Targeting improved performance

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Targeting improved performance

  1. 1. Targeting improved performance Creating an effective performance management system in the Defence Logistics Organisation of the Ministry of Defence John Dowdy
  2. 2. Acknowledgements I would like to thank the many contributors to this report, without whom this product would not exist. I suppose it is appropriate to start by thanking Petri Allas and Neville Salkeld, McKinsey experts on the topic of performance management, for their guidance, comments and critique. In terms of shaping these conceptual underpinnings, collaboration with Sir Michael Bichard and his Civil Service Management Committee Group on Performance Management was essential. Active support from HM Treasury and the Cabinet Office ensured that these recommendations were consistent with the numerous other initiatives touching in some way on this critical topic. Within the DLO, David Smith and David Gould provided both access and active and enthusiastic support. Most of all, I would like to thank Nick Moberly and Kai Zolleis, who did much of the detailed work upon which the report is based. Finally, I would like to thank the members of the Public Services Productivity Panel itself, who have provided, at various points, comments and criticism in driving this report to its final state. John Dowdy Contents Executive summary 2 An overview of the report’s area of study and of the Panel’s performance management model Section 1: Performance management in the Defence Logistics Organisation 4 A summary of the role of the DLO, its progress to date in performance management, and remaining challenges Section 2: Developing an effective performance management system in the DLO 9 Further detail on the DLO’s progress in developing a system, and recommended next steps Appendix: The performance management framework 18 An explanation of the Panel’s performance management model, which has been adopted by the Civil Service Management Board
  3. 3. Targeting improved performance 1 Foreword by the Chief Secretary to the Treasury Successful public services lie at the heart of a successful economy and society. At their best, they respond quickly to their customers, operate efficiently, and set the highest standards of quality and probity. In practice there have been wide variations in quality and in some areas ineffectiveness and waste have been tolerated. Modernising Government – the drive to achieve better, more responsive government and public services – means raising all services to the standards of the best and recharging our public organisations with fresh vigour, incentives and ideas. As part of its comprehensive plan for modernisation, the Government has recruited a team of top private sector managers to the Public Services Productivity Panel – with a remit to advise on improving efficiency and productivity. The focus on productivity is linked in particular to the Public Service Agreements (PSAs), now published for all government departments, which enable the Government to track performance, improve accountability, sharpen responsiveness and inform investment. The role of the Panel is to support departments in raising standards to achieve or outperform their PSA targets, providing a source of practical ideas and new approaches. Each member of the Panel is focussing on a different area, working with individual government departments and agencies to identify solutions that will increase productivity. In doing so, the Panel recognises that there is no monopoly of wisdom in the private sector about how to raise productivity. Instead, it is the blend of fresh ideas and learning from good practice in our public services that can provide the spur to improvement. The findings of each project will be published and the Panel aims to draw together the overall lessons of its work during the first half of 2000. I am grateful to John Dowdy of McKinsey for preparing this report. It reviews the performance management system which is being developed by the newly formed Defence Logistics Organisation against the model developed by the Panel and adopted by the Civil Service Management Board. The DLO spends £4.5 billion a year and its effectiveness is vital to its customers: the armed forces whose lives can depend on prompt, dependable logistic support to operations. The report summarises progress to date and identifies priorities for further DLO action to improve its productivity. It will be relevant to many public services, in particular those like the DLO which provide services to internal customers. Our challenge now is to translate these finding into clear and meaningful public benefit. Expectations of all who use public services are rightly ambitious. By involving valuable private sector experience in our drive to modernise government, our promise is to match that ambition with excellence for the many, not the few. Rt Hon. Andrew Smith MP Chief Secretary to the Treasury
  4. 4. 2 Targeting improved performance Executive summary Developing an effective performance management system is absolutely fundamental to the success of any organisation, whether public sector or private. Indeed, my own experience in both settings has indicated that although there are multiple paths to improved productivity, high performing institutions all share a few common characteristics. One the most essential is robust performance management. To be clear, the concept of performance management is generally well understood and accepted in the public sector. Most public sector managers would recognise the essential elements of a good performance management system, and have been working hard to develop effective management systems for a number of years. In addition, many recent government initiatives have been aimed at reinforcing the process and speeding up the pace of progress. That being said, successful implementation appears to be a major challenge. In my experience, the quality of the performance management systems across the public sector is very mixed, and even in areas that already have good systems, some of the building blocks are stronger than others. As a result, major improvements in productivity can be achieved by improving these systems and properly integrating the various building blocks. Project Scope This project was conducted as part of the work of the Public Services Productivity Panel in co-operation with the newly formed Defence Logistics Organisation (DLO) within the Ministry of Defence (MoD). Our remit was to assess the quality of the performance management systems in place prior to the creation of the DLO, to evaluate the progress that the DLO has made, and to make recommendations on how to improve upon their latest thinking to create a world class system. The DLO itself was formed early in 1999 to provide unified logistic support to the three armed Services, and comprises some 41,000 staff responsible for around £4.5 billion of annual cash spend. It provides an interesting case example for two reasons. First, it is tackling this task in a serious and concerted manner, which highlights some important learnings for other government departments. Secondly – in contrast to some of the other governmental organisations that other Panel reports examine – its focus is on providing a service to internal customers within the MoD rather than to the public at large. A Framework for Performance Management This report is based on a framework, describing the five main elements necessary for an effective performance management system. This framework was developed in the Panel’s early days, and refined in discussions with the Civil Service Management Committee’s group on performance management1. The framework itself is based on 1 Performance Management, Civil Service Reform: A Report to the Meeting of Permanent two fundamental assumptions: Heads of Departments, Sunningdale, 30 September – 1 October 1999 • Improved productivity is predicated on the creation of a well functioning performance management system. In order to function optimally, all of the basic building blocks must be in place. If essential parts of the system are not robust, others are not likely to work well either. • There is a natural sequence in which these need to be addressed. In other words, some items need to be in place before others will be completely effective. This means, for example, that it is very difficult to design an effective personal incentive system if meaningful business targets have not been set at all levels.
  5. 5. Targeting improved performance 3 The Building Blocks The five building blocks, shown in Exhibit 1, are: • A bold aspiration, to stretch and motivate the organisation • A coherent set of performance measures, and a demanding set of targets based on these, to translate this aspiration into a set of specific metrics against which performance and progress can be measured • Clear accountability for these targets at an appropriate level within the organisation, so that the individuals who are best placed to ensure their delivery have real ownership for doing so • A rigorous performance review process to ensure that continuously improving performance is being delivered in line with expectations • Meaningful reinforcements and incentives to motivate individuals to deliver the targeted performance. A more detailed description of the building blocks can be found in the Appendix. Exhibit 1 Performance management framework To stretch and motivate the organisation. Bold aspiration To translate the aspiration into a set of specific metrics Coherent set of against which performance and progress can be measured. performance measures and demanding targets To ensure that individuals who are best placed to ensure To ensure that continuously improving performance delivery of targets have real ownership for doing so. Clear is being delivered in line with expectations. accountability at an Rigorous appropriate level performance review To motivate individuals to deliver the targeted performance. Meaningful reinforcements
  6. 6. 4 Targeting improved performance SECTION 1: Performance management in the Defence Logistics Organisation Background The Strategic Defence Review (SDR) recognised the fundamental importance of taking an integrated approach to defence across all three Services (Navy, Army and RAF). This applied not just to the execution of operations but also to their support. In line with this approach, one of the SDR’s main conclusions was to extend the approach whereby many support activities are undertaken either through a joint organisation (that is, an organisation acting on behalf of all three Services), or through a lead Service acting on behalf of all three. As a result, the Defence Logistics Organisation (DLO) was created on 1 April 1999 to assume overall control of the three separate logistics organisations supporting the Navy, Army and RAF. The aim was to create an organisation capable of responding to the specific needs of the three individual Services, whilst at the same time allowing the maximum scope for the rationalisation of functions and processes on a defence-wide basis. Overall, this new organisation comprises some 41,000 staff and has responsibility for around £4.5 billion of annual cash spend. Creating a new organisation is an extremely complex undertaking, requiring not just the design of new formal structures, but also many other changes to create a properly functioning entity. The year to April 2000 has therefore been a transitional year for the DLO, with work being undertaken on multiple fronts to complete the overall organisational design. Apart from the creation of the DLO, two further changes have occurred over the past 12 months which affect the delivery of defence logistics support. The first is the introduction of Resource Accounting and Budgeting (RAB) (Exhibit 2), under which central government including the MoD will move from an accounting approach based on cash expenditure to an accruals-based approach (in line with established practice in the private sector). RAB focuses on resources consumed, and not just cash spent, and takes account of capital expenditure in a way which better reflects its economic significance and places greater emphasis on outputs. Exhibit 2 Moving from cash accounting to resource accounting Approach Principle Consequences Traditional accounting and • Accounting based on • Expenditure is charged at the time it occurs, not when * Similar approach applied throughout central budgeting in the MoD* cash spent the resources are consumed – e.g. full cash cost of ship government is accounted for in year of purchase, disregarding how long it is going to be in service; stocks are accounted for in year of purchase, not year of consumption • Cost of capital is not taken into account – e.g. no capital charge is made for stock of spares held • There is no clear linkage of costs to outputs – e.g. it is not possible to determine accurately the cost of delivering a given output (for example, a ship at given state of readiness) because some of the costs which contribute to the delivery of that output are currently not appropriately allocated • RAB – which is based on resources consumed – will address all these issues • RAB is currently being rolled out on a government-wide basis • MoD is in the process of implementing RAB – initial implementation should be completed by end Financial Year 2000/01
  7. 7. Targeting improved performance 5 The second change is the introduction, under the banner of Smart Procurement, of a far reaching set of process and organisational changes affecting the whole of the MoD’s procurement system. These are designed to deliver £2 billion of acquisition cost savings over 10 years (against an annual spend of £9 billion on equipment, spares and stores). At the heart of Smart Procurement are two critical organisational changes (Exhibit 3). The first is the clear definition and separation of the roles of the internal customer for the equipment being procured and supported, and the supplier of procurement and support services. The second is the creation of empowered cross-functional Integrated Project Teams (IPTs) responsible for procuring and supporting equipment on a “through life basis”. In all, some 50 IPTs have been created within the DLO. For example, the VC10 IPT is responsible for providing in-service logistics support for all VC10 transport/tanker aircraft, encompassing activities that were previously part of five different entities. Exhibit 3 High level summary of the Smart Procurement organisational model Procuring Equipment Supporting equipment in-service Internal Customer Central customer Service end user (2nd customer) • Defines overall defence equipment programme • Acts as customer for IPT's in-service support activities • Specifies requirements for individual equipment (including specifying outputs required) • Acts as customer for IPT as it procures equipment IPT answerable to relevant internal customer Supplier Integrated project team (IPT) • Cross functional (including industry) • Procures individual equipment and supports them in-service IPT accountable to relevant supplier organisation Defence Procurement Agency (DPA) Defence Logistics Organisation • Provides oversight for IPT's procurement activities • Provides oversight for IPT's in-service support activities Prior to these changes, the three support organisations took widely different approaches towards managing performance. Taken as a whole, all three of these systems fell far short of best practice. None had articulated a compelling performance aspiration, for example. Performance measures were not based on a robust understanding of the drivers of performance (and in many cases the targets set for these measures were insufficiently stretching). None of the support organisations had any formal accountability to their customer for delivery of outputs, not least because there was no systematic identification of who the customer for each output was. Nor – within the organisations – was accountability for delivering targeted performance always delegated to an appropriate level. In addition, performance review processes and management reporting were of variable quality across the three organisations, and success or failure in delivering the targeted performance had limited direct consequences – either positive or negative. Incentives – a critical element of any package of reinforcing mechanisms – were rudimentary, with severe constraints in particular on the use of financial incentives. In the light of this, it was recognised that a new performance management system was needed for the DLO that would build on the best of the three previous systems whilst also drawing on external best practice. Lessons Learned Since its creation almost a year ago, the DLO has made important progress in laying the foundations for an effective performance management system, building on
  8. 8. 6 Targeting improved performance internal best practice and learnings from the private sector, as well as developing some innovative approaches of its own. Particularly noteworthy are: • Its recognition that a balanced set of performance measures and targets is required as a basis for managing performance. A balanced scorecard of performance measures and targets is currently in development, covering: – Customers: delivery against outputs agreed in customer service agreements (CSAs) – Finance: adherence to budget – Internal processes: improvements in internal processes – Innovation: success in hitting key change programme milestones • Its innovative work in conducting a structured dialogue with its internal customers to define a clear set of outputs. Prior to the formal creation of the DLO, it was recognised that there was no real clarity – either within the three existing logistics organisations or amongst the users themselves – as to precisely what outputs the DLO was actually providing. The DLO has therefore undertaken a structured dialogue with its internal customers to define and agree the outputs which it should deliver (Exhibit 4). Exhibit 4 Structured dialogue with internal customers Map out current Agree "Part 1" Negotiate "Part Negotiate Negotiate CSAs outputs and CSAs with 2" CSAs with costed CSAs with detailed customers customers customers output costs Timing • Pre '98 • By Q1 '98 • By Q1 '99 • By Q3 '99 •? • Determine • Agree at a very • Agree specific scale • Agree overall cost • Agree CSAs with detailed outputs high level what of outputs and of delivering each detailed costs currently being outputs are associated metrics CSA associated with provided, and provided individual outputs Activity customers, at "unit" level (e.g., ordnance depot, RAF station) • Equipment support • Number of frigates • Costs of providing • Costs of providing for frigates • Weapons fitted overall ship support overall ship support • Availability to Flag Officer to FOSF, with • Etc. Surface Flotilla detailed costing for Example (FOSF), but only individual outputs approximate (e.g., support to breakdown at level frigates) of individual outputs (e.g., support to frigates) DLO Created – An initial set of some 200 CSAs enshrining these agreed outputs was concluded at the beginning of the 1999/2000 financial year: for example, a CSA for support to ships was agreed between the two-star head of the DLO’s Ship Support Agency and his two-star counterpart within Fleet (Exhibit 5).
  9. 9. Targeting improved performance 7 Exhibit 5 Profile of CSAs negotiated – “support to ships” example Supplier - DLO CSA for support to ships Internal customer • One CSA concluded Chief of Defence Commander in between each Logistics Chief Fleet supplier/customer pair • Total of 200 CSAs with MoD internal customers, as well as around 70 Ship support Flag Officer further CSAs between Overall CSA Agency Surface Flotilla different parts of DLO • One annex negotiated for each output – Negotiated at IPT Desk officer level (or equivalent) Annex Frigates IPT responsible for – Formally approved as Support to frigates frigates part of overall CSA – Although generally acknowledged to be of variable quality and with many rough edges, the balance of opinion within both the DLO and its key internal customers is that this process is already starting to have a significant beneficial impact (Exhibit 6) – most of those interviewed highlighted how the CSAs had helped to clarify outputs, initiate a culture change within the DLO’s customers, and provide the basis for a meaningful performance dialogue. Exhibit 6 Illustrative views on CSAs* Positive Negative * Comments relate to current CSAs, which do not yet include costings • "Has really helped to clarify the outputs to be delivered" • "Still very embryonic – light years away from being really robust" • "Has already resulted in a culture change within the • "Has only served to formalise the links which were already second customer" in place – another layer of bureaucracy" • "Is already being used as a tool to manage performance" • "Has been put on the shelf to gather dust – it is not being used as a tool for managing performance" Overall balance of opinion – There was also general agreement that the next round of CSAs – to be concluded by April 2000 – would be likely to be much more consistent, granular and appropriately focused than those concluded for the 1999/2000 financial year. An example of the kind of refinement that can be anticipated is the plan to replace the current availability measure for ships (“materially available vessel days”) with a more granular set of measures (“available force element days”, “available force element for scheduling” and “ready force element days”) (Exhibit 7).
  10. 10. 8 Targeting improved performance Exhibit 7 Ongoing development of CSAs – Frigates example Measure of availability Description Current CSA (negotiated • Materially Available • Total number of days when vessel is available for full military use Vessel Days (MAVD) in April 1999) • Available Force Element • Total number of days when vessel is available, but not necessarily Planned for next CSA (to be negotiated Days (AFED) for all programmes (e.g., vessel ready to move to an operational region, some weapon defects in the progress of being repaired during the transfer) by April 2000) • Available Force Element • Total number of vessels fully available for scheduling For Scheduling (AFES) • Ready Force Element • Total number of days when vessel is available at a certain degree of Days (RFED) readiness (R0 to R10) • Its progress in delegating accountability and authority down the organisation – delegations covering £2.75 billion have been made to the leaders of the 50 cross- functional integrated project teams (IPTs) which are directly responsible for delivering logistics support to the Services. • The direct engagement and involvement of the DLO’s top management in the entire performance management process. • Finally, the articulation of a stretching performance aspiration for the organisation at the end of this effort – to reduce output costs by 20% by 2005 whilst maintaining both the quantity and quality of outputs required by customers. Naturally, some very significant challenges still remain outstanding at this relatively early stage. The key priorities going forward are: • To undertake a comprehensive diagnostic assessment of the drivers of its performance, and to refine and finalise its balanced scorecard of performance measures and targets in the light of this, ensuring consistency with other parts of MoD. • To institutionalise a coherent overall performance review architecture which promotes constructive dialogue on performance issues and involves both internal customers and DLO top management, building on the encouraging early work in this area. • To refine the CSAs it has already concluded with its internal customers, in particular pushing ahead swiftly with existing plans to develop robust and granular output- based costings. • To continue to work with internal customers to develop their “intelligent customer” capability.
  11. 11. Targeting improved performance 9 SECTION 2: Developing an effective performance management system in the DLO The DLO has already invested significant effort, and made important progress, in laying the foundations of a new and more effective performance management system. In doing so, it has drawn on MoD best practice and learnings from the private sector, as well as developing some innovative approaches of its own. This section assesses in more detail the progress made to date in establishing each of the five building blocks, and identifies the further work that is now needed in each area. 1. Bold aspirations for the future DLO progress to date On formation in 1999, the DLO recognised the need to spell out the fundamental purpose of the new organisation, and therefore articulated a mission, a vision and an initial set of objectives (Exhibit 8). As can be seen from the highlighted sections of this exhibit, a number of specific performance aspirations were embedded within its “objectives”, for example “to drive down unit costs through innovative arrangements for Non Project Procurement”. These were incorporated into the initial Business Plan and disseminated widely throughout the new organisation. Exhibit 8 DLO mission, vision and objectives Mission • To deliver joint logistics support to our Armed Forces. Vision • To excel as an integrated and responsive defence logistics team. Objectives • To provide the logistic component of operational military capability, through a unified logistics organisation, with overall accountability to the Chief of the Defence Staff (CDS). • To regard people as our most important resource; to invest in their Equality of Opportunity, Health, Safety, Welfare and Morale, Training and Career Management accordingly, thereby achieving early Investor in People (IIP) recognition throughout the organisation; and to communicate clearly and actively our policies for doing so. • To advise Ministers, CDS, Chiefs of Staff and the Centre Staffs on strategic logistic policy. • To meet the material capability and logistic requirements of the Front Line Top Level Budgets (TLBs), and other Objectives including some performance customers – through close and productive working relationships – within agreed time, cost and performance criteria. aspiration • To exploit fully the opportunities of Resource Accounting and Budgeting, aligning responsibility, accountability and authority for delivery of output at all levels. • To establish, as rapidly as possible, effective output-based costing mechanisms. • To exploit synergies and drive down overhead costs through a continuous and dynamic programme of rationalisation, convergence and business efficiency improvement; with particular emphasis on the coherent development and exploitation of Information Systems. • In concert with the new arrangements planned under the Smart Procurement initiative, to champion a whole-life approach to the procurement and support of military equipment, seeking constantly to drive down whole-life costs. • To drive down unit costs through innovative arrangements for Non Project Procurement. • To promote the identification and adoption of best practice throughout the organisation and with industry, and to achieve better value for money from the DLO's suppliers. During the course of work with the Panel, the DLO made real progress in setting a specific and challenging performance aspiration for the organisation, committing to reduce output costs by 20 per cent by 2005 while ensuring the continued output delivery and, where appropriate, improvement in the quality of the output (Exhibit 9). In support of this, the Corporate Plan now identifies seven Key Areas for long-term improvement, which will be the subject of more specific performance targets embodied in the annual Short-Term Business Plans.
  12. 12. 10 Targeting improved performance Exhibit 9 DLO Corporate Plan summary The DLO Corporate Plan sets the strategic agenda for the DLO and provides the key direction against which the DLO Business Plan has been developed. Accordingly, the defining elements of the Corporate Plan are reproduced below, to set the context for the more detailed requirements in the subsequent parts of the Business Plan. Mission • To provide joint logistics support to our Armed Forces. Vision • To excel as an integrated and responsive defence logistics team. Strategic Goal • To reduce our output costs by 20 per cent by 2005 while ensuring that we continue to deliver, and where appropriate improve, the quality of our outputs. Key Areas • People We will provide training to develop the skills, competencies and behaviour needed to deliver the transformation required and to enable everyone to realise their full potential. • Inventory We will create a single Defence inventory, sharing information with our suppliers, and we will shorten and rationalise our supply chain. • Industry We will transform our relationship with industry to engage them more effectively in delivering support to our Armed Forces. • Capital Asset Management We will reduce both the volume and value of stock held and ensure that all of our assets are exploited fully • Engineering Support We will make radical improvements to engineering support, particularly in repair and maintenance, to ensure more complete and higher quality services are provided by both private sector and in-house agencies. • E-Business We will aggressively exploit the potential of e-business, which will be key to our business transformation programme. • Convergence We will rigorously examine all parts of the DLO against the principle of achieving maximum integration of process and capacity across the organisation and remove overlap and duplication. Further work needed Having committed to an appropriately bold overall aspiration, the DLO must now relentlessly communicate this sharpened performance aspiration throughout the organisation, with top management playing a leading role in aligning the organisation around this. 2. Performance measures DLO progress to date The DLO has taken some important – and in some respects innovative – steps to develop a balanced scorecard of measures: • It has made some progress in defining both a balanced and evolving set of measures, and targets based on these (Exhibit 10), covering:
  13. 13. Targeting improved performance 11 – Customers: delivery against outputs agreed in customer service agreements (CSAs), covering support to current operations and the performance of 50 IPTs. – Finance: adherence to budget, including measures such as fixed asset and stock financing ratios. – Internal processes: improvements in internal processes, as manifested in measures such as the stock cover ratio. – Innovation: success in hitting key change programme milestones, for example the formation of a Non Project Procurement Office. Exhibit 10 DLO emerging balanced scorecard, 2000-01 Basic Scorecard agreed for 2000/01 Customers Finance • Support to Current Operations • Forecast of Out-turn against cash allocation • Support to Operational Capability • Fixed Asset and Stock Financing Ratios • Military Capability Support • Asset Delivery Schedule slippage • Forecast Gross Operating Costs against Resource Control Total (12/00) • Forecast Capital Expenditure vs CAPEX Control Total (12/00) Internal Processes Innovation • SDR Stock Reduction (quarterly) • Initiative monitoring • SDR Storage/Distribution Reduction • Non Project Procurement Office • Sickness levels (civilian, proxy for morale) • Land Rover Public Private Partnership • Stock Cover Ratios (by Repairables and Consumables) • Other Business Development Initiatives • Supplier performance: • Managing Under RAB – Number of suppliers (short-term measure only) • Whole Life Costing – Supplier capability ratings • Fixed asset capacity (proxy for Asset Utilisation) Aspirational Additions to Scorecard Customers Finance • Cost of unplanned unavailability • Gross Operating Costs to Budget (10/00) • Major projects forecast spend to budget • Output cost comparatives (e.g., Level of overheads) Internal Processes Innovation • Demand fulfilment • E-Commerce • Total procurement costs as per Supply Chain Integration • Trading Fund progress (DARA and ABRO) at the Point of Purchase • Internal suppliers' performance against internal CSAs Key: Currently available or planned to be available from April 2000. Likely to be progressively available during Financial Year 00/01. Aspirational only at this stage. • It has also recognised the need for this scorecard to evolve over time: – An early version of the scorecard has already been developed and is currently being used by the DLO Board to manage performance of the organisation. – Agreement has now been reached on a refined version of the scorecard which will be implemented for the coming financial year. Many of the measures and targets (for example, “SDR stock reduction”) will be in place from the start of the financial year. A number of additional measures (for example “stock cover ratios”) will be introduced during the course of the year when the necessary underlying work has been completed. • Some progress has also been made on target setting, although further work is still 2 A 20 per cent, or £2.2 billion, reduction in the book value of stock over the next three needed. It is already clear that the two stretching targets relating to the DLO years, and a 3 per cent annual efficiency saving which were agreed in the Comprehensive Spending Review, published in the SDR in operating costs over each of the next four and enshrined in the MoD’s current PSA will be included.2 years.
  14. 14. 12 Targeting improved performance • Finally, the DLO is planning to experiment with scorecards at lower levels of the organisation. It is planning to pilot cascaded versions of the scorecard in the sea and air equipment support business units during the early part of the coming financial year. These will be consistent with, but not identical to, the top level scorecard. Further work needed Overall, notwithstanding this good early progress, a great deal remains to be done. The DLO should now push rapidly ahead in refining and implementing the balanced scorecard of performance measures and targets, and – as an input to this – in refining and agreeing with internal customers the outputs it should deliver. Specific recommendations are as follows: • It should undertake a comprehensive diagnostic of its performance drivers to inform the overall design of the scorecard. To create a robust scorecard, a comprehensive analysis is needed of the performance drivers of the organisation, and the improvement opportunity associated with each of these. A “top down” diagnostic analysis of this kind is crucial for three reasons: – First, it provides a basis for building understanding and alignment within the organisation of what drives performance. – Secondly, it provides a basis for identifying the input and output measures and predictive indicators which should be included in the scorecard. – Thirdly, it provides a basis for setting challenging improvement targets for both categories of measure, based on a realistic assessment of the scale of the improvement opportunity. The DLO has yet to undertake a comprehensive overall diagnostic of this kind, and therefore does not have a robust picture of the key outputs and performance drivers of the organisation, or the scale of the improvement opportunity associated with these. As a result, whilst a number of the measures already identified in the draft scorecard are clearly appropriate for inclusion, it is not possible to say with any confidence that the overall set of measures identified thus far are the appropriate ones. Nor will it be easy for the DLO to set appropriately challenging targets based on these. The DLO therefore must undertake a diagnostic assessment of its performance drivers as a matter of urgency. • Based on this diagnostic work, it should specify in detail a balanced set of scorecard measures, and a demanding set of targets to meet the overall 20 per cent goal, ensuring consistency with other areas of the MoD. – Once a robust overall scorecard framework has been agreed, the DLO should press ahead – as it is planning to do – with completing the detailed definition of individual measures, and setting short term and medium term targets for each of these (so far, in many instances an area of interest (e.g., whole life costing) has been identified, but no specific performance measure attributed). – In doing this, it is important to remember that the DLO represents only one element in the overall MoD procurement system. Ultimately, a coherent performance management approach – including a consistent set of measures and targets – will be needed across all parts of this procurement system. This has yet to be achieved. As the DLO finalises its overall scorecard structure and the detailed definition of measures and targets, it will be important to ensure overall consistency with those of other areas of the MoD.
  15. 15. Targeting improved performance 13 • It should incorporate measures and targets agreed for the DLO into future versions of the MoD’s PSAs. • The DLO should continuously refine the current CSAs, in particular developing robust and granular output-based costings in line with RAB principles; and work with its internal customers to enhance their capability to act as “intelligent customers”. Based on the encouraging early work in developing CSAs, there is real potential for these to become a major driver of improved performance throughout the DLO. But there is still much to do before this is achieved. It is apparent that the quality of the current CSAs varies significantly. Even the most well-developed of the CSAs is in need of considerable further refinement. One particular area where further progress across the board is needed is in developing robust and granular output- based costings so that well-founded decisions can be made on required outputs and how best to satisfy these (the CSAs for the 1999/2000 financial year are uncosted, pending the introduction of the accounting systems necessary to support output-based costing). • It should cascade the measures and targets down the organisation, creating a coherent set of lower level balanced scorecards as necessary. Once the overall scorecard has been finalised, the DLO should press ahead with its existing plans to create scorecards for its eight constituent business units, and possibly lower down the organisation as well. These scorecards will not exactly replicate all aspects of the top level scorecard, but in all events they and the top level scorecard should be consistent (and where necessary the top level scorecard should be adjusted to reflect this “bottom-up” input). The development of these cascaded scorecards should involve key individuals within the relevant business units. It will be important to ensure that the targets currently in place for the various agencies which form part of the DLO are harmonised with this overall framework (Exhibit 11). • It should also review and reduce the number of change initiatives currently underway. Some 240 change initiatives are currently underway in the DLO. This runs the risk of overstretching the organisation. Going forward, the DLO should focus its energies on pursuing a manageable number of initiatives which offer maximum opportunity to improve targeted performance. Any initiatives which will not contribute to improving targeted performance should be cancelled. The DLO has already started to address this. It should now bring this review and prioritisation exercise to an early conclusion. 3. Ownership and accountability DLO progress to date The DLO has already made some good progress in this area, and has decided on – and in some cases started to put into practice – a number of important principles: • Each measure in the overall scorecard will have an overall “sponsor” at DLO Board level. The sponsor will be responsible for the detailed definition of the measure, for ensuring that appropriate data collection mechanisms are in place to support this, and for advising the Board on performance issues relating to this measure. For example, Director General Equipment Support (Air) will be responsible for developing the new “unplanned unavailability” measure. • The accountability for delivering each top level measure will be clearly identified and cascaded down the organisation, and where appropriate matched with control over the necessary resources to deliver targeted performance.
  16. 16. 14 Targeting improved performance Exhibit 11 DLO structure Director General Support Mgt (RAF) Equipment support deciders (DGSM(RAF)) Ship Support Agency (SSA) Director General Equipment Support (Army) (DGES(A)) Defence Storage and Naval Bases and Distribution Agency Supply Agency (DSDA) (NBSA) Support providers Chief of Defence Defence Clothing and Logistics (CDL) Defence Textile Agency (DCTA) Communications Support Agency (DCSA) British Forces Post Office (BFPO) DLO HQ Director General (inc. DG Communication Logistic Support (DGLS) Defence Transport and Information Services and Movement Business Unit) Agency (DTMO) Specialist repair providers Army Base Repair Organisation* (ABRO) Defence Aviation Repair Agency* Agency, with formal targets (DARA) endorsed by Ministers and reviewed by Public Accounts Committee (not yet consistent with balanced scorecard). *Both planning to move to Trading Fund Status within three years. – A cascaded approach will be used in allocating accountability. For example, accountability for meeting the top level target for “forecast of out-turn against cash allocation” (i.e., the forecast of cash that is actually spent in the year compared with the amount allocated at the beginning of the year) will be split between each of the main DLO business units. Within each of these business units, accountability will then be cascaded further down the organisation – to IPT level in the case of the Equipment Support business units. – Both accountability and authority will be pushed down the organisation. Although a comprehensive assessment was not part of this exercise, substantial formal delegations of accountability and control over resources are being made to the leaders of those IPTs which have already been formed in the equipment support business units of the DLO (sea, land and air) (Exhibit 12). In total, the 50 IPT leaders have been given delegated authority over a support budget of £2.75 billion. This accords with the best practice “heavyweight project manager” model which was agreed as an integral part of the overall package of Smart Procurement recommendations. The leaders of established IPTs interviewed as part of this effort have confirmed that these delegations are working in practice and have expressed broad satisfaction with the degree of accountability and authority that this model affords them.
  17. 17. Targeting improved performance 15 Exhibit 12 Authority and accountability of IPT leaders for provision of support services (delegated from two-star level in DLO*) Key authority Key accountability • Financial: to commit expenditure within budget • Financial: to ensure allocated ** – Economic, efficient and effective use of all resources – Adherence to agreed accounting and budgeting requirements – Reporting of write-off losses • Contractual: n/a (authority delegated to contracts • Contractual: to observe a defence procurement officer) policy/procedures/practices in regard to contracts/local purchases • Personnel: to decide on • Personnel: to ensure – Number and grades of most IPT posts – Efficient, effective and economic use of manpower – Disciplinary penalties for civilian staff and – Adherence to internal policies, e.g., equal opportunities dismissal/downgrading of staff in case of inefficiency • Other: to take all other day-to-day management • Other: to ensure decisions relating to IPT – Adherence to regulations of MoD, Treasury, Cabinet Office and legal requirements – Proper management of assets (stores, equipment, property) * Also answerable to 2nd customer for delivery of outputs agreed in CSA. ** Up to £100m, subject to a limit of £50m on development activites. Further work needed As the new organisation rolls out, the DLO should proceed as planned in allocating accountability for each measure and in driving accountability down the organisation. Specifically: • As the overall balanced scorecard is refined and finalised, the DLO should firm up on the allocation of accountabilities for delivering each measure/target. • It should also take steps to ensure that accountability is delegated to the appropriate level within the organisation. – In the equipment support business units, it should continue to delegate substantial authority and accountability to IPT leaders as IPTs are formed and launched, as envisaged under Smart Procurement. – It should also explicitly review the delegation of accountability and authority in other areas of the DLO to ensure that these have been driven down to the most appropriate organisational level. 4. Rigorous performance review DLO progress to date The DLO has made some encouraging early progress in defining a robust overall performance review architecture: • Targets will be set annually in the context of the departmental short term planning round. As part of the annual exercise to develop and agree the MoD’s Short-Term Plan, the DLO will agree overall performance targets for the organisation, as well as conclude revised CSAs with internal customers. • The DLO Board has already started to monitor overall performance of the organisation on a monthly basis, using the preliminary version of the balanced scorecard. The DLO plans to continue this monthly cycle of Board level performance review. • There is evidence of regular performance dialogue with internal customers. The processes and mechanisms for engaging internal customers in a dialogue about performance have yet to be finalised, and approaches appear to vary significantly
  18. 18. 16 Targeting improved performance in different areas. However, leaders of the more established IPTs (and their respective customers) have given encouraging reports of the frequency and quality of the performance dialogue, highlighting in particular extensive day to day contacts between the IPT and the internal customer, both at an IPT member and IPT leader level; and regular (typically quarterly) formal performance reviews involving senior staff from the internal customer organisation. • There is also evidence that regular and constructive performance review mechanisms are starting to emerge within the DLO organisational structure. No settled approach has yet emerged on the frequency and nature of the internal DLO dialogue between accountable middle-tier managers and their superiors. However, early indications from those more established IPT leaders suggest that, in some areas at least, a constructive approach is emerging. Two of the IPT leaders described constructive “one on one” meetings taking place every six to 12 weeks, focused around progress in delivering CSA targets, with the emphasis being on “light touch” coaching rather than heavy handed and directive intervention. Further work needed The DLO now needs to press ahead with institutionalising a rigorous performance review process and developing supporting management reporting. • The DLO should finalise the emerging performance review architecture and implement this consistently across the organisation. It was clear from our discussions with DLO that there is still considerable variation in approach across DLO, in particular on engaging internal customers in a performance dialogue, and undertaking internal DLO performance reviews. The DLO should now seek to define and implement a consistent approach across the organisation, building on some of the encouraging practices which are already evident. • It should design appropriate management reporting to support this process, and put in place the necessary systems solutions to support it. There is still substantial work needed to design appropriate management reports to support the performance review process and put in place the systems solutions which will enable these to be generated on a highly automated basis. The DLO should focus on this important task as soon as the overall suite of performance measures and targets has been finalised. • It should also ensure that appropriate knowledge transfer mechanisms are in place to support this. 5. Reinforcements and incentives Given the early stage in the creation of the key components of a performance management system for the DLO, this report does not emphasise reinforcements and incentives. This is, however, a critical issue, and DLO should conduct a thorough 3 “Incentives for Change” – Rewarding review of reinforcements (in particular incentives) once the other main building blocks performance in national government networks. have been put in place, referring to the detailed Public Services Productivity Panel material on this topic3. Implementation Next Steps In summary, the DLO has made an encouraging start on aspects of its overall performance management system, but much still remains to be done. The specific recommendations on next steps made throughout this section are summarised in Exhibit 13. If these are addressed comprehensively and effectively, they should lead to the establishment of a truly performance-oriented culture in the
  19. 19. Targeting improved performance 17 new organisation. One critical requirement to deliver successfully on this programme will be the sustained involvement of, and leadership from, the highest management levels within DLO. Assuming that this leadership and focus is forthcoming, the great majority of these recommendations can and should be successfully implemented within the next 12 months. Exhibit 13 Recommended next steps Communicate the sharpened DL0 performance aspiration 1. Relentlessly communicate this sharpened perfomance aspiration throughout the organisation. Push rapidly ahead in refining and implementing the balanced scorecard of performance measures and targets, and in refining and agreeing with internal customers the outputs it should deliver. 2. Undertake a comprehensive diagnostic of its performance drivers to inform the overall design of the scorecard. 3. Specify in detail a balanced set of scorecard measures, and a demanding set of targets to meet the overall 20 per cent goal, ensuring consistency with other areas of the MoD. 4. Incorporate measures and targets agreed for the DLO into future versions of MoD's PSAs. 5. Continuously refine the current CSAs, in particular developing robust and granular output-based costings in line with RAB principles; and work with its internal customers to enhance their capability to act as "intelligent customers". 6. Cascade the measures and targets down the organisation. 7. Review and reduce number of change initiatives currently underway. Proceed as planned in allocating accountability for each measure and in driving accountability down the organisation 8. Firm up on the allocation of accountabilities for delivering each measure/target. 9. Continue to delegate substantial authority and accountability to IPT leaders. 10. Explicitly review the delegation of accountability and authority in other areas of the DLO to ensure that these have been driven down to the most appropriate organisational level. Institutionalise a rigorous performance review process and supporting management reporting 11. Finalise the emerging performance review architecture and implement this consistently across the organisation. 12. Design appropriate management reporting to support this process, and put in place the necessary systems solutions to support it. 13. Ensure that appropriate knowledge transfer mechanisms are in place to support this. Review reinforcements 14. Conduct a thorough review of reinforcements (in particular incentives) once the other main building blocks have been put in place. Early Progress Based on these recommendations, the MoD has already taken the following actions: • Most significantly, the Chief of Defence Logistics and the DLO Board have committed themselves to a single over-arching goal of achieving a radical cost improvement by reducing output costs by 20 per cent by 2005, whilst maintaining both the quantity and quality of output required by customers. • Furthermore, the MoD has now committed to develop its own balanced scorecard for the Department as a whole, bringing together key measures from the Defence Procurement Agency (DPA), the DLO and the Operating Commands. Post-project evaluation approach The following post-project evaluation approach has been agreed by the DLO: • Minister Defence Procurement to review the DLO’s progress in implementing these recommendations as part of the quarterly Smart Procurement Initiative review. • DLO to report progress publicly in September 2000.
  20. 20. 18 Targeting improved performance Appendix: The performance management framework This section provides a detailed explanation of the five key components of a performance management system. Creating a bold aspiration for the future A bold aspiration is needed to stretch and motivate the organisation. A number of key principles should be applied in developing this: • It should be clearly linked to the core purpose of the organisation, stretching and tangible. – It should flow directly from, and support, the overall mission and vision of the organisation. – It should be bold and stretching, in order to challenge and energise all levels of the organisation. – It should focus on the key aspects of performance against which the success of the organisation will be judged (for example, customer satisfaction, unit costs, etc.) and should be sufficiently explicit to serve as a basis for setting concrete performance measures and targets. • It should be clearly articulated, and communicated relentlessly throughout the organisation, with clear buy-in from the leadership. Some specific examples of compelling performance aspirations are summarised in Exhibit 14. Exhibit 14 Bold aspiration – examples Coca Cola "Our goal is to be the number one beverage, ahead of water" GE "Be number one or two in every market in which we compete" Jefferson Smurfit Group "One key objective – to be the world's premier packaging company" Johnson & Johnson "To better humanity as the world's leading healthcare company" Emerson Electric "Produce the highest quality products at the lowest relevant global cost" Komatsu "Encircle Caterpillar"* President Kennedy "We'll put a man on the moon by the end of the decade" (early 1960s) *Its leading competitor Defining coherent performance measures, and a demanding set of targets based on these A coherent set of performance measures, and a demanding set of targets based on these, is required to translate this aspiration into a set of specific metrics against which performance and progress can be measured. The following principles should be taken account when defining these: • A balanced set of measures, and a demanding set of targets based on these, should be developed and evolved as necessary over time. – A mix of measures should be used: • In recognition of the fact that the performance of the organisation will not be judged solely in financial terms, both financial and non financial measures should be included.
  21. 21. Targeting improved performance 19 • The measures should be both forward and backward looking. Specifically, there should be a mix of input measures, which focus on the availability and management of the resources required to deliver the desired end result; output measures, which focus on current success in delivering the desired end result; and predictive indicators, which focus on whether individuals within the organisation are taking the actions and adopting the behaviours required to deliver future performance, thus allowing any problems to be identified early. An example of how these different types of measures link together in support of the overarching outcome is set out in Exhibit 15. Exhibit 15 Comparison of different types of performance measure Output measure • Immediate result of activities • E.g., number of Input measure "frigate days" available Outcome for scheduling • The ultimate result • Staff or physical that the Government resources required seeks to achieve to deliver an output • E.g., military • E.g., operating capability as outlined budget to provide Predictive indicator in the Strategic support to frigates Defence Review • Current activities which directly impact on future delivery of outputs • E.g., level of stock for spares held • A manageable number of measures should be selected to help management focus on the critical performance issues facing the organisation and make appropriate trade-offs between the different performance levers available. The appropriate number will vary depending on the nature of the organisation, but typically it is appropriate to focus on around 10 measures at each organisational level. – Stretching multi-year targets should be set. • In line with the overall performance aspiration, the targets set should be demanding. They should reflect assessed opportunity, rather than incremental improvement on existing performance. • Continuous performance improvement should be targeted for each of these output measures and indicators: i.e., annual targets for each measure should be set covering the current year, as well as medium-term (3-5 year) improvement goals. • The suite of measures and targets should not be “set in stone”. Rather, they should be developed and changed as necessary over time to reflect the achievement of earlier targets and/or any changes in the priorities and aspirations of the organisation. • The suite of measures and targets should be cascaded down the organisation in a consistent manner, to the lowest possible level.
  22. 22. 20 Targeting improved performance • The suite of measures and targets should be used to drive the performance improvement agenda of the organisation. The focus should be on undertaking a manageable number of initiatives which are designed to deliver tangible improvements against the measures and targets set. Any initiatives which will not contribute to improving targeted performance should be discontinued. Some specific examples of the effective definition of measures and targets by private sector companies are described in Exhibit 16. Exhibit 16 Measures and targets – private sector examples Best practices Examples • Both financial and • NW Mutual: uses "policy persistence rate" (percentage of non-financial policy owners who renew) as one of main goals measures should be • GE: uses a combination of individual financial goals and included 'soft' values to determine performance • The measures should • Oil Company: uses a mix of input measures (eg., be both forward and capex), output measures (eg., volumes) and predictive backward looking indicators (e.g., finding cost, time to first oil) • A manageable • Oil Company: 13 top level targets number of measures should be selected • The targets set should • Nucor: "Goals are set so that there is 60 per cent certainty be demanding of achieving them" • Emerson Electric: "Consistent high performance requires ambitious and dynamic targets" • Continuous • Oil company: uses a combination of medium-term performance targets (3-5 years) and annual milestones improvement should be targeted • The suite of measures • Frito-Lay: "There is a constant updating of goals. When and targets should not one major target is met, another is immediately created" be "set in stone" • Navy Seals: "Always a new mountain to climb • The suite of measures • HP: "Employees are expected to set 8-10 individual goals and targets should be that derive from the overall company objectives" cascaded down the organisation Establishing ownership and accountability, with clear responsibility for delivering each target Assigning clear accountability for these targets at an appropriate level within the organisation is an important requirement. The individuals who are best placed to ensure their delivery must have real ownership for doing so. The following key principles should be applied in developing an overall approach: • Accountability for delivering against each target should be clearly specified. Accountability can be assigned to an individual, or a group of individuals or team, as appropriate. • Accountability should be delegated to the level within the organisation where the requisite decisions can most effectively be taken: that is, to the level where the best balance of information and understanding exists in terms of detail, context and risk.
  23. 23. Targeting improved performance 21 • In many cases, it is appropriate to align accountability with “authority” (that is, control over the resources required to deliver the targeted performance). In no circumstances should authority be assigned without accountability. Examples of effective definition of accountability in some private sector companies are set out in Exhibit 17. Exhibit 17 Private Sector examples of effective assignment of accountability BP Amoco - Exploration ABB Executive Committee Corporate Staff Group Executive (ExCo) (~150) Management (~8) Performance Contract Regional Managers Business Area (~60) Managers (~55) BU BU BU BU BU BU BU Profit centre • Approximately 100 independent BUs reporting • 1,200 independent incorporated business units directly to Executive Committee. broken down into ~5,000 autonomous profit • Performance contract with ExCo agreed, setting centres. out performance to be delivered. BU leader fully • Almost all profit centres have their own P&L and accountable for delivering agreed performance. balance sheet, and are accountable for delivering • BU leader has control over key operating agreed performance goals. resources required to deliver this (specified in • Profit centre has control over resources required performance contract). to deliver agreed goals. Defining a rigorous performance review process A rigorous performance review process is needed to ensure that continuously improving performance is being delivered in line with expectations, and to enable corrective action to be taken where necessary. The following key principles should be taken account of in designing such a process: • A coherent overall performance review architecture is needed. – A structured overall cycle is required which typically involves the following (Exhibit 18). • An annual target-setting exercise. • A regular cycle of performance reviews. • Effective analysis of root causes of any under-performance, and planning/execution of any required remedial action. – The leadership of the organisation should be integrally involved. The performance review process is a critical tool for guiding and driving the performance of the organisation. Direct involvement of top managers is therefore essential. – A constructive style and approach should be adopted in performance discussions. Put simply, the interactions should have a “board room”, not a “court room”, flavour.

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