Performance management indicatorsGood organisations exist in a state of constant change. They adapt to changingcircumstances 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 thelives of many people, and the organization needs to know whether they are working asplanned.Most of the time the changes are a simple reaction to some external stimulus, withsuccess or failure dictating whether the change will be repeated. Let us regard this asevolutionary change. It happens anyway, it cannot be stopped, and the results often looklike 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 boardmeetings was primarily financial accounts, with a historical perspective and budgetcomparisons. Directors relied on management reports to provide leading indicator datalike forecasts and soft performance trends. These reports were rarely KPI based.If we are dealing with evolutionary change, and the leading indicators are embedded ina KPI model, the performance change should be easy to track over time, and subtlechanges over time can be found and correlated with changes in financial results. Thedrivers of small performance changes are identified and can be reinforced or eliminatedby management action. This incremental change process is inevitable, so it is importantto capture small steps in the right direction.When we embark on revolutionary strategic change the picture changes. I suggest thatfew changes in strategy should be approved without a thorough examination of how theywill work and what results can be expected. Best practice here uses ScenarioDevelopment techniques, and the most likely, best, and worst cases are examined using acomputer model. Normal KPI modeling processes quickly reveal the main points ofleverage, and confirm the KPIs for the new strategy.If structural change is projected, the KPI modeling process reveals the new relationshipbetween functional units, and new KPIs and performance targets can be set. In this way itmay be possible to reduce the effect of unintended consequences.
An example from my casebook.The argument I have put forward looks good, but needs examples to provide moreexplicit guidance. Here is one, with an explanation of how the specific KPIs that emergedfrom 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 capturethe benefits of a commercial approach to the provision of government services. All theservice functions, scattered through the whole of government, that existed to provideservices to government were gathered together into single new Department, DAS. Mostof the services were commercially contestable, and the objective was to expose theseprogressively to greater levels of private sector competition and capture the expectedgains in efficiency. There were 28 business units in the new DAS. The first step was tointroduce accrual accounting to the new organization. This was a major task, as theGovernment used traditional cash accounting and programme budgeting, with all theirweaknesses, at that time. One of the most difficult part of the process was identificationand valuation of all the assets. Training all 18,000 employees in the principles andpractice of accrual accounting took quite a while. The concept of making a profit wassimply 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 thesenior 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. Thefinancial reports had improved in reliability and accuracy (clearly soft kpis for this majorstrategic change).He described it in these terms "We could hear the troops all marching to the same drumbeat, but we were uneasy. It took us a little while to realize that they were all marching indifferent directions. That was when we decided that the next stage of the job was tointroduce a major program of training in commercial practices. Thats when you gotinvolved."Each of the 28 business units had a different business model and a different range ofcommercial and public good services. The commercial services needed KPI models, andthe process of working with staff to develop the profit and pricing models was a key partof the commercialisation training that happened. Each of the 28 was making its ownstructural changes in response to the exposure to competition imposed by thegovernment. 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
• 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 wemeasured trends. The targets were different for every business, because the businesseswere 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 competitionfrom 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, whiletotal revenue remained constant. Staff productivity was markedly improved. The skilledstaff 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. Thesuccess of this type of grand experiment with peoples lives is not measured by KPIs butin the social and political out-comes The lessons learned from this guided change processhave served Australia well over recent years.Some of you may be asking, "Why is this important to me? My business does not employ18,000 people."The answer is that most of the 28 business units were small; each individual business unitsimply had to learn something completely new to the public sector - how to compete withthe private sector for what had traditionally been their own work. It required a completechange in the public service mindset, and everyone had to learn the real meaning of theword profit. 8,000 of them succeeded well enough to retain their customers and make a
profit. This was a completely new goal for people who joined to serve the public with nothought of profit. They succeeded.If you are planning revolutionary change, your KPIs should be derived from the new KPImodel. If the change is evolutionary, fewer changes in KPIs are needed, but you will findthat keeping your KPI model aligned with your structure will guide the way.http://performanceappraisalebooks.info/ : Over 200 ebooks, templates, forms forperformance appraisal.