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Performance measurement is how organizations, public and private, measure the quality of their activities and services. An influential 1982 book, “In Search of Excellence,” sparked interest in performance measurement. Since then, business, government and other organizations have tried to measure the degree to which the organization’s objectives are being achieved. Performance measurement may sound simple, but it is often a complicated process that requires deep strategic thinking and evaluation.
Performance measurement is the process by which companies, governments and other organizations establish criteria to determine the quality of their activities, based on organizational objectives. It is about creating a simple, but effective system to determine if they meet the objectives of the organizations. One example is the US Department of Agriculture’s safety inspection program, which uses food borne illness reduction in meat products. Business examples include increasing revenue and profits, reducing production costs, and the amount of time required to process customer orders. All of these examples can be measured quantitatively.
“In Pursuit of Excellence,” written by Tom Peters and Bob Waterman, uses performance measurement to identify the characteristics of successful companies. The book sold millions of copies and ushered in the era in which management is all the rage. Many business leaders and academics read the book and begin to think more deeply about organizational performance issues. Today, performance measurement (also called performance management) is a specialty within the fields of business, management, and public administration.
Developing a performance measurement system begins with defining strategic objectives. For a business, the most important goal is to make a profit. For government agencies and other organizations, the main objectives can be more difficult to define. An organization then defines a set of strategic indicators, such as increasing sales and reducing production costs. The organization sets performance targets, such as increasing sales by 30 percent and reducing production costs by 10 percent. After setting objectives, the organization can begin to measure actual performance. By comparing actual results with objectives, organizations can identify areas for improvement needed.
A variety of factors make performance measurement a complicated process. Sometimes knowing what to measure is not very clear. This is especially true for public sector organizations, where managers may complain that they are being held accountable for goals that they cannot fully control. For example, some public school systems object to their performance being measured by student results on standardized tests, pointing out that factors external to schools, such as family environment, can affect student performance on the test.
The complexity of organizations and business models further complicates performance measurement. Furthermore, the intangibility of some measures, especially non-financial ones, is a complicating factor, since these measures can be subject to manipulation. This makes performance measurement in the public sector especially difficult.