Practicum: Performance Evaluation in the Margin

New performance measures need to be developed to evaluate the success of margin initiatives.

Applying traditional performance metrics to margin initiatives is a mistake in terms of corporate strategy. It undervalues the contributions of those working margin initiatives - the same personnel/initiatives that drive the creation of new corporate value. At the same time, it motivates margin leaders to pursue opportunities which may align better with established performance metrics but can only be undertaken at greater risk. These leaders will contribute less resources to the strategic wins which can build longer-term success to pursue higher-risk, short-term gains.

One way to deal with is this performance measurement challenge is to create a separate set of performance measures specifically designed for early-stage initiatives and programs. These metrics could emphasize market entry tactics such as contracts with new clients, business in new markets or industries, etc. Organizationally, the company would need to categorize initiatives by a "traditional or margin" classification to know which set of metrics should be applied.

Another approach is to diversify the common set of performance metrics used across the organization to allow multiple pathways to success. A small contract with a new client organization may be more valuable to the organization in the longer term than a larger contract with an established client. A refined set of performance metrics, for example, could assign greater per-dollar value to contracts with first-time clients. Alternatively, the organization could track the number of new client contracts obtained. By allowing multiple pathways to success and diversifying the metric set, organizations can encourage long-term strategic activities and margin initiatives without needing separate classifications.

Companies that incorporate performance measures friendly to margin initiatives can better align long-term strategy goals with corporate activities. Firms that say they want to diversify or move into new markets but continue to reward performance based on focused revenue-driven metrics fail to recognize that pioneering into new areas is different than maintaining an established program. Instead of achieving their goals, these firms create disincentives for activities which will lead to long-term growth.