We all know it is important to measure how we are doing, not just to give ourselves a pat on the back or a kick up the… backside, as appropriate. We need to learn what are our strengths and weaknesses, what works and what does not, so we can do better in future. That is one reason for compiling statistics from within our business, as opposed to looking at other people’s. (They are important too. We need to know about national and local trends in our sectors, for instance.) This article looks at the three ways of measuring success and considers the importance of balancing all three.
What we can all too easily overlook is that there are three measures we can use, so we have to decide which one is most relevant to our situation, or whether we could learn more by looking at all three.
The three measures are: Efficiency, Economy, and Effectiveness. Let us look at each in turn.
Efficiency is the one we tend to be most familiar with, especially if we come from a technical background. It measures the relationship between inputs and output. We might measure inputs in terms of cost or by some physical measure, such as materials or man-hours. Similarly we might measure outputs in terms of sales income or numbers of items produced. It obviously better to achieve a higher output for less cost so we always want to keep an eye on this relationship to see if it is changing, and in which direction. However, when we look at the other two E’s we may see why we need to avoid becoming too obsessed with efficiency. There is the risk of failing to see wood for trees.
Economy is about overall costs and revenues. It takes into account the way a change in one cost or benefit can have effects on others, so that an improvement in efficiency in one area might lead to higher costs elsewhere. You could improve efficiency in a way which put too much pressure on employees leading to higher absenteeism and faster staff turnover and therefore higher total costs.
Effectiveness is about achieving your objectives. It is especially important in the Public Sector and the Third Sector, where the aim is to provide a service rather than to make a profit. An efficient and economical system which failed to achieve your principal objective would not be a success. Even if you are in the Private Sector, you might find it worthwhile looking at Effectiveness as well as the other E’s as annual profits may need to be balanced against long term growth or market share. In many industries, such as electricity or health services, you might be providing a service to the public even if you are in the Private Sector, and you might not be in business long if it becomes apparent that you are making profits without providing a satisfactory service.
Obviously, there are many cases where all three measures point in the same direction. A badly managed business will fail by all three measures, and any sensible improvement to working methods is likely to result in a better performance no matter which one you look at. There are, however, many cases where the three measures give contradictory results. This is where common sense or management ability becomes important. Relying on the wrong measure can seriously damage your business.
I have certainly come across some bad examples of organisations becoming too focussed on any one of these three measures to the exclusion of the others.
- We all know of instances where Public Sector organisations have obsessed about targets with little thought about cost or efficiency.
- During the 1983 coal miners’ strike, one of the big issues was the definition on an “uneconomic” pit, because the cost to the taxpayer of closing some pits would have been more than the cost of keeping them running at a loss, given the dependence of many local businesses on the mine and the miners.
- I have heard of the success of a claims-handling unit being measured by the average cost of processing a claim, or the average time taken. This thinking failed to take into account whether the claims-handler was making correct decisions. It is always quicker and cheaper to pay a claim rather than defend it, or even investigate it thoroughly. Such a measure would be likely to result in an unnecessarily high cost in the payment of unjustified claims.
When you have collected the relevant statistics about your business, do look at them in the light of all the three E’s so as to get an all-round picture of how you are doing, but in the end, the priority or emphasis of each E over the others is a matter only you can decide.
If you want to go into this in more depth, here’s a link you might find useful. https://www.internetadvisor.com/key-internet-statistics?msID=293bc4f1-4b6f-4238-ad27-8b32fbee5355