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
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
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
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).
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
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.
* 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
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
* 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
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
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.
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.
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 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
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.
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
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
Reprinted from the CMA
magazine with permission from The Society of Management Accountants of Canada.