Performance management metrics are statistics designed to quantify selected aspects of an organization's performance so that management can better monitor, control, and take corrective action. The basic mantra is you cannot manage what you do not measure. Business performance management software is widely available to assist with the routine measurement task. Historically, performance metrics focused on the interests of owners, and hence an organization's financial performance. Over the past two decades, that narrow focus has broadened to include non-financial metrics.
Financial performance is tracked using a battery of individual line items reported in three major financial statements — the profit and loss, balance sheet, and cash flow statements. These line items include sales, cost of goods sold, tax expense, profit after tax, total assets, capital expenditure, and cash flow from operations. Financial line items are used to calculate a litany of financial ratios.
Financial ratio analysis is a standard topic covered in many undergraduate accounting and management courses as well as a core technique for investment analysis. Key areas covered by financial ratios include the profitability of sales, efficiency of costs, strength of cash of flow, structure of capital employed, and the profitability of that capital. Apart from management, the main audience for these metrics is shareholders, the owners of a firm.
Within private sector firms nominally focused on profit maximization, the ultimate objective of financial metrics is to increase the firm's value and hence the wealth of shareholders. This objective, in turn, ultimately depends on two key metrics: the size of a firm's capital base and the rate of profitability earned by the firm on that capital. The many and varied financial ratios all assist in understanding these two key value drivers.
During the 1980s, organization leaders expressed an interest in having available performance management metrics that extended beyond the financial, and which addressed all stakeholders. Employees, customers, and the public began to call for increased transparency into organizations. This, it was believed, would allow them to better assess how organizations affected them, both individually and collectively, through impacts on community assets and the environment.
To help meet that need, the balanced scorecard was developed as a performance management tool during the early 1990s by Drs. Robert Kaplan and David Norton. In addition to financial performance, balanced scorecard metrics cover three other broad themes: the customer, the business process, plus learning and growth. It is a comprehensive framework aimed at assisting organizations to scrutinize performance, align activities with vision and strategy, and, importantly, improve communication with all stakeholders. As the name implies, the balanced scorecard provides a more balanced set of performance management metrics.
Performance management metrics are used by organizations across all sectors of the economy — private, government, and not-for-profit. Given that the visions and goals of organizations varies greatly across these sectors, so too do the performance management metrics they choose. The selection of appropriate metrics always involves four basic steps: identify important issues that deserve measurement, develop relevant metrics, set appropriate targets, and monitor and manage performance towards the targets.