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Key performance indicators or metrics allow organizations to create a common reporting system and language that leaders on all levels can understand and use in their decision-making. However, performance measurement decisions deliver key information and data that triggers specific decisions and actions at different levels of the organization.
Performance-based measurement systems provide feedback and insight into all levels of leadership within the organization. Local leaders make decisions based on trigger points and triggered events as well as overall performance of their organizational units.
On the other hand, senior managers must take a strategic perspective that links the performance of all organizational units into feedback related to the entity organization's performance; their decisions are global and focus on the sustainability of the entire organization.
It is important for leaders on all levels to understand the links between local performance and the entire organization. Key performance indicators and metrics trigger decisions on multiple levels. Lower trigger points may cause lower levels to react and make decisions and changes based upon the organizational unit in a specific location.
Senior leadership will have trigger points at higher levels that concern the performance of the entire organization, compelling them to make decisions and changes based upon the feedback they receive. While the perspectives may be different at various levels of leadership, the use of key performance indicators and metrics allows all leaders to make the decisions that are their responsibility.
Decisions can be tactical on a local operational level and strategic at a higher leadership level. The decisions are linked in that the strategic decisions will affect tactical decisions, but tactical may not affect strategic. Strategic decisions typically provide leaders with the boundaries and parameters that they must work within.
Leaders at all levels must understand that all decisions impact the organization. Daily decisions may not appear to be connected to the major areas discussed in this section, but, extremely, all decisions made are based in one of these key areas.
Quality of Execution of Organizational Strategies
The availability of performance measurement systems and key performance indicators provides leaders on all levels of the organization with the decision making tools to measure the quality of the strategy that drives the organization.
Financial indicators are lagging indicators, while non-financial indicators provide leaders with a balanced view of what is happening. Metrics provide leaders with specific questions to facilitate the organization's ability to make tough decisions and quickly seize opportunities as well as to evaluate how well it adapts to changing technologies and markets.
Improvement of Non-Financial Performance
Non-financial metrics linked with more traditional financial ones provide leaders with the information to make timely decisions that impact their unit's performance and the entire organization's ability to adapt. Trigger events and predetermined trigger points provide pivotal moments for leaders to make key performance decisions. These events can be established on both strategic and tactical levels with individual leaders responsible for making specific decisions within the organization.
Value Creation
More companies are using value creation indexes that focus on the relationship between non-financial performance and the organization's market value. The establishment of a value creation index provides leaders with key insights by establishing direct links between the two areas of focus. Research has shown that a reliance on non-financial performance leads to more accurate forecasts and valuation. Typically the value creation drivers are:
- Innovation
- Quality
- Customers
- Management
- Alliances
- Technology
- Brand
- Employees
- Environment
While value creation is defined and utilized by senior leadership within the organization, its metrics that measure non-financial performance are driven into the organization and become part of the suite of performance measurement tools used by leaders on all levels.
Research has shown that intangible elements such as innovation, alliance, management and employees are the key players in producing the organization's value. Within the durable and non-durable manufacturing environment, improvement in key value drivers results in higher market values. These are the indicators that allow organizations to measure and predict future performance.
Efficient Resource Allocation
The balanced use of performance measurement systems that evaluate both financial and non-financial performance metrics allow leaders to efficiently allocate the use of scarce resources through the organization. Decisions that effectively manage resource allocation allow organizations to sustain their performance and profitability.
While local leadership on the tactical level makes decisions on the use and application of resources, senior leadership on the strategic level is able to ensure that resources are used in ways that benefit the entire organization. The use of performance measurement metrics allows leaders on all levels to evaluate effectiveness and make decisions regarding future performance.
Excerpt: Maximizing Financial Performance: Pinpoint Leadership Skill Development Training Series (Majorium Business Press, Stevens Point, WI 2011)
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