Measuring Corporate Performance: causes and consequences
What does an organisation need to measure? Why should it measure its performance? Isn’t it already following the prescribed rules and regulations, and making the required filings? What the organisation needs to measure correctly, may have certain consequences, and what these consequences may be, will depend greatly on the organisation itself.
The term “measuring corporate performance” encompasses the ongoing or continuous data gathering from all or specific areas of the organisation to gauge its progress towards reaching its objectives. This is seen as an integral part of making decisions that will affect the company’s operations, competitiveness, growth and sustainability. Measuring corporate performance requires that the organisation tolerates more stringent scrutiny; if there are skeletons in the corporate cupboard, this is the time they will come to light. However, in the past two decades, tighter scrutiny of companies in general has spurred many firms to be more open and transparent in their operations because of public outcry, coupled with the fact that stakeholders could likely be shareholders, and vice versa.
Annual reports tend to paint a positive picture of the firm, and shareholders don’t usually question its operations as long as they reap healthy returns but corporate complacency has led to increased instances of fraud and corruption in recent years – hence the need for more stringent measurement and reporting. Measuring corporate performance has internal and external value. Internally, the organisation becomes aware of how well it is operating, where its shortfalls lie and what it needs to do to address these and improve performance. Externally, it demonstrates to its shareholders and stakeholders that it is serious about transparency and good corporate governance, and wants to be seen as a responsible entity that capably manages investors’ funds.
The measurements offer an accurate, unvarnished picture of how the organisation is being managed, and in doing so provide investors with a certain level of comfort and assurance that their investments are being responsibly applied. As measurements are applied, the organisation derives better insight into how it functions, i.e., its internal dynamics, and can adjust its strategies accordingly. The measurements may indicate where some methods work better than others, which should be duly noted because a change in the way things are done may be the basis of substantial cost-savings for the company in the long term, and enable it to streamline or align its operating methods more effectively.
With measuring corporate performance, a top-down approach is needed; it is the Board which must moot the idea of detailed analysis of how the organisation is operating, and compare this against its stated goals, while management undertakes the process. The Board also needs to provide oversight, which means that it has to be clear about the objectives of measuring corporate performance, and how the measurements are going to improve the organisation’s performance. While this implies that there will be areas that need improvement, it indicates that there will be challenges ahead for the organisation – so efforts and resources will need to be put in place to address these issues before they escalate.
However, not everything needs to be measured, and sometimes the best measurement methods are the simplest ones. It may be helpful to identify the key business processes of the organisation, and concentrate on measuring those first. Profit and loss may be the obvious place to start, but the measurement has to extend beyond asking why things happened the way they did, and what can be done to improve the processes involved to achieve better results. A list of desired outcomes can be drawn up which could be the basis for improvement across the organisation. Accessing the necessary information and bringing shortfalls to light so that they can be addressed also means that internal barriers, particularly to channels of communication, need to be dismantled so that information is shared.
If communication has always been a contentious area, this is the opportunity to demonstrate how open communication can be a great advantage to the organisation. One of the main barriers to better corporate performance is the tendency for departments or units to operate in their own silos. Prodding them out of their silos, by insisting on better communication is one way to overcome the silo mentality that still afflicts many organisations today. Although many models exist that can guide organisations through the processes required to measure corporate performance, organisations need to thoroughly understand their respective cultures and requirements, and customise their measurement methods accordingly. Measurement should not focus exclusively on financial performance.
There are several methods of measurement, such as Kaplan and Norton’s Balanced Scorecard, TQM, Benchmarking or Business Process Re-engineering, that cover numerous areas. But organisations may find that no single method is appropriate because each organisation has its own individual characteristics that must be taken into consideration when developing an accurate picture of how it is performing. In all probability, a combination of tried and tested methods, infused with elements that take into account the existing company culture and the current sentiments in the environment it operates in, will have to underpin the processes that the firm selects to measure its performance.
Performance measurement is a strategic tool that helps organisations answer the “How Are We Doing?” question in a comprehensive, ongoing manner. It will not only help organisations identify problems in a timely manner, but it will enable stakeholders to get a better idea of the company’s strategy and direction, and a deeper understanding of its priorities, flexibility and values.