Performance management systems align decisions with short- and long-term objectives and the overall strategy. Such systems typically include long-term strategic plans, short-term budgets, capital budgeting systems, performance reporting and reviews, and compensation frameworks. The rigor and honesty of implementing the system is at least as important as the system itself. Implementing the system includes choosing the metrics, composing the scorecard, and setting the meeting calendars.
Choosing the right metrics means identifying the value drivers. Typically, the ultimate drivers are long-term growth, ROIC, and the cost of capital. Short-term, medium-term, and long-term value drivers determine growth, ROIC, and the cost of capital. Short-term value drivers are usually the easiest to quantify, and examples include sales productivity, operating cost productivity, and capital productivity. Medium-term value drivers consist of measures of commercial health, cost structure health, and asset health. Long-term value drivers address strategic issues such as ways to exploit new growth areas and the existence of potential market threats. Understanding the value drivers allows the managers to have a common language for their goals and to make better choices of trade-offs between critical and less critical drivers.
Managers should follow some of the guidelines of the balanced scorecard approach, introduced by Robert S. Kaplan and David P. Norton in “The Balanced Scorecard: ...