Is your performance measurement system delivering what you want? What you expect? Do you have such a system? Developing an effective performance measurement system can be tricky. To paraphrase management guru Peter Drucker, some implementation efforts result in people doing with great efficiency that which should not be done at all. Consider the following examples:
- A fast-food restaurant manager so motivated to meet his efficiency goals reducing food waste that he directs staff not to cook meals until ordered, spiraling the outlet into losses as customers refuse to return.
- Sales people jeopardizing customer relationships and sales by delaying contracts when they’ve already met their quota for the period. Or alternatively, those that are so motivated to maximize sales, they close all deals, no matter the impact on production, customer satisfaction or profit.
- Purchasing managers, rewarded for discounts, buying in lots so large that the company experiences a cash crunch, halting production and severely damaging its reputation when it’s unable to pay its bills. Or purchasing managers rewarded for meeting cash-flow-conscious inventory targets, resulting in production stoppages while waiting for missing parts.
Effective performance measurement can be transformational, but creating a system that has the intended effects requires careful thought and commitment. This series focuses on how to create a performance measurement system that is effective, instructive and data-based, but intuitive. A system that is a competitive advantage, not an administrative burden.
Throughout this series we’ll help you avoid common traps while you:
- Set the stage
- Create the environment for meaningful discussion
- Reach a unified understanding of your strategy
- Develop understanding of processes and causal relationships
- Focus attention on inputs and action
- Emphasize relevance, understanding and flexibility over “standards”
- Develop presentations converting data to information, and triggering discussion, understanding, and ultimately effective and profitable action
- Setting the Stage: Who will use your performance measurement system?
The most important aspect of your system is social, not numeric. Really. Performance is generated by people, your team. They’re also the ultimate user of your measurement system. The output of your system is important, but it pales in comparison to the discussion and discovery it generates.
For many of our clients the learning and changes generated during the creation or update of their performance measurement system exceed their initial goals for the project. Sustaining the dialog through review of the system’s results, and through continuous improvements to the measures, generates an ever-growing pool of expertise and a powerful platform for innovation. Without people to read, understand and act on it, however, your performance measurements will be little more than a pile of preserved electrons or sacrificed trees gathering dust on an analyst’s shelf.
The culture in which you introduce your system is also crucial. Successful systems encourage discussion and understanding, not punishment and reward. Integrating punishment and reward with your measurements typically generates unintended consequences and encourages destructive gaming of the system. You’re likely to end up like the Russian government with super-heavyweight weight lifter Vasili Alexeyev. He was rewarded with handsome bonuses for breaking world records, so he learned to smash them frequently and successively, but by only one or two grams at a time.
- Be clear about your strategy. One of the most powerful phases of this process is developing a common understanding about your strategy and what you’re trying to achieve. Consider these company strategy statements.
- We will generate a loyal, long-term customer base through superior customer service.
- We will generate competitive advantage by continually setting the standard, delivering faster and better, for less.
- We will grow our leadership position through our commitment to innovation.
These may all be inspiring words for the right audience, but what do they really mean? Does providing superior customer service not include delivering faster, better and cheaper? Will we provide superior customer service even when it means being unprofitable? If so, how far is too far or how long is too long? Is our commitment to innovation limited to certain industries or product lines? When will we pursue innovation that cannibalizes our own product line? How do we even define innovation?
These are all important questions. Questions for which these companies’ team members had a multitude of intelligent, but different and often conflicting, answers. Chances are your organization has similar questions, where it’s crucial your team explores the options and develops a common answer that unifies your efforts for maximum impact.
- Get clear about the process. If you don’t know how the process works, you can’t manipulate the outcomes. This is just as crucial for service businesses as it is for manufacturing.
Wells Fargo Turned Banker’s Hours Upside Down
Terri Dial turned the concept of a banker’s leisurely consideration and thoughtful pace on its head while at Wells Fargo. Bankers’ hours, long payday lines and months-long loan approvals were common practice at that time in California banks. Informed by solid analysis but still risking mutiny in the branches, Dial announced Wells Fargo would now open its branches at 8:00 a.m., remain open until 5:00 p.m. or later, and in some locations even open their doors on Saturdays. Not long thereafter, Dial instituted the Ten Minute Max, committing branches to a maximum customer wait time.
Because she and her team understood the business, the stakes and the risks, Dial could choose to change the game, surprising her competitors and making a powerful statement about Wells Fargo’s commitment to customers. In the following years Dial continued to change the expectations for banks’ customer service. She pushed through initiatives such as compressing loan approval times for most small business loans from roughly three months to one week, then five minutes, and finally the virtual process we now expect to see within seconds over the Internet every day. Painful for bankers? Certainly. But the change was inevitable. Only the leader was to be decided.
Service firms may look at processing times or cross-selling services. Manufacturers may look at end-to-end cycle time or component costs. What’s important is to understand the process and develop an understanding of the relationships and causal links. Without that understanding, you may as well be playing the slots in Las Vegas, where what goes there, stays there.
- Inputs come before outputs. Performance measurements are for taking action first, and monitoring results second. Systems that merely monitor and report results after the fact generate little value. They are more prone to generate creative story-telling than performance improvements that will push you beyond the competition.
To make your system effective, focus more of your measurements on the inputs you can manage than the outputs measuring the impact of what you changed. Monitoring outputs is important to understanding which efforts have the most impact and why. Learning the intricacies of your inputs is what creates competitive advantage. This typically translates to more leading indicators around people and process than lagging indicators such as financial measures reporting results after the fact.
- Look for leverage points.
Effective performance measurement is about finding the smallest number of key measures providing the greatest insights. Too often we find dashboards, scorecards and performance matrices offering many pages more of detail than any manager should be reviewing on a regular basis. When everything is important, nothing is, because every effort is of equal value.
Archimedes said, “Give me a lever and a place to stand, and I will move the world.” When you find yourself falling into the trap of too many measurements and not enough focus, ask yourself which of these measures can have an order of magnitude impact on your business. Which are the 10% that make 90% of the difference? Common triggers include customer retention, price points (net of discounts), and end-to-end cycle time. For Southwest Airlines, it was high utilization as measured by turn-around times between flights, a tangible goal everyone had to work together to achieve. For Dell, it was a measure of cash flow. What is it for your business?
Back From the Brink
In Dell Computer’s early days, it had a laser-like focus on growth. As it succeeded in growing, however, new challenges emerged. The rapid pace consumed ever-larger amounts of cash to fund manufacturing, faster than Dell could find sources. As Dell teetered on the edge, it discovered a new key performance metric that would make all the difference: its cash conversion cycle time. Dell focused the entire company on reducing its cash-to-cash conversion time, driving it down relentlessly from 70 days to an amazing less-than-zero days. By developing a business process that allowed it to collect the cash for its products before it paid for the units it had just sold, Dell fueled an enormous engine for growth.
Now the market has changed again, and Dell faces new challenges. Will it be able to discover a measure to drive its performance to new heights again?
When you’re setting the stage for your organization’s performance measurement, avoid the temptation to get it over-with, relying on generic industry measures. Measures of best-in-class performance are only useful for those who want to be in the same class. If you’re ready to graduate, select the measures that reflect your unique circumstances — and create a unique advantage.