Over the years I’ve learnt a few things about implementing performance measurement systems in practice. These suggestions apply equally whether we are talking about key performance indicators, scorecards or dashboards.
Outcomes and drivers are ends and means
We can use the term OUTCOMES to describe the measurable end results of a particular activity or project. An objective is a goal that may or may not be achieved, the outcome is what is actually achieved. PERFORMANCE DRIVERS are the methods or ways or initiatives that are going to achieve the end result. A good performance measurement system will address both ends and means: what you want to achieve and how you want to achieve it. Outcome measures are lagging indicators and measures of the end result. Performance drivers are leading indicators and input measures of the method you will use to achieve end results.
Examples of outcomes
Retailing: The manager of a grocery store wants more customers visiting her store every day. She introduces a competition for her staff whereby customers are invited to nominate particular employees for outstanding friendliness and service.
Desired outcome (end) = More customers in-store Measure: Customer count from tills
Performance driver (means) = Improved customer service Measure: In-store nominations
Manufacturing: In an effort to increase sales, a manufacturer wants to improve performance on the shop floor, and starts a project for workers aimed at lowering defect rates, and faster on-time delivery. These are shop floor performance drivers, leading indicators, and input measures of how to achieve increased sales.
When a satisfied customer places further orders as a result of the reduced defect rates and better on-time delivery, the desired customer outcome would be more customer orders placed. The final outcome would be increased sales to key customers.
Create a virtuous circle of metrics
We can see that the shop floor worker’s outcome (lower defect rates) is also one of the supervisor’s performance drivers (more orders placed) and a manager’s outcome measure (increased divisional sales) is a performance driver for the company as a whole. This gives us the opportunity to link worker’s outcomes to supervisors’ performance drivers and then continue linking the measures all the way up the hierarchy, and thus create a virtuous circle whereby:
- Worker outcomes of faster cycle times and lower defect rates are linked to
- Supervisor outcomes of growth in orders and on-time delivery, which in turn are linked to
- A manager’s outcome of business unit sales, which in turn are linked to
- The company’s outcomes which include increased revenue from new products
Develop your scorecards and performance measures on a top-down basis
To build the virtuous circle of metrics, start with the performance measures for the Chief Executive Officer or the Board and then follow the organisation structure and cascade scorecards down at each successive level of the hierarchy until you reach the shop floor where people might have only one performance measure in just one of the quadrants.
As you move down the hierarchy many departments, including shared service departments, will have internal rather than external customers. But the same principles apply: the key measures of internal customers are customer satisfaction and then the quality, quantity, time and cost – and perhaps consistency – of internal service delivery.
As you move down the hierarchy it may also become increasingly difficult to find meaningful measures of the shareholder perspective (apart from beating the budget), particularly when you get to shop floor level and it can help to consider shareholder measures from a stakeholder perspective.
Tradecraft – useful tips
- It really helps to have a champion in senior management who believes in the measurement principles and stands behind you.
- Develop and record the measures in the same standard format all the way down the organisation. Where you can’t find a particular scorecard measure for a department or person, leave it blank.
- Consider both group and individual recognition and rewards, and award incentives to staff for achieving the measurement targets. The incentives can be financial and non-financial.
- Ensure the measures are an early agenda item at your monthly management meeting so people can deal with the statistics while they are still fresh.
- Make the routine recording of performance measurement data part of your existing daily routines and accounting and IT systems.
The article was first published in Unit 4 Prevero Blog