Measure like you mean it: Q & A with Michael Hammer. (Special Section: Measurement).

Michael Hammer was dubbed "radical" for unleashing on the corporate community in the 1990s not merely a new buzzword, but a business transformation tool -- reengineering -- that drove companies to use technology to reinvent the way they did things. Often that involved major workforce reductions.

Since the '70s, Hammer has been studying and consulting with organizations on their use of technology and how work is designed and carried out. He says it became clear early on that problems stemmed from the ways technology was used. "Throwing technology at poorly designed operations won't fix problems," he says.

Hammer has recently combined nine new ideas on organizational structure and measurement systems into an agenda that describes the concepts companies need to adopt in today's environment of fierce competition and even fiercer customers.

One of those ideas is that measurement should be a management tool -- and not an accounting activity. Financial Executive asked Hammer to discuss how to accomplish this task and to give some examples of companies that are succeeding. Hammer is president of Hammer and Co., a Cambridge, Mass.-based consulting firm. He is co-author of Reengineering the Corporation and author of The Agenda.

* In tough times you say that it's even more important to set ambitious corporate goals that aim to dominate rather than survive. Will you explain this premise?

MH: Your reach should always exceed your grasp. If you set modest goals, you'll never do anything more than perform modestly. [It's especially so] in highly competitive times, when those who set low goals are likely to be steam-rolled by competitors who set ambitious goals. In tough times, there is no easy growth. With no sales coming through the door, we're now in a battle for market share, and those companies who commit to extraordinary performance will defeat those who commit only to good performance.

* Instead of being single-sided, your new organizational approach involves several sides: process, the role of management, the structure of management systems, relationships with suppliers and customers and more.

MH: One of the most important things I have learned over the last 10 years is that companies are addicted to magic bullets [and are] looking for single answers to the problems they face. There is no single answer.

You have to do a lot of things: You have to rethink your processes; change your style of management; how you interface with your customers; and how you build measurement systems. No one of these will help; you have to do them all.

* Let's focus on the item in your new agenda that relates to measurement. First, what's the problem in today's organizations with the state of measurement?

MH: The measurement systems we have are antiquated relics of a long-gone era that were developed for reporting to investors and governmental authorities and pressed into service as management tools for which they have little or no value.

In particular, the financial measurement systems we [now] have don't tell a manager very much at all. If I know that sales are down and costs are up, that's useful, but that doesn't give me any clues to what to do about it.

The rest of our measurement systems are piecemeal and haphazard. They were designed on an adhoc, non-integrated basis, where arbitrary measurements were created, seeming like a good idea at the time, yet without any real understanding of how they fit together.

Some quotes I've run across make these points: "We're masters of the micro. We measure paper clips at acquisition time." That represents that people measure what is easy to measure, even though it is not important. Here's another: "We measure far too much, and get far too little for what we measure, because we never articulate what we need to get better at. And our measures aren't tied together to support higher-level decision-making."

That's really the essence of it. In too many organizations, measurement is an activity that is an end in itself, and it's not really linked into any understanding of how changes in performance will lead to changes in the business as a whole. So, while our measurement systems are close to worthless, we persist with them. The challenge is to rethink those.

* How do you define a good measurement system?

MH: A simple way to put it: A good measurement system is one that can be used effectively to improve business results. Yet, too many of the measurement systems [in use] don't fit that criteria. They either don't relate to business performance in a meaningful way, or they're too hard to use. What we need are practical measurement systems that focus on what managers can control, and give them timely data about those things, as well as guidance as to what to do about them.

* What does an effective measurement strategy look like to you?

MH: It begins by identifying what the enterprise is trying to achieve. Then, through a series of cause-and-effect analyses, track that down to concrete issues that the company can control. The following are examples of companies that have done an extraordinarily good job of that:

* Duke Power Co., a Carolinas-based electric power company, developed something called internally the "Gameplan." It's a picture that starts with what it's trying to achieve at the top in terms of revenue growth and customer retention, and translates down into things that it has some control over. The trouble with, say, "revenue growth" as a measurement, and then focusing people on it, is they don't know what to do about it. Duke's Gameplan identified that.

It identified, for example, that customers value the notion of "hassle-free service," and that if offered hassle-free service, customers would stick with you and do more business with you. What does hassle-free service mean? For one, it's that things are done when promised; so Duke set out to measure how often electrical service was installed on the promised date. When measured carefully, the process [was] unsatisfactory, with the average across the company about 45 percent. Instead of just saying it wasn't good, Duke committed to improving performance.

By carefully looking at the service installation process, many flaws were found. The process was redesigned, and performance for on on-time installation across the company is now consistently over 98 percent. It took about a year to get from 45 percent to about 75 percent; the next year [it rose] to over 98 percent, a continual improvement over two years.

* Harvard Pilgrim Health Care Inc. a health management organization (HMO) in Boston, was loosing money -- was actually in quite bad financial straits -- and brought in a new CEO to drive a turnaround. He used measurements as an essential tool. Harvard Pilgram Health Care developed a new set of measures, which highlighted areas that needed improvement, and focused on those. In about 18 months, it turned [a business that] lost $227 million in fiscal year 1999 into one that in 2001 was in the black. This [turnaround] was heavily driven by a measurement-based improvement system.

* Eastman Chemical Co. focused on its supply-chain activities and developed a new set of metrics for end-to-end supply chain performance. Those metrics gave it true diagnostics of where improvements needed to happen. As a result, it achieved dramatic improvements in supply-chain performance.

* Allmerica Financial Corp. is a Worcester, Mass.-based diversified insurance company that, like Duke, translated its overall strategic goals into specific operational metrics. For example, it determined that the cycle time to turn around an application for insurance was important, so the process was measured. It was determined that the process in place wasn't good, and it was redesigned.

In a three-year period, two remarkable things resulted: operating expenses were cut by several hundred million dollars, while [at] the same time, its customer service ranking -- as measured by a third party -- went from number 37 out of 50 in its industry to number 4. Allmerica was now providing much better service and saving a lot of money.

* International Business Machines Corp. has developed new sets of process metrics that it measures carefully and then analyzes the reasons for shortfalls in performance; [then] tries improvement efforts. As a result, IBM reduced by 75 percent the time it takes to bring a new product to market.

A very important point in what I'm saying is: Measurement is not an end in itself, it's only valuable if it is tied into a systematic program of improvement.

* How can CFOs lead their organizations in the direction of making measurement relevant and removing only the accounting aspect?

MH: CFOs and financial organizations have to recast their thinking. They are not about finance per se, or at least not exclusively. Measurement is not an accounting activity. It's a management activity, and it's an essential tool for running an organization today. Once upon a time -- in less competitive environments -- we could afford to be sloppy in how we ran organizations. We can't any more. Measurement has to be a critical part of a disciplined approach to improving and managing organizations, and CFOs have to recast their roles from being purely financially and accounting-oriented to really being the providers of measurement and improvement tools.

* Do you see "measurement," as a process, as something that should be a best practice measurement in itself?

MH: Yes, that is exactly what I see. We're starting to see that there really is a best practice approach to measurement. It's a disciplined system that links controllable activities to corporate objectives. If you don't do it that way, you're going to waste a lot of time collecting measurements that you're not going to do anything with.

On the other hand, if done this way, you can have a hugely effective measurement system that really makes a difference to the company's performance.

RELATED ARTICLE: BASE MANAGING ON MEASURING

* Take measurement out of accounting and make it part of every manager's job.

* Abandon the measures you have inherited from the past.

* Develop a model of your business that links overall goals to specific things you control.

* Put in place measures and targets for the key items in this model.

* Design measures that are objective, timely and easy to calculate and understand.

* Make ongoing performance improvement inevitable by incorporating it into a disciplined measurement-based process.

* Let facts and measurement triumph over intuition and opinion.

Source: The Agenda: What Every Business Must Do to Dominate the Decade, by Michael Hammer