Bruce E. Jacobs02.26.07
Performance Measurements: Tools or Weapons?
Bruce E. Jacobs
Every enterprise has the potential to be perfectly designed to achieve the results it attains, and performance measurements embedded in the company’s structure are what drive management’s behavior to achieve them. If your enterprise underperforms, it is designed to underperform. If it achieves exemplary results, those results also were by design.
For example, a company that underperforms generally has few, if any, performance measurements in place or has inappropriate indicators that drive the wrong management behavior. If management lacks the appropriate measurements that can reveal how the company is performing, it also will lack the data it needs to identify problems and develop solutions to improve performance.
On the other hand, a business that excels has measurements in place that provide data to management about how well the company is performing. These data also can help identify problems and opportunities for solving them as well as continually improving performance.
Your Management Style
As a medical device manufacturer, are performance measurements management tools or management weapons? The answer most likely depends on the culture of your company. When problems occur and performance declines, performance measurements used as management tools will sound the alarm and provide the information needed to analyze the situation and determine the corrective action to improve performance. A culture that views performance measurements as a tool expects performance improvements, but it does not abuse, belittle or hold in contempt the individuals responsible for poor performance. Instead, the tools are used as a strategy for encouraging teamwork and employee participation to correct the problem and improve performance.
The fallacy of companies that use performance measurements as a management weapon—versus as a tool—is that these organizations tend to have combative, control-oriented cultures in which measurements are used to keep personnel in line by threatening employees with job loss if performance is poor. In addition, this type of culture can create conflicts that consume energy, which—in the tool-based scenario—alternatively could be better used to analyze problems, determine corrective actions and implement improvements.
Medical device firms in which management continually alters and modifies performance measurements are indicative of this sort of problematic culture. When performance fails to meet expectation, measurements are invalidated and changed. Over time, the performance measurements become meaningless and totally misrepresent actual performance. Manage-ment begins to suffer from delusions of adequacy, while the business quietly underperforms and loses market share and customers. Profitability erodes, and the enterprise gradually slides into a sloppy operation that is always 90 days from bankruptcy.
Optimally Configure Your Measurements
Do the measurements you have in place assess the right things and drive the proper behavior desired in your company? To determine this, collect every performance measurement from every department and in the company. Be specific. Collect financial and operating performance measurements, and post them down the left-hand column of a spreadsheet. Next, label four columns across the top of the page:
• Customer Service
• Revenue
• Cost Control
• Asset Performance
These are the primary management behaviors that performance measurements should drive.
For each performance measurement listed, place an “X” in the column under the appropriate behavior the measurement influences. Now, total the Xs in the columns and identify which behavior is influenced the most by the performance measurements. If you want to change management’s behavior, change the measurements.
Experience with this exercise indicates that most performance measurements are financial measurements; many of them focus on cost control; and many work against each other across the enterprise, creating disharmony in management behavior and disproportionate costs in other parts of the enterprise
Good performance measurements have certain characteristics:
• Visibility—Performance measurements are identifiable, and employees know and understand them and how they are used.
• Harmony—Performance measurements work in harmony with each other.
• Process Measurement—Performance measurements identify how well business processes are performing.
• Appropriate Behavior—Performance measurements influence management’s behavior to make improvements.
• Map to Financial Performance—Performance measurements are operation based and relate directly to financials.
To improve your company’s performance, you need appropriate measurements that will help you determine your firm’s strengths and weaknesses. You can determine your own optimal measurements by asking certain questions. What behavior do you want to influence? How many performance measurements are needed?
In addition, identify which business processes benefit most from performance measurements. Some examples include customer service and the process of order fulfillment; labor productivity and the process of work output; and scheduling and the process of providing an end product within a scheduled period.
Performance measurements define the relationship between outputs to inputs, expressed as a ratio or as a percentage—for example: pieces/hour of production; dollar cost of goods sold/dollar revenue x 100; quantity of pieces ordered/total pieces shipped; returns/orders shipped; dollar damage claims/dollar order shipped; dollar revenue/employee; and suppliers/commodity purchased.
After you have defined the performance measurements you will use, be careful not to create an administrative nightmare. Ideally, management must spend more time improving performance than gathering data and measuring performance. To derive maximum benefit from your efforts, keep your measurement calculations simple and publish the formulas so employees know them. Use the lowest total cost method to gather your data and measure performance. The simplest method is to post data and performance measurements in the workplaces where they are used. Have employees record the data, calculate the performance and post the performance measurements where they are highly visible. Reinforce to both yourself and employees that these indicators are management tools—not weapons.
For most enterprises, approximately 45 key performance measurements could be used. It’s rare for a company to use them all, though—so be careful not to go overboard. For any single business process, you use three to five key measures.
You must be able to measure your company’s performance to improve it. The right performance measurements drive the right management behaviors, so your enterprise can achieve its desired result. Having the right tool is always more productive.