The definition of success or effectiveness for an organization is frequently not a simple task: Not only are the criteria of business success complex in most situations, they also frequently change over time. A good metric is a criterion on which the success or failure of a particular aspect of the organization's strategy and concomitant objectives are judged. The development of reliable, valid business metrics that are related to the organization's strategy and objectives is essential for organizational success. One conceptual framework that assists an organization in setting strategy and measuring organizational effectiveness along the vectors of financials, customer relations, internal business processes, and learning and growth is Balanced Scorecard.
By definition, businesses are in business to succeed. The question, however, is how to know when this rather nebulous goal is accomplished. For example, a modest goal upon starting a business may be to grow a consulting practice to the point that there are numerous employees that allow the entrepreneur to be an executive rather than a professional working on projects. After a number of years when the goal is met, the original metric will most likely no longer equate to success. Business goals differ from what they were in the past, based on factors other than pure financial considerations. In fact, financial considerations are rarely the sole determinants of organizational success. For example, some railroads of the nineteenth century met their immediate financial goals by skimping on maintenance of such items as rolling stock and track. Although in the short term their financial goals were met, in the end the maintenance had to be performed and only postponed (and in some cases compounded) the inevitable need for maintenance.
Defining an Organization's Success
The development of business metrics -- objective, quantifiable criteria used to measure some aspect of the organization's performance or effectiveness -- can be a complicated process. Like most real-world problems, the definition of success or effectiveness in an organization is frequently not a simple task. Success on a contract can be defined, for example, as meeting the schedule and staying within budget. However, if by doing so the technical goals of the contract are not met, can the contract performance truly be deemed successful? Similarly, if once the contract is underway unexpected complications are found and more money or time are needed in order to meet the technical goals, do the resultant budgetary or schedule slippages mean that the contract performance was not a success?
In addition, not only are the criteria of business success complex in most situations, they also frequently change over time. An organization that has the same financial goal year after year will probably not be considered to be successful in most cases. Most organizations are constantly seeking for ways to grow and expand and meet ever-changing market needs and demands in order to gain a larger market share. Particularly when other factors such as inflation and cost of living are considered in the calculations, meeting static financial goals cannot always be considered successful.
The development of objective, meaningful business metrics is essential to the success of the organization. Meaningful metrics are important because without them, one does not know whether or not one's goals are being met. In addition, metrics provide a factual basis for providing quantifiable feedback to show the status of organizational objectives and goals from the various perspectives reflected in the strategic plan. The collection and analysis of business metrics also can be used as diagnostic feedback to guide the organization in continuous improvement of its various business processes, including the identification of trends in performance over time. In addition, the routine collection of data from business metrics can be invaluable in business forecasting methods and the development of models and decision support systems to help managers and other decision makers make the most efficacious decisions as they lead the organization into the future.
Good Metric Criterion
A good metric is a criterion on which the success or failure of a particular aspect of the organization's strategy and concomitant objectives are judged. Criteria are dependent variables or predicted measures (e.g., if we do institute an incentive system, we will produce more widgets) that are used to judge the effectiveness of the organization's processes, policies, and activities in relation to meeting an objective.
- Good criteria are relevant: They are related to an organizational objective and are a valid measure of the status of that aspect of the organization.
- In addition, good criterion measures need to be reliable, yielding consistent measurements time after time. For these reasons, subjective measures such as ratings are less desirable than quantitative data. For example, although one could poll the company's executives to see how well they thought the business was doing, it is rather unlikely that they would each have the same subjective measure in mind when giving an answer. Similarly, subjective measures tend to be nebulous and change over time. Therefore, it is always advisable to get hard data that can be measured and that do not depend on the subjective judgments of people.
As difficult as it may be to develop adequate and accurate metrics for business, they are an essential part of strategic planning and goal setting. One cannot improve a process or meet an objective if one cannot operationally define it. To say that Widget Corporation wants to be successful is insufficient: What are the standards against which success will be measured? There is no such thing as the standard set of business metrics. They must be developed based on the requirements and priorities of the organization's strategic plan and then operationally defined in quantifiable terms so that real measures of success or failure can be gathered. This information, in turn, will inform the continuing refining of the organization's strategy.
In business, goals define in practical terms what the organization would like to be within a specific period of time. Strategic planning is the process of determining the best way to accomplish these goals. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization's resources and abilities. In addition, a good business strategy specifies what metrics will be used to measure the success or failure of the organization vis a vis its goals and objectives.
Developing Concrete Terms
Determining the organization's business goals requires an examination of all areas of the firm's functioning. So that the organization is not involved in activities that are not related to the goals of the organization or not contributing to its success, the objectives of the organization need to be expressed in concrete terms and translated into measurable metrics by which progress can be evaluated. Rather than stating that...
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