The Cost of Measuring Performance

Peter Drucker famously said,

“What gets measured gets managed.”

TIn this light, many practitioners in the field of Performance Based Contracting (PBC) attempt to apply large numbers of performance measures in trying to cover the entirety of the contract scope of work.

While generally this approach works it doesn’t consider 2 factors; (1) the ability of an individual or organisation to actively manage a large number of performance measures and (2) the cost of measurement. This particular post reflects the later cost of measurement.

The reason I bring it up is that I recently read a 2014 working paper by Morten Jerven on behalf of a European think tank, the Copenhagen Consensus. This paper provides an estimate of the cost of measuring the United Nations (UN) Millennium Development Goals (MDGs). The MDGs, while laudable in nature, comprised 8 targets measured using 60 performance indicators over the period of 1990 – 2015. His conservative estimate the cost of measuring success against these MDGs was a staggering USD$28B. The main cost driver was a lack of data to support the success (or failure) against the goal . While significant, the estimated cost of measuring the draft post-2015 goals is USD$254B based on 17 goals and 167 performance indicators. Morten’s discussion is not that we shouldn’t undertake these activities, but rather that we should consider the cost of measuring success (or failure) against each of these when considering how many goals and measures the UN should consider. Those interested in this thought-provoking article can find it at http://www.copenhagenconsensus.com/post-2015-consensus/datafordevelopment.

In our field of PBC I have observed this same problem. With the best of intent people choose performance measures that don’t have existing data sources or processes, or have processes requiring significant (and costly!) manual intervention. While it is perfectly OK to choose these performance measures, I would like people to consider the cost of measuring the “perfect” performance measure. Indeed a friend of mine from the seller side of PBCs has said that they could save between USD$200,000 to USD$300,000 per year per contract if the buyer had chosen a different performance measure. This isn’t the seller trying to avoid being accountable, but rather being cost conscious in delivering an affordable solution.

So in summary, as Morten Jerven points out, in selecting performance measures we need to carefully consider the cost of measurement to make sure that we can affordably manage success or failure of our contracts.

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