Statline article from The Quality Magazine, 6(4), August 1997, 79-80

Why measure?

Measurement is at the heart of understanding an organisation. This article, number two in our series on measurement, introduces the theme of 'obtaining the right data' by considering the fundamental question of "Why measure?".

Understanding why an organisation needs to measure its performance is a necessary pre-requisite to the measurement process. Managers who understand what they want to achieve by collecting and using data will be able to more logically decide what should be measured and how the information should be used.

All organisations must keep some measures on their performance. Statutory reporting requirements see organisations providing data on their financial performance to their owners (including shareholders) and to the government. Many organisations also have to provide evidence of compliance against other types of regulations such as emission standards. Obviously one answer to the "Why measure?" question is: "Because we have to.".

This article looks at what an organisation chooses to measure. Why should an organisation collect any sort of data beyond what is required by legislation and regulation? The clear and compelling reason is that organisations need to measure themselves to understand how they are performing.

Understanding organisational performance has many dimensions. These can be broadly summarised as measure to:

• monitor and control our processes and outputs, and,
• improve our processes and outputs.

We now expand on these concepts.

1) Measurement for monitoring and control

First and foremost, any organisation needs to understand how well they are performing now and how well they are likely to perform in the future. This requires measurement. Some organisations feel comfortable using data on past financial performance alone to assess their health. Previous sales data, for example, is often used to predict future outcomes.

However, some organisations take a more insightful view of performance. They understand that outcomes (of which financial performance is but one) are the result of the interaction of numerous variables, many of which can be measured and some of which can be controlled. Such organisations will typically choose to collect and respond to a broad range of measurements. Some of these will be on current performance, and some will be predictive of future performance. More specifically, outcome measures give information about how the organisation has performed in the past, whereas measures on processes can give information about how the organisation is likely to perform in the future.

For example, past sales and current customer satisfaction levels are both performance measures that are related to future sales. Past sales alone may not be as good an indicator of future performance. Internal quality indicators and process measures can often be used as predictors of future customer satisfaction levels.

There are several ways of determining what are the 'right' measures for an organisation, and we will explore some of them in future articles.

Not only do organisations need to understand how they are performing, they must also be aware of how well they are capable of performing.

Measurements around capacity and process capability, for instance, help bridge the gap between promise makers such as sales, marketing and management in organisations, and promise keepers such as design and production.

Measures around capability and capacity are necessary to help an organisation set realistic objectives and, in particular, to plan expansion. For example, a major services provider who recently launched a new product ran into difficulties when the product proved more popular than anticipated. Their telephone systems and customer services representatives could not cope with the increased demand. While good forecasting methods are useful here, they must be augmented by good information on organisational capabilities.

Many enterprises have strategic plans but too often these bear little relationship to how the workforce goes about its daily activities. What is frequently missing is a mechanism or system to translate abstract visions and plans for the future into measurable outputs.

Properly chosen measurements can be used to cascade the planning process downwards. At each level of the organisation - strategic, tactical and operational -performance measurements can be used to link outcomes at one level to expectations at the other levels.

To take a simple illustration, a strategic objective may be to provide a certain level of return on investment to shareholders. In order to track performance against this objective, measurements on key dimensions such as sales and margins are required. Such strategic indicators lead to performance measurement and target setting on output, overall quality, customer satisfaction and so on. In turn, these outcomes are predicted at the operational level by internal process measures. If a strategic objective is to be realised than the actions which result in that objective being attained must be measured.

2) Measure for Improvement and Learning

Lastly, measurement is integral to building systems that lead to improvement. In order to be able to improve, an organisation must understand who their customers are and what they require of the organisation. It must also understand how its processes function. One way that improvement comes about is when changes in processes result in increased customer satisfaction. Understanding customers and processes requires measurement.

Information on customers is most commonly obtained through market research. Customer perceptions of quality are measured through surveys, complaints and warranty records. Process knowledge is derived from output measures such as quality characteristics, timeliness and defect rates, as well as from internal process measurement.

As we will see in the articles which follow this one, it is sometimes not easy to decide what should be measured. Further, obtaining data can be far from straightforward and using data to guide decision-making can be fraught. However, it should now be clear that measuring is important for a number of reasons. In fact, measurement is at the heart of understanding your organisation.