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Performance Measurement and Benchmarking

Scott Edwards Term 1,2011

Performance Measurement and Benchmarking

Course at a glance

STRAND 1: THE ESSENTIALS OF PERFORMANCE MEASUREMENT

STRAND 2: INTEGRATING PERFORMANCE MEASUREMENT THINKING

STRAND 3: ALIGNING OBJECTIVES, TARGETS, PEOPLE AND PROCESSES

Session 1: The performance measurement challenge

Session 4: Mapping the path to success

Session 7: Aligning objectives and measures

Session 2: Developing measurement frameworks

Session 5: Translating strategy to action

Session 8: Learning from syndicates

Session 3: Effective management systems

Session 6: Mid-term examination

Session 9: Benchmarking practices

Session 10: Contemporary issues, wrap up and review

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Tools for Business

Top 10 tools from Bain
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Benchmarking Strategic Planning Mission and Vision statements Customer Relationship Management Outsourcing Balanced Scorecard Customer Segmentation Business Process Reengineering Core Competencies Mergers and Acquisitions

Top trends are: Towards soft issues Global growth Innovation

Management tools have become a common part of executives existence

Source: Bain and Co 2009 www.bain.com/tools

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Performance Measurement and Benchmarking

Session 1 The Performance Management Challenge
Scott Edwards Term 1,2011

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Why is PM and B hot?

Companies are managed with intuition and anecdote

Make decisions

Implement Strategy

Performance Measurement
Improve Performance Report Performance

Performance Management is on the agenda....no Performance Management is the agenda

Why is PM and B hot?

Companies are managed with intuition and anecdote

Strategy

Customers

Employees

Performance Measurement and Benchmarking

Processes

Metrics are the language of business

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The modern business environment

Increasingly competitive and requiring focus
What structural changes, if any, do you expect to be affecting your industry at the end of 2014?
Industry consolidation (54) More innovation (45) Decrease in industrys growth rate (36) Stricter regulation (36) Entry of new competitors (36) Lower tolerance of risk (31) Increased reliance on low cost suppliers (25) Increased reliance on international sales (23) Lower sales because of shift to less expensive products (17) Increase reliance on local sales (12) Increase reliance on local suppliers to avoid supply chain risk (9) Lower sales because of businesses inability to get credit (8) Lower sales because of stricter consumer lending standards (6) Less innovation (5)

Today, good enough is not good enough

Source: McKinsey 2009 Global Economic Conditions Survey - box from Transforming Performance Measures by Dean Spitzer

The Information age operating environment (1/2)

Increasingly looking to the external

The information age operating environment characterised by the following operating assumptions:

is

Cross functions (shift from specialised functional skills to integrated business processes) Customer and supplier links (shift from arms-length transactions to integration of supply, production, and delivery processes) Customer segmentation (customisation without cost penalty) Global scale (combine efficiencies of global operations with marketing sensitivity to local needs) Innovation (rapid product and process innovation both continuous improvement and radical jumps) Knowledge workers (people as problem solvers and creators of knowledge)

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The Information age operating environment (2/2)

Increasingly looking to the external
To achieve this transformation, organisations are trying out a variety of improvement initiatives. These include:
Total Quality Management (TQM), Six Sigma etc. Just-in-Time (JIT) Lean Manufacturing Activity-Based Cost Management Employee Empowerment Business Process Reengineering

However, such programs may not be successful unless they are linked to the firms strategy and desired outcomes. Implementing major programs for change also requires major changes in a firms performance measurement systems.

Performance measurement and management

Definitions

Purpose of performance measurement systems is to convey financial and non-financial information that influences decision making and managerial action (Simons, 2000) The organisational approach to assess and monitor performance in relation to set goals and objectives. It emcompasses methodologies, frameworks and indicators that are used to help organisations in the formulation and assessment of the strategy, to motivate people and to communicate or report performance to external stakeholders . (Cranfield, 2003)

The Scope of Performance Measurement and Management

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Performance Measurement is growing

The environment for performance measurement
Wealth of practitioner and popular publications Flood of academic publication New frameworks and methods Over 100 software vendors Growing conference activity Increased emphasis on governance Annual reports including scorecard tables Demands for performance on public service

Performance Management must be socialised into the organisation

The Evolution of Performance Measurement

The industrial revolution to today
Major Movements Specialisation of labour introduction of machinery Scientific management Individual to Group Foundations of Operations Management (OM) Self Managed Work Teams Total Quality Management Strategic importance of Operations Producing Improving Business Process Reengineering What to measure Efficiency Effectiveness Time and motion Cost and efficiency Quality, Flexibility, Timeliness Social factors Service Speed, Dependability, Responsiveness Balance Time
1776 (Smith) 1911 (Taylor) 1954 (Maslow) 1966 (Hertzberg) 1974 (Skinner) 1980 (Hayes) 1982 (Deming) 1992 (Kaplan) Today

Tell me how you measure me and I will tell you how I behave
Source: Box quote be Eli Goldratt

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The evolution of measurement

What is the trend
Older measures One perspective After the fact Manage cost inputs Control and report Not actionable Show snapshots Presented in tables Rob Peter, Pay Paul Within functional areas Todays measures Multiple perspective Real-time tracking Manage value outputs Align effort, Create value Line of sight to action Show trends Presented graphically Balance opposing forces Across functional areas

Older measures have grown out of the financial perspective

Source: Designing Metrics and Measuring Performance by Bob Frost

Performance Measurement System

So how is PMS changing? Not enough!!
US Study by Scheimann 1996 of percent respondents with clearly defined measures in different areas:
Financial (92); Operating efficiency (68); Customer satisfaction (48); Community/Environment (25); Employee performance (17); Innovation/Change (13)

Australian Study by Cuganesan 2007 showed 54% of respondents report over half their KPIs are financial measures Lack of alignment between what is important and what is emphasised Financial still dominate decision making Non-financials are:
Not linked to financials (causal modelling) Under-used in decision-making (strategy, compensation) Too many non-financials which ones matter?

Risk of current PMS practice unbalanced and not driving value creating actions
Performance Measurement System need to drive value creation
Source: Cuganesan notes 2010 BPMM MGSM

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The Importance of PM for Managers (1/6)

Control and Responsibilities Improved Control
Performance measurement (PM) provides feedback Without meaningful feedback managers, and hence the firm itself, cannot recognise opportunities and threats PM feedback helps managers to recognise deviations from expected performance and take timely corrective action

Clear Responsibilities and Objectives

Clear PM tell who is responsible for specific results and outlines what good performance means Everyone knows how they are to be evaluated and become accountable for their performance

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

The Importance of PM for Managers (2/6)

Alignment and understanding
Strategic Alignment of Objectives
Breaking down a firms strategic objectives into lower level objectives and performance measures (PMs), in a cascading manner, can ensure congruence in strategy implementation PMs can also help to determine whether the strategy being implemented is effective or not.

Understanding Business Processes

To understand how a business process works it is important to measure what goes in, what happens after that, what factors affect what happens, and what comes out. Clever PM often divulges a big gap in what management thinks is happening and what actually happens. PM can help to reveal the magnitude and causes of various problems

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

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The Importance of PM for Managers (3/6)

Capability and Quality

Understanding Process Capability

PM can also help managers to understand the capability of a process what level of performance can it deliver. This knowledge can help to decide whether to change the process to remain competitive and provide guidelines for the design of the new process

Improved Quality
Quality improvements require an assessment of the following
The gap that exists between what the firm can offer and what customers want The capability of the process that is delivering customer needs The extent to which the gap has been bridged after improvements have been made

PM helps in improving quality by helping to do these assessments

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

The Importance of PM for Managers (4/6)

Improvement and resources
Performance Improvement
Introduction of PMs can lead to performance improvement almost immediately. This is because of the following reasons.
There is immediate focus on important issues People begin to understand better what they are expected to do When PM is visible no one wants to look bad

Efficient Allocation of Resources

Often managers try ad-hoc measures to improve performance without any clear information on why things are going wrong PM helps managers to allocate resources wisely by establishing the relative importance of problems and opportunities PM also helps everyone to reach a consensus on how to allocate resources because there will be a rational basis based on the PMs

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

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The Importance of PM for Managers (5/6)

Planning, delegation and argument
Better Planning and Forecasting
When the dynamics of a process are well understood based on PMs it becomes easier to plan better and forecast better. Of course forecasts can go wrong due to external events that are beyond the control of the firm

Freedom to Delegate
Many managers are afraid to delegate because they think they will lose control However, if they can stay in touch through PMs, it becomes easier to delegate and the manager can concentrate on doing higher level tasks without having to micro-manage.

Defending Your Position

When arguments are made with supportive PMs no one can dismiss it as an opinion not supported by facts

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

The Importance of PM for Managers (6/6)

Culture
Changing Company Culture
PMs are a powerful catalyst for changing a companys culture By defining common goals PMs foster teamwork By establishing clear objectives, accountability, and responsibility PMs promote cooperation between different units of the firm and reduce conflicts Objective PMs help to create a culture where people start discussing issues rationally and not based on emotions and personal likes and dislikes A good and well accepted PM helps to keep everyone honest by giving no one a place to hide If the leadership sets the right tone by driving away fear then PMs help everyone to confide weaknesses in the system and suggesting ways to improve performance.

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

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The Importance of PM for Employees (1/2)

Responsibilities and Recognition Clear Responsibilities and Objectives
Clear PM tell who is responsible for specific results and outlines what good performance means Everyone knows how they are to be evaluated and become accountable for their performance Front-line employees are often very keen to know what they should do to help realise corporate objectives

Seeing Accomplishments and Receiving Recognition

PMs help managers to recognise, praise, and reward employees. It also helps managers to coach and help employees to improve

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

The Importance of PM for Employees (2/2)

Evaluation and empowerment

Being Evaluated Objectively

Employees like to evaluated objectively based on their accomplishments rather than on a subjective opinion given by a supervisor If the PMs help objective evaluation it would be possible to develop good incentive schemes for rewarding employees who perform with distinction

Empowerment
Good PMs help managers to avoid micro-managing and encourage employees to take the initiative to do things by themselves When employees begin to accept responsibility and take the initiative to do things by themselves it becomes easier to foster the concept of empowerment

Source: Kaydos, W 1999 Operational Performance Measurement, CRC Press, Boca Raton, FL

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Measurement purposes

The seven generic objectives of measuring

General Look back Roll up Cascade down Compare Compensate Motivate Specific Look forward

Full spectrum utility

Source: Rethinking Performance Measurement by Marshall W. Meyer box from Transforming Performance Measures by Dean Spitzer

The importance of measuring

Measurement......

Directs behaviour Increases visibility of performance Focuses attention Clarifies expectations Enables accountability Increases objectivity Provides the basis for goal setting Improves execution Promotes consistency

Facilitates feedback Increases alignment Improves decision making Improves problem solving Provides early warning signals Enhances understanding Enables prediction Motivates

Clich warning: What gets measured gets done

Source: Spitzer, D 2007, Transforming Performance Measurement, AMCOM, New York

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Performance Measurement System

Where does the performance go?
Averaged realised performance 63% Average performance loss 37% Breakdown of 37 %
Inadequate or unavailable resources Poorly communicated strategy Actions required to execute not clearly defined Unclear accountabilities for execution Organisational silos and culture blocking execution Inadequate performance monitoring Inadequate consequences or rewards for failure or success Poor senior leadership Uncommitted leadership Unapproved strategy Other obstacles (including inadequate skills and capabilities)

The PMS is a Performance Improvement Opportunity

7.5 5.2 4.5 4.1 3.7 3.0 3.0 2.6 1.9 0.7 0.7

A well designed system will provide a rich view with multiple perspectives
Source: Cuganesan notes 2010 BPMM MGSM

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