on target

Effectiveness vs efficiency

Performance measurement is the basis of any goal management system. An old adage says: "you can't manage what you don't measure".

Effectiveness and efficiency are two broad categories of performance indicators.

Effectiveness indicators measure how much your targets were reached. They relate actual to expected values. Typical examples are:

• actual to expected sales
• saving on budget
• project overrun

Effectiveness indicators require a plan: you can't measure effectiveness unless you have a target.

Efficiency indicators, measure how "well" your resources (like people, machines and money) were to produced output (like products, services and profit).

Efficiency indicators include traditional financial ratios (profitability, turnover ...), but non-monetary efficiency measures are today recognized as a key factor to track cause-effect of business decisions. Examples of such measures are:

• work hours per unit produced
• prospect close rate
• calls per prospect
• visits per prospect
• incidents per work-month.

Trying to be effective will in many cases compromise efficiency.
To reach sales budget, for example, we can increase campaign investment (increasing cost/sales) or reduce unit price thus profitability. For this reason using a balanced mix of effectiveness and efficiency indicators is usually a good choice.

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Posted at 05:46PM Jan 02, 2009 by admin in General  |