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Performance Measurement: Rules For Driving Results
- 1. Performance Measurement: Systems for Driving Business Results
Editor's Notes
- Welcome to Performance Measurement presented by the Global Institute for Management. In this presentation, you will gain insight into measurement systems that impact strategic execution and business results.
- In this presentation, you will gain an understanding of the problems that exist with traditional performance measures. You will see how companies often make the mistake of creating measurements that have no significant purpose and fail to motive people. In addition, you will learn how to align people to strategy through performance measures. This will require an understanding of how measures can be translated out of the strategic objectives of the organization. You will also gain valuable insights into how to build and refine performance measurement systems. This presentation will cover the topic of how to balance leading and lagging indicators and how to properly communicate strategy.
- When times of economic trouble come, it is common for many businesses to see red colored metrics appear on their operational dashboards. This realization can develop curiosities within us and make us wonder whether we’ve been doing the right things. We’ll stop and question whether or not we truly understand our business or industry. [read the slide]
- Read the slide. [after first bullet] In an industrial aged economy, financial measurements were the primary performance assessment tools. But in our modern knowledge based economy, we have to turn measurements that assess the intangible aspects of the business. However, [read the second bullet].
- So why is a comprehensive performance measurement system necessary? According to a survey of 2000 respondents conducted by consultant Lawrence Maisel and the American Institute of Certified Public Accountants, 80% said that performance measurement systems were a way to achieve business results and create value for shareholders. What was noticed about the performance measurement systems of the respondents was that they were too focused on traditional financial measures such as operating income, sales revenue, and cash flow. According to author Loren Gary, they don’t really know what the drivers of the nonfinancial areas of their business are, nor do they understand how these areas relate to each other or overall business performance.
- Read the slide. Agility, adaptability, and anticipation are required not just for the success of the modern business but for its own survival. Traditional financial measures simply cannot give a business these qualities.
- Before we can fully understand how to improve the way we measure performance, we have to understand the different types of performance measures that are available. It is important to remember that we want to measure the tangible and intangible aspects of the business. [Read the slide]
- Performance measures do not mean anything unless they are built on a foundation. The organizational strategy is the foundation on which performance measures need to be based on. Since the strategy is the path to which the organization achieves its goals, the measures should assess the organization’s progress in executing the strategy. While aligning a measurement system to strategy does not fully guarantee an organization protection from adverse conditions, it does provide managers with a clear path for making decisions and determining tradeoffs.
- Read the slide. Discussion and collaboration is needed for the proper assessment of the organizational strategy. The strategy must point us to the goals of the organization, and the measures must support the execution of the strategy.
- The balanced scorecard is a management tool which communicates an organization’s progress in executing its strategy. It can connect performance measures to corporate strategy. A complete balanced scorecard consists of five components. The strategy map, seen on the left, is a diagram of the cause-and-effect relationships between strategic objectives. The objectives in the strategy map are statements of what the strategy must achieve and what’s critical to its success. The measurement shows how success in achieving the strategy will be measured and tracked. The target indicates the level of performance or rate of improvement needed. This is typically communicated through a number. The initiative is a key action program required for the achievement of the objective. In a complete scorecard, measurements, targets, and initiatives will emerge out of each objective in the strategy map. In this example, Michael’s Pizza is focusing on operating efficiency. The company realizes that through operating efficiency, enhanced profitability can be achieved as seen in the financial perspective. Enhanced profitability is a product of lower costs and increased revenue, as also seen in the financial perspective. However, to see increased revenue, Michael’s Pizza is going to have to improve its ability to retain customers and win new ones. Customers in this industry want to see deliveries arrive on time and they like to have piping hot pizzas arriving to them, so meeting the temperature requirement of the customer can provide a significant competitive advantage. But Michael’s Pizza has another problem – it takes too long for them to make pizzas. It takes 12 minutes to make a pizza which is inefficient by industry standards. This inefficiency is keeping delivery drivers from leaving Michael’s Pizza on time. So, Micahel’s Pizza has to reduce the amount of time it takes to reduce pizzas as articulated in the internal perspective. To achieve the internal objective, kitchen staff members are going to have to be aligned together. They are going to have to communicate with one another and understand each other’s roles. In this example, you can see that the measurement used to track the objective of reducing manufacturing cycle time is the average amount of time used to make a pizza. The numerical target set for pizza cycle time is 9 minutes which is a 25% improvement off of the current 12 minute time it takes to make a pizza. The initiative set in place to make the achievement of the objective likely is the installation of new ovens which use less energy and apply new technology in reducing cooking time. The initiative addresses the reduction in cooking time that is needed to make pizzas more efficiently.
- Read the slide. The balanced scorecard shows us that treating initiatives as an end result is not effective strategic planning (as a matter of fact, that’s not strategic planning at all). We should ultimately strive to achieve organizational objectives and not the establishment of measures or colorful sounding initiatives.
- Read the slide.
- Read the slide. Targets established by employees can be a tremendous motivating factor for execution.
- So how many measures should you be using? There are many opinions on this question. It’s sufficient to say that the verdict is still out on the answer to this one. [Read the slide] Regardless of what opinion you accept, you must keep a few things in mind: don’t get too fixated on a single metric – it’s fine to go back and refine metrics – also, do not take on more data than you and your managers can handle. When building a measurement system, it is feasible to error on the side of simplicity. Your measurement system is going to have to be understood by everyone who sees it.
- Read the slide.
- Read the slide.
- Thank you for joining us. If you have any questions regarding the content of this presentation, please visit us at www.gimanagement.com or send me an e-mail at henry.killackey@gimanagement.com