AllgemeinEconomicsKnowledge Management

Efficiency and Effectiveness

By 26. September 2017 No Comments

In theses days we talked about Knowledge management, of intangible assets and on value programs. All this is still true and creates value, but we are today more outside driven by technology, digitalization and transformation. I think a look into this article will remember a lot, there is still work to do in this field – measure the right thing 🙂
„Although often used as synonyms, efficiency and effectiveness measure different things. Efficiency measures utilisation, i.e. how well an organization is using its capacity, regardless of what it produces. A criterion of efficiency, often used by consultancy firms is billable time; time billed to clients, as a proportion of time available. This measures how much time consultants are paid for. It is a simple and good indicator of short term profitability because it measures capacity usage, but it says nothing about what the consultants accomplish in that time.

The needs of the various parties concerned may, of course, differ; shareholders are interested in dividends; customers are interested in service levels, and quality. Firms should, therefore, employ different efficiency measures, for different audiences. ROI (return on invested capital) is a criterion of efficiency popular in financial circles. It measures profit generated by the capital invested in a company, or a project and is thus a very important indicator of efficiency, to both creditors and the owners of the invested capital. For shareholders, the most important figure is what they earn after tax, in the form dividends on the capital they have put into the company; the return after tax on their own equity, often shortened ROE.

The management must also track the return on the firm´s total capital, and on particular investment projects, so that they can control their allocation of capital. Unfortunately, this technique cannot be applied to intangible assets, so various income statement, and non-monetary measurements, must be used instead to calculate efficiency.

Effectiveness measures how well an organization is satisfying the need of those it serves. It is more difficult to measure also because one must often go outside one´s own organization. Measuring customer satisfaction for instance, an important indicator of an organisation’s effectiveness, relies on customer polls. Therefore effectiveness is seldom measured. Even if it is not practically possible to measure effectiveness, it is never-the-less valuable to think in effectiveness terms. What gives the most revealing picture of performance? To focus on the costs of people or on the revenues they bring in? Cost focus is efficiency oriented, revenue focus is effectiveness oriented.“

 

Text by Dr. Karl Erik Sveiby 1999 – Swedish Consultant and Professor at the Hanken Management School Helsinki, Finland – he is also the mind behind the Tango Simulation offered by Celemi. Read more about the simulation . A video made by Cenandu in 2007 in German will give you some insights on how the boardgames runs ….