PERFORMANCE
MEASUREMENT
AT ED TEL

This new system is moving the Edmonton Telephone Corporation

toward true performance management and is focusing

all levels of the organization on the creation of shareholder value.

by Brian Meadows, CMA, Kim Freeman, Sandro Berardocco,

Ken Thomson and Maria Zmatlo

The challenges being faced by Edmonton Telephones Corporation (ED TEL) are no different than at any other company. Competition is increasing, consumers are becoming more discerning and the quality and price of service, and advances in technology threaten to challenge traditional revenue streams. Like other companies, we are feeling the pressure to improve financial performance and to drive up productivity - in short, to do more with less.

At ED TEL, a number of factors have led us to believe that our current performance measurement system is sub-optimal. As a result, management is currently implementing a new system. As we have strived to identify ways of improving performance, a plethora of "performance enhancing drugs" has been prescribed - total quality management, re-engineering, continuous improvement, benchmarking, activity-based costing, customer satisfaction measurement, employee empowerment and shareholder value analysis, just to name a few. To complicate matters, each of these tools has been championed by different groups within ED TEL, and the impact of adopting one tool on others' work is often not considered. While each of these tools claims to improve organizational performance, by themselves, they do not show a clear link between financial and operational performance. We also began to question how each of these tools integrate with each other (if at all). Another factor that has led us to re-evaluate our performance measurement approach was the development of a new corporate strategy. We now need to ensure that our performance measurement system reflects key result areas identified in the strategic plan. With these challenges in mind, we began the task of developing an improved performance measurement framework (PMF).

Developing the improved performance measurement framework at ED TEL is the responsibility of the corporate planning and measurement group which reports to the chief financial officer. Given our responsibilities for facilitating the strategic management process, the integration of the performance measurement framework is a natural extension of the corporate planning mandate. We recognize the critical importance of alignment of all aspects of the organization with ED TEL's strategy and vision, and the PMF is seen as an integral vehicle to promote alignment and accountability. We commissioned the assistance of Paul Sharman from Focused Management Information Inc., an affiliate of the Rummler-Brache Group, to facilitate the development of the new performance measurement framework.

The new performance measurement framework (PMF) that is currently being implemented at ED TEL is designed to be an integrated framework that will help rationalize the use of the various tools described above, improve the adequacy of management information, support the strategic management process, ensure accountability, ensure that the right measures are developed and monitored, and support the move towards a decentralized management structure. This framework has several characteristics to meet these objectives:

Internal measures and targets for performance are determined by stakeholder needs.

The PMF takes a "stakeholder-down" view in developing measures. It necessitates an understanding of the needs of our stakeholders first, then translates these needs into key internal measures. Several measurement tools will be used to assess the degree to which the needs of key organizational stakeholders - shareholders, customers, employees and business partners - are satisfied by organizational outputs.

Fig 1: PMF integration model

Stakeholder needs will be measured in terms of time, quality and cost. For example, one measurement tool to assess the satisfaction of our shareholders' needs from a time, quality and cost perspective is economic value added (EVA). We feel that ultimately ED TEL's performance will be measured by the change in shareholder value over time. A key tool for the assessment of our customers' needs is customer satisfaction measurement (CSM). Sophisticated CSM tools are being used to identify how our customers feel about us in general, as well as how they feel we are performing on specific attributes of our service and product delivery. The CSM information is currently being enhanced to become much more predictive of customer loyalty and purchase behavior. These enhancements are critical to ultimately link CSM with our revenues. Other tools are currently being analyzed and fine-tuned to accurately reflect satisfaction of the needs of employees and business partners.

The PMF focuses on improved process performance first. Functional performance measures are improved second.

In support of Michael Porter's value chain and Geary Rummler's process management work, we believe that the key to developing competitive advantage and implementing strategy resides in a company's business processes. The PMF therefore looks at improving performance at the process level before looking at functional or departmental performance. Once key measures of process performance are developed and implemented, the next step is to determine the degree to which functional areas contribute to that performance. These contributions are then "added up," and functional areas become accountable for those process activities that they can affect. Using this technique enables company-wide acknowledgement of the importance of processes to company success.

Accountability for performance is built in early and is linked with compensation.

A key change in the new PMF from our existing system is a move towards horizontal management. In order to implement such a change in the way the organization has traditionally viewed performance, there needs to be a significant move toward integration with the formal compensation systems. Up-front changes to this system will support and sustain a shift from a functional to a process orientation. If a process-related performance measurement system is viewed as a non integrated "parallel" system to traditional compensation determinants, performance on a process basis will fail to be taken seriously.

The framework supports the empowerment of teams and facilitates decentralized decision-making.

Responsibility for developing and maintaining process measurements must reside with the process owners and their teams. Ownership of process measures by this group is critical as these process teams will ultimately be responsible for improving their processes' performance and attaining targets. Implementation of the new PMF will help provide process teams with the required management information they will need to support a new horizontal management structure. The PMF will also provide process teams with end-of-process targets, which are ultimately determined through the stakeholder needs analysis and the strategic direction of the firm. Senior managers will create the strategic context for the teams but not the measures themselves. Strategic goals are provided through targets; however, top management must ensure that each team understands how it fits into the strategy and that it is responsible for its own measures as a means of achieving those targets.

The framework supports both strategic analysis and implementation.

The information provided by the framework is critical to strategic analysis - information about current performance in relation to stakeholder needs allows management to prioritize and validate strategic decisions. Further, it facilitates quick implementation of strategic changes, as all managers need to do is change end-of-process targets, and teams will change the targets within the process to reflect the new direction.

The PMF supports clear integration of traditional financial performance and key non-financial measures.

In many businesses, growth in "overhead" costs has become significant. Often, there is little understanding of the cost drivers that have led to that growth. We will utilize activity-based costing to help us better understand our overhead and support costs as they directly support key process outputs. We perceive activity-based costing as the integrating tool to link key operational measures with traditional financial measures. ABC information will enable process owners and their teams to make decisions based on both the cost and benefit of improving the activity's quality or cycle time, reducing cost, or eliminating that activity altogether. This involves changing the nature of the way costs are viewed. It enables the demonstration of a direct link between investing in activities and obtaining revenue. This is critical at ED TEL, and involves moving away from a reliance of qualitative benefits of improvement initiatives to one that is firmly linked to the creation of shareholder value.

Elimination of non-value-added activities and investment in value-adding activities is encouraged, and the information provided by combining activity-based costing information with customer satisfaction data supports process improvement recommendations made by teams.

Figure 1 is a conceptual way of illustrating how the PMF integrates the various tools and enables optimal process team decision-making.

"WE PERCEIVE

ABC as the integrating tool to link key

operational measures with traditional

financial measures."

Process teams will collect and receive activity-based costing information for those activities that are involved in their processes. CSM (customer satisfaction measurement) data is typically most relevant for measuring process outputs - in fact, processes are defined as having outputs that are meaningful to customers. Customers' reactions to process outputs are in terms of experiences and expectations. These reactions lead to revenue for ED TEL and the consumption of resources within the processes is manifested as costs.

By linking changes in customer satisfaction to changes in revenue and by tying this relationship back to ABC, we can now perform a cost-benefit analysis on core processes with a view to optimization. This contrasts the more traditional approach of trying to minimize costs with less understanding of the impact on revenue or, conversely, trying to maximize revenue (or satisfaction) with only limited consideration of costs. This linkage can be used in goal setting and the evaluation of the process in light of the revenue generated by the costs that are expended.

The benefits of combining customer satisfaction measurement with activity-based costing information to facilitate process performance improvement decision-making are promising. Process owners and teams are able to perform powerful sensitivity analysis to determine the cost and benefit of making process improvements. Let's say it is found that, by shortening the delivery time of a particular service, the expected revenue increase, predicted using customer satisfaction analysis, will be $500,000 a year, and ABC-related information indicates that the cost associated with shortening the cycle time of those activities involved in that service delivery is $100,000. The value added to the shareholder is $400,000, and more value is perceived by the customer because of the decreased time of delivery. Similarly, activities that do not add value may be identified using the same information. Process teams may then focus on the elimination or cost reduction of those activities.

The shareholder gains from the cost savings, reflected in EVA performance, and the perceived value to the customer is increased, as ED TEL ultimately becomes more price-competitive.

The model's emphasis on the relationship between inputs and outputs is supported by the use of EVA (economic value added) as a measure of shareholder value. The objective of shareholders is to receive returns greater than the cost of capital, a goal that is validated by EVA. We propose using EVA as the ultimate measure of how well managers use the assets and resources that have been entrusted to them from the shareholders.

Lessons learned from other companies

We have also learned from the experiences of other companies that have attempted to focus on operational performances as a means of improving corporate performance - companies that have grasped "process management" as key to running their business. We learned several lessons from other companies' experiences that influenced the design of the new PMF:

* Many companies view the key to improved performance to be management of their business processes. However, in some cases, top management may fear that if they let process teams define their own objectives, these objectives will drive the corporate strategy, rather than the other way around. Further, there is often a reluctance to completely "give up" the use of traditional financial measures for reporting and decision-making purposes. Failing to identify the link between operational process-level measures and financial indicators may result in "falling back" on financial or functional measures only, and operational performance improvement will fail to be rewarded or fully understood. This often results in process improvement initiatives being viewed as a "fad" or the latest "flavor of the month" because top management continues to measure and reward on the basis of traditional financial and functional measures.

INTEGRATING PROCESS MANAGEMENT into the

fabric of strategic analysis,

formulation and implementation demonstrates

commitment to TQM principles.

* Regardless of how much top management wants to drive performance by installing a process orientation through the company, it cannot do so without making individuals accountable for process-related results and improvement initiatives. Failing to tie operational performance into management compensation often results in "lip service" to a process orientation and ultimately an unsustainable process improvement program.

* Process improvement or re-engineering initiatives performed without an understanding of the interrelationships between all major processes in the organization can be perceived to be successful and yet not contribute to increased value for the customer or the shareholder. For example, little customer value is added by driving up the number of sales orders in the selling process unless the order fulfilment process is changed so that resources are available to see a product or service through to delivery. Functional measurement and failure to take an organization-wide strategic view of performance measurement enable such situations, as functional areas continue to be concerned only with their own performance measures rather than the customer's view of the entire organization and its outputs.

* Often, process-related performance measurements are used only by process teams, not by top management. Because of the view that "no one cares" at the top about improvements in process performance, teams may become disheartened, preventing further improvements. Further, these measurements are typically not installed until after a major re-engineering effort has been performed. Failing to measure performance before a major re-engineering or improvement effort may lead to an inability to quantify the actual benefits of the initiative or inappropriate prioritization of the processes that were selected for improvement in the first place. We subscribe to the classic strategy planning concept of knowing where you are before deciding where you want to be.

We believe that the PMF addresses current gaps in management information, moves ED TEL toward true performance management, and aligns all levels of the organization toward the creation of shareholder value. While this integrated PMF is expected to have many benefits, it is not to be expected to be without its challenges. Changing the very nature of the functional management system will necessitate a significant cultural change. Integration of process management into the fabric of strategic analysis, formulation and implementation demonstrates a firm commitment to total quality management (TQM) principles and makes a process orientation part of everyday management. Although major challenges are anticipated, the effort is expected to significantly contribute to ED TEL's strategic vision of becoming a leading information, communications and multimedia power. CMA.

ED TEL's corporate planning and measures team consists of: Brian Meadows, CMA, manager of corporate planning and measures; Ken Thomson, manager of customer satisfaction measurement; and Sandro Berardocco, Kim Freeman and Maria Zmatlo, corporate planning and performance analysts.

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