Making Performance Measurements Perform

Making Performance Measurements Perform

          
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Making Performance Measurements Perform

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    In This Article
    • Performance measurements are supposed to focus the energy of an organization on its strategic goals, track progress toward those goals, and provide feedback.
    • If performance measurements haven't been realigned with the new priorities of the business, they will keep the organization from achieving advantage.
    • Changing the goals without changing the measurements is no change at all.
     
    Performance measurements at most companies are out-of-step with the business environment. What matters today is meeting rising customer expectations by emphasizing time and quality. Let's look at the characteristics of traditional performance measurements to see why they no longer work.

    Traditional performance measurements focus more on internal goals of cost and efficiency than on external realities of customer satisfaction and competitive capabilities.

    Company A's customers almost always received their orders when the shipping department promised. Yet the company was losing customers to higher-priced competitors. The problem was that the internal measurement of “ship-to-promise” failed to detect the external reality that customers wanted the product even sooner and would pay a premium to get it. A “ship-to-customer want” measurement would have captured this.

    An automotive component company achieved its key customer's highest quality classification, yet its competitor was gaining market share. It turned out that the competitor was supplying other customers with twice the quality at lower cost. While focusing on one customer's quality criteria, this company neglected to look at what its competitor could do for other customers.

    Traditional performance measurements emphasize control at the expense of customer response.

    Company C's distribution outlets were measured on their fill rate, i.e., how many orders they could fill off the shelf. When the product wasn't in stock, however, some customers went elsewhere. Because the distribution department's measurement tracked only customers who placed orders, the number of orders lost went undetected. In fact, it was to the distribution center manager's disadvantage to persuade the customer to order and wait for delivery because that would count as a stock-out for the distribution center.

    Traditional performance measurements focus on the end product and overlook the importance of the process.

    Market share and profitability are results. They measure how effectively and efficiently a company has met its customers' needs after the fact. Additionally, a company could focus on the process employed to meet these needs. Such measurements as the percentage of transactions handled in one phone call, time from customer order to delivery, or percentage delivered when customer wanted it would highlight how well an organization's business system was performing against customers' needs.

    Traditional performance measurements focus on particular departments or aspects of a business, often at the expense of overall business goals.

    When Company D's distribution center ordered parts from the factory, the factory would make more than ordered because it could never be sure of the yield. Because the distribution center was measured on product turns, however, it would take only the number ordered, even if the factory yielded more. If demand was greater than expected and the distribution center ran out of inventory, orders were lost even though the organization had already committed time and money to producing the product.

    A specialty material producer, believing its business to be capital-intensive, measured and focused on asset utilization. This resulted in large product backlogs to ensure that machines were kept busy. A smaller competitor observed that many customers needed product quickly and chose to measure time. It put in “excess” capacity to achieve its time objectives. The result: a complete reversal of market shares and profitability for the two.

    These four characteristics of typical performance measurements can result in an organization's spending significant effort without making much progress toward its goals.

    Measurements That Work

    Every business is different, so each should have its own set of performance measurements. But there are some common rules to follow in designing effective measurements. They are:

    Start on the outside of your business, not inside the company.

    Ask yourself: “What do customers really want and when?” “What do our best competitors give customers that we do not?” For example, customers almost always welcome recommendations on how they might make better use of their suppliers. They also want personal relationships to help build commitment from suppliers. But these items aren't high on the agendas of most departments. If you value them, measure them.

    Responsiveness to customers overshadows all other marketing goals. Make sure control measures don't get in the way.

    You have to dismantle control measures that work against customer responsiveness. For example, backlog is a time-honored measurement of a company's strength. Companies are comfortable when backlog is high. Department heads use it to justify hiring more people. But high backlog means slow response to customers. If you're serious about responsiveness, don't reward backlog. Reward throughput.

    Think of process and product as equals.

    Focusing on the end product can cause you to lose sight of the process unless measurements make both equally visible to your people. Most employees think in terms of fixing the product as it goes by. This is because it's easier to spot a flawed product than a flawed process. Make your process explicit. Map and measure it. Reward people who fix the process.

    You compete as a company. Don't let overall business goals get lost among the many operating measures.

    In measuring more processes and more variables, it's easy to lose sight of the overall goal. Beware of losing track of the larger measures that tell you how the customer views you against competitors. Watch customer retention, customer gains and customer losses. Share this information with your people. If you measure them only on their own piece of the company, they may not look beyond to the larger picture. Train your people to think of the company as one integrated delivery system for the customer's benefit.

    Establishing New Measurements

    Externally focused, process-oriented, and systemwide performance measurements are essential for encouraging the actions that create competitive advantage today, but they won't happen without strong management support.

    The process starts with communication. Convincing an organization to rethink measurements that have been part of its business mindset for years is not an easy undertaking. Rules give people security and a sense of purpose. Changing them arouses anxiety. Some employees will worry about having to work too hard, others will wonder if the company isn't neglecting the bottom line.

    Therefore, management has to give the rationale behind the new measurements. Too often people are told the “what” without the “why.” The more employees know about why customer satisfaction, time, and quality really matter, the more they can support the new goals. Once the rationale is clear, give your people a chance to design the new measurements. Let them wrestle with the various options to figure out which make sense and which will just get in the way.

    Management also needs to show commitment to the new rules by monitoring them to make sure they are keeping pace with the rapidly changing competitive environment and by sticking to them even if results are slow to materialize.

    The purpose of performance measurements is to focus the energy of the organization on its strategic goals, track progress toward the goals, and provide feedback. If performance measurements haven't been realigned with the new priorities of the business, they will keep the organization from achieving advantage. When in conflict, the old performance measurements will win out over new goals because measurements, not goals, determine promotions and compensation. Changing the goals without changing the measurements is not to change at all.

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