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Developing performance measurements.

As the economy continues to change, creating new financial, operational and market challenges, having the right performance measurements are a necessity if a company intends to maintain control, respond to challenges and improve performance. The measurements an organization uses to calibrate performance need to be reliable and valid indicators of the operational performance of the company.

The best performance of an enterprise cannot be sustained without effective performance measurements that are operationally based, measure processes, work in harmony with each other, and correlate with the financial and cost performance reporting system. Most firms have an array of financial performance measurements related to budget and cost performance and are reviewed and assessed by management upon completion of the period being reported. Unfortunately, these measurements often are too removed and untimely to be useful for making immediate corrections and resolving issues.

It's difficult for management to remember what happened at the first of the month that may have affected the total month's performance unless the issue was a major event. Most daily operations have numerous, small and medium-size business issues and problems that regularly occur. By the time financial and cost performance reports are available for review at the end of the month, it's too late to implement substantive corrections to affect the performance of the period based on this information. More importantly, effective performance measurements are management tools embedded in the enterprise's management processes and used to monitor the performance of business processes, identify when performance is not meeting requirements or acceptable levels, provide information for taking corrective action and influence management and employees to improve performance.

There are three design factors for performance measurements to be effective management tools. Measurements influence and drive management and employee behavior. Measurements assess the performance of business processes, not organizations. Measurements are tools to evaluate performance issues for improvement.

Enterprises that use performance measurements as management tools begin to rely on them and use them proactively to improve performance when performance declines. Five fundamental characteristics are present when performance measurements are management tools and are embedded in the management processes:

* The measurements have simple formulas for calculation, are visible to management and employees who understand the measurements and the performance information they provide;

* The measurements track business processes by identifying how the processes are performing and provide adequate information to analyze the cause of poor performance;

* The measurements work in harmony with each other and do not create any disproportionate costs or disadvantage with other measurements;

* The measurements influence management and employee behavior and responsiveness to achieve performance gains and quickly resolve performance issues; and

* The measurements are operationally based, such that when performance changes as identified by the operationally based measurements, the affect is reflected in the financial and cost-performance-reporting system.

The design and use of operationally based performance measurements is the route to systemic performance improvement gains and is exemplified in various process improvement and problem-solving methodologies, including Lean Six Sigma, Kaizen and statistical process control to mention a few. In addition, most performance measurements required by government regulatory agencies are operationally based.

Defining the Measurements

Effective performance measurements define relevant relationships between the inputs and outputs of a business process--simply defined and calculated as a ratio, percentage or rate. For example, productivity would be measured based on the units produced divided by the total labor hours expended to provide a measurement of units per labor hour produced. Determining productivity for the entire company could be calculated based on the total value of product produced divided by the total of the company's man hours to provide a measurement of the enterprise's productivity. Additional performance measurements may include sales revenue per day for the reporting period in order to monitor the sales performance being achieved against the target sales performance for the reporting period. Other factors include performance to schedule, orders shipped per day, revenue shipped per day, defects per units produced, absentee hours per total hours scheduled to work, customer complaints per orders shipped, damaged orders received by the customer per total orders shipped, and numerous other performance measurements that can be developed to provide relevant indication of the performance of a business process.

Performance measurements can be created for any process. Before beginning, however, certain questions must be answered. The first is: How is it measured? The second is: What is acceptable performance? The third question is: What is the formula to calculate the performance? The fourth is: What management and employee behavior will the measurement influence? Answering these will avoid the issue of measurements becoming meaningless good intentions that track nothing of relevance because they are too complicated to calculate or the formula has been modified from its original formula to show a higher level of performance than the original formula would indicate.

Hazards of Measurements

Enterprises that do not customarily use performance measurements as a component of their management process but begin to embark on the design and implementation of measurements will be confronted with several hazards and barriers, including:

* Management and employee resistance to using and accepting the measurements because they don't trust the data's validity and didn't participate in developing the measurements or determining their use

* Efforts made to discredit the validity of the measurements because the performance is too low to be believable and, therefore, the measurements must be invalid

* Employees disregarding the use of the measurements as a management tool because the formulas for calculating the measurements are complicated, cumbersome and not understood

* More time spent measuring performance and justifying the performance rather than improving performance

* Measurements fail to influence the right management and employee behavior, and they are not perceived as management tools

* The tyranny of performance measurements where everything is measured and reported but no improvements are achieved

* Key measurements that compare performance to targets rather than measure the performance of the business process.

Rules of Play When developing and implementing performance measurements, there are several critical rules of play that should be followed in order for the measurements to become embedded in daily management:

* Key process performance measurements should not exceed five measurements;

* Management and employees should participate in the development of the performance measurements;

* The use of the measurements and the meaning of the measurements must be understood and the measurements should measure factual and relevant activities and processes;

* The validity and reliability of the data used to calculate the measurements must be accurate and verifiable;

* The measurements are management and employee tools used to define performance, take corrective action and improve performance when performance declines;

* Key performance measurements should be visible to management and employees;

* Timeliness and frequency of measurements to be used to take corrective action and resolve issues; and

* The information support systems do not dictate the measurements that are used and their availability for use. Manual reporting and posting is still acceptable and preferred in many instances to achieve timely feedback about performance.

The best-performing firms are noted for the rigor they employ in using performance measurements. Companies that have operationally based performance measurements in their day-to-day management processes generally outperform those that do not, and they recognize they have to measure performance in order to improve it. Measuring performance is the core competency for improving performance. After all, if you don't measure it, how will you know how it's performing?

Bruce E. Jacobs is a consulting partner with BrokenGate Consulting. He can be reached at (314) 704-0693.
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Title Annotation:Best Practices
Author:Jacobs, Bruce E.
Publication:Medical Product Outsourcing
Date:May 1, 2010
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