plan for design of performance management system

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Designing Performance Management Systems From An Alignment Perspective – A Software Model

M.Raja ChidambaramUrs Productively ,

6/6 Vishal apartments, 57th Street,10th Avenue,Ashok Nagar – Chennai– 600 083.Tamilnadu, India.

E-mail: [email protected]

Abstract

Sound performance management systems is critical for organizations which are ready for Process Orientation , to ensure process maturity and continual improvement. This paper discusses about effective design of performance management system for organizations, especially from the alignment viewpoint where organization perspectives at different levels are held together. It is defined that performance management is not only measurement oriented but also improvement oriented. The paper also presents the structure of Performance Management System in a PDCA framework. The tools that can be used to ensure the effectiveness of different phases of performance management system are also discussed. The paper also discusses about a software developed for designing and implementing performance management system, based on the above principles.

Keywords:

Performance Management system, Performance Improvement

1. Why Performance Management System

Establishing sound performance management system is gaining growing importance in organizations for following reasons.

Organizations are redefining themselves, orienting themselves toward process approach. It is not sufficient just to have processes, but also we must have mature processes. Continuous improvement must be an integral part of any process to attain process maturity. Continuous improvement is possible only if Performance is measured.

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2. Understanding Performance Management systems

A performance management system needs to be differentiated from a performance measurement system. Performance measurement is only establishing measures that depict how a process is progressing. Performance Management system, is a wholesome approach which can be an organization wide initiative, to ensure the effectiveness of performance measures. The phases Performance Management system would be

The phases of a performances management system, which will overlap with any process, will be:

Performance Planning Performing Performance Measurement Performance Improvement

The Model of a performance management system is shown in Figure-1. The Performance Management System given here follows Deming’ s PDCA cycle.

Figure-1: Performance Management Model and PDCA

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Performance Planning

Performance Improvement

Performance Measures

Performing

A

C

D

P

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3. Design of Performance Management System

The guiding principle in the design of Performance Management System is the need to integrate finance strategy and operations to achieve business targets and drive shareholder value. The performance management framework, which will enable this, is shown in Figure-2.

Figure-2 :Framework of Performance Management system

3

Business Vision, Mission

Policy - HR Policy - Finance

Finance - Objectives

Finance - Processes

Finance – Performance Measures

Finance - Strategy / Goals

Marketing - Objectives

Marketing - Processes

Marketing - Strategy / Goals

HR - Objectives

HR - Processes

HR – Performance Measures

HR - Strategy / Goals

Marketing – Performance Measures

Continuous Improvement

Policy - Marketing

Functional Policies Social Values Share Holder Value

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3.1 Design Considerations at Different Phases of Performance Management System:

The detailed design of Performance Management will include the phase of - Performance Planning, Performing, Performance measures and Performance Improvement. The key here is the alignment.

Ensuring correlation between financial strategies, Objectives and Performance Measures.

For each phase of designing Performance Management, the considerations and possible tools to ensure correlation between financial strategies, objectives and Performance Measures is given below.

Phase: Performance Planning:

Considerations:

Align Policy - The Policy must be aligned with Vision.Align Strategy / Goals - The Strategy / Goals must be aligned with Policy.Align Objectives - The objectives must be aligned with Strategy / Goals

Tools:

Correlation Matrix – Objectives(Refer Figure – 3)

Goals Goal-1Improve Market Share

Goal-1Product Range

Goal-1Business Growth

Objectives

Objective-1Reduce Manufacturing Cost

5 1 3

Objective-2Reduce wastages

5 1 3

Objective-3Reduce indirect expenses

5 2 4

Objective-4Improve Sample development

4 5 4

Objective -5Improve Delivery Performance

4 1 4

Objective -6Reduce Internal Rejections

4 1 4

High Correlation -5-4-3-2-1-Least Correlation

Figure –3: Objectives Vs Goal

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Phase: Performing

Considerations:

Control InputsControl ProcessesControl Outputs

Tools:

Visual Control of Measures – To show the trends of performance values.(Refer Figure – 4)

Fig-4: Visual Control of Measures

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LABOUR (In Lakhs)

2.36

3.04

2.40

2.96

3.23

4.404.76 4.26

0.00

1.00

2.00

3.00

4.00

5.00

Nov Dec J an Feb

Rupees

ACTUAL COSTING

OVERHEADS (In Lakhs)

4.754.494.35

4.29

5.174.11

3.21

4.35

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Nov Dec J an Feb

Ru

pees

ACTUAL COSTING

PRODUCTIVITY

2.24

2.01

2.06

2.66

-

0.50

1.00

1.50

2.00

2.50

3.00

Aug Sep Oct Nov

Pd

ty.

Achieved Target

LABOUR PER UNIT

48.35 48.40

44.02

37.79

-

10. 00

20. 00

30. 00

40. 00

50. 00

60. 00

A ug Sep Oc t Nov

Rupees

Achieved Target

OH PER UNIT

87.5171.61 70.71

68.52

-

20.00

40.00

60.00

80.00

100.00

Aug Sep Oct Nov

Rupees

Achieved Target

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Phase : Performance Measurement

Considerations:

Ensure Adequacy of Measures – The measures must address the four basic aspects of measurement, Namely – Time, Cost, Quality and FlexibilityEnsure Alignment of Measures – The performance measures selected should align with objectives.

Tools:

Correlation Matrix – Adequacy Correlation Matrix – Measures(Refer Figure –5, 6)

Adequacy of Measures Time Cost Quality Flexibility

Performance Mesures

Labor Productivity 4 5 3 1

Value addition per employee man-day

3 5 4 1

Labor Cost/ Product 3 5 3 1

Expenses / Product 3 5 3 1

Over Head % on Labor 3 5 3 1

Total Labor Savings 3 5 3 1

In Process Rejection % 3 3 5 1

No of samples dispatched 4 3 3 2

% Original In-house sample 3 3 4 3

% Shipments on time 5 3 3 3


Figure –5: Adequacy of Performance Measures

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Objectives

Red

uce

Man

ufac

turi

ng

Cos

t

Red

uce

Was

tage

Red

uce

Indi

rect

E

xpen

ses

Impr

ove

sam

ple

Dev

elop

men

t

Impr

ove

Del

iver

y P

erfo

rman

ce

Red

uce

Inte

rnal

R

ejec

tion

s

Performance Measures

Labor Productivity 5 4 4 1 4 3Value addition per employee man-day 4 5 4 1 3 3Labor Cost/ Product 5 5 3 1 3 2Expenses / Product 5 4 5 3 3 2Over Head % on Labor 5 3 5 2 3 2Total Labor Savings 5 3 3 2 3 3In Process Rejection % 4 4 3 3 4 5No of samples dispatched 1 1 2 5 2 1% Original In-house sample 1 1 2 5 2 1% Shipments on time 3 3 3 2 5 3


Figure 6 : Correlation Matrix : Performance Measure Vs Objective

Phase: Performance Improvement

Considerations:

Analyze Performance values and isolate major causesSelect appropriate Initiative

Tools:

Process Improvement Tools(Refer Figure –7)

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Process Improvement ToolsEliminate non-value adding activities P01Reduce the number of separate activities within a process P02Perform activities in parallel or concurrently P03Standardize P04Error proof P05Re-sequence activities P06Make the people or teams performing the activities responsible for the activity

P07

Introduce a case manager, caseworkers or case team P08Move activities out of the process P09Create multiple routes or paths through the process P10Use Information Technology (and technology) to enable activities and processes

P11

Figure-7: Process Improvement Tools

4.The Software

A Software has also been developed to design and implement performance management system. This software can be used for setting up performance management system for many processes of an organization. The Major modules of the software are:

Performance PlanningPerformance MeasurementPerformance Improvement

The structure of the software is shown in Figure –8.

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Figure –8 : Software Structure

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Performing &Performance Measurement

PerformanceImprovement

Responsibilities

Define Vision

Define Policy

Define Mission

Define Objectives

Define Goals

Define Processes

Defines Performance Measures

Align Goals

Align Objectives

Align Performance Measures

Functions Define Techniques

SQC

ContinuousImprovement Project

Define Periods

Process Measurement Values

PerformanceManagement

PerformancePlanning

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5.Approach plan for implementing performance measurement System to over come Pitfalls:

To ensure that the performance measurement is implemented successfully the following points must be considered in detail.

- AlignmentThe effort to alignment of business goals, strategies, objectives and performance measures is the key for successful implementation of the performance system and subsequent benchmarking.

- Easy measurementThe performance measures that are established should be simple and easy to understand, quick to habituate. This will enable the users constantly compute the measures, manual or otherwise , and take corrective actions and improvement initiatives.

- Integrate with ISO 9000ISO 9000:2000 standards calls for measuring the performance of the processes. These performance measures are discussed in the management review meeting also. So there will be a good control and monitoring.

- Integrate with ERPOrganizations that go for ERP will put together effective data capturing and information processing across various functions like planning , Materials , Manufacturing and Hr etc. The performance measures of each functions can be taken as specification for the information system outputs. This will ensure that the day to day data capturing will be in accordance with the performance measures also.

References :

Anthony, R.N. and Govindarajan, V. (1998). "Management Control Systems" (9th ed.), Irwin / McGraw-Hill, Homewood IL.

Kaplan, R.S. and Atkinson, A.A. (1998). "Advanced Management Accounting" (3rd international ed.), Prentice Hall, Upper Saddle River, New Jersey, USA.

Neely, A.D. and Waggoner, D.B. (1998). "Preface", In: Neely, A.D. and Waggoner, D.B. (ed.), Performance Measurement – Theory and Practice , Volume I , University of Cambridge, Centre for Business Performance, p. iii.

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