words:1173
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