New ways of measuring performance

The complexity and accelerating pace of change has put pressure on companies to become more agile. As BPM97 shows, new approaches to performance measurement are an essential component of this response.

One question that has begun to concern many companies is whether their performance measurement systems are more of a hindrance than a help. Some have already determined to devise a new way of keeping score. Not only in terms of the timeliness with which they track results, but also with respect to the depth and breadth of the measures they apply. Companies limited to monitoring lagging indicators, typically relying on a staple diet of financial and sales figures, are increasingly finding themselves exposed on a number of fronts. If they are to become agile competitors, the realisation is dawning that they have to develop new ways of measuring and managing performance.

In a growing number of cases, businesses are exploring previously uncalibrated dimensions of their operations, such as corporate knowledge and intellectual assets, while existing frameworks like the balanced business scorecard are being adapted to reflect the importance of innovation and other drivers of future growth. Originators of the balanced scorecard concept, David Norton, president of Renaissance Solutions, and Harvard Business School Professor Robert Kaplan, argue that traditional performance measurement is hindering the strategic management of businesses. “Most companies’ operational and management control systems are built around financial measurements and targets which bear little relation to the company’s progress in achieving long-term strategic objectives. Thus the emphasis which most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.”

This idea that the right measures can help companies pursue strategically important operational targets has won a number of corporate converts.

Tony Singarayar, director of process redesign at McNeil Consumer Products in the US, and president of the Winning Edge consultancy, stresses the value of the balanced business scorecard in focusing attention on priority goals. “The key thing to remember when looking at performance measurement,” he says, “is that results need to be translated into clear terms so that everyone in the company is rowing in the same direction.” The four quadrants of the scorecard: customer perspective; internal business perspective; innovation and learning perspective; and financial perspective, are a powerful means of achieving this common focus throughout the organisation.

“The scorecard is essentially a methodology that clarifies thinking,” explains Singarayar.

One of the ideas implicit in the scorecard concept is the relevance of non-financial measures as drivers of performance. This has been turned to business advantage by Sait Gozum, vice president of operations at Turkish telecommunications company Netas. He has used the key areas of customer satisfaction, defects, cycle-time and cost to support the company’s continuous improvement programme. All four measures, he says, are “the things that do effect, and will continue to have an effect”.

According to Singarayar, maximising the return on your investment in this framework is best guaranteed by focusing on clearly defining your objectives and concentrate on “early-warning” measures that will prevent business “ills” rather than cure them. It also requires precision and specificity in the selection of metrics. “For example, if you choose ‘quality’ as a measure, this could be interpreted in many different ways, such as durability, functionality, or even aesthetic appearance. They may be all correct, but the more the measure can be focused, the more it is effective.”

While the balanced business scorecard is one framework gaining in popularity, others are helping companies to define a broader picture of their performance.

Rank Xerox’s recently updated Xerox Management Model of self-assessment, originally developed alongside the European Foundation for Quality Management (EFQM) framework in 1990, is claimed to have been largely responsible for increasing customer satisfaction levels in Europe to around 98% from 80+% six years ago, among other business benefits.

By using a six-block assessment framework, compared to the EFQM’s nine-step model, Xerox broke the core measures down to 31 items which could then be benchmarked in order to find a “desired state”. For instance, human resource management was broken down into elements such as resource planning, people development and staffing, these in turn were then judged on a scale 1-7. From the process management category, the analysis led to identifiable savings of $400m.

Xerox Quality Services’ managing consultant Graham Pearson gives the case of invoice approval levels: “We used to have a special process for handling invoices for customers who wanted a ‘special deal’. As the process became standard billing we realised that the 112 days it was taking us was totally unacceptable.” Using the Management Model the senior management were able to identify the cause of this delay: multiple approval levels: “By just trusting an employee lower down the approval scale, we were able to slash the invoice period to just two days saving u3m in interest charges in the UK alone”.

Similar to Singarayar, Pearson points to the importance of focus in achieving success with the self-assessment model. In the case of a multi-national company like Xerox this involves comparing measures country by country.

Another example Pearson gives is of identifying and then transferring best-practice procedures. “We were able to add 2-3% on British efficiency levels by adopting the Belgians’ technique of just cleaning and not polishing the machines after repairing them. The measurements suggested this practice did not damage the Belgian high standards, but speeded up the operations.” Other machine-performance enhancing practices that promoted customer satisfaction were also transplanted.

Cross-border comparisons, Pearson believes, are essential to make the most of performance measurement and improvement in an era of global competition.

The practice of benchmarking to establish best practice in operational and process activities, pioneered by Xerox as an essential adjunct to continuous improvement, has been widely adopted. Its value in supporting the development of new measurement frameworks has been spotted by many companies, including Hewlett-Packard.

Ian May, director of Hewlett-Packard Finance in Northern Europe, has found benchmarking particularly useful for setting performance standards in a number of areas. In this case, he has sought out companies that are regarded as world-class in terms of their performance in a particular process or management discipline. Recently, May benchmarked Hewlett-Packard’s customer services department with that of a telephone banking company.

The case for organising what involved an elaborate external exercise has only arisen twice in three years so far. As far as benchmarking as a practice is concerned, May stresses the importance of careful choice of comparators.

“Knowing what is important to you is essential”.

The same principle applies to performance measurement in the widest sense.

And what is important in some companies’ eyes is changing with the rise of new business priorities. For Dow Chemicals, the US-based global business, knowledge and intellectual asset management has resulted in the development of a set of practices and disciplines, including appropriate performance measurement systems. Over the past three years, its 100-strong intellectual asset management teams have been working on ways of assessing the value of patents, know-how, trade secrets and trademarks as part of its bid to manage this dimension of Dow’s business more effectively.

So far, the pay-off from this work has been substantial, with a saving of $40m in the tax maintenance cost of patents, a $1m saving in attorney fees and an increased target in patent revenues from $25m in 1995 to $125m by the year 2000. “Our aim is not merely to save costs, but to produce revenue,” says intellectual asset manager Gordon McConnachie.

The next challenge for the team is to measure and manage employee knowledge within the corporation to its optimum strength.

Working in conjunction with the Canadian Imperial Bank of Commerce and Swedish insurer Skandia, Dow has created a common definition for intellectual capital. “The key to making this process work,” says Gordon Petrash, the global director of intellectual asset management, “is to discover how human, organisational and customer capital can be balanced so that they can work together to create value.”

Capturing the intellectual know-how, Petrash believes, will have a positive impact on the performance measurements of the company: “This process will remove inefficiencies and the need to rediscover key knowledge. Basically, we’ll be improving the corporate IQ, and will have a documented organisational memory to tap into.”

Despite substantial innovations in performance measurement, there is little indication that there is a general agreement on the nature of exactly what the new framework should be like. Given the flux in the business environment, it is likely the search for more practical solutions will continue for some time to come. But May warns: “There is no such thing as the magic secret, but performance measurement does open your eyes to the possibilities.”

David Harvey is a director of Business Intelligence.

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