The document discusses using key performance indicators (KPIs) to track organizational performance during periods of evolutionary and revolutionary change. For evolutionary change, KPIs should be embedded in a model to track small performance changes over time. For revolutionary strategic change, scenario development and KPI modeling can reduce unintended consequences by revealing how strategies will work and identifying new KPIs. An example is provided of a large government organization in Australia that underwent commercialization, where KPIs like productivity, profitability, and customer satisfaction were used to measure progress during the multi-year change process.

1. Performance management indicators
Good organisations exist in a state of constant change. They adapt to changing
circumstances to survive.
Sometimes, when faced with a crisis, they adopt a deliberate, planned change in strategy.
This is revolutionary change, commissioned by the board and top management team,
often with external professional guidance. These are expensive programmes, affecting the
lives of many people, and the organization needs to know whether they are working as
planned.
Most of the time the changes are a simple reaction to some external stimulus, with
success or failure dictating whether the change will be repeated. Let us regard this as
evolutionary change. It happens anyway, it cannot be stopped, and the results often look
like a random walk, with unexpected consequences creating frustration for the top team.
The role of performance management.
Best practice says that management teams should use Key Performance Indicators
(KPIs), as well as financial accounts to monitor performance.
When I wear my company director hat, I recollect that the hard data I received at board
meetings was primarily financial accounts, with a historical perspective and budget
comparisons. Directors relied on management reports to provide leading indicator data
like forecasts and soft performance trends. These reports were rarely KPI based.
If we are dealing with evolutionary change, and the leading indicators are embedded in
a KPI model, the performance change should be easy to track over time, and subtle
changes over time can be found and correlated with changes in financial results. The
drivers of small performance changes are identified and can be reinforced or eliminated
by management action. This incremental change process is inevitable, so it is important
to capture small steps in the right direction.
When we embark on revolutionary strategic change the picture changes. I suggest that
few changes in strategy should be approved without a thorough examination of how they
will work and what results can be expected. Best practice here uses Scenario
Development techniques, and the most likely, best, and worst cases are examined using a
computer model. Normal KPI modeling processes quickly reveal the main points of
leverage, and confirm the KPIs for the new strategy.
If structural change is projected, the KPI modeling process reveals the new relationship
between functional units, and new KPIs and performance targets can be set. In this way it
may be possible to reduce the effect of unintended consequences.

2. An example from my casebook.
The argument I have put forward looks good, but needs examples to provide more
explicit guidance. Here is one, with an explanation of how the specific KPIs that emerged
from the strategy were derived.
Commercialisation of a large government organization - a grand experiment.
20+ years ago the Australian Government embarked on a program of change to capture
the benefits of a commercial approach to the provision of government services. All the
service functions, scattered through the whole of government, that existed to provide
services to government were gathered together into single new Department, DAS. Most
of the services were commercially contestable, and the objective was to expose these
progressively to greater levels of private sector competition and capture the expected
gains in efficiency. There were 28 business units in the new DAS. The first step was to
introduce accrual accounting to the new organization. This was a major task, as the
Government used traditional cash accounting and programme budgeting, with all their
weaknesses, at that time. One of the most difficult part of the process was identification
and valuation of all the assets. Training all 18,000 employees in the principles and
practice of accrual accounting took quite a while. The concept of making a profit was
simply not part of the culture, so this took even longer.
In 2005, I had a private discussion with the just retired Secretary of DAS, Noel Tanzer,
and I was fascinated to learn about the process. Noel was highly regarded as one of the
senior Mandarins of the Commonwealth public service. He told me that after 2-3 years,
the board was pleased with the results of the introduction of accrual accounting. The
financial reports had improved in reliability and accuracy (clearly soft kpis for this major
strategic change).
He described it in these terms "We could hear the troops all marching to the same drum
beat, but we were uneasy. It took us a little while to realize that they were all marching in
different directions. That was when we decided that the next stage of the job was to
introduce a major program of training in commercial practices. That's when you got
involved."
Each of the 28 business units had a different business model and a different range of
commercial and public good services. The commercial services needed KPI models, and
the process of working with staff to develop the profit and pricing models was a key part
of the commercialisation training that happened. Each of the 28 was making its own
structural changes in response to the exposure to competition imposed by the
government. The goal posts changed every year.
What KPIs did we use to measure progress?
• The most important hard KPIs were productivity and price related
• Return on funds employed

3. • Revenue and Gross Profit per employee were the high level measures Price per
DL hour
• · Direct labour utilization
• · Sales and marketing cost % of revenue
· Achievement of sales forecasts
· Overhead ratios
· Asset and working capital management ratios.
We used the models to set feasible but challenging target ranges for KPIs and we
measured trends. The targets were different for every business, because the businesses
were so different, but the principles were the same.
Soft KPIs were also vitally important:
· Market share % for the main business segments
· Quality and timeliness of project delivery
· Customer satisfaction was evaluated by the % of business retained against competition
from the private sector.
I define these as soft kpis, because they are dependent on external measures.
Did it work?
Over a five year period the total number of staff was reduced from 18,000 to 8,000, while
total revenue remained constant. Staff productivity was markedly improved. The skilled
staff who were lost were generally snapped up by the private sector.
There were some failures of course, but they were far outweighed by the successes. The
success of this type of grand experiment with people's lives is not measured by KPIs but
in the social and political out-comes The lessons learned from this guided change process
have served Australia well over recent years.
Some of you may be asking, "Why is this important to me? My business does not employ
18,000 people."
The answer is that most of the 28 business units were small; each individual business unit
simply had to learn something completely new to the public sector - how to compete with
the private sector for what had traditionally been their own work. It required a complete
change in the public service mindset, and everyone had to learn the real meaning of the
word profit. 8,000 of them succeeded well enough to retain their customers and make a

4. profit. This was a completely new goal for people who joined to serve the public with no
thought of profit. They succeeded.
If you are planning revolutionary change, your KPIs should be derived from the new KPI
model. If the change is evolutionary, fewer changes in KPIs are needed, but you will find
that keeping your KPI model aligned with your structure will guide the way.
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