Manage performance to maximise results

Using Measurement to Boost Your Unit's Performance

If you're like most managers, you're drowning in statistics. Financial numbers. Operational data. Page after page of reports and tables piling up on your desk or hard drive. This information overload just gets worse as organizations install so-called enterprise resource planning systems, which provide real-time data on an ever greater number of variables. Mark Graham Brown, a performance-measurement consultant, reports working with a telecommunications company that expected its managers to review 100 to 200 pages of data a week. Other organizations pile on even more.

Data doesn't have to be the bane of your existence. In fact, it can be a tremendously powerful tool for managing your unit -- if you know how to sort through it and how to use it to improve performance. Recent insights into the art and science of performance measurement suggest five key steps.

Figure out the numbers that matter

Any unit or functional department has to focus on only a few key measurements. More than a few, and pretty soon people get lost -- or start finding ways to justify nearly any action on the grounds that it improves one or another metric. An HR unit might concentrate on average time required to fill a position, and on turnover rates. A product-development group might focus on development cost and time-to-market, both compared to plan. Any unit can come up with its critical indicators just by asking a few questions:

What should our goals be in light of the company's objectives and needs?

Analyze your organization's situation and strategic objectives for this year. Is the company focusing on venue growth? Increased market share? Cost reduction? Introduction of new products? There maybe ways your department can contribute to these goals -- and if so, the targets you set will be that much more meaningful for being tied in which a big-picture objective. This process is easiest if your company has already adopted a "balanced scorecard" or some similar system of explicit goal-setting. But even if it hasn't, managers in healthy organizations generally know the company's priorities and can choose key metrics accordingly.

What will happen if we focus on a particular metric?

Brown calls this the "chicken efficiency" test. A fast-food chain gave lip service to many objectives, but what senior managers watched most rigorously was how much cooked chicken its restaurants had to throw away ("chicken efficiency"). What happened? As one restaurant operator explained, it was easy to hit your chicken-efficiency targets: just don't cook any chicken until somebody orders it. Customers might have to wait 20 minutes for their meal, and would probably never come back-but you'd sure make your numbers. Moral: a measurement may look good on paper, but you need to ask what behavior it will drive. You may be focusing on the wrong metric-or too much on only one of the right ones.

Are we checking leading indicators as well as lagging ones?

Financial results (or performance-to-budget figures) are "hard" metric, calibrated in dollars and nearly always meaningful. The problem is that they lag your performance. They tell you how you did yesterday or last month, but not how you're likely to do tomorrow or next year. For that you need "soft" or "perceptual" measures such as customer satisfaction and employee commitment, says William Schiemann, president of Metrus Group. "Perceptual measures are often leading indicators in the sense that they're highly predictive of financial performance." For your department, soft indicators might be measures such as employee turnover or surveys of internal-customer satisfaction. Track such measure s today and you may find yourself worrying less about missing your budget tomorrow.

Drill down to understand cause-and-effect connections

Once you've chosen a few key metrics to track, the next challenge is to understand what the numbers are telling you. If defect rates have suddenly started to rise, is it because you're receiving lower-quality materials? Or because you recently hired several inexperienced employees? Most numbers worth watching are themselves the sum of many other numbers, and you need to "explode" the metric into its component parts so you can see what is driving the change.

Chris Howe, a consultant with Towers Perrin, reports working with a large utility company whose challenge was to reduce the cost of delivering a particular service.

It turned out that labor cost was far and away the biggest driver of overall expense. So the team handling the problem mapped out every component of labor cost: wage rates, overtime, benefit costs, absenteeism, turnover, and so on. Breaking one "chunky" number -- labor costs-into its component parts enabled the team to pinpoint, monitor, and then attack key areas of potential costs reduction.

If your unit is relatively large, the key metrics may in fact be made up of a cascade of numbers, for which individual groups and teams within the unit are responsible.

A sales department, for example, might have aggregate goals for gross revenues, gross margin dollars, and selling expense; in this case, the overall goals would simply be the accumulation of goals for each product group or territorial team within the department. If the aggregate numbers don't turn out the way they're supposed to, it's easy to drill down to the component parts and find out where the problem is.

Set real goals, not arbitrary ones

It should go without saying: a metric without a target to compare it against is worthless. But a metric without a meaningful target isn't worth much, either. Too often, companies set goals simply by looking at least year's performance and tacking on 5 per cent or 10 per cent for improvement. Or else they set "stretch" goals that turn out to be ambitious objectives plucked out of thin air.

(You can spot this kind of stretch goal easily, writes Brown in his book Keeping Score, "because they have nice round numbers like 10 or 100" - for example, a "tenfold improvement in product quality.") Brown advocates setting goals by analyzing your own past performance, your competitors" performance, the performance of "benchmark-level companies in similar businesses," your own capabilities (can you hit the goal given the resources available?), and input from employees and suppliers. "Competitors," incidentally, should b interpreted broadly. A functional department such as HR or IT can compare the cost of the services it provides with the cost of outsourcing those services, and establish goals based on that benchmark.

We'll discuss the element of employee involvement in more detail below. But it should also go without saying that the more people have a hand in setting a goal, the more they're likely to work hard to attain it. Goals imposed from above without rhyme or reason rarely motivate people. Goals imposed with rhyme and reason may or may not motivate people. Goals developed by a group that understands their importance are the most powerful motivators of all.

Excerpted from: Managing performance to maximise results. Reprinted by permission of Harvard Business School Press. Price: Rs 625. Copyright 2007 Harvard Business School Publishing Corporation. All rights reserved.