Don't use numbers

The push for greater transparency and reduced risk is increasing corporate dependence on performance measurement and management tools. But how meaningful is the information they provide? As Lesley Meall finds, the devil is in the detail

During a month-long doctors' strike in Israel in 1973 the death rate dropped 40%; 3.7m Americans claim to have been abducted by aliens; 80% of the cars found on Albanian roads were stolen elsewhere in Europe; in India 30% of the population have not heard of the USA; in 1997, 39 people visited the accident and emergency departments of UK hospitals because of incidents involving tea-cosies; 65% of CFOs say their main focus is measuring and monitoring business performance; 43.3% of statistics are meaningless.

We are obsessed with counting and measuring anything and everything we consider of potential value. Businesses, investors, and politicians all argue their corner, and plan for their futures, armed with as many supportive statistics as they can muster. When this means counting the number of DVDs Amazon has sold in Australia, or calculating the annual revenue of Nissan Europe, it is all very well. But when you start trying to measure the popularity of George W Bush, the performance of the Blacklow Brow Primary School, or customer satisfaction at Starbucks, then just how meaningful can the results possibly be?

James Anyon, a UK émigré who was one of the founding fathers of US accounting, steadfastly warned the profession against such antics. 'Use figures as little as you can,' he told accountants at the turn of the (20th) century. 'Your client doesn't want them or like them, he wants brains.' A hundred years on Anyon is probably turning in his grave. 'Think and act upon facts, truths and principles,' he advised, 'and regard figures only as things to express these.'

No man is an island

The business world has changed a great deal since he was an accountant, and facts, truths and principles can seem thin on the ground. Anyon's advice seems irrelevant to a profession required to count and measure everything from alien abductions and accidents involving tea-cosies, to customer satisfaction and the risk of business failure. Accountants have never before been asked to provide quite so many decision support metrics for quite so many people. Analysts, board members, regulators, and myriad members of the wider stakeholder community, all expect finance to provide the right numbers, at the right time, to the right people, in the right format.

Attempts to be all things to all people tend to be doomed to failure, yet the profession has to try to meet these financial reporting needs - not least because of the regulatory requirement to do so. 'Improving access to information is tightly linked to improving performance management,' asserts Michael Schroek, a partner with IBM business Consulting Services, ergo it follows that the latter is a good thing. And, although improved performance management is no guarantee of improved performance, or reduced risk, the former has almost become an end in itself.

Even so, monitoring and managing performance can be easier said than done, particularly if you're trying to do it with a hotchpotch of disparate and disconnected systems and hundreds or thousands of spreadsheets. So dedicated performance management tools have stepped into the breach. Whether you call them enterprise performance systems (EPS), business performance management systems (BPM), or some other variation on the theme, the aim is much the same. Nigel Youell, marketing director with performance management specialist, Hyperion, describes them as 'the ERP of business management'. In theory, BPM can 'link individual processes into a coherent system, allowing businesses to efficiently manage and collaborate on the entire business performance management process'.

Answered prayers

This sounds like the answer to many an accountant's prayer. Few organisations have the level of software and systems integration required to support finance professionals' exponential financial reporting needs. For historical reasons, islands of information are very much the order of the day. Many accounting applications cannot easily be connected to other business applications, such as sales and marketing databases and forecasting and analysis tools - and the larger and more complex an organisation is, the greater the magnitude of the problem.

So, organisations as diverse as Aston Martin, Cable & Wireless, Fortis Health, Great North Eastern Railways and Ladybird Industries have turned to performance management specialists such as ALG, Cartesis, Comshare, CPiO, Frango and Hyperion for a solution. They're not cheap of course. According to Youell, a corporate performance management system could cost anywhere between $50,000 and $2.4m. But they do offer a solution to a pressing problem: how to get more from your existing investment in systems without completely reinventing the wheel. In many instances, BPM systems are being used to unify multiple ERPs, link accounting with areas such as sales and warehousing, and replace large numbers of unwieldy spreadsheets.

Stephen Hammond, financial controller with Ladybird Industries, says: 'The system will link the accounts payable and receivable, inventory control, general ledger and cash management activities that were previously done manually across disparate systems.' He adds: 'It will bring improved efficiencies and increased visibility of management information across the entire organisation.' This is the sort of thing you need if you are going to try to accommodate initiatives such as Basel II, international accounting standards or Sarbanes-Oxley, where extensive integration, multidimensional analysis, and 'joined up' financial reporting are the order of the day.

But performance management tools also promise to help organisations measure more esoteric performance indicators. 'Financial measures, income statements, balance sheets, and so on, are the way most of the world measures a company's success,' observes Schroek. 'However, it's the dynamic factors impacting those numbers that performance management seeks to measure and influence, as the root cause of profit and loss.' This means trying to measure factors such as customer profitability and satisfaction, employee effectiveness and turnover, for example.

What's the point?

But these are murky areas. Before you start measuring things you have to know what you are trying to achieve, and why, and you need to think very carefully about the possible impact of your activity on the very thing you are trying to measure. 'If the measures are not carefully crafted, the results can be unpredictable,' warns Mike Bourne, a business performance lecturer at Cranfield School of Management. People and organisations will simply aim to meet your expectations.

As a consequence, UK hospitals measure the time between accident and emergency patients being seen and being treated, and a 90-year-old who spends 24 hours on a trolley is officially logged as having waited 45 minutes. Schools concentrate on the success of borderline pupils who can have the greatest effect on their position in league tables, and neglect pupils who are more or less bright. Customer loyalty is hard to quantify, so companies measure how quickly staff can get callers off the phone, and then wonder why their customers hate them. And, just in case you haven't got the point, Bourne has a (possibly apocryphal) tale about an airline which decided to try to improve its baggage delivery performance, in the belief that customer satisfaction was significantly affected by how long it took passengers to receive their bags at the end of their journey.

A new performance measure was duly introduced, and, a few days later, management took a peek at how their baggage handlers dealt with an incoming flight. To begin with, the handlers gathered near the conveyor belt, chatting while they waited for the baggage to be delivered from the plane. Contrary to expectation, when it arrived, all of them continued this activity, except for one lone handler, who grabbed the smallest bag he could find and raced with it to the baggage conveyor. Then he ambled back and chatted for a few minutes with the rest of the group, before they eventually sauntered casually across to unload the rest of the bags.

'We are often surprised by people's behaviour after the implementation of performance measures,' says Bourne, 'but we wouldn't be if we took time to think them through.' On reflection, measuring the time it took to deliver the first bag was probably not such a clever idea. He adds: 'People will go to quite extraordinary lengths to manipulate the measurement system.' This could make business performance measurement about as useful as the figures for alien abductions and accidents with tea-cosies. But it won't stop us counting.

Lesley Meall is a writer on business and technology issues.