To consolidate the diversity of opinion about the definition of competency, an operational definition and skills classification matrix is presented. Although most people agree that competency tests should measure student ability to transfer academic training to life situations, the fact that life skills and school skills represent different domains creates semantic problems. Competency can be defined as the ability to use a specific skill or set of skills to meet the needs of a specific situation. The dimensions suggested here--enabling skills, and context in which they are applied--provide a two-dimensional matrix. Matrix rows can identify skills which may be classified as content areas (reading, mathematics); columns can identify application of these skills to academic performance, job requirements, or everyday situations. Skills and context can also be classified narrowly to analyze definitions of competency or items on existing tests. Use of the matrix avoids the need to decide whether competency tests, in general, measure school-developed skills or life-related abilities. After defining context and describing skills, the final step of competency evaluation is deciding how skills should be measured (tests, observation, product evaluation, etc.), and how much is enough. (CP)