All too often people fail to understand this fundamental point:  a metrics program is not the same as a performance management program. Metrics are a necessary and irreplaceable element in performance management, but as a stand-alone initiative they are inadequate. The challenge facing business managers is in taking metrics to the next level, and creating a viable performance management process grounded in fact.

No two successful performance management programs are the same, but all successful performance management programs share common principles.  To help shed light on what separates a good company from a great company, let's consider a framework. Think of a "foundation" supporting the "building blocks" of a successful performance management program.  

The foundation and pillars (labeled as "required"; see diagram on p. 28) are essential to the successful implementation and use of a performance measurement program.  Getting the right measures in place, establishing the culture to depend on these measures and extending the measures to your suppliers should be done first.  This follows the general rule that process should be completed before the investment in technology is made.  The "Optional" and "Nice to Have" components can be added later to enhance the value to the company once the culture is established and results are being achieved.  

The Foundation:  Aligning Metrics with Strategy

It is no coincidence that the foundation of a successful performance management program is grounded in having metrics aligned with a company's strategy. 

In business, it is essential to know where you want to go, or else you can end up channeling an entire corporation in the wrong direction. To exacerbate the problem, companies create hundreds of measures but fail to link those measures to actionable plans that drive progress towards the company's goals – suffering from an ailment we like to call measurement minutiae. 

The concept that more measurement is better can lead companies astray.  Forget quantity and focus instead on linking measures to strategic capabilities, customer expectations and financial indicators. 

Pillar 1:  Process, Not Functional Metrics

A survey of University of Michigan Business School executive development program attendees indicated that managers stood by as subordinates engaged in activities that clearly hurt the firm but helped a key measure look strong. These metrics are often created and managed at the functional "silo" level and individuals strive to achieve their results targets for their functions.   Unfortunately, when left unchecked, people often "game" the system to meet their individual or functional goals.    

For example, a company rewarded their procurement people on purchase price variance, and their manufacturing people on machine efficiency.  A purchase of a less expensive raw material slowed down the production equipment, and increased the overall cost of goods.  However, the procurement manager was paid his bonus, and the manufacturing manager was "dinged" as a result.  Functional metrics can drive suboptimization, waste time and money, and sap an organization of its vital energy.   

This gets to the heart of the first building block – that companies need to focus on process, not functional results metrics.  An integrated measurement system is a mechanism for balancing the tendency toward functional suboptimization at the expense of the enterprise's overall results.  These cross-functional or process metrics, if selected correctly, identify and track the measures that are critical to overall success.  

Pillar 2: Use Balanced Metrics

In the early 1990s, Kaplan and Norton wrote their first article on the concept of the Balanced Scorecard.  The most apparent change introduced by the Balanced Scorecard methodology was the integration of other performance dimensions beyond a purely financial view, hence the "balanced" view on organizational achievement. Kaplan and Norton's Balanced Scorecard Framework supports equal emphasis on internal and external perspectives. Studies have found that companies that use a balanced set of strategic measures – both financial and nonfinancial – outperform their less disciplined rivals in performance and management. One key reason for this is that companies that look only at financial metrics are analogous to driving a car by looking in the rear view mirror – because financial measures tend to be lagging indicators.