Performance Measurement: Rules For Driving Results

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This presentation covers the attributes of effective performance measures and how they can be used to drive business performance.

This presentation covers the attributes of effective performance measures and how they can be used to drive business performance.

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  • 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

Transcript

  • 1. Performance Measurement: Systems for Driving Business Results
  • 2. Learning Objectives. . .
    • Understand the problems with traditional performance measures
    • Learn how to use performance measures to align people to strategy
    • Gain valuable insights into how to build and refine performance measurement systems that foster the achievement of strategic objectives
  • 3. Are We Measuring the Right Things?
    • In times of economic trouble and recession, it is natural for us to reconsider the way we do business.
    • In many businesses, the signs will emerge that action must be taken.
    • Our performance measures have to play a role in preparing us for the future.
  • 4. What’s the Problem with Traditional Performance Measures?
    • Many performance measures are too focused on financials. Financial measurements give us a picture of past business performance.
    • On the other hand, a significant portion of measures related to customer service and internal processes do not give us a deep enough understanding of the factors that drive the business.
  • 5. Why is a Comprehensive Performance Measurement System necessary?
    • We need a performance measurement system to guide us to business results and value for shareholders (80% of respondents in an AICPA survey confirm this necessity).
    • But there’s a problem in how we measure performance:
    • Performance measurement systems are too narrowly focused on traditional financial measurements such as cash flow and sales revenue.
  • 6. Why can’t we stick to using the Traditional Measures?
    • The economic pace of the world has increased dramatically; winning organizations are agile.
    • There are significant challenges ahead that can threaten the long-term outlook of any business (e.g. the retirement of “Baby Boomers” and the need for effective succession planning).
    • Organizations face regulations, globalization, and increased competition.
  • 7. Understanding “Hard” vs. “Soft” Metrics
    • Hard metrics refer to financial results. They tell us how we did last month or last year. They do not provide insight into how we’ll do in the future. These are also called lagging indicators .
    • Soft metrics can provide insight into future performance. These metrics track such items as employee development / engagement and process efficiency. These are also called leading indicators .
  • 8. The Solution: Strategic Alignment
    • To give our measures or KPIs (key performance indicators) the potency required to provide valuable business insights, they must be aligned to organizational strategy.
  • 9. What should We ask when fixing Performance Measures / KPIs?
    • We have to ask strategic questions first:
    • Do we have a comprehensive and sound strategy?
    • Do our measures relate to the strategy?
    • Are we effectively using the data gathered through our measures to evaluate our strategic priorities and initiatives?
  • 10. Example of Linking Performance Measures to Strategy: The Balanced Scorecard (Michael’s Pizza) Objectives
    • Reduce Pizza Cycle Time
    Statement of what strategy must achieve and what’s critical to its success Target
    • 9 Minutes
    • 25%
    The level of performance or rate of improvement needed Key action programs required to achieve objectives Measurement
    • Time (average time to make one pizza)
    How success in achieving the strategy will be measured and tracked
    • Install new ovens
    Initiative Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Strategic Theme: Operating Efficiency Enhanced Profitability Financial Learning Increase Revenue Align the Kitchen Staff Hot Temperature Lower Costs Customer Internal Reduce Pizza Cycle Time Timely Deliveries Source: Kaplan and Norton
  • 11. What can We learn from the Michael’s Pizza example?
    • Performance measures are determined after the strategic theme has been established and the strategy map has been built.
    • Strategic planning is not about managing initiatives. Initiatives are not an end result, but they are a means of implementing a strategic objective and reaching a target.
  • 12. What Rules does the Balanced Scorecard Establish in regards to Measurements?
    • The BSC establishes a balance of leading and lagging indicators
    • It requires us to articulate strategy before building and fixing measures
    • It builds a discipline of creating targets to support and communicate measurements
  • 13. How should Targets be constructed?
    • Targets must be constructed through the feedback and input of employees.
    • Business insight from multiple perspectives is required to establish targets that make sense.
    • The more people have a hand in establishing a target, the more they’re likely to work hard to reach it.
  • 14. How many Measures should You be using?
    • “ I’d go with the magic number seven, plus or minus two.”
    • David Larcker Ernst & Young Professor of Accounting, University of Pennsylvania
    • “ Kaplan and Norton, however, figure that a well-designed balanced scorecard should have 23 to 25 measures, and that no more than five should be financial.”
    • Loren Gary
    • “ How to Think About Performance Measures Now”
  • 15. How do You Instill Performance Measures into the Organization?
    • Do not create and implement performance measures by yourself. Collaborate with others!
    • Communicate the measures in simple terms over and over again.
    • Conduct regular meetings to monitor performance numbers.
  • 16. In summary. . .
    • Traditional measurement systems are too focused on financial performance and do not provide us with enough business insight to drive lasting results
    • Measurement systems for the modern business need a balance between leading and lagging indicators which are tied directly to the organizational strategy
    • Measures, targets and initiatives are not end results of strategic plans but they are needed to support the execution of strategy
    • Input from employees is required to create effective measures and targets
  • 17. THANK YOU!
    • Henry Killackey
    • Global Institute for Management (GIM)
    • 213.291.8655
    • [email_address]
    • Visit us at www.gimanagement.com
    • Please don’t forget to contact us with any questions!