We’ve been stuck in a financial measurement model since the beginning of the 20th century as the predominate yardstick of organizational performance. Subsequently everything an organization does has been filtered through financial lens, measured in terms of financial productivity and managed based on a financial result. Every wonder if all these financial metrics truly reflect an organizations performance?
Financial performance and organizational performance are two different things. Financial performance may and may not reflect organization performance. Many companies have “cooked the books” to satisfy short-term Wall Street pressures to only collapse in the long-term. Even more companies chase results without understanding what really creates and sustains results. Organizational performance is the real indicator of progressive financial performance but how many companies understand the real metrics of organizational performance?
Financial vs. Organizational Performance
Most businesses think that organizational measures follow similar form of financial measures. From an organizational perspective people (employee’s and customers), products and processes are measured in terms of productivity, profitability and this elusive thing called satisfaction. The measure of satisfaction has only risen to the top of performance metrics because there is a direct correlation to productivity and profitability which are extensions of financial performance. So again while we think we understand the real metrics of organizational performance they have merely become an extension of financial performance.
In a McKinsey Quarterly article titled “The new metrics of corporate performance: Profit per employee states: “The bigger problem is that most companies gear the way they measure their financial performance to the needs of an earlier industrial age, when capital enjoyed pride of place in the minds of strategists and investors. Companies fill their annual reports with information about how they use capital but fail to reflect sufficiently on their use of the “thinking-intensive” people who increasingly drive wealth creation in today’s digital economy. The development of external financial reports according to generally accepted accounting principles (GAAP) ranks among the principal foundations of our modern global capital marketplace. Financial performance (seen through balance sheets, cash flow reports, and income statements) no doubt is and will remain the principal metric for evaluating a company and its management. But it’s time to recognize that financial performance increasingly comes from returns on talent, not on capital.”
McKinsey talks about returns on talent but note the title of the article is framed as “profit per employee”, just another financial measure and a dangerous one at that since it can be easily gamed by lowering headcount and outsourcing work and competencies that are necessary for the long-term success of the organization.
From Intangible Capital to Tangible Results
The Social Era represents a clear shift to an emphasis on a different type of capital that in fact is the sources of all economic capital. Today people are able to tap into worldwide resources of information, knowledge, tools and relationships that enable them individually and collectively to collaborate online and off with one simple aim, create value for each other and the community at large. The process has no rules, no boundaries and the only capital required to create anything is intangible. However the outcomes of the creations are very tangible and the subsequent results are transforming the global economy.
The invisible nature of intangible capital has become very visible, recognizable and even measurable. Intangible capital represents the human, structural, strategic and relationship capital that is the essence of organizational performance. An organizations performance is directly related to the strength of its human capital, the support of its structural capital, the foresight of its strategic capital and the bond of its relationship capital.
In the Social Era Smarter Companies know that the real metrics of an organizations performance are intangible measures. Those that identify, measure and improve upon their intangible capital learn to trust that the financial results will always follow.