Chapter 11, Six Steps of Performance Measurement

1. Chapter 11, Six Steps of Performance Measurement Our new corporate motto is READY…FIRE…AIM

2. Operating plans and budgets Project management Needs Assessment Performance Measurement Strategies Resources Action Review Figure 11.1, The Management Cycle

3. The perfect world In a perfect world, a measurement system will actively promote performance improvement by; • measuring what matters, • providing corrective feedback and positive reinforcement to enthusiastic people who enjoy being measured and take improvement on as a challenge.

4. ATTRIBUTES OF A GOOD MEASUREMENT SYSTEM • An effective performance measurement system should have the following attributes. • FOCUS ON EFFECTIVENESS • 1) We have a need to measure better. • 2) We have a need to measure less. • FOCUS ON THE FUTURE

5. ATTRIBUTES OF A GOOD MEASUREMENT SYSTEM • FOCUS ON OBJECTIVES, “KEY RESULT AREAS” • KRAs are those functions or divisions of performance in which your organization must continually improve to be successful.

6. EXAMPLES OF “KEY RESULT” AREAS • Customer • Product/service • Public/society/natural environment • Marketing • Human Resources • Production • Maintenance • Operations • Finance • Good measurement systems don’t just measure things done according to the organizational chart. Good systems measure things done to satisfy stakeholders.

7. Key Performance Indicators “KPI’s” • This is the essence of measurement. Let’s make sure the concept of Key Performance Indicator is understood. • An “indicator” is a gauge or a measure that reports information. • “Performance” is the result or activity we are looking for that fits in to strategic goals. • “Key” means that this measure has been pinpointed so carefully that management knows precisely what to do. • Measures are developed to capture both the input and output elements of a business system. • Some examples of measures follow.

8. SPEED INDICATORS • response time records • turn around time records • cycle time records • project completion dates • meeting scheduled time records

9. ACCURACY INDICATORS • judgment based climate or opinion surveys • focus groups • comment cards • telephone surveys • advisory panels • opinions of community leaders • meeting design specifications or passing an inspection point that ensures the product works. • Customer returns or warranty claims.

10. VOLUME INDICTORS • Measures the amount (Number of) of outputs or results from a specific activity or program. number of units produced • number of completed transactions • % market share • Back order statistics • Number of failed sales due to being out of stock

11. INVESTMENT INDICATORS • Measures the amount of resources expended on a specific program or activity or the unit cost (cost/number of units produced ($)). • operating costs per unit produced • capital costs per unit produced • cost per customer as to sales and marketing expenses • cost per unit of after sales service and customer support. • Notice that the financial measures are “per” something

12. ‘Six Steps’ of a Measurement System • Separate Strategic Goals Into Input and Output Dimensions • Develop Output and Results Measures for each goal • Develop Input Measures for each goal • Check with SAVI to see if the set of measures is complete • Use an Effective Recognition System • Build the Culture

13. Step 1, Separate Strategic Goals Into Input and Output Dimensions • Following from Vision, Mission and Values, organizations create strategic goals that identify “Key Result” areas of the organization where change and improvement is possible and desirable. • Our first step in developing measures to reflect the goal is to dissect the goal into its input and output dimensions.

14. Input dimension • unit cost efficiency • How well are materials used, (excessive waste) • How well is labour used, (excessive idle time) • How well is overhead used (idle capacity) Figure 11.2, Broad measurement concept of inputs

15. Output Dimension Internal Results maintaining and improving quality lower consumer prices External Results financial returns improve market share meet current and future demand Figure 11.3, Broad measurement concepts of Outputs

16. Step 2, Develop Output Measures or Each Goal • Outputs are accomplishments. In most organizations, accomplishments can be categorized into three groups. • Investment returns • Customer Satisfaction • Social Impacts

17. OUTPUT MEASURES CATEGORY MEASUREMENT CONCEPT PERFORMANCE MEASURE PERFORMANCE GOAL (changes of specific amounts over specific time frames) Investment Returns Financial returns % return on investment % return on assets employed Profit margin on sales All should increase by a specific % change, to be accomplished by a specific date. Market share % market share relative to the competition % market share relative to total market size The proportion of the market share against the competition should increase. The proportion of the market share relative to the total market should increase at a rate that is faster than the rate of change in total market size. Figure 11.4, Measures of outputs or Results.

18. Customer Satisfaction Product or service quality Rejection rates in the production process Sales returns Both should decline by a specific amount in a specific timeframe. Deliver on time and in sufficient quantity Backorder and delivery statistics Backorders should decline and delivery cycle times should improve. Consumer prices Retail price by product The retail price matched to value should decline. Social Benefits Child development Improvement in reading skills Children using these toys should show a measured improvement in reading skills Environmental impact Impact on landfills when the toy is finished The proportion of toys presented for re-cycling should go up. Measures of outputs or Results

19. Step 3, Develop Input Measures For Each Goal • We normally develop input measures after we have developed output measures because it is a good idea to know where you are going before you decide how to get there. • Financial operating resources • Financial capital resources • Other organizational resources

20. INPUT MEASURES for “UNIT COST EFFICIENCY” CATEGORY MEASUREMENT CONCEPT PERFORMANCE MEASURE PERFORMANCE GOAL Financial Operating Resources Materials and labour Direct materials and direct labour per unit, expressed in both dollar and quantity terms Material and labour cost and or consumption per unit should decline over a specified time period Overhead Overhead charged per unit Overhead consumed per unit produced should decline % utilization of capacity %capacity utilized should increase to or remain at optimal levels Financial Capital Resources Capital investment in operating assets Dollars of capital investment per unit produced Dollars per unit of capital invested should decline over time as capital resources are used more efficiently Other Organizational Resources Non-financial resources consumed by the performance area Management estimates of the resources of talent and energy and other non-financial resources that have been dedicated to this performance area The amount consumed will increase as the project is developed and decrease after it is implemented Figure 11.5, Measures of Inputs or Efficiencies

21. Step 4, Check with SAVI to see if the set of measures is complete • Before we can be sure that we have a complete set of measures, we need to apply the SAVI framework to categorize the measures as to Speed, Accuracy, Volume and Investment.

22. OUTPUT MEASURES CATEGORY MEASUREMENT CONCEPT PERFORMANCE MEASURE SAVI Investment Returns financial returns % return on investment % return on assets employed Profit margin on sales Accuracy market share % market share relative to the competition % market share relative to total market size Volume Customer Satisfaction Product or service quality Rejection rates in the production process Sales returns Accuracy & Volume Deliver on time and in sufficient quantity Backorder and delivery statistics Speed & Volume Consumer prices Retail price per product Investment Social Benefits Child development Improvement in reading skills Accuracy Environmental impact Impact on landfills when the toy is finished Volume Figure 11.6, Linking Output Measures to SAVI

23. INPUT MEASURES for “UNIT COST EFFICIENCY” CATEGORY MEASUREMENT CONCEPT PERFORMANCE MEASURE SAVI Financial Operating resources Materials and labour Direct materials and direct labour per unit, in both dollar and quantity terms. Investment Overhead Overhead charged per unit. Investment % utilization of capacity Volume Financial Capital Resources Capital investment in operating assets Dollars of capital investment per unit produced Investment Other organizational resources Non-financial resources consumed Management estimates of the resources of talent and energy that have been dedicated to this performance area. Investment Figure 11.7, Linking Input Measures to SAVI

24. Testing the measures • Once we are satisfied that the set is complete we need to subject each and every measure to a test. Refer to figure 11.8

25. Step 5, Use an Effective Recognition System • Use Measurement to Initiate Change • An effective measurement system will use the measured results as a management tool. • Every result should have an automatic intervention strategy. • When results are as expected we should offer congratulations and reinforcement to keep it going, • when results are less than expected we should quickly isolate the cause and correct the process

26. Step 6, Build the culture • Good systems need good people. There is no sense in examining a process unless at the same time you examine the people who govern the process. • Improvement does not take place on paper. • Improvement happens when people employ enthusiasm, dedication, commitment, leadership and morale in their daily routine. • A good system on paper is a healthy beginning but if you want results you need to follow up a paper system with a people system.

27. Closing remarks • In the beginning of this chapter you were challenged to find measures and see the resulting behavior. • So how about the 30 minute pizza delivery guarantee. That promotes speeding and if a delivery person has an order at 28 minutes and another at 10, which does he deliver first? And what happens if Pizza delivery people are offered a cash bonus for every delivery made within 30 minutes, and what does this do to pizza quality?

28. People are curious beings. We bring our own personal values to the job, we react differently to control systems, we are motivated by different things. A performance measurement system is a uniform set of measures that is trying to motivate a most un-uniform set of people. • Chapter 12 will deal with how we need to manage people as part of the performance improvement process.