Measuring Performance (7 of 2023)

Do you own a smart watch, maintain a tracker or keep scores? Most people are probably performance driven or achievement oriented or just naturally competitive and want to know the status of latest achievements in comparison to earlier results, personal best or some other parameters. In much the same way organisations want - and need - to track the changes in their overall performance, even more because of the number of stakeholders involved.  This is needed by the executives, unit managers, group leaders, shareholders, industry analysts, customers, media and government regulators. 

"You can't manage what you can't measure" - Peter Drucker

Measuring performance means assessing business results to :(1) Determine the effectiveness of a company's strategy and the efficiency of its operating processes and (2) make changes to address shortfalls and other problems.

Business performances are apprised for number of reasons, and here are just a few:

1. Improvement: By tracking performance, companies can spot- and promptly address- problems such as declining customer loyalty, flattening profits or defections of talented employees.
2. Planning and forecasting: Performance management serves as a progress check, enabling organizations to track their goals.
3. Competition: Comparing performance against rivals and industry benchmarks, help identify weak areas and address them to sharpen their competitive edge.
4. Reward: Performance based incentives and rewards can be distributed fairly.
5. Regulatory and standard compliance: Performance measure is needed to comply with government regulations (such as antipollution laws) or to meet international standards (for instance, ISO 9000)

Companies take stock of their performance using different methods and criteria. It entails examining the results generated by key business activities, using specific performance metrics (also known  as measures). For each business activity there could be numerous possible metrics. Few examples of specific performance metrics are:

1) Finance: 

• Profit margin (Percentage of every dollar of ales that contributes to the company's bottom line)
• Revenues
• Return on invested capital

2) Marketing:

• Market Share
• customer Loyalty
• Customer profitability

3) Production:

• Number of units manufactured within a specific time period
• Number of items hipped on time
• Machine change-over time

4) Sales:

• Percentage of customer visits or phone calls that generate sales
• Percentage increase in sales over previous quarter or year
• Percentage of customers retained this period

5) Customer Service:

• Number of customer complaints
• Service-call response time

6) Purchasing:

• Vendor's ability to provide services or materials on time
• Defect rate of vendors products

7) Quality:

• Product yield: ratio of good products produced to total products started into production
• Defect rate of a key process

8) Human Resources:

• Workforce turnover
• Employee skills
• Employee motivation

Many organisations use a coordinated system or framework to apprise performance across functions, best system demonstrate balance:

1. Combining financial and non financial performance
2. Considering internal and external data
3. Examining lagging indicators and leading indicators
4. Weighing subjective aspects to objective (easy to quantify) aspects.

Understand Key Performance Indicators (KPIs)

If you are not keeping score, you're only practicing, not playing - Vince Lombardi.

A KPI is a measure reflecting how an organization is doing in a specific aspect of performance. A KPI is one representation of a critical success factor (CSF) - a Key activity needed to achieve a given strategic objective. KPIs come in three types:

1. Process - Measuring efficiency or productivity of a business process. 
2. Input - Measure assets and resources invested in or used to generate business results.
3. Output - Financial and Non Financial of business. Three common Output KPIs are:
1. ROI = Net Income/Total Assets {Help know how effectively managers have used resources}
2. EVA = Net Operating profit after taxes - (net operating assets*weighted average cost of capital) {Shareholders of a company receive a positive EVA when the return from the equity employed in the business's operations is greater than the (risk-adjusted) cost of capital. 
3. Market Share: The percentage of sales in a given industry segment or subsegment captured by your company. 

A mix of the three types ensures a comprehensive picture of your unit's or organization's performance. 

Understanding Performance Management Systems (PMSs)

A formal performance measurement (PM) systems is a set of strategic objectives and performance metrics (including KPIs) applied throughout the entire enterprise. PM systems enable executives to see how business results generated in the company's many different units combine to influence the enterprises overall results. 

PMS enables manager to define (and track performance on) metrics for every strategic objective set by their unit and company. By noting performance that falls short of targets, managers can address the causes of the shortfall and work to continually improve performance. They also show how performance in different parts of the company affects performance in other parts. By seeing the interrelationships, companies can make more informed decisions. For instance, they can increase a budget, add new hires, or introduce more efficient process to improve performance instead of guessing which factors need to be addressed. 

Types of performance measurement systems: - Out of the several, more commonly used types are:

Dashboards or cockpits:  Possibly the simplest type, this combines the company's numerous metrics, targets and performance data into one online or printed document (such as a spreadsheet) that's prepared monthly, quarterly or on some other schedule. Some dashboards use 'traffic light' (RAG) coding system to evaluate performance on each metric, enabling leaders to spot and address problems promptly. 

Quality-improvement systems: Comes in different forms including:

• Plan-Do-Check-Act - Popularised by Toal Quality Management (TQM) founder W.Edwards Deming, this framework helps managers establish a cycle of continuous improvement. The cycle comprises these steps: (1) Plan - Identify a performance problem and the processes affecting it; (2) Do- Explore potential solutions and implement one (3) Check - Assess how well your solution worked (4) Act - If your solution worked well, institutionalize it and look for another improvement opportunity. I it didn't return to step 1.
• Six Sigma - It is a data and measurement driven approach that helps managers continually improve business processes through reduction of errors. Many companies that use Six Sigma apply it to all their business processes - manufacturing, product development, order fulfilment, customer service and so forth.
• Baldrige national Quality Program - Established in United States National Institute of Standards and Technology, this defines criteria for high-quality business performance in numerous areas, such as leadership, strategic planning, customer focus and knowledge management. It's European equivalent is European Foundation for Quality Management. 

Balance Scorecard: The system seeks to balance a company's financial 'perspective' with three non financial 'perspectives' - customer, internal processes and workforce learning and development. Companies that implement the BSC methodology develop and use two powerful tools:

Strategy map - A one-page document that graphically depicts executives theory of the organizations strategy and the cause and effect relationships among objectives in the four scorecard perspectives. The map shows the strategic objectives of each perspective and how they will affect performance on objectives in other perspectives. Many company develop a corporate level strategy map as well as strategy maps for each division, unit, and department. These lower-level maps contain objectives supporting the high-level map. 

The second tool is the scorecard, which contains the metrics, targets and actual performance data for each objective on the strategy map. Companies have a corporate-level  scorecard that links down to lower-level business and support-unit scorecards. organisations often automate their scorecards with special software: When unit managers input data into their scorecards, the data is automatically aggregated into the high-level scorecard to show overall company performance. Software also allows manager to distribute and analyse reports easily. 

Whether your organization has adopted a companywide PMS system or not, you can make it regular part of your job. First understand the process 

Steps:

1. Decide what to measure - Suggestions for choosing performance criteria to evaluate. Define your -
1. Objective
2. Critical Success Factors : Measure what you want, not what you can measure. 
3. Performance Metrics - Start with your objective and CSF
4. Evaluate Data Source
2. Gather Performance Data - Ideas for where to obtain the information you need to apprise performance - 
1. Setting targets - Performance you want to see on each of your metrics. Involve employees and boss, consider trends, use SWOT analysis, gather feedback from stakeholders, consider industry average, Identify initiatives. 
2. Use benchmarking and baselines
3. Determine a target range - Establish a three point range. 
4. Collecting and communicating data - Simplicity and ease of use are critical. Create story, charts and graphs. 
3. Interpret Performance Data
1. Analyze performance data - Compare target and actual performance
2. Test your measurement system - Decide how to respond - Consider the inherent variability in the process being measured, Think about what's causing any variations in the data, ask whether your targets or metrics need to be changed. 

Avoid Common Mistakes

1. Too few or too many metrics
2. Unaligned metrics
3. Overly aggressive targets
4. Manipulation of performance data
5. Difficulty validating data
6. Inappropriate responses to performance shortfalls
7. Outdated objectives and measures

By measuring performance, you ultimately manage the performance more effectively. In other words, by pulling away from your daily routine and thinking carefully about how your group does what it does, you can determine how effectively your group is operating. You can then address shortfalls and other problems, whether they stem from your direct reports performance, your managing style or some other source.