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Sales per employee ($1,000) 98.8 193 .0 94.2
Quest for Balance, Andre A. de Waal; Copyright © 2002 by John Wiley & Sons, Inc.
This material is used by permission of John Wiley & Sons, Inc.
provided one explanation when he said that, while the virtual close let Cisco look at the financial state of the company on a daily basis, it did not allow the company to predict the future, especially macroeconomic shifts.3 Others attributed the failure to Cisco’s culture (too growth oriented), its strategy (building inventory in anticipation of projected growth), its data (not all of the inventory data was automatically fed into its systems), and its partners (afraid to deliver news of the downturn in demand), to name just a few possibilities. Whatever the reasons, Cisco’s experiences with its real-time financial system serve to underscore the complexities and potential problems associated with the successful design, creation, and deployment of any measurement system, even one as highly touted as Cisco’s.
In spite of Cisco’s downturn, some have suggested that the damage to the company would have been greater if it had not been using its measurement system. A variety of studies lend credence to this supposition. More specifically, studies indicate that organizational performance is enhanced by the implementation and deployment of a performance measurement system. For example, Andre de Waal reports that in 1998, researcher Edward L. Gubman did an analysis of 437 publicly traded firms, 205 of which had “structured” performance measurement systems. Based on his analysis, he found that over a three-year period, the financial performance of those firms with a performance measurement system was substantially improved by the deployment of those systems (see Exhibit 4.1) and the financial performance of those firms with a performance measurement system was substantially better than those firms without a system (see Exhibit 4.2).4
The Strategy Gap
Exhibit 4.2 Financial performance of firms with and without performance management systems.
Three-Year Growth Rates Firms with Performance Management Firms without Performance Management
Total shareholder return 7.9% 0.0%
Return on equity 10.2% 4.4%
Return on assets 8.0% 4.5%
Cash flow ROI 6.6% 4.7%
Real growth in sales 2.1% 1.1%
Real growth in employees 0.0% 1.1%
Sales per employee $169,900 $126,100
Income per employee $5,700 $1,900
Quest for Balance, Andre A. de Waal; Copyright © 2002 by John Wiley & Sons, Inc. This material is used by permission of John Wiley & Sons, Inc.
These results are consistent with an earlier study by William Schiemann and John Lingle, based on an analysis of 58 companies that employed “measurement in a disciplined fashion” compared to 64 companies that did not.5 The companies were asked to rate their performance on three criteria: whether their company was perceived as an industry leader, whether their company was financially in the top third of their industry group, and whether their most recent major change effort was successful. Their self-reported performance was later corroborated by data on their three-year return on investment (ROI). As the results in Exhibit 4.3 indicate, those companies with a managed measurement system substantially outperformed on all of the criteria those companies without a system.
Besides the financial payoffs, deployment of a performance management system also results in less tangible payoffs. Again, according to Schiemann and Lingle’s study, measurement-managed companies have:
• Clear agreement on strategy among senior management (93 percent vs. 37 percent)
• Good cooperation among management (85 percent vs. 38 percent)
Measurement and Methodologies
Exhibit 4.3 Relating measurement management to performance.
Measure of Success Measurement- Managed Organizations Non Measurement-Managed Organizations
Perceived as an industry leader over past 3 years 74% 44%
Reported to be financially ranked in the top third of their industry 83% 52%
Three-year return on investment (ROI) 80% 45%
Last major cultural or operational change judged to be very or moderately successful 97% 55%
Adapted with permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from BULLSEYE! Hitting Your Strategic Targets Through High-Impact Measurement by William A. Schiemann and John H. Lingle. Copyright © 1999 by The Metrus Group, Inc.
• Links between performance measures and company strategies (74 percent vs. 16 percent)
• Open sharing of information (71 percent vs. 30 percent)
• Employees willing to take a risk (52 percent vs. 22 percent)
• Links between individual performance and unit performance (52 percent vs. 11 percent)
• High levels of self monitoring by employees (42 percent vs. 16 percent)6
STATE OF THE MEASUREMENT ART
Underlying corporate performance management (CPM) is a performance measurement system. In Robert Simons’s terms, a performance measurement system “assists managers in tracking the implementation of business strategy by comparing actual results against strategic goals and objectives. A performance measurement system typically comprises systematic methods of setting business goals together with periodic feedback reports that indicate progress against goals.”7