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When studying management control, we have learned that companies draw upon not only “hard” techniques (budgets, the Balanced Scorecard, etc.) but also “softer” aspects, such as their values, vision and mission.

We typically find these variables underneath and embedded in the techniques companies use: for example, the vision and mission of an organization should be at the heart, at the beginning and the end, of the Balanced Scorecard and its related strategy map, with their multiple Key Performance Indicators attempting to capture the organization’s performance and leading its employees in the desired direction.

New research from Ernst and Young and Harvard Business School has expanded our knowledge about how performance and “purpose” can be related. “Purpose” was not defined merely as the particular “vision” of an organization, but was considered as “an aspirational reason for being which inspires and provides a call to action for an organization and its partners and stakeholders and provides beneft to local and global society”.

Based on a survey to executives, they gathered insights about the multiple ways in which having a clearly defined purpose can drive performance. In fact, and perhaps paradoxically, even when purely financial aspects are at stake, purpose-driven organizations seem to be more profitable than those which are more profit-focused. In fact, this study updates a previous research from Jim Collins and Jerry Porras, Built to Last, who identified a group of “visionary” companies, guided by a purpose other than making money, who actually had shareholders’ returns six times higher than profit-focused competitors.

This E&Y / HBS’s research touches on many important points, but this post will focus on only one, close to the typical concerns of management control people: how organizations define their measures of performance. As Simon Caulkin stressed in the Financial Times (https://www.ft.com/content/b22933e0-b618-11e5-b147-e5e5bba42e51), “to many, ‘purpose’ looks like a ‘black box’, its workings hidden from view”. However, without a definable purpose, measuring progress towards it becomes impossible. Importantly, “In the abstract, measures are arbitrary and unhelpful. Purpose dictates appropriate measures and measures give manageability, the capacity to learn and improve”. Otherwise, without a purpose to give meaning to employees’ actions, “metrics fill the vacuum”, and the nightmare every lecturer on management control should warn about emerges: the myopic focus on the measured aspects and on “hitting the numbers”, rather than actually attempting to fulfil the organization’s higher purpose.

But of course, the existence of a purpose does not automatically solve the problems. As E&Y / HBS’s study also identified, one of the single biggest purpose-driven barriers is that “Staff performance targets/incentives are not aligned with purpose” – hence driving employees’ and organizational action and direction away from the purpose.

There’s much more in this study on the role of purpose to improve performance. Interested? Check the original at https://www.ey.com/Publication/vwLUAssets/ey-the-business-case-for-purpose/$FILE/ey-pdf, or check our next post!