HOW TO IMPLEMENT

PERFORMANCE MEASUREMENT

IN YOUR ORGANIZATION

Practical applications of integrated performance measurement are
changing the way in which organizations are managed.
Here is a review of the key components of the new systems, how they are implemented and what benefits they are achieving.

by Paul Sharman

Organizations are gaining experience with analytical management tools developed in the late '80s and early '90s. Activity-based costing, process management and benchmark performance measurement provide the basis for integration of information into planning and management control systems. This is made possible today by the advancing technology of computers and communications. However, people have been measuring performance for as long as they have striven to accomplish new goals.

Management accountants, specifically, have had responsibility for tracking the definitive measurement by which the performance of senior managers is ultimately judged and compensation awarded -- money. Accordingly, our profession has focused almost exclusively on financial measures. For years, management accountants have worked with the expectation that people in other organizational functions are both knowledgeable of their own work and also fully understand how they contribute to the strategic direction of the organization. Generally, it was reasonable for us to assume that functions act in the best interests of the organization in order to meet financial goals. It turns out, however, that this assumption was highly optimistic.

In reality, most functions act in a way that is limited by the scope of their specialization. In other words, although sales, marketing and other operational functions may be very good at what they do, most functions possess only a general understanding of how they contribute to the overall organizational goals and frequently they tend to maximize performance around their own goals. Functional goals are often influenced by the personal agendas of the function's senior managers, while individual employees just do their job, thus suboptimizing the organization's performance, overall. Take a moment to reflect before you read on and ask yourself if this is true in your organization.

With today's focus on competing aggressively for market share, satisfying customers, ensuring quality, and maintaining healthy relationships with employees, regulators and suppliers, managing performance requires a lot of information. Furthermore, that information must be designed and distributed to people in a way that will influence the best possible behavior. Managing performance is, therefore, highly dependent on the availability of a well-designed performance measurement system which provides clear linkage between strategy and human behavior.

Most organizations have conducted business with managers located in functional structures where layers of people concern themselves with measurements of functional performance. Over the past 10 years, most organizations have removed those layers of management and have placed more emphasis on individual performance. In an environment with fewer managers, functional organizational structures exist to co-ordinate individuals with a shared-activity orientation (skill base) to supply resources and activities to cross- functional processes. Processes are the sequence of cross-functional activities performed by people and machines which combine valuable resources to convert inputs into outputs. It is processes which provide the linkage between organizational level goals and the work performed by people.

Processes can be measured effectively. Measurements may be applied to many aspects and attributes of processes and the critical few are; time, quality, cost (financial), and scale. These measures act hierarchically within all organizations at three levels of performance; at the organizational level, at the process level, and at the individual level. This combination of measuring different attributes of the organization within a hierarchical structure is called an integrated performance measurement framework (PMF), see figure 1. The most important aspect of this for management accountants is that performance in all dimensions and functions can be directly traced to financial goals and results, and vice versa. Therefore, if the purpose of all commercial organizations is to increase wealth, the establishment of a tightly integrated PMF is highly desirable.

Measurement in the process-driven organization

Figure 1: Performance measurement framework (PMF)

Organizational level measures

Measurement of economic profit using shareholder value-added (SVA), or such derivatives as economic value-added (EVA), and market value-added (MVA), establishes a single top-level goal for organizational performance. Central to this measure is the generation of economic profit (i.e., those profits generated after taking into account revenue, operating costs, and an assumed cost of capital invested). In commercial enterprises, economic profit is used as the ultimate performance measurement against which all activities are evaluated, to assist in decision making among competing alternatives, to measure the performance of all existing operations, and executive compensation. The high-level measurement would be different for non-commercial organizations, but all other aspects of the PMF apply equally.

Management's goals are to achieve, through operational activities, certain levels of increase in shareholder value. These must be planned and executed through the translation of strategic direction and goals into operational actions, at the business unit, process, and individual levels. Through this approach, management starts to align organizational activity and resource allocation, with strategic goals.

Increases in profit are generated by effective and efficient use of operating resources at any level of revenue. If management has established cost reduction as an operational goal for the business units, then the implementation of this goal must be defined and measured. This will assure the achievement of the organization's improvement goals. The key is: who is going to do what, by when, to make this happen? This is where traditional planning and operational deployment begin to fall apart.

An integrated performance measures framework (or system) establishes direct linkages between the top-level measures (such as SVA) and the cascade of action plans through the entire organization. These collectively add up to the achievement of the established goals. Individual performance and team activities can then be measured and compensated on their ability to achieve the part of the overall plan that links with and supports their business unit objectives.

Establishing a measurement system, on economic profit alone, is not adequate for organizational direction. An integrated performance measurement framework also encompasses those actions that are undertaken to achieve the needs of other stakeholders such as customers, employees, suppliers, alliance partners, and regulators. These actions would complement the SVA goal, but require different operational measures. For example, actions to develop and launch a new product being demanded by customers may be a key operational goal through which revenue growth is achieved. Factors which may be critical to achieving market penetration and overall success might be; a high level of customer satisfaction in the new product, and an on-time achievement of the development process. In this situation, both activities should be measured.

Customer measures and employee measures are keys to driving financial performance and should be incorporated into the measurement framework. For example; changes in work methods (e.g., the adoption of a new team approach) will require support and commitment by the employees. This is a measurable goal that should be incorporated as a driver in achieving the anticipated reductions in operating costs, through improved work methods. In summary, total organizational level measures are established around both the needs of stakeholders and strategic goals, which are often described as critical success factors. These high-level goals are referred to as organizational level measures (M0) in our framework (figure 1).

Process measures

Performance of the organization is completely dependent on the performances of its processes. In fact, in any organization, its performance is equal to the sum of the performance of its processes. Processes are measured as a complete structure, e.g., the repair process produces 2,000 complete repair procedures, each within five hours of the customer call, at a total cost of $2 million a year while 99.5 per cent of customers are completely satisfied with the entire interaction with our organization. These high-level process measures are referred to as level one measures (M1). See figure 2.

Processes are decomposed into sub-processes, with similar measures that contribute to level one performance. Sub-process measures are referred to as level two measures (M2). The sum of the M2s equals the M1s. For example, the repair process -- dispatch call sub-process -- handles 2,500 phone calls a year, dispatches 2,000 service procedures within 15 minutes of receipt of each call, picks up 95 per cent of customer calls on the first ring, satisfies customers with the personal interactions 95 per cent of the time, and incurs a total sub-process cost of $250,000 a year. As you examine these sub-process measures, it is possible to see how individual people fit in, e.g. their performance and their cost.

Implementation steps

* Complete stakeholder, strategic and operational needs analysis and goal identification addressed in terms of the critical dimensions; time, quality, and cost.

* Implement activity-based costing and activity-based budgeting applications to define activity and cost driver relationships. This will yield an understanding of profitability by product (service) and cost of activities, transactions and processes as well as the cost of quality.

* Develop a structured benchmarking methodology and access to qualified benchmarking partners in order to establish realistic goals.

* Identify organizational and strategic outputs. Develop measures and goals for each critical attribute, based on stakeholder requirements and strategic/operational imperatives.

Figure 2: Hierarchy of measures for a repair process

* Analyze significant processes, their outputs and attributes that are needed to support process performance requirements. Develop and align measures and goals for each process.

* Break out process steps, their outputs and measurement attributes that are needed to support sub-process performance. Develop aligned measures and goals.

* Identify function output by process step and trace to individual role/responsibility. Within each function, develop a supportive human performance system for key individuals in the organization.

* Review the existing compensation and reward system and recommend an approach for alignment with new performance measurements.

* Senior managers assigned as process owners with a clear mandate and accountability for all aspects of performance of their process.

Performance management -- operational PMF

The goal of performance measurement frameworks is to provide an information infrastructure to motivate and encourage the organization to move closer to attaining its strategic goals. In the past, performance feedback has been cumbersome due to the paper and perceptual methods employed by most organizations. Today, things are changing because data can be easily captured from the computer databases that record every transaction of our organizational processes.

A feature of PMF is the use of software tools to extract, organize, communicate and display performance immediately and comprehensively. With the software tools available -- data repositories, modeling databases and presentation systems -- managers can expect workers to have entered commentary on performance variances and trends into the data base before the managers review the results. The role of staff groups changes because they are no longer needed to filter information as this type of technology facilitates direct communication between workers and management.

Having these capabilities changes the way in which organizations function. Managers have more time for planning and developing business, and need to spend less time worrying about what went wrong. Workers have clear lines of communication and all aspects of their performance are communicated and are open to exposure. Strong performance is quickly communicated and successful techniques are quickly copied. The nature of this technology makes it difficult to hide poor performance. Hence, the impact on human beings is bound to be dramatic.

Role for management accountants

Management accountants can assist management by facilitating change in their organizations through the implementation of a performance measurement framework. Few other groups are better suited or have the requisite responsibility. It is also important to remember that implementation will involve the whole organization, so other functions should be involved from the outset. When implementing a performance measurement framework, you must be careful not to let the PMF appear as, or to become, yet another stick with which to beat people. Improved performance is about people doing things differently. People always react to the measures by which their performance is judged. Therefore, if you want to have positive performance, you must have a positive and healthy measurement system and implement it in a positive and healthy manner. Over to you!

Paul Sharman, feature editor of CMA magazine, is president of Focused Management Information Inc. The company helps businesses to implement new cost management techniques.

1. Improving Performance. How to manage the white space on the organizational chart. Geary A. Rummler and Alan P. Brache. Jossey-Bass California, 1995.

2. See CMA magazine article next month by Jim Fisher on executive compensation schemes for an explanation.

3. EVA is a trademark of the Stern Stewart company.

4. Improving Performance. How to manage the white space on the organizational chart. Geary A. Rummler and Alan P. Brache. Jossey-Bass California, 1995.

5. Burkett, Alison. Role responsibility analysis, CMA magazine, March 1995.

The Edmonton Telephone experience

by Kim Freeman, Sandro Berardocco, Dieter Thomas, Ken Thomson, and Maria Zmatlo

ED TEL decided to implement a performance measurement framework because management wanted to link processes (what people do) to strategy (what the company wants to do) and ultimately address the issue of accountability for the implementation of strategy. This would ensure the alignment between processes and strategy, and enable ED TEL to quickly adapt to a change in strategy. The PMF pilot, that was launched in one of ED TEL's subsidiaries, involved six steps. 1. strategic analysis 2. process definition 3. measures development 4.performance data collection 5. gap analysis, and 6. on-going management. A multi-functional team was appointed by management to actually do the work in developing the PMF in this subsidiary. This team consisted of the president, senior managers, internal PMF facilitators, front-line staff, and a consulting team from the Rummler Brache Group (RBG).

To ensure ED TEL's alignment and adaptability to changes in strategy, it was essential for ED TEL to identify the inefficient activities in the processes (non-value added) and the productive activities (value added). This information is critical to identify the changes required in the processes to align them to strategy.

It was also ED TEL's goal that the performance measures should ultimately reward and encourage process performance improvements through a compensation structure linked to the creation of shareholder value. This linkage to compensation and accountability was not addressed during the pilot project, although there has been a great deal of discussion with the human resources area about the need for establishing the link to compensation.

Strategic analysis

Strategy and objectives of the company were reviewed by the PMF team to understand the current and future position of the company. Afterwards, a stakeholder's needs assessment was undertaken, particularly focusing on the needs of the customers, shareholders and employees. The stakeholder needs identified through the needs assessment formed the basis of the measures at the highest level. Stakeholder needs were categorized from a time/quality/cost perspective. Once these needs were identified, they were translated into internal measures.

Our consultants, the Rummler Brache Group, provided two tools -- a super-system map, and an organization relationship map -- that we used at this point to help participants understand the link between strategy and processes. These tools also provided a good view of the linkage between the stakeholders' macro view of the business strategy and operational processes. The two tools provided greater insights into the relationship among the organization, its environment, and other organizations.

Finally, the subsidiary reviewed the critical success factors and identified the ones that they must manage. This review was based upon the premise that critical elements of strategy can only be managed if they are measured; otherwise you don't know how you are doing.

Process definition

The team then completed process definitions in order to fully understand all components of the business. This involved identifying the starts and stops of each process, the relationships between processes, and finally, resulted in detailed mapping of all primary processes (the processes which directly touch the customer). Two support processes were also mapped during the completion of this step.

The roles played by each function in the processes were determined by interviewing functional representatives throughout the organization. The process inventory tool helped to identify the outputs, inputs and major sub-process steps within a process. The relationships between processes were graphically depicted on a process relationship map.

The mapping of processes was performed using the RBG methodology -- a format that identifies all the functional players that are involved in each step. This mapping methodology was necessary for measures development, as it was later used to identify accountability for different sub-process and activity-level measures, and to identify "white spaces." White spaces are the cross-overs from one function to another within the process. These "spaces" are normally not managed and therefore problems occur. Sub-processes and their outputs were identified after the processes were mapped, so that measures could be assigned to the major deliverables from each process. Finally, the maps were validated in a cross-functional formal session to ensure their clarity and accuracy.

Measures development

Measures development was performed primarily by a measures sub-group and was validated by the entire subsidiary PMF team. The measures sub-group -- a group of four individuals, representing each functional area -- was appointed by the larger group to develop the initial structure of measures. It started with the end-of-process outputs and developed appropriate financial and non-financial process measures for these outputs. The measures sub-group then produced a measurement hierarchy which included measures for sub-process outputs. For example, for every end-of-process measure, several sub-process level measures cumulated to the end of process measure. Finally a formal session was conducted so that the larger team could validate and refine the measures created by the sub-team.

Performance data collection

Having defined the measurement structure, the team began collecting actual measures data. This also coincided with the collection of cost driver data for the activity-based costing project which was supplying process costs for the PMF. While the data was being gathered, the assignment of responsibility for measures was completed and routines for data collection and ongoing reporting were established. During the collection of data, the envisioned requirement for an information delivery tool became essential to the presentation of the complex relationships which were evolving within the PMF. The project team assessed several presentation alternatives and settled on the use of an executive information system (EIS) -- LightshipTM -- to display the performance measures.

Gap analysis

The team was trained in analyzing measures in order to identify process improvement opportunities. This analysis allowed teams to decide between different improvement tools, such as continuous improvement or re-engineering techniques, by pin-pointing the source and the scope of the problem. Process teams then analyzed the measures and looked for performance gaps. A "gap" is the distance between the target (where you want to be tomorrow) and current performance (where you are today). Functional areas then developed plans to improve performance within their own areas, and by co-operating with other functional areas. One very useful tool, the role/responsibility (R/R) matrix, was used along with measures to help pin-point problem areas. For example, if the R/R matrix showed that a particular piece of work "jumps" from one functional area to another without any review steps, this was identified as an area that was a good opportunity for improvement. As a general observation, the entire PMF process led to managerial identification of gaps. It was especially notable that, during the exercise of mapping out the processes, several improvement opportunities were identified.

On-going management

Once preliminary performance data was collected in relation to the strategy, improvement priorities were set and goals were developed for performance measures. The business unit management team showed that, armed with this performance information and a clear strategy, they could rapidly develop process improvement and redesign plans.

Project status

The project team has made significant gains in the development and implementation of a performance measurement framework. It is our opinion that the completion of our pilot project has given us a greater understanding of the relationship between measurement and strategy. This pilot project has been a precursor to the ongoing effort to implement a performance measurement framework throughout our organization