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A holistic approach to performance management could mean the difference between organisational success and failure. Roland Stringer discusses how firms can benefit from aligning their performance measurement systems

One of the consequences of having an entire profession devoted to finance and another profession devoted to human resources is that each discipline generates and develops its own ideas about measurement. This is usually positive, since organisations thrive and grow on ideas. But it can sometimes lead to conflict.

While finance professionals have been busy developing measurement techniques -- balanced business scorecard, activity-based management, etc -- HR professionals have been just as active with innovations such as performance-related pay, competencies and 360-degree appraisal.

The problem is that too often these developments have not been integrated. After all, how many companies have bothered to embed balanced business scorecards into their performance management process? Yet, if we started to approach these concepts more holistically and managed to align them, the organisation would benefit as a whole.

Of course this is not quite as simple as it sounds. There are organisational barriers to aligning measurement systems and I suspect that many people already know the behaviours that must be changed to achieve it. The prize, however, is well worth the effort. You only have to look at Tesco's focus on the customer, or the Co-operative Bank's pursuit of ethical and environmental sustainability, to see that alignment can bring notable success, as well as making the brand more distinctive in a "me too" world.

Alignment should encompass every mechanism that measures critical success factors or encourages strategic decision-making -- although you should bear in mind that at this stage the two may not be synonymous. It ought also to include strategic planning, performance management for individuals, investment decision frameworks and actual and forecast results. The connections between these are illustrated in figure 1.

[ILLUSTRATION OMITTED]

The style of measurement needs to be appropriate to the fast-evolving modern world and to the particular markets in which the organisation operates. This should mean that measurement is fast and approximate.

Indicators should also reflect the impact that a modern organisation has on the world around it and how it is perceived. This is why some form of balanced scorecard is important. Given the way such measurement mechanisms tend to operate, it is wise to move away from the concept of monthly results towards an "as needed" cycle, which may differ from one scorecard segment to another. It is likely to be more useful to have, say, a quarterly rolling view on staff or customer perceptions, but probably more appropriate to have a weekly view on sales.

Last (and crucially) the measurement framework must be consistent across all elements of the organisation performance measurement model.

Figure 1 shows what can be done to achieve consistency and alignment. In theory, it all begins with planning -- modern, light, strategic-direction planning, not endless rounds of budget preparation and aggravation. The distinction is in its objective: planning in this context is a tool to gain and reinforce organisational strategic clarity.

It should, therefore, be a process that enables an organisation rapidly to:

1. consider markets, threats and opportunities;

2. surface, test and gain commitment for strategic responses to those conditions;

3. understand the relative impact of responses.

TXU Europe, a leading European energy company, has used planning as the starting point for a holistic approach to performance measurement. Its aspirational planning process involves people at all levels and in every discipline across the business in intensive regular (usually quarterly) bursts of planning activity.

This is planning at its fastest, most flexible and most involving -- a workshop-based system designed to create rapid well-understood responses to emerging business opportunities. And the outputs of a typical planning workshop can feed directly into the other elements of the model in figure 1. This makes it all the more imperative (and provides a strong incentive) that the same broad measurement framework is used throughout.

This approach to planning allows accountants to take more of a back seat than is often the case. They can adopt a facilitative style which encourages others to take more ownership and to accept responsibility. There is also scope for them to take the lead in building small and simple business models, which can be used in real time to assess instantly the quantitative impact of alternative actions.

Performing this type of process regularly helps to keep it light and fresh. It is not necessary to reinvent the wheel each time. Once it is established and familiar, the process can then focus on what has changed in the market and what the organisation's responses should be.

The next area is forecasts and actual results and the the key message here is consistency -- between what you plan to do (planning), what you think the likely outcome will be (forecasting) and what happened (actuals). If the same measurement framework is applied to each of these, there is a reasonable chance that learning from the actuals can be applied to plans and forecasts.

Most organisations start in this area by constructing a balanced scorecard, but this start point might discourage senior management sponsorship. Experienced scorecard practitioners are too often asked: "Couldn't you make it a bit less operational and a bit more strategic?" To be fair, if the senior managers are doing what they are paid to do, they are probably right.

If a scorecard is the product of the planning process, it will be much smarter and more strategic. It is more likely to include measures that relate to an organisation's strategic goals -- for example gaining a European presence, growth and brand positioning -- aspects which are less visible in a conventional monthly scorecard.

Planning should also encourage organisations to think about their measurement framework more broadly. The commonly used scorecard dimensions work well in operational environments, but are less relevant in knowledge-based businesses. These organisations should consider other dimensions or stakeholders such as the firm's impact on the community or how its brand is perceived.

Budgeting has not been mentioned here on the assumption that forecasting is the older and wiser brother of budgeting. Forecasting can encourage collective responsibility. This can be further encouraged using the performance management system to promote an adult, honest and collective approach to business challenges. Budgeting, however, usually encourages confrontation, point scoring and an individualistic approach to business. There seem to be two aspects which cause this:

* imposing targets from above, rather than through a sense of collective responsibility among senior management;

* granting excessive autonomy to divisions, so each is regarded by management as being more important than the group to which it belongs.

When it comes to investment, Hanson has followed a hugely successful principle: anything is for sale -- at a price. Most organisations find acquisition much easier than disposal. Yet knowing the right time to sell can generate vastly superior value.

One reason why organisations might be better at buying than at selling could come down to how the two actions are measured. With acquisitions, the technique of discounted cash flow (DCF) is available to guide decision-makers to a black and white answer. The opportunity for disposals is often left too late because DCF methodology is applied only once the emotional hurdle has been overcome.

Yet it is useful to know how much your existing businesses are worth every month and, conversely, it is useful to know what a potential acquisition would mean for your existing business in the dimensions in which it is normally measured. These connections are easy and illuminating, yet rarely made.

On the acquisition side, the easiest route is to apply your forecasting scorecard to your acquisition target. The acquisition is now visible in the round, the project team has to look deeper and the decision is no longer black and white. But the contribution of the acquisition to the existing business can be better understood and the non-finance members of the decision-making body can assess the pros and cons more accurately. A regular forecast should yield enough cash flow data to allow a value to be determined from DCF techniques.

The next area is performance measurement and the key to an effective model is to promote desired behaviours with a comprehensive and integrated performance management system across the organisation. The same language and measures should be used throughout the organisation.

As in the case of planning, we need to move away from annual cycles for such processes. The world moves too fast for that. It is sensible, therefore, to link performance management with planning. One of the outcomes of the planning system at TXU was that individuals' roles could be adapted to suit adjusted planning directions. This ensures that individual contributions still work towards corporate objectives (see figure 2).

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This measurement system should also be broad yet light and quick to put into practice. It will probably include a number of elements.

1. Responsibilities and accountabilities (what you did). These should:

* be broadly (scorecard) based;

* lead to overall organisational objectives;

* be regularly reviewed and refocused as plans change;

2. Skills and capabilities (what you needed to do it).

3. Behaviours (how you did it). These can be based on edited, updated highlights of commercially available competency models, but it is advisable to:

* focus on what is really important;

* ensure the competencies anticipate the future and do not look back to how people used to behave;

* tailor any competency model to your organisation. One size does not fit all;

4. Values (what you believe is important). These need to come from inside the organisation -- you cannot make them up.

When values and behaviours come into the equation, you need to maintain objectivity and this can be achieved through 360-degree assessment. Pay particular attention to making the system light and fast and make sure that it can be accessed on the intranet, which is the ideal vehicle for efficiently disseminating and collating the resulting data.

The performance management system must have teeth if it is to create incentives. As in figure 2, it should link to remuneration, training and development, and to succession planning. How often it does this will depend on circumstances, although it is usually appropriate to review these aspects whenever individual roles are shifted. This helps to build mutual trust.

People respond well to an environment where their total contribution is recognised. Traditional performance management systems do little to recognise important, but less tangible, contributions -- the extent to which people share knowledge, come up with ideas and suggestions, coach or mentor people. When the firm recognises their efforts, some individuals will develop rapidly.

However different organisations choose to implement these changes, the most important thing is to connect together all the measurement techniques in a coherent and comprehensible manner. The more familiar this appears and the more staff feel committed to its design and implementation, the greater the chance that it will be accepted. Creative workshops can help to make it fun and develop a sense of ownership and passion, but it takes time to achieve and a deliberate, incremental approach usually works better than a big bang.

The rewards, however, are strategic coherence and the development of a sustainable strategic message that everyone can understand -- and, just as important, remember.

Roland Stringer is a freelance consultant who has specialised in performance measurement, knowledge management and performance management

E-mail: rolandstringer@supanet.com or visit www.roland-stringer.co.ukformore information
COPYRIGHT 2000 Chartered Institute of Management Accountants (CIMA)
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Title Annotation:performance measurement standards based on the whole company
Author:Stringer, Roland
Publication:Financial Management (UK)
Geographic Code:4EUUK
Date:Dec 1, 2000
Words:1894
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