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Chapter 11, Six Steps of Performance Measurement

Our new corporate motto is READY…FIRE…AIM

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Figure 11.1, The Management Cycle

Needs Assessment

Operating plans and budgets

Project management

Performance Measurement

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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.

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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

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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.

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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.

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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.

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SPEED INDICATORS

• response time records

• turn around time records

• cycle time records

• project completion dates

• meeting scheduled time records

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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.

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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

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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

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‘Six Steps’ of a Measurement System

1. Separate Strategic Goals Into Input and Output Dimensions

2. Develop Output and Results Measures for each goal

3. Develop Input Measures for each goal

4. Check with SAVI to see if the set of measures is complete

5. Use an Effective Recognition System

6. Build the Culture

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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.

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Figure 11.2, Broad measurement concept of inputs

Input dimension

unit cost efficiencyHow well are materials used, (excessive waste)How well is labour used, (excessive idle time)How well is overhead used (idle capacity)

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Figure 11.3, Broad measurement concepts of Outputs

Output Dimension

Internal Results

maintaining and improving qualitylower consumer prices

External Results

financial returnsimprove market sharemeet current and future demand

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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

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Figure 11.4, Measures of outputs or Results.

OUTPUT MEASURES

CATEGORYMEASUREMENT

CONCEPTPERFORMANCE

MEASURE

PERFORMANCE GOAL (changes of specific amounts over

specific time frames)

Investment Returns

Financial returns

% return on investment% return on assets employedProfit 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.

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Measures of outputs or Results

Customer Satisfaction

Product or service quality

Rejection rates in the production processSales 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.

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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

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Figure 11.5, Measures of Inputs or EfficienciesINPUT MEASURES for “UNIT COST EFFICIENCY”

CATEGORYMEASUREMENT

CONCEPTPERFORMANCE 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 unitOverhead 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

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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.

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Figure 11.6, Linking Output Measures to SAVI

OUTPUT MEASURES

CATEGORYMEASUREMENT

CONCEPTPERFORMANCE MEASURE SAVI

Investment Returns

financial returns% return on investment% return on assets employedProfit 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 processSales returns

Accuracy & Volume

Deliver on time and in sufficient quantity

Backorder and delivery statisticsSpeed & 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

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Figure 11.7, Linking Input Measures to SAVI

INPUT MEASURES for “UNIT COST EFFICIENCY”

CATEGORYMEASUREMENT

CONCEPTPERFORMANCE 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

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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

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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

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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.

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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?

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• 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.