Developing Performance Measures That Are Suited to Your Organization

By Tom Barker

A speech given in a seminar on “Linking financial and non-financial performance measures to the overall strategy of your organization” sponsored by the Institute for International Research, Toronto, May 22, 1997

You Can’t Borrow Measures…

When you are invited to attend a formal social function and start looking at an outfit to wear, there are two key questions to ask. First, will it be appropriate to the occasion? And second, will it fit? (Ouch.)

The same logic applies when looking at what performance measures to choose for your organization. Like us, organizations come in all shapes and sizes. They also grow and change over time. As a rule, organizations cannot expect to borrow measures from other organizations, any more than people (adults anyway!) can expect to be able to borrow tuxedos or ballgowns from each other and have them fit right. This article is about how to tailor a set of performance measures for your organization that will suit it.

How do we tell if a set of measures is a good “fit”? To see if an outfit fits, we look at our image in a mirror to see if it hangs loose or is stretched to breaking point, and that the overall effect is esthetically pleasing. A similar visual check for performance measures uses the concept of alignment. To see if the set of measures fits, we need to look at the horizontal and vertical alignment of the organization’s vision/strategies, key performance areas/indicators and individual’s one-page measures.

The Importance of Alignment

So, what is alignment? Well for a car, alignment is when each wheel is pointed in the same direction as the others and in the same direction as the thrust from the engine. As someone who owns a 1978 car, I can testify to handling difficulties and high fuel and tire costs of a misaligned car. So, too, organizations where people, teams, projects and systems are not pointed in the same direction as each other or as the strategy, create wasted resources, both in dollars and human energies.

A performance measurement framework, developed to fit the organization, sometimes known as a balanced scorecard, helps to create alignment by clarifying expectations for people, processes and projects and provides a means to provide ongoing feedback to keep all these “wheels” pointed in the strategic direction.

performancemeasuresfig1 Developing Performance Measures That Are Suited to Your Organization

At the heart of a balanced scorecard are the definition of Key Performance Areas (KPAs) and Key Performance Indicators (KPIs). The Key Performance Areas are those areas of performance that are reflected explicitly or implicitly in the vision and strategies of the organization. KPAs in a balanced scorecard are like the subject areas in a student’s school report card. Key Performance Indicators are the individual measures for which specific numerical values can be obtained at predetermined intervals of time. KPIs are like the grade points obtained by the student for each separate part of the subject area.

One-Page Measures (OPMs) are for individuals what KPIs are for the organization. These are tailored to an individual’s role in order to define the performance for which they are to be held accountable, what performance level they need to achieve to be successful that will in turn make the organization successful.

Developing Suitable Measures

While we believe that Key Performance Areas ideally should be tailored to the organization, we have a default list that we have found hits the key areas that any organization should consider when choosing KPAs. These are six areas on our list (in no particular order): Financial, Customer, Process, People, Innovation, Learning. While the first four require little explanation, the last two do warrant some elaboration. By Innovation we mean organized activity that creates new processes, products and services that render existing ones obsolete. Whereas Learning is a related but different concept, that of organized activity that creates ideas and insights that lead to specific changes in the operational behavior of people and systems.

For each KPA we need to identify three to five KPIs (specific measures). This is usually done by the senior management team of the organization. It typically takes several sessions to get a final list. It sometimes helps to agree on a long-term objective for each KPA, sort of a mini vision statement. In fact, it may be a direct extract from vision statements if these have been recently developed or re-validated. After generating some candidate KPIs for each KPA, the senior team members will typically take these around to their teams and/or convene cross-functional breakout sessions to review the list, add to it and select the most appropriate set of KPIs. This improves the quality of the resulting measures and also increases buy-in.

A Checklist for Good KPIs

To make a final cut on KPIs it is helpful for the teams to ask themselves, “Does this set of KPIs

  • Collectively reflect the long-term objective and therefore the organization’s vision?”
  • Contain both leading and lagging indicators, where lagging indicators measure desired outcomes (results) and leading indicators measure the capacity of the organization to produce outcomes?”
  • Strongly link to key processes so that actions based on measures will impact results?”

For example, one client chose three KPIs to reflect the KPA of Product Innovation. The first was a leading indicator and measured (relative to best practices) the organization’s available R&D infrastructure of resources, equipment and processes to develop product concepts and prototype products. The second, also a leading indicator, measured the interest level and perceived value of prototype products in the eyes of focus groups and major customer representatives. Thirdly, they implemented the classic (lagging indicator) measure of percent of sales from products less than two years old.

One-Page Measures

These are the individual scorecards for people in the organization. Just as the development of a balanced scorecard needs to start with strategy, the implementation of OPMs needs to start with the CEO, not with front-line staff. Most CEOs are not resistant to the idea, mostly because they know they are accountable for everything anyway!

Typically OPMs have 12-20 measures, developed by and with the individual that integrates top-down and bottom-up measures, as well as peer group needs and expectations.

OPMs for an individual include any KPIs that are relevant to their area of responsibility, as well as process measures for processes they own. Most people in organizations today also have measures covering their non-routine responsibilities, such as project deliverables and special assignments delegated by their senior manager/ team leader. Lastly, it is becoming more common to include measures of contribution to key teams, even at senior management level.

Typical Implementation Issues

  • Implementation should be timed to suit the specific circumstances of the organization, e.g.:
    • Major vision/strategy revisions
    • Mergers or acquisitions
    • Reorganizations
    • Planning cycle
    • Reengineering
    • ERP systems implementation
  • Target markets. Most of us think our organization is crystal clear about what markets and customers we want to serve-until we sit down to decide what to measure about these markets.
  • Performance management. How will we set priorities, report actions, and review performance? This is an opportunity to put into place new management practices (e.g., competencies, coaching roles, customer groups, stakeholder involvement, etc.).
  • Piloting. Someone has to start using the measures. This could be, for example, KPIs at senior management group meetings and/or One-Page Measures for a pilot group, typically a work group for a department or process. The CEO and senior management group are very valuable as a pilot group if the “readiness” exists.
  • Measures are revisable. The process must be consensus-oriented, but time-limited, with the understanding that the measures are revisable as new knowledge or new measures are discovered.
  • Communication. Must take place in all those areas involved in the system: communication, consideration, connecting with real issues, clarity, and contracting between person, boss, and coworkers, together with the skilled coaching of both person and boss.
  • Training. May be vital to give people new skills to go with their new accountabilities.
    • Process management skills
    • Coaching/teamwork skills
    • Leadership skills
    • Basic statistics/data interpretation skills
    • Financial awareness
  • Data collection and dissemination. There is the sheer logistical task of collecting and organizing the data in a reliable, consistent, and efficient manner. Automated systems may be needed to take data from operating systems, MIS systems, and critical manual inputs and roll them up and deploy customized reports to all areas of the organization simultaneously.

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