measurement and management university of toronto fall 2009

Measurement and Management

University of Toronto

Fall 2009

Fall 2009 page 2Strategy & Measuring Performance University of Toronto

Performance Management and Success

Study by Hewitt—437 Companies

Companies that used performance management processes compared to those that did not showed:• Greater profits• Better cash flow• Stronger stock market performance• Greater stock value• Higher sales per employee

* 1994 study of 437 companies in USA 1990-92 (as described in Harvard Business Review, May/June 1995)



Companies with performance management processes compared to those in the same industry without performance management processes showed:• Total shareholder return increased by 24.8%

• Productivity increased by 94.2%



Study by William Schiemann & Associates - 203 Firms - Conference Board

“Measurement Managed” firms significantly outperform their competitors, regardless of size, on key indicators such as industry leadership, financial ranking and capacity to make organizational or operational change

* Conference Board, Using Measurement to Transform the Organization, 1996


Organization of the Future and the Implications for People and Programs

Key philosophy is that people are rewarded for results

What counts is what you do and what you accomplish

Managers should be rewarded for how they focus and direct the efforts of their employees


Edward E. Lawler

Key factors that determine Organizational Success:• Knowledge of the work, business and the total

work systems

• Information about processes, quality, customer feedback, events and business results

• Power to act and make decisions about the work in all its aspects

• Rewards tied to business results and growth in capability and contribution


Performance Measurement Frameworks

• Traditional Financial Reporting

• Multi-Dimensional Measurement Framework, e.g., Balanced Scorecard

TraditionalFinancialReporting

Customers

Financial

People

Innovation

Quality

Internal Processes

Other (?)

BalancedScorecard

LOW HIGH

Usefulness of Reporting


Why Use Multi-DimensionalMeasurement Frameworks?

Using financial data only has significant limitations. It looks at the past. Does not help to predict the future

Financial measures are not relevant for important indicators such as customer satisfaction, cycle time, risk management, new product introduction, etc.

Significant “noise” in accounting numbers caused by accounting process, e.g., overhead allocation

GAAP allows significant use of judgment which can impact results


Multi- Dimensional Performance Management Model

THE GOAL

To implement a consistent performance model that objectively measures achievement towards set goals


Why Use Multi-DimensionalMeasurement Frameworks?

“What gets measured gets done”

Or

“Tell me how I’m measured and I’ll tell you what I’ll do”


Key Questions When Choosing a Model for Performance Measurement

1. How does it allow you to understand the drivers of financial performance?

2. How does it allow you to understand relationships with customers?

3. How does it allow you to understand the effectiveness of internal processes?

4. How does it allow you to assess the organization’s performance in innovating and growth for the future?


Key Questions When Choosing a Model for Performance Measurement

5. How does it allow you to assess operational risk factors?

6. How does it assist you in planning for the organization’s future?


Alternative Measurement Frameworks

Balanced Scorecard - Kaplan and Norton

Quantum Performance Management System - Anderson Consulting

Performance Pyramid - Cross and Lynch


The Generic Four Dialsof a Balanced Scorecard

Balanced ScorecardBalanced Scorecard

Financial

Customer/Markets

Innovation/ Learning/Growt

h

Internal BusinessProcesses


The Performance Pyramid

Objectives Measures Financial

Business Units

Business Operating Systems

Departments and Work Centres

External Effectiveness

Internal Effectiveness

Operations

Corporate Vision

Market

Customer Satisfaction Flexibility Productivity

Quality Delivery Cycle Time Waste

Source: Lynch, R.L. and Cross, K.F., “Measure Up!, Blackwell Publishers, 1994.


Quantum Performance Matrix and Model Application

Marketing and

selling

New product

development

Cycle time

Number of parts

used

Number of

vendors

Desirability Actual cost to budget

Increase speed to market by

50% over next 2 years

Develop 2 new products each

year

Get 25T of company profits

form new products in 2

years

Conceptual design

Product

design

Prototyping Target costin

g

Maintain customer loyalty through rapid product introduction

Maintain customer loyalty through rapid product introduction

Corporate Strategy

Goals

Critical Processes

Output Measures

Key ActivitiesProcess Measures

Number of steps in the

manufacturing process

Supplier involvement by X day?

Cross-functional

input?

Design standards upheld?

Number of common

parts

People Measures1. Are the right people

involved?2. Do they have the right

number of skills?

People Measures1. Are the right people

involved?2. Do they have the right

number of skills?

Source: Hronec, S.M., Vital Signs, AMACOM, 1993


What is a Balanced Scorecard?

A multi-dimensional set of performance dials for measuring strategic health and performance

A vehicle for enriching dialogue about the business at all levels

A rigorous approach to translating vision, strategy and tactics into concrete performance targets and measures

A vehicle for communicating what’s important to everyone in the business


BusinessStrategy

Balanced Scorecard

Financial

Innovation

PeopleProcesses

Market

OperationalPerformance

What Does a Balanced Scorecard Look Like?


Why Use a Balanced Scorecard?

It is simple, easy to understand and easy to communicate

It translates the organization’s mission and strategy into a multi-dimensional/comprehensive set of performance measures that provides the framework for a strategic measurement and management system

It retains emphasis on achieving financial objectives but also includes the performance drivers of these financial objectives


Why Use a Balanced Scorecard?

It is unique to each organization

Assessments of performance will generally be against targets and will reflect the organization’s success in improving performance over time

Targets may come from benchmarking, historical data, markets, business plan, stretch goals, strategic plan, etc.


A Management-Driven Business Process for Strategy Execution and Cultural Change

Strategy

Culture and Values

Strategy

Culture and Values

Critical Success Factors

(“what it takes to

win”)

Critical Success Factors

(“what it takes to

win”)

Measurement and

Management of Performance

(individual, team, unit, work process,

company levels)

Measurement and

Management of Performance

(individual, team, unit, work process,

company levels)

Company Performan

ce

Company Performan

ce


How Do We Start?

1. Define/Articulate the vision/mission/strategy

2. Develop lists of measures based on strategic capabilities

3. Refine measures» may have transition and end state

4. Develop implementation plan for gathering and reporting required information and assign one person with key accountability for coordinating and delivering the regular report

5. Use information as a key focal point in the management processes for the organization/unit


“Long list”of measures

“Critical few” measures

FinancialCustomers/Market

Internalprocesses

Innovation& learning

Business Strategy

Operational Performance

Balanced ScorecardMethodology


Key Questions

“So what?”• Does the measure tie into strategic capabilities?

• What are the cross-functional implications?

• Does it impact on line of sight?

“As measured by…”?

What’s the right blend of measures? What are the right dials?

How often should we measure/monitor?


Key Questions

Should we/how do we cascade the objectives/ measures down into the organization?

How far can/should we go in the first version?


Department Business Planning

Division/ Program Business Planning

Individual Performance

Planning

Individual Performance

Individual Compensation

Individual PerformanceManagement

StrategicManagement

Process

Integration of Balanced Scorecard into Business Planning Process



Customers/Markets

Financial

Internal Processes & People

Innovation, Learning &

Growth

Traditional Corporate Performance Measurement Program

Efficiency

CustomerService

Community Impact


Balanced Scorecard for Public Sector Organization



Community Impact• Safety• Innovation

Customer Service• Quality• High Performance

Teams• Staff Contribution• Internal Customer

Satisfaction• External Customer

Satisfaction

Efficiency• Operating Costs• Timely Completion of

Capital Projects

Balanced Scorecard for Public Sector Organization


Operations and Maintenance% of Departmentoperating costs

System Operations% of Division

operating costs

RoadsCost/Lane km

UtilitiesCost/Pipe km

Division

Section

Unit

Cascading Division Measurement: Example


Municipality/ Department

Division Programs

Focus AreasGaps and Issues

Priorities

Priorities and Targets by Scorecard Dial

EfficiencyCommunity Impact Customer Service

Assessments and Plans submitted by Division and Program Managers

Long list of priorities identified

Narrowed to “Critical Few” priorities

Department/Division/Program $$ targets

identified

Building the Department Business Plan


• Commits to deliverables and deadlines• Organizes work to deliver• Regularly reports accurate information to monitoring and tracking re. progress against deadlines and issues/changes to objectives and plan• Consults with Department Head in advance when changes to deliverables or deadlines will be required

Department Head

• Conducts reviews on consistent basis• Reviews accuracy and timeliness of reporting• Reviews progress against interim deadlines• Reviews quality and timeliness of final products• Suggests improvements and corrections• Reinforces good performance

Monitoring and Tracking

• Acts as agent of Department Head• Designs tracking mechanisms in consultation with affected executives• Receives regular information from executives re. progress against deadlines and issues/changes to deliverable and plan• Issues regular report of compiled information• Alerts Directors and Department Head as to issues and potential problems

Department Head

DirectorDirector DirectorDirector DirectorDirector

Structure of the Monitoring and Tracking System


Lessons Learned

Concerns over whether or not Scorecards are “perfect”

Aversion to moving from traditional financial-based incentives - not sure they understand the levers to affect results

Positive impact of group work to ensure commitment and alignment


Linkages to Information Systems

Issues• Most information systems limited beyond financial

data and even this has limitations

• Existence of information within the organization

• Cost effective ways of capturing and reporting» Spreadsheet» PB Views» Alacrity

• May need transitional Scorecards and use of proxies in the short term


Summary

No “Magic Bullet”

Iterative process/continuous learning due to:• Limitations of information systems

• Subsequent input by employees and other managers into what should be measured

• Organizational learning in terms of knowing how to use the instrument

But…!!!


Summary (cont’d)

Structured, rigourous approach to performance management

Encourages new insights into the underlying dynamics of the business

Helps people to think “outside of the box”

Increases focus on key drivers of the business

Facilitates linkages with Human Resource programs


Questions for Reflection

1. How would this approach change the way you manage your organizations? What kinds of conversations might you have?

2. Where in the organization, i.e., what level, would you start implementation? What dials (and measures) would be most useful for your organization?

3. Should this type of approach be tied to your individual performance management system? Should there be implications for compensation?


Appendix A

Approach to Balanced Scorecard(Source Kaplan and Norton, The Balanced Scorecard, Harvard Press, 1997)


Strategic Framework for Action


Planning and Target Setting

• Setting targets• Aligning strategic

initiatives• Allocating resources• Establishing

milestones

Strategic Feedback and Learning

• Articulating the shared vision

• Supplying strategic feedback

• Facilitating strategy review and learning

Communicating and Linking

• Communicating and educating

• Setting goals• Linking rewards to

performance measures

Clarifying and Translating the Vision and Strategy

• Clarifying the vision• Gaining consensus


A Different Management System for Strategic Implementation

Clarifying and Translating the Vision and Strategy

Communicating and Linking

Strategic Feedback and Learning

Planning and Target Setting

Balanced Scorecard

Balanced Scorecard

• The strategy is the reference point for the entire management process

• The shared vision is the foundation for strategic learning

• Stretch targets are established and accepted• Strategic initiatives are clearly identified• Investments are determined by the strategy• Annual budgets are linked to long-range plans

• Goal alignment exists from top to bottom

• Education and open communication about strategy are basis for employee empowerment

• Compensations is linked to strategy

• Feedback system used to test the hypotheses on which strategy is based

• Team problem solving• Strategy development is

a continuous process


Appendix B

Scorecard Examples


Insurance Case

Balanced Scorecard Implementation• Use of Senior Management team to develop

divisional Balanced Scorecard

• Focus on divisional strategy - what do we need to do to be successful


Insurance Case

Use of retreat methodology (1 day) to build Scorecard• Homework: “What does my area need to do to be

successful?”

• Confirm strategy/CSF identification

• Key goals/themes/drivers for success

• Use of ‘Strawman’ Scorecard » confirmation of appropriate dials/buckets» confirm/identify measures/indicators


Insurance Case

Balanced Scorecard Implementation• Post retreat

» asked Senior Management group for feasibility on indicators

» developed template for reporting» development of senior management monthly

meeting agenda to incorporate reporting on Balanced Scorecard basis


Insurance Case

Balanced Scorecard Implementation• Second retreat - half day

» purpose - weighting of scorecard and dealing with feasibility issues

» presentation of proposed integration with variable compensation

– cascade of divisional Scorecard into Scorecard for Senior Management group

– threshold on Financial measures



Internal Processes and People

• Cycle time by product• Employee satisfaction• Risk management• Claims leakage

Innovation/Learning/Growth

• % sales from new products/services

• # of new products to market

• Intellectual capital

Customers/Markets• Brand awareness• Customer satisfaction• Customer retention• Market share• Proportion of sales by

distribution channel

Financial• Return on capital

employed• EVA• Asset accumulation• Profitability by line of

business

Insurance Case Balanced Scorecard


Telecom Case Balanced Scorecard

Pre Balanced Scorecard Implementation• Initiated because of change in organization

structure

• Variable incentive compensation linked to financial results» operating profitability for profit centre» cost goals for cost centre

• Maximum incentive payout - 40%» averaging 20-30 %actual but

– poor financial results– loss of customer franchise– poor stock performance



Balanced Scorecard Implementation• Used a bottom up methodology by working with

the divisions through a series of workshops to develop Scorecards

• Development of ‘Strawman’ Scorecard for review of senior management group» review of current strategy and CSFs for fit» development of feasibility plan for

measures/indicators» discuss/approve weightings



Balanced Scorecard Implementation• Incorporated project completion bonuses

• Incorporation of Scorecard into monthly senior management meetings

• Cascade plan down to the Director level within the organization



Balanced Scorecard Implementation• Posting of the Scorecard results with monthly

financials available on the network

• Slow down of market share loss

• Improvement of financial operating results, cash flow and stock performance



Internal Processes• Internal Service Levels• Product Intro Cycle

Time• IS/IT Effectiveness• Efficiency

Employee/Organizational Learning

• New Products• Employee Satisfaction• Competency• Organizational

Leadership

Customers/Markets• Share of Wallet• Customer Satisfaction• Customer Retention• Market Share

Financial• Free Cash Flow• Operating Cash Flow• Value Created/SVA• Revenue• Net Income

Telecom Balanced Scorecard

measurement and management university of toronto fall 2009

Documents

consistent performance

risk management

contribution slide

success companies

financial ranking

success study

financial data

future financial measures