How am I doing? There are ways for a company to answer that question - digging deeper than measuring sales, profits and cash flow.

It's relatively easy for an accountant to measure the financial performance of a business. But managers today are painfully aware that to survive in today's marketplace they must measure more than those numbers that fit neatly into spreadsheet cells. They have to gauge such things as customer expectations, the organization's success in meeting those expectations, product and service quality levels and newproduct development rates. What's more, these things have to be measured regularly and often in nearly real time if an alert manager is to uncover a problem early enough to fix it before customers complain or, worse, cancel orders.

The speed at which today's business events change complicates these efforts. Customer expectations, for example, are a moving target: Every increase in competitive performance creates a new baseline for customer expectations and a demand for even better performance. This article tells how one company tried, failed and then finally succeeded in establishing a business-measuring process that works.

NOT ON ORGANIZATION CHARTS

The first step in developing such a system is to determine what to measure. Core business processes - those that create and deliver a product or service to a customer - provide the most reliable and readily available source of data on a company's performance. They typically cut horizontally across an organization and include a collection of activities performed by functional departments. Yet they don't usually appear on an organization chart and they may not even have agreed-upon names. As a result they often escape meaningful scrutiny and seldom are the focus of performance measures. Yet all companies are keenly aware of their existence for they constitute the essence of the business.

In general, every business has at least two core processes: the new-product-service development process and the customer order fulfillment process. The first brings together research and development, marketing and product development. The second encompasses the sales, purchasing, production and accounting organizations.

How does a company select the right processes to measure? That's the easy part of the exercise. All managers have to do is keep in mind that the primary purpose of process measurements is to provide performance data that gauge customer expectations and business objectives. Regardless of the industry, customers are generally concerned with the same issues: How well does the product or service meet my needs? Is it available when I need it? If not, how long do I have to wait to get it? How much will it cost? Is the quality good? Will I get the service and support I need How will I be treated if there is a problem?

In turn, business generally has one concern: Are our business processes efficient enough to allow us to meet our customers expectations while generating a reason able profit?

If a business develops process-focused performance measures from this list o questions, it cannot go wrong. However, there is a trap, and that is overdoing the number of things to measure. The goal is to select three or four of the most important measures and define them in a way meaningful to employee and customer alike.

The exhibit on page 81 shows how measurements of various business processes can be plotted so managers can get an instant picture of how that process is proceeding.

ONE COMPANY'S EXPERIENCE

A company in the Pacific Northwest provides a good illustration of both the potential pitfalls and successes associated with creating process measures. The company is a medium-sized aerospace corporation with $90 million annual sales. It specializes in custom-designed electronics products sold primarily to aerospace original-equipment manufacturers. It started process measuring in 1989 to increase its competitive position. To launch the program it first conducted a survey of its key customers, asking about product design, quality and reliability; the company's ability to meet delivery schedules and other commitments; pricing and relative perceived value; service and the capability to recover from mistakes; and the overall ease of doing business with the company.

The results were surprising. Contrary to expectations, customers were not concerned with the company's technological prowess - characteristics it had been proud of for years. Instead, customers were concerned with cost, quality and delivery performance. To its dismay the company also discovered its customers were dissatisfied with the company's performance in these areas. Some said they continued to buy from the company only because it was easy to do business with and it resolved problems quickly.

In order to design an operational improvement plan the company realized it needed to track its progress and make sure its efforts were paying off. That job was assigned to an executive staff team that met weekly. In short order the meetings turned into prolonged debates over the number and kind of performance measures to be employed. Hours of brainstorming yielded 32 possible and seemingly desirable measures. Reluctantly the team conceded that the list was just too long. This kicked off several more weeks of discussion that eventually whittled the list down to these 10:

1. On-time delivery. 2. Master schedule stability. 3. Engineering cost performance. 4. New-product development cycle time. 5. Manufacturing first-pass yield. 6. Manufacturing cycle time. 7. Productivity. 8. Warranty returns. 9. Vendor quality. 10. Rework and scrap costs.

The team assigned the company's controller to collect performance data and issue a monthly report. Graphs of the results were posted for employees and customers to see. The team also encouraged middle management to develop similar measures for each of their functional areas and suggested that the work teams themselves each develop specific things to measure that affected their performance.

To the surprise and annoyance of the executive team, middle managers did not receive these suggestions with enthusiasm, to say the least. The middle managers were upset they had been left out of the process for developing the measures and consequently had little stake in the results. They also concluded they had little control over any of the individual measures, as each was affected by the complex interplay of multiple departments and functions. And they resented that they were going to be held accountable for measures they perceived to be outside of their control.

On the other hand, they knew what was politically good for them and so they began implementing a staggering number of their own measures designed to make sure their departments looked good. The company thus went through a painful period of measurement for measurement's sake.

It didn't take long for the company's chief executive officer to see through the measurement sham. At an executive staff meeting he said the middle managers had developed a Tower of Babel, in which a proliferation of different measurement "languages" had undermined, rather than improved, communication. He wanted to undo this mistake and asked for a plan that met the following goals:

* The number of performance measurements should be reduced. They should be consistent across the organization and they should be measures that both employees and customers felt were important and would intuitively understand.

* Employees should be motivated and empowered by the measures to act on their own initiative to improve performance in as close to real time as possible.

* Three areas should be the main focus: cost, quality and schedule. Those measures were the ones customers cared most about; thus the company should care most about them as well.

* It should be up to employee teams and local area management to define appropriate measures that translate the various goals into practice.

BACK TO THE DRAWING BOARD

Thus the executive team was assigned to rework their corporate-level measures to make them consistent with the cost, quality and schedule theme. After some laboring, the team came up with these five:

1 . Warranty returns. 2. New-product development cycle time. 3. Manufacturing cycle time. 4. On-time delivery. 5. Productivity.

The specific controllable details that affected cost, quality and schedule were to be developed by employee teams, and each team was to be responsible for its process. Employees were told they were expected to manage these processes as enterprises and that management would delegate to them significant decision-making authority for them. That is, the employees were expected to use their own cost, quality and schedule measures to report on the health of their processes in periodic meetings with senior management. Almost without exception, the teams responded to this challenge with enthusiasm. Following are some of the teams' results:

* New-product development teams tracked projected unit production costs for each project under development. That included the performance-to-development schedule, development cycle time and manufacturability (design quality).

* Manufacturing teams measured unit production costs against targets, performance-to-schedule, order cycle time and first-pass yield (manufacturing quality).

* Administrative teams varied much more by function. For instance, the product a management team tracked document release cycle times, documents released per person per month and document accuracy. The accounts payable team measured on-time payment, transactions per employee and check errors.

All of these performance measures were reviewed and discussed with customers. They became a critical part of any meeting in which the local team or its management reviewed team performance. Eventually team performance became a factor in the overall team performance review and compensation systems.

DECIDING WHAT TO MEASURE

When deciding what to measure, it is helpful to think of process measures as covering two broad categories: the value provided to the customer and the efficiency of the process itself It is important that an organization have performance data from both categories so it can maintain a balance between the interests of the customer and the business. A company that focuses only on meeting customer needs might find itself losing money as a result of inefficient internal operations, while a company focusing solely on internal efficiency may lose customers whose needs are inadequately met.

Customer "value added" is most easily measured by quantifying the company's ability to meet or exceed key customer needs - measuring such performance attributes as quality, availability and service. Process efficiency is most easily captured by measuring cycle time. The relationship between efficiency and cycle time is apparent from the following logic: If customer needs are being met (that is, providing value-added products or services at competitive cost) in shorter and shorter cycle times, then the processes are by definition becoming increasingly efficient. The following are common examples of measures available in each category:

Measures of customer value added:

* Alignment of product-service performance to customer expectations.

* Availability when the customer needs it.

* Cost versus the features-benefit received.

* Quality and reliability.

* Service and support provided.

* Recovery from problems.

Measures of cycle time:

* New-product-service development time.

* Time to market.

* Order fulfillment cycle time.

* Performance to schedule.

* Recovery-response time.

* Rework and other nonvalue-added time.

These examples suggest several possibilities for creating organizational process measurement methods, each dependent on the type of industry and the needs of the organization. A service company for instance may best be served by measures covering alignment to customer expectations, service availability and recovery-response times. A manufacturing business may be better served by measures covering product quality and reliability, cost and performance to schedule. The key to picking the right measures is knowing what is most important to customers and to the corporation.

THE BOTTOM LINE

Process-focused performance measures played a crucial role in the company's overall efforts to increase its competitive position. Between 1989, when the program started, and 1993 it achieved the following performance improvements:

* Customer-quoted lead times were cut 50%. * On-time shipments rose 89%. * Product-development cycle time fell 35%. * Manufacturing costs as a percentage of

manufacturing sales fell 10%.

Still, today there are some managers who continue to resist process measures because they feel they aren't a valid predictor of a company's financial success. A careful review of the traditional financial performance measures discloses that such a view is unfounded: There is indeed close alignment between measures of process and financial performance measures of profit margin and asset turnover. The company that monitors the key systems is bound to perform financially better than the business that does not.

KAVASSERI V. RAMANATHAN, PhD, is professor of accounting at the University of Washington, Seattle. de serves the American Institute of CPAs as a member of the strategic performance measures task force of the management accounting executive committee. DOUGLAS S. SCHAFFER is president of Strategic Alignment, a business consulting firm based in Snohomish, Washington.