WhatShouldYourCompanyMeasure BesidesFinancialResults?

ByWillKaydos Most people dont recognize that performance measurement lies at the heart of the improvementswehumanshavemadeinourstandardoflivinginthepastfewcenturies.Thats becausealmostallofthegainscanbelinkedtousingtheScientificMethodtodeterminecause effectrelationshipsandthatrequiresmeasurement. Forexample,bloodlettingtocureillnesswasacommonpracticeinmanyculturesforover2000 yearsuntilPierreLouisusedmeasurementtoshowthepracticedidnotincreaserecoveryrates (circa 1850). Although his discoveries were not quickly adopted, they eventually led to discontinuingthisworthless,andpotentiallyharmful,procedure. UntilLouiscamealong,everyone"knew"bloodlettingworkedbecausesomepeopledidrecover afterbeingdrainedofseveralouncesofblood.Sure,somedied,butwhenthathappened,the rationalewasthatthepersonwasjusttoosicktobecuredinthefirstplace.Itshardtoargue withthatkindofthinkingunless,likeLouis,youhavethedatatoproveotherwise. Butarethingssomuchdifferenttoday?Theycertainlyareinthescientificcommunity,where rigoroussubstantiationoftheoriesbysounddataisalwaysrequired.Thebusinesscommunity, however, is nowhere near as disciplined. Some companies have excellent measurement systems,butmanyarestillintheDarkAgeswhenitcomestotheirexecutivesandmanagers havingthemeasuresnecessarytounderstandhowtheirbusinessworks,howitisperforming, and why it is performing as it is. Like tenthcentury physicians, managers in these companies are making decisions based on subjective information, anecdotal evidence, and beliefs about whatdrivesresultsthataresimplynottrue. AsPierreLouisdemonstrated,whenitcomestoidentifyingcauseeffectrelationships,nothing beats measurement and the same is true about identifying business problems and opportunities. So what should a wellmanaged company measure besides the usual financial results? Measurementframeworks TheBalancedScorecardiscurrentlyaverytrendy(andoftenmisunderstood)topicinbusiness circles, but there are other measurement frameworks such as the Performance Prism, the QuantumPerformanceManagementModelandtheTableaudeBord.Allareuseful,butnone ofthemistheanswertoeverythingdespitewhattheiradvocatesmaysay.

Combining elements of various measurement frameworks yields the measurement model below.Itworksasfollows: 1. The needs and expectations of customers and stakeholders are the primary drivers of strategies. Stakeholders include shareholders and employees, but suppliers, the community, government entities and other organizations could also be important stakeholders. 2. Strategy consists of defining your intended customers and how you are going to competeforthem.Acompanysstrategyismadeupofindividualstrategies,whichare thekeyactionsacompanymusttaketoachieveitsvisionandgoals.Whendeveloping strategies,allotherelementsofthemodelmustbeconsidered. 3. Operationsincludealldirectandsupportbusinessactivitiesthatexecutestrategiesand produceproductsandservicesforcustomersandstakeholders. 4. Thecapabilitiesofacompanysorganizationandinfrastructureenableitsoperationsto efficientlysatisfycustomerandstakeholderrequirements.Stakeholdercapabilitiesmay also be important to a companys operations. In the shortterm, capabilities can limit what strategies are feasible; in the longterm they may need to be developed to implementcertainstrategies. 5. Stakeholdercontributionsincludeproductsorservicesthatareessentialtooperations. Forexample,suppliersmayprovidecriticaltechnicalsupportfordesigningproducts. 6. Products and services provided to customers create financial returns (7) for shareholdersandperhapsotherstakeholdersaswell. Note: For public sector organizations, the model is similar, but customer and stakeholder satisfactionbecometheprimarydesiredoutcome,notfinancialreturns. Criticalquestionsexecutivesmustanswer Using this model, we can develop the critical questions executives must be able to answer abouttheircompanyandtheperformancemeasuresthatapplytoeachquestion. CUSTOMERS 1.Arewesatisfyingourcustomers? Customersatisfactionanddissatisfaction Customerretentionandbehavior STAKEHOLDERS 2.Arewesatisfyingourshareholders? Financialreturnstoshareholders

3.Arewesatisfyingourotherstakeholders? Stakeholdersatisfactionanddissatisfaction Stakeholderretentionandbehavior STRATEGIES 4.Whatishappeningtoourcustomerbase? Marketpotential Marketgrowthrate 5.Isourcompanystrategyworking? Marketshare Customeracquisition Customerprofitability Product/serviceprofitability Externalfactorsthataffectcustomers 6.Areourindividualstrategiesbeingproperlyexecuted? Strategicgoalsandtheobjectivesnecessarytoachievethem. OPERATIONS 7.Areweservingourcustomersandstakeholderseffectively? Productandservicequality 8.Areweoperatingefficiently? Processqualityandcapability Productivity Waste Productandservicecosts STAKEHOLDERCONTRIBUTIONS 9.Arestakeholderscontributingwhattheyshould? Stakeholderresourcecontribution Stakeholdercontributionquality

CAPABILITIES 10.Arewedevelopingtheabilitiesweneedto;executeourstrategies? Organizationalcapabilities Infrastructurecapabilities Stakeholdercapabilities Thisisasimplifiedpictureofwhatshouldbemeasuredattheexecutivelevelofanycompany. Therearesomeoverlapsamongthequestionsandmeasuresaswellasmanyfinerpointsthat wont be discussed here, but this overview is consistent with what leading companies are measuring. Theimportanceofmarketshare Manywouldsaymarketshareisthemostimportantmeasure,becauseifyourelosingmarket share, your competitors have an advantage and they will soon eat your lunch. Market share wonttellyouhowtocorrecttheproblem,butitwilltellyouwhenyouaregettingintotrouble. For example, Kmart was losing market share to WalMart way back in the 70s, but Kmarts management failed to heed the warning apparently because the company was still growing andprofitable.AlthoughKmarteventuallymadesomechangestoitsstrategy,itwastoolittle, too late. Now its a Chapter 11 "bluelight special" and the chances of it regaining its market positionappeartobesomewherebetweenzeroandnone. Measurementandbusinesssuccess Allofthelistedvariablescanbemeasuredtoausefuldegreeofaccuracyandsomecompanies are doing it. Companies that have won the Baldrige Award or similar state award have extensivemeasurementsystemsthatincludealloftheabovemeasures. In reviewing numerous Baldrigebased quality award applications, I have found that a good estimateofacompanysfinalscorecanbemadebyjustexaminingthemeasuresbeingused. Why? Because the depth, breadth and underlying logic of a companys measures reflect managementsunderstandingofthebusinessandhowwellitisbeingmanaged. Not surprisingly, over a fiveyear period ending in 1998, the winners of Baldrige and similar awardsdidtwotothreetimesbetterthancomparablecompaniesintermsoftheirgrowthin salesandoperatingincome.Thatisahugedifference!

Determiningwhattomeasure Sohowcanyoudeterminewhatyourcompanyshouldmeasure?Asmentionedbefore,there areseveralframeworksthatcanbeused.Althoughtheyallhavemerit,somehaveadvantages intermsoftheirstateofdevelopment,easeofuse,anddirectrelationshiptocommonbusiness practices. I believe the best approach for developing company or business unit strategy and related measures is to use the Balanced Scorecard methodology in conjunction with the robust perspectives of the Performance Prism. Balanced Scorecard performance systems have an established record of success, but one needs a disciplined way of building and implementing thesystemtoensurethatbusinessstrategiesgetexecutedandthatthenecessaryorganization culture change gets implemented. One framework that is becoming an international "best practice"istheBalancedScorecardInstitute'sNineStepMethodologyfordevelopingstrategic themes,businessstrategies,strategicgoals,strategymaps,performancemeasures,targets,and new initiatives. The result is a strategic management system that is comprehensive, logically sound,andsupportedbythewholeorganization. This does not assure the strategies will work, but the measures will provide timely feedback about how well they are working so timely corrective action can be taken regarding the strategiesortheirexecution.Withoutthemeasures,acompanysstrategyandfinancescould getsubstantiallyofftrackbeforeanyproblemsareevenrecognized. But having good strategies is not enough to be successful. Operational excellence is also needed to execute them. To achieve and maintain high levels of productivity, quality, and customerservice,comprehensiveoperationsorprocessmeasurementsystemsareneededto manage processes, departments and work units. These systems would include the measures that are strategically important, but those measures alone are insufficient for effectively managingoperations. Fordevelopingoperationalmeasures,Irecommendtheapproachandmodelgiveninmybook Operational Performance Measurement: Increasing Total Productivity. No doubt I am biased, butthebooksprocessmeasurementmodelistheonlyoneIveseenthatmeetsthreecritical criteria: it is logically sound, it readily relates to real world processes, and it has a record of successfulapplication.ThemodelisalsoconsistentwithTQMandSixSigmamethodologiesthat containmanyspecializedtechniquesformeasuringandmanagingprocesses. BecomingfamiliarwiththeBaldrigeCriteriaforPerformanceExcellenceisalsorecommended. Sinceitoutlinesgeneralmanagementbestpractices,itprovidesaveryhelpfulperspectiveon whatawellmanagedcompanyshouldbemeasuring,aswellaswhatitshouldbedoing.

Cascadingmeasures Corporatelevelmeasuresareveryimportant,buttheyarentgoingtohavemuchimpactunless theyarecascadedalltheywaydowntofrontlineemployees.Thecaseforcascadingissimple: Doyouwant10%ofyouremployeesworkingtowardcompanyobjectivesor100%? With some exceptions, such as market share, what you measure at the top is what must be measured at all levels. However, the specific measures will change with every function and organizationallevelbecausemanagersdoingdifferentjobsneeddifferentinformationtomake differentdecisions. The same methodologies used to develop measures at the corporate level can be used to cascadethemeasuresdowntofrontlinemanagers,supervisors,andemployees.However,as you go down the organization chart, the focus is on operations or processes. Strategy is incorporated into operational measures by giving more weight to the measures that are strategically important. This communicates strategy to all employees by translating it into operationaltermsaprimaryobjectiveoftheBalancedScorecard. Implementingperformancemeasures Determining what to measure can take considerable effort, but it will probably be less than onethird of the total effort required to implement an efficient and effective measurement system. Data collection and processing systems will have to be implemented to produce the measures; everyone will have to be trained in using the systems and measures; and as the measures are used, some problems are sure to be identified that will require changes to the system. Perhapsthegreatestchallengefacedwhenimplementingperformancemeasurementsystems is changing an organizations culture. Using performance measures requires managers and employeestochangethewaytheythinkandact.Formostpeople,thisisrelativelyeasy,butfor some,changingoldbeliefsandhabitsisverydifficult. Overcoming such problems requires strong leadership to provide appropriate direction and support. The best measurement system in the world will yield few benefits if the right knowledge,skills,abilities,andvaluesarenotdevelopedinacompany.Anorganizationdoesnt justinterfacewithameasurementsystem;itispartofthesystem. Developing and implementing effective measurement systems requires leadership, commitment, and hard work. Some investment is required, but it is small relative to the key benefitsofawelldesignedandimplementedmeasurementsystem: The ability to determine if sales and profit problems are caused by strategies, operations,orboth; Earlyidentificationofproblemsandopportunities;

Increasedproductivity,quality,andcustomerservice; A clear understanding of what drives financial and operational performance so resourcescanbeallocatedtotheareasofgreatestreturn;and Acohesiveorganizationworkingtowardcommongoals. Nomatterwhatapproachyouusetodevelopperformancemeasures,bearinmindthat the objective is not to have a Balanced Scorecard, Performance Prism or some other typeofsystem,buttohavethemeasuresinplacethatwillenablemanagersatalllevels toanswerthetenkeyquestionsgivenearlier. If all of your managers can readily answer those questions about their areas of responsibility and support their answers with objective numbers, your company has the performance measuresitneeds.Iftheycant,someofthe"good"decisionstheyaremakingareundoubtedly notveryeffectiveandtheymayevenbeharmful. Soundsalotlikepracticingbloodletting,doesntit?