Performance Measurement

**************************************************************************************
ACKNOWLEDGEMENT

This article was published in the New Straits Times on August 30, 2003
as a CIMA Business Talk article.

Reproduced here with permission from
The Chartered Institute of Management Accountants (CIMA Malaysia).
***************************************************************************************

The future of performance measurement is all about planning not reviews, answers not data, and “managing through measurement”.

Management’s obsession with measurement grows unbounded. The latest data from Gartner, the US-based research organisation, suggests that over 70 per cent of large US firms had adopted the balanced scorecard by the end of 2001. The recent Enron scandal has provoked a flurry of debate about corporate reporting, disclosure and the use of creative accounting practices to smooth income and earnings statements.

The software industry is also playing a significant role in driving the measurement agenda forward. There are now over 40 vendors worldwide that offer performance reporting solutions. Some of these performance reporting solutions are little more than glorified spreadsheets, while others enable executives to access immense amounts of data. The problem with many of the software reporting packages on the market today is that all they offer is data – not information or insight.

The problem is that too much is being measured. Executives are obsessed with quantification. They want everything described in numerical terms – customer satisfaction, customer loyalty, customer profitability, brand value, employee satisfaction, supplier performance, health and safety, efficiency, productivity, innovation, new product development, etc. This is becoming such a significant issue that some executives are now questioning what value they get from their organisation’s measurement systems. These questions become even more frantic when they think about how much their organisation's measurement systems cost them to run.

Recent research completed by members of the Centre for Business Performance at Cranfield School of Management, UK, found that Ford spent 0.7 per cent of sales, or USD1.2 billion annually on budgeting. Surprisingly the vast majority of executives have no real idea how much they are spending on measurement.

Everyone knows they are spending a lot, but no one knows how much. Just because you spend a lot on something does not mean that it is not worthwhile. However, organisations should think carefully about how they can best use their measurement systems to ensure that they deliver maximum value.

Broaden the agenda

Significant effort has been devoted to improving measurement methodologies. People have developed new methods of measuring financial performance and new frameworks to balance financial and non-financial measures. Research has focused on how to design and apply such methodologies and frameworks. These topics are important, but as we enhance our understanding of them, we need to broaden the agenda and ask: how do we make measurement pay?

More specifically we should do the following:

• Think in terms of performance planning not performance reviews
  
• In most organisations, measurement forms the basis of performance reviews, which are historic or backward looking in nature and – either implicitly or explicitly – designed to put people on the defensive

Why, in performance reviews, do people spend most of their time justifying why performance is as it is? They come to the review armed to the teeth with excuses about why they are where they are. For example: “We are only at 70 per cent of our target because our suppliers let us down, or our competitors have introduced a new product."

Such discussions are irrelevant, or at least relatively unimportant in comparison with focusing on how we are going to get to where we want to be.

Discussions about how we are going to get to where we want to be are not performance reviews. They are performance planning sessions. They require executive teams to understand the reasons why performance is as it is, and then focus on how they are going to make progress.

Ask for answers not for data

Why do people get sucked into performance reviews rather than performance planning sessions? A significant reason is that far too often the meetings themselves are structured as performance reviews. Far too often we simply present raw performance data to executives and expect them to analyse it there and then.

You would never conduct a scientific experiment that way. You never make a presentation to an audience without first analysing the data and understanding the messages it contains. Yet far too often that is what we do in performance reviews. We give people figures on profitability by customer segment, on absenteeism levels, on productivity. But nobody has been through the data and extracted the insights from it in advance.

David Coles, managing director of DHL UK used an excellent phrase to describe this in a recent presentation “numerical crosswords”.

He explained how his board used to spend all of their time at performance reviews trying to join up the pieces of the numerical jigsaw that they were presented with. Directors would look at a performance report and try to draw spurious correlations between different events to offer explanations for unusual observations.

When they realised this was what they were doing, DHL UK changed the structure of their board meetings, and defined specific questions that they wanted to be answered.

They now ask their performance analysts to come to the board meeting, armed not with raw data or excuses, but presentations that address questions of concern to the board.

The board’s role is to probe the quality of the analysis and, once they are comfortable with it, decide what they are going to do to move performance in the desired direction.

In changing the structure of their board meetings, DHL UK has eliminated the defensive behaviours associated with performance reviews and encouraged the creative dialogue associated with planning.

Build the capability of performance analysts

In adopting this new structure and format, DHL recognised that they had to upgrade the skills of their performance analysts. These performance analysts need to be able to manipulate performance data, interpret it, and present it in a way that engages and provides insight to others.

Research at the Centre for Business Performance has resulted in a concept called the Performance Planning Value Chain, which encapsulates a systematic process for extracting insights from performance data.

The analogy underpinning the Performance Planning Value Chain is of a journalist. When writing a story, a journalist is very careful to identify the “hook” that will capture the reader's attention. Rarely do we do this with performance reports.

This issue becomes even more important when the focus of measurement is shifted to systems not functions. Organisations consist of complex interdependencies. Marketing relies on operations. Operations rely on human resources, etc. Yet when it comes to measurement, we often ignore these interdependencies. Marketing looks at the marketing and customer satisfaction data. Human resources look at the people data, etc. It is as if we have functionalised measurement, just as we have functionalised everything else in organisations.

Yet the functionalisation of measurement is a mistake. Each part of an organisation affects others, so we have to recognise this interaction if we are to get the most from our measurement data. It should give us the big picture. This requires us to equip performance analysts with the skills to cope with this complexity.

Written by Andy Neely. The writer is director of Centre for Business Performance, Cranfield School of Management, United Kingdom. This article first appeared in Insight, an online newsletter for management accountants published by The Chartered Institute of Management Accountants (CIMA). Insight is accessible at www.cimaglobal.com/newsletters.