Developing Key Performance Indicators Tom Freas Principal October 6, 2004

2. Developing Key Performance IndicatorsTom FreasPrincipalOctober 6, 2004

3. Sustainable high performance & measuring what is important to success…

4. Developing Key Performance Indicators - Agenda • Performance Measurement Today • Issues & Responses • Performance Measurement Framework • Performance Measurement Techniques • Knowledge Management as an Enabler • Performance Measurement Tools

5. Performance Measurement Today

6. In Today’s World, we keep it simple and expect staff to rally around a few bottom line measures….that way, we are all on the same page…Right? Our market capitalization has declined, therefore we must improve ROCE, EVA, EBITDA... EBITDA, hah!, most of the folks who get these reports cannot spell EBITDA! I wonder how Aunt Eva is doing? So, what does ROCE have to do with whether I get these drawings to the customer? Wrong!…organization complexity increases the chances of the bottom line measures getting “lost in the shuffle”, ignored and…

7. Issues & Responses

8. The Issue - When performance measures get ignored, employee focus declines causing the organization to expose itself to issues that negatively impact sustainable performance.

9. The Response – Many organizations have had limited success in implementing performance measurement programs. Unsuccessful programs sometimes resemble… Program Result K.I.S.S. Program: The Company is asking the entire organization to keep it simple and focus on a “select few” measures. “Have it Your Way” Program: The Company allows each function to select their own performance measures for success Most of the organization does not know what these few measures really mean. Functions pick the “self-serving” measures and walls between departments grow.

10. Performance Measurement Framework

11. Question: – How can Executive Leaders build a performance measurement program where staff are given a more clear understanding of what is strategically important? Answer: Build a performance management framework that includes: • A set of performance measures that… • all levels in the organization can understand • are clearly linked to the corporate strategy and goals • can be measured • A consistent process for capturing, tracking, monitoring and disseminating these performance measures throughout the organization (typically business intelligence tools). • A culture that is willing to reward individual performance based upon these performance measures. (typically incentive compensation programs). So, how can an organization determine the right set of measures for a successful program?

12. Strategies Performance Measurement Answer– Build a performance measurement framework around the “performance building blocks” unique to your company. Strategies represent executable statements defining key focus areas that position the company to meet its long term vision and overall mission Goals Goals are measurable and time bound targets that support the company strategy Competencies describe how the company differentiates itself from its competition to achieve it’s goals Competencies Competencies Competencies Critical Success Factors define what activities the company must do well to successfully excel at their competencies Critical Success Factors Critical Success Factors Critical Success Factors

13. Performance Measurement Answer – and link the building blocks to performance measures. Strategies 1 6 Results Measures Goals (Tier 1: Sr. Executive) 2 Linked 3 Cascading Performance Measures Competencies Competencies Competencies (Tier 2: VPs/Directors & Tier 3: Managers) 5 4 Critical Success Factors Critical Success Factors Critical Success Factors

14. Strategies 1 Goals 2 3 Competencies Competencies Competencies 4 Critical Success Factors Critical Success Factors Critical Success Factors Accountability – The results and performance measures can be stratified into multiple tiers for assignment of staff accountability 5 Results Measures Performance Measures 6 • Executive level measures • Typically financial metrics • Results measures Tier 1 These measures involve setting the strategic goals and metrics regarding organizational results which are managed by the most senior executive level. These are considered results based and typically contain a strong financial component. • VP/Director level measures • Typically a combination of financial and non-financial metrics • Competency level measures These measures are identified and set around those things a company must do well to compete and succeed in the market at the division level. They may be both financial and non-financial in nature. Tier 2 Tier 3 • Manager and Supervisor level Measures • Some financial and most non-financial metrics • Operational These measures relate to Critical Success Factors that define what activities a company must do well to successfully excel at their competencies . These measures are at an operational level. They may be both financial and non-financial in nature.

15. Results – Using this approach allows organizations to select a set of performance measures for the enterprise scorecard that… • Are linked to all levels in the organization via a set of concrete critical success factors that are in a language the organization understands • Are linked to the corporate strategies via a set of organization competencies that link the critical success measures to the organization goals. • Contain a set of distinct measures that are linked to the critical success factors and the results measures.

16. Performance Measurement Techniques

17. Balanced Scorecard – is a strategic management system used to drive performance and accountability throughout the organization • The scorecard balances traditional performance measures with more forward-looking indicators in four key dimensions: • Financial • Operational Excellence • Employees • Customers • Benefits include: • Alignment of individual and State of Ohio objectives • Accountability throughout the organization • Culture driven by performance • Support of shareholder value creation

18. Best return on information technology (RoIT) Simple and rewarding experiences World-class cost structures Focused Innovation State of Ohio Objectives Capture the XYZ market potential Build direct business capabilities Protect Supplies Business Establish organization as a leader in technology Department A Objectives Strategy Mapping – methodology translates high level strategic vision into measures, and ensures alignment of objectives throughout the organization . Sample “Department A” Strategy Map Maximize market share while meeting current year revenue & profit commitments Sample Department Balanced Scorecard Financial Strategies • Marketing spend / Revenue • % increase in marketing reach • Revenue / Total market • Operating profit Customer Strategies Improve brand performance Develop new products / solutions Sample Department A Strategies Operational Excellence Strategies Develop effective, sustainable marketing programs • Brand recognition rating • New product ramp rates • New product revenue/Total revenue • Global diversity rating • Meeting employee retention plans Attract the diversity, skills and competencies we need Employee Strategies

19. Strategy Mapping - Use consistent terms and definitions throughout the strategy mapping process for communication across departments and functions To monitor progress, targets are set for each measure in given time period. Targets should be based off the strategic planning financials and assumptions. Objectives support the overall vision and provide areas of emphasis for the organization to focus its activities Measures are directly linked to strategies of the organization and should include all major performance drivers for each strategy. • Measures should be: • Timely, accurate, focused and relevant • Leading indicators of performance • Linked to controllable events • Cost effective to collect and compute • Easy to communicate broadly to the organization Strategies break down the objectives into more actionable elements and in aggregate should represent the overall organizational focus

20. Knowledge Management as an Enabler

21. Knowledge Management- is a process; and is closely linked to Performance Measurement Create Capture/ Store Refine Distribute Use Monitor • Which subprocesses do we do (well)? • Where do we need to focus? • Who owns or manages each one? • What human and technical enablers apply? How do we assure a continuous and natural flow of information?To the benefit of performance improvement.

22. Personalized Information – The right information to the right Audience Information • The web application is fully automated and interactive, providing a personalized combination of push and pull information sources: • Information about company’s products and services • Industry and firm specific applications, services, articles, market studies, financial information etc. • Personalized data and content from other existing WebSites / Portals / Marketplaces etc... • Computer based training (WBT)

23. Performance Measurement Tools

24. The user can select any organizational unit and period for performance results The Service Operations Dashboard has been selected--Dashboards can also be constructed for Call Centers, Dispatch Centers, Network Operations, etc. Actual results for selected organizational unit Management specified targets point in desired performance direction and change color to reflect positive or negative results Results for the rest of the company Balanced Measures – A personalized Dashboard shows at a glance the performance of any department across a balanced set of performance measures Note: Dashboard measures are fully customizable. 24

25. Return on Equity Return on Equity Return on Equity Simulate the Effect ! Simulate the Effect ! Simulate the Effect ! Change the Value ! Monitoring Tools– provide management with the operational information, required to make strategic decisions Distribution Channel Production Line Geographic Area Period û 18.09% ROE ! ü 36.14% 6,54% Leverage ROA ü 13,09% ü 0.503 ü $ 2,389 Operational Margin Assets Turnover Equity ü ü $ 36 ü $ 277 ! $ 4,222 $ 6,610 Net Profit Sales Liabilities Assets 25

26. Tomorrow – The organization has a clearly defined approach to linking what people should be doing to what is important for the organization. Now we can focus on measurements of success... Thank goodness Bob quit asking for those crazy reports, now I can start following up on our past due inquiries Now that we are buying the right PCs, I can help finish this job faster If I get these annual plans done accurately, they will get approved today, and we will be able to…

27. Contact Info. Thomas Freasthfreas@deloitte.com CFO Principal, Deloitte Consulting LLP

28. Questions and Answers