By Will Kaydos
Most people don’t recognize that performance measurement lies at the heart of the improvements we humans have made in our standard of living in the past few centuries. That’s because almost all of the gains can be linked to using the Scientific Method to determine cause-effect relationships – and that requires measurement.
For example, bloodletting to cure illness was a common practice in many cultures for over 2000 years until Pierre Louis used measurement to show the practice did not increase recovery rates (circa 1850). Although his discoveries were not quickly adopted, they eventually led to discontinuing this worthless, and potentially harmful, procedure.
Until Louis came along, everyone “knew” bloodletting worked because some people did recover after being drained of several ounces of blood. Sure, some died, but when that happened, the rationale was that the person was just too sick to be cured in the first place. It’s hard to argue with that kind of thinking unless, like Louis, you have the data to prove otherwise.
But are things so much different today? They certainly are in the scientific community, where rigorous substantiation of theories by sound data is always required. The business community, however, is nowhere near as disciplined. Some companies have excellent measurement systems, but many are still in the Dark Ages when it comes to their executives and managers having the measures necessary to understand how their business works, how it is performing, and why it is performing as it is. Like tenth-century physicians, managers in these companies are making decisions based on subjective information, anecdotal evidence, and beliefs about what drives results that are simply not true.
As Pierre Louis demonstrated, when it comes to identifying cause-effect relationships, nothing beats measurement – and the same is true about identifying business problems and opportunities. So what should a well-managed company measure besides the usual financial results?
The Balanced Scorecard is currently a very trendy (and often misunderstood) topic in business circles, but there are other measurement frameworks such as the Performance Prism, the Quantum Performance Management Model and the Tableau de Bord. All are useful, but none of them is the answer to everything despite what their advocates may say.
Combining elements of various measurement frameworks yields the measurement model below. It works as follows:
- The needs and expectations of customers and stakeholders are the primary drivers of strategies. Stakeholders include shareholders and employees, but suppliers, the community, government entities and other organizations could also be important stakeholders.
- Strategy consists of defining your intended customers and how you are going to compete for them. A company’s strategy is made up of individual strategies, which are the key actions a company must take to achieve its vision and goals. When developing strategies, all other elements of the model must be considered.
- Operations include all direct and support business activities that execute strategies and produce products and services for customers and stakeholders.
- The capabilities of a company’s organization and infrastructure enable its operations to efficiently satisfy customer and stakeholder requirements. Stakeholder capabilities may also be important to a company’s operations. In the short-term, capabilities can limit what strategies are feasible; in the long-term they may need to be developed to implement certain strategies.
- Stakeholder contributions include products or services that are essential to operations. For example, suppliers may provide critical technical support for designing products.
- Products and services provided to customers create financial returns (7) for shareholders and perhaps other stakeholders as well.
Note: For public sector organizations, the model is similar, but customer and stakeholder satisfaction become the primary desired outcome, not financial returns.
Critical questions executives must answer
Using this model, we can develop the critical questions executives must be able to answer about their company and the performance measures that apply to each question.
1. Are we satisfying our customers?
- Customer satisfaction and dissatisfaction
- Customer retention and behavior
2. Are we satisfying our shareholders?
- Financial returns to shareholders
3. Are we satisfying our other stakeholders?
- Stakeholder satisfaction and dissatisfaction
- Stakeholder retention and behavior
4. What is happening to our customer base?
- Market potential
- Market growth rate
5. Is our company strategy working?
- Market share
- Customer acquisition
- Customer profitability
- Product/service profitability
- External factors that affect customers
6. Are our individual strategies being properly executed?
- Strategic goals and the objectives necessary to achieve them.
7. Are we serving our customers and stakeholders effectively?
- Product and service quality
8. Are we operating efficiently?
- Process quality and capability
- Product and service costs
9. Are stakeholders contributing what they should?
- Stakeholder resource contribution
- Stakeholder contribution quality
10. Are we developing the abilities we need to ; execute our strategies?
- Organizational capabilities
- Infrastructure capabilities
- Stakeholder capabilities
This is a simplified picture of what should be measured at the executive level of any company. There are some overlaps among the questions and measures as well as many finer points that won’t be discussed here, but this overview is consistent with what leading companies are measuring.
The importance of market share
Many would say market share is the most important measure, because if you’re losing market share, your competitors have an advantage and they will soon eat your lunch. Market share won’t tell you how to correct the problem, but it will tell you when you are getting into trouble.
For example, Kmart was losing market share to Wal-Mart way back in the ‘70’s, but Kmart’s management failed to heed the warning – apparently because the company was still growing and profitable. Although Kmart eventually made some changes to its strategy, it was too little, too late. Now it’s a Chapter 11 “blue-light special” and the chances of it regaining its market position appear to be somewhere between zero and none.
Measurement and business success
All of the listed variables can be measured to a useful degree of accuracy and some companies are doing it. Companies that have won the Baldrige Award or similar state award have extensive measurement systems that include all of the above measures.
In reviewing numerous Baldrige-based quality award applications, I have found that a good estimate of a company’s final score can be made by just examining the measures being used. Why? Because the depth, breadth and underlying logic of a company’s measures reflect management’s understanding of the business and how well it is being managed.
Not surprisingly, over a five-year period ending in 1998, the winners of Baldrige and similar awards did two to three times better than comparable companies in terms of their growth in sales and operating income. That is a huge difference!
Determining what to measure
So how can you determine what your company should measure? As mentioned before, there are several frameworks that can be used. Although they all have merit, some have advantages in terms of their state of development, ease of use, and direct relationship to common business practices.
I believe the best approach for developing company or business unit strategy and related measures is to use the Balanced Scorecard methodology in conjunction with the robust perspectives of the Performance Prism. Balanced Scorecard performance systems have an established record of success, but one needs a disciplined way of building and implementing the system to ensure that business strategies get executed and that the necessary organization culture change gets implemented. One framework that is becoming an international “best practice” is the Balanced Scorecard Institute’s Nine-Step Methodology for developing strategic themes, business strategies, strategic goals, strategy maps, performance measures, targets, and new initiatives. The result is a strategic management system that is comprehensive, logically sound, and supported by the whole organization.
This does not assure the strategies will work, but the measures will provide timely feedback about how well they are working so timely corrective action can be taken regarding the strategies or their execution. Without the measures, a company’s strategy and finances could get substantially off-track before any problems are even recognized.
But having good strategies is not enough to be successful. Operational excellence is also needed to execute them. To achieve and maintain high levels of productivity, quality, and customer service, comprehensive operations or process measurement systems are needed to manage processes, departments and work units. These systems would include the measures that are strategically important, but those measures alone are insufficient for effectively managing operations.
For developing operational measures, I recommend the approach and model given in my book Operational Performance Measurement: Increasing Total Productivity. No doubt I am biased, but the book’s process measurement model is the only one I’ve seen that meets three critical criteria: it is logically sound, it readily relates to real world processes, and it has a record of successful application. The model is also consistent with TQM and Six Sigma methodologies that contain many specialized techniques for measuring and managing processes.
Becoming familiar with the Baldrige Criteria for Performance Excellence is also recommended. Since it outlines general management best practices, it provides a very helpful perspective on what a well-managed company should be measuring, as well as what it should be doing.
Corporate level measures are very important, but they aren’t going to have much impact unless they are cascaded all they way down to front-line employees. The case for cascading is simple: Do you want 10% of your employees working toward company objectives or 100%?
With some exceptions, such as market share, what you measure at the top is what must be measured at all levels. However, the specific measures will change with every function and organizational level because managers doing different jobs need different information to make different decisions.
The same methodologies used to develop measures at the corporate level can be used to cascade the measures down to front-line managers, supervisors, and employees. However, as you go down the organization chart, the focus is on operations or processes. Strategy is incorporated into operational measures by giving more weight to the measures that are strategically important. This communicates strategy to all employees by translating it into operational terms – a primary objective of the Balanced Scorecard.
Implementing performance measures
Determining what to measure can take considerable effort, but it will probably be less than one-third of the total effort required to implement an efficient and effective measurement system. Data collection and processing systems will have to be implemented to produce the measures; everyone will have to be trained in using the systems and measures; and as the measures are used, some problems are sure to be identified that will require changes to the system.
Perhaps the greatest challenge faced when implementing performance measurement systems is changing an organization’s culture. Using performance measures requires managers and employees to change the way they think and act. For most people, this is relatively easy, but for some, changing old beliefs and habits is very difficult.
Overcoming such problems requires strong leadership to provide appropriate direction and support. The best measurement system in the world will yield few benefits if the right knowledge, skills, abilities, and values are not developed in a company. An organization doesn’t just interface with a measurement system; it is part of the system.
Developing and implementing effective measurement systems requires leadership, commitment, and hard work. Some investment is required, but it is small relative to the key benefits of a well-designed and implemented measurement system:
- The ability to determine if sales and profit problems are caused by strategies, operations, or both;
- Early identification of problems and opportunities;
- Increased productivity, quality, and customer service;
- A clear understanding of what drives financial and operational performance so resources can be allocated to the areas of greatest return; and
- A cohesive organization working toward common goals.
- No matter what approach you use to develop performance measures, bear in mind that the objective is not to have a Balanced Scorecard, Performance Prism or some other type of system, but to have the measures in place that will enable managers at all levels to answer the ten key questions given earlier.
If all of your managers can readily answer those questions about their areas of responsibility and support their answers with objective numbers, your company has the performance measures it needs. If they can’t, some of the “good” decisions they are making are undoubtedly not very effective – and they may even be harmful.
Sounds a lot like practicing bloodletting, doesn’t it?
Will has been helping organizations improve their performance for thirty years. His experience includes operations management, performance measurement, the balanced scorecard, strategic planning, total quality management, management systems, and Baldrige assessment.