The Role of Performance Measurement in Economic Development

May 2005

By:  John Warren

AngelouEconomics

Some people look at economic development as if it were the lottery: tossing a bundle of money in the hope of the big payoff. But it’s not. Truly effective economic development comes about from a community’s commitment, a well-thought out plan, and a significant investment in time, staff, and money. With so much on the line, it makes sense that communities should expect results from their economic development efforts. But how do you measure the success of economic development efforts?

Economic development agencies, particularly those agencies that are units of government, are under increasing pressure to be accountable to the taxpayer, just as all other government agencies are. Even the supporters of private economic development organizations want to know if their organizations are successful. These organizations use performance measurements to track their progress. Harry Hatry with the Urban Institute, an expert in the field of performance measurement, says that performance measures should be aimed at achieving clearly identified outcomes. Hatry defines outcomes very clearly, saying that “outcomes are not what the program itself did but the consequences of what the program did.” Performance measurement is about results.

There are several interrelated elements organizations use to measure performance of an operation. Those elements are:

• Inputs, which are resources such as money, staff time and other items used to produce outputs and outcomes. Inputs indicate the amount of a particular resource that is actually used to produce a desired result;

• Activities, which are the actions a program takes to achieve a particular result;

• Outputs, which are the amounts of products created and services delivered in a reported period, such as number of training programs conducted, number of classes taught, or number of clients served; and

• Outcomes, which are changes in knowledge, skills, attitudes, values, behavior, or condition that indicate progress toward achieving the program’s mission and objectives. Outcomes can be short-term, intermediate, or long-term. Outcomes are linked to a program’s overall mission.

Another element is often used to measure a program’s performance. An efficiency measure, usually expressed in a ratio of costs per unit, is the relationship between the amount of a particular input (usually money or staff hours) it takes to produce an output or outcome. This is an important measure for an organization to track internally. It tells staff and policy makers the amount of effort the organization takes to produce results and how efficiently it is doing so.

The following diagram shows how these elements are put together to demonstrate the desired result a program is trying to achieve. This diagram was adapted to reflect performance measures for economic development, but this is the same type of model used to develop just about any type of performance measurement.

Source: AngelouEconomics, 2005. Adapted from Measuring Program Outcomes: A Practical Approach, United Way of America, 1996.

Performance measurement is becoming more widely used to track the effectiveness of economic development efforts. A survey of state economic development agencies conducted in 2004 by the Andrew Young School of Policy Studies at Georgia State University indicated that many of these organizations are working to put performance measurement systems in place. The following chart shows the most important performance measures these agencies use to track progress in tourism, business recruitment, and international trade programs.

MOST IMPORTANT PERFORMANCE MEASURES USED IN STATE ECONOMIC DEVELOPMENT AGENCIES IN TOURISM, BUSINESS RECRUITMENT, AND INTERNATIONAL TRADE

Source: Performance Measurement in State Economic Development Agencies: Lessons and Next Steps for GDITT. Andrew Young School of Policy Studies, February 2004.

Overall, state economic development agencies responding to the Young School survey find performance measures an important part of their operations.

• 85 percent of respondents said that communication between divisions and the agency head’s office had improved with the implementation of performance measures

• 81 percent said communication between the agency and the state budget office had improved

• 76 percent said communication between the agency and the state legislature had improved

• 62 percent said the use of performance had shifted budget discussions among legislators to focus more on program results

• 68 percent said performance measures were a vital component in decisions on budget issues in their agency, and 85 percent said the use of performance measures enhanced the management of agency programs. 55 percent said they could directly attribute changes in appropriations to outcomes achieved with performance measures

• 93 percent indicated that their agencies were likely to increase their use of performance measures in decision-making, and 91 percent said that overall, their agency was better off since it began using performance measures

Clearly, these economic development agencies have found performance measures useful tools in economic development efforts. So, how can you develop performance measures that will enhance management of your programs? There are many helpful publications on this subject. For example, check out Performance Measurement: Getting Results authored by Harry Hatry and published by the Urban Institute. There is also a simple device to remember the characteristics of an effective performance measure. All performance measures should be SMART:

Specific - Establishing some pie-in-the-sky, lofty measurement that sounds good but is not specific is not going to give you the credibility you need, or help your program accomplish its goals. Performance measurements need to be as specific as possible so that people investing in economic development efforts know how those efforts are going to be measured.

Measurable - There’s an old saying, “If you don’t know where you’re going, any road will get you there.” A performance measurement is only useful if you can actually measure it, either by quantifying it with specific numbers, or verifying through qualitative means that the goal has been accomplished.

Achievable – Make sure that your performance measures can actually be accomplished. Setting a goal that is impossible to achieve will only cause frustration. It’s all right, however, to set ambitious goals that stretch your organization. Everyone needs to reach a little beyond their grasp.

Relevant – Performance measurements need to be relevant to your organization’s mission and your program’s strategic objectives.

Time-based – Make sure that performance measures are achieved within a specific period.

Good luck with your efforts. Performance measurement will not only help you manage your economic development programs more effectively, but also help you gain and keep public support by demonstrating that your program gets results.