PRIORITIZATION OF PERFORMANCE MEASURES USING AHP Revaz Vachnadze Full Professor, ESM Business School, Free University of Tbilisi Visiting Professor, School of Governance, Georgian Institute of Public Affairs Tbilisi, Georgia E-mails: r.vachnadze@freeuni.edu.ge, revaz.vachnadze@gipa.ge

WE CAN MANAGE WHAT WE MEASURE!

Organizational Performance Measurement Organizational performance measurement and measures has become one of the main trends of scholars’ and practitioners’ attention in recent years. At the same time performance measurement is often failing in organizations worldwide. WHY IS THIS HAPPENING? The measures that have been adopted usually are not with any linkage to the critical success factors (CSF) of the organizations.

Critical Success Factors CSFs are a list of issues or aspects of organizational performance that determine ongoing health, vitality and well-being. (Source: AusIndustry) The main purpose of performance measures is to ensure that staff members spend their working hours focused primarily on the organization’s CSFs. It is the CSFs, and performance measures within them, that link daily activities to the organization’s strategies. Key Performance Indicators (KPIs) are the only things that truly link day-to-day performance in the workplace to the organization’s critical success factors.

Performance Measures A performance measure is a comparison that provides objective evidence of the degree to which a performance result is occurring over time. (Source: Stacey Barr) We can pick out two subsets from the set of performance measures: result indicators (RIs) and performance indicators (PIs). Result indicator - a summation of more than one team’s input. Performance indicator - a measure that can be tied to a team or a cluster of teams working together for a common purpose.

Performance Measures (cont.) Some measures are more important and picking out corresponding subsets from RIs and PIs and using the extra word “key” we come to: Key result indicators (KRIs) - measures which give an overall summary of how the organization is performing. Key performance indicators (KPIs) - measures which show management how the organization is performing in their critical success factors (CSFs) and, by monitoring them, management is able to increase performance dramatically.

Prioritization in Need “We measure too much and get far too little for what we measure.” (Source: Michael Hammer – “The Agenda”) Better practice recommends limiting the number of CSFs, KPIs and KRIs to 10 each. Scarcity of resources forces us to prioritize and distribute them accordingly. And here the AHP comes:

Suggested Approach Performance measures and their prioritization have become the subject of interest of dozens of studies. We lean on Shahin and Mahbod’s approach who use AHP’s three-level hierarchy with SMART conception’s components as criteria and KPIs as alternatives. Considering the importance of Critical Success Factors in establishing key performance measures, we suggest adding a CSFs level to form a four-level hierarchy of the following type:

Suggested Four-level Hierarchy

Notes: In the suggested model each of the KPI and KRI subsets is to be prioritized separately so, essentially, we will have a hierarchy with two different sets of alternatives. For any type of organization, each KPI and KRI should not necessarily affect every CSFs and not every child item of the hierarchy should be connected to the parent node in this case.

Simplification In practice well formulated organizational goals/strategies usually are a priori stated in a SMART mode; therefore, the suggested four-level hierarchy can be simplified by the elimination of the level 2 - SMART criteria, thus transforming to the following three-level hierarchy:

Suggested Three-level Hierarchy

Conclusions: The prioritization of KPIs, KRIs and CSFs allows the organizations’ governing bodies and management to focus scarce resources on the issues of top priorities. The separation of KPIs and KRIs reflects the degree of interest of the governing body (board) and the management in them so that a governance report should consist of a list of prioritized KRIs whereas KPIs are to be of prime interest for CEOs, management and staff.

Thank you for your attention!