targeting improved performance

Targeting improved performanceCreating an effective performance management system in theDefence Logistics Organisation of the Ministry of Defence

John Dowdy

Acknowledgements

I would like to thank the many contributors to this report, without whom thisproduct would not exist. I suppose it is appropriate to start by thanking Petri Allasand Neville Salkeld, McKinsey experts on the topic of performance management, fortheir guidance, comments and critique. In terms of shaping these conceptualunderpinnings, collaboration with Sir Michael Bichard and his Civil ServiceManagement Committee Group on Performance Management was essential. Activesupport from HM Treasury and the Cabinet Office ensured that these recommendationswere consistent with the numerous other initiatives touching in some way on thiscritical topic.

Within the DLO, David Smith and David Gould provided both access and active andenthusiastic support. Most of all, I would like to thank Nick Moberly and Kai Zolleis,who did much of the detailed work upon which the report is based.

Finally, I would like to thank the members of the Public Services Productivity Panelitself, who have provided, at various points, comments and criticism in driving thisreport to its final state.

John Dowdy

Contents

Executive summary 2An overview of the report’sarea of study and of the Panel’sperformance management model

Section 1: Performancemanagement in the DefenceLogistics Organisation 4A summary of the role of the DLO,its progress to date in performancemanagement, and remainingchallenges

Section 2: Developing aneffective performancemanagement system in the DLO 9Further detail on the DLO’sprogress in developing a system,and recommended next steps

Appendix: The performancemanagement framework 18An explanation of the Panel’sperformance management model,which has been adopted by theCivil Service Management Board

Targeting improved performance 1

Foreword by the Chief Secretary to the Treasury

Successful public services lie at the heart of a successful economy and society. Attheir best, they respond quickly to their customers, operate efficiently, and set thehighest standards of quality and probity. In practice there have been wide variationsin quality and in some areas ineffectiveness and waste have been tolerated.Modernising Government – the drive to achieve better, more responsive governmentand public services – means raising all services to the standards of the best andrecharging our public organisations with fresh vigour, incentives and ideas.

As part of its comprehensive plan for modernisation, the Government has recruited ateam of top private sector managers to the Public Services Productivity Panel – with aremit to advise on improving efficiency and productivity. The focus on productivity islinked in particular to the Public Service Agreements (PSAs), now published for allgovernment departments, which enable the Government to track performance, improveaccountability, sharpen responsiveness and inform investment. The role of the Panel isto support departments in raising standards to achieve or outperform their PSAtargets, providing a source of practical ideas and new approaches.

Each member of the Panel is focussing on a different area, working with individualgovernment departments and agencies to identify solutions that will increaseproductivity. In doing so, the Panel recognises that there is no monopoly of wisdomin the private sector about how to raise productivity. Instead, it is the blend of freshideas and learning from good practice in our public services that can provide the spurto improvement. The findings of each project will be published and the Panel aims todraw together the overall lessons of its work during the first half of 2000.

I am grateful to John Dowdy of McKinsey for preparing this report. It reviews theperformance management system which is being developed by the newly formedDefence Logistics Organisation against the model developed by the Panel and adoptedby the Civil Service Management Board. The DLO spends £4.5 billion a year and itseffectiveness is vital to its customers: the armed forces whose lives can depend onprompt, dependable logistic support to operations. The report summarises progress todate and identifies priorities for further DLO action to improve its productivity. It willbe relevant to many public services, in particular those like the DLO which provideservices to internal customers.

Our challenge now is to translate these finding into clear and meaningful publicbenefit. Expectations of all who use public services are rightly ambitious. By involvingvaluable private sector experience in our drive to modernise government, our promiseis to match that ambition with excellence for the many, not the few.

Rt Hon. Andrew Smith MPChief Secretary to the Treasury

Executive summary

Developing an effective performance management system is absolutely fundamental tothe success of any organisation, whether public sector or private. Indeed, my ownexperience in both settings has indicated that although there are multiple paths toimproved productivity, high performing institutions all share a few commoncharacteristics. One the most essential is robust performance management.

To be clear, the concept of performance management is generally well understood andaccepted in the public sector. Most public sector managers would recognise theessential elements of a good performance management system, and have beenworking hard to develop effective management systems for a number of years. Inaddition, many recent government initiatives have been aimed at reinforcing theprocess and speeding up the pace of progress.

That being said, successful implementation appears to be a major challenge. In myexperience, the quality of the performance management systems across the publicsector is very mixed, and even in areas that already have good systems, some of thebuilding blocks are stronger than others. As a result, major improvements inproductivity can be achieved by improving these systems and properly integrating thevarious building blocks.

Project ScopeThis project was conducted as part of the work of the Public Services ProductivityPanel in co-operation with the newly formed Defence Logistics Organisation (DLO)within the Ministry of Defence (MoD). Our remit was to assess the quality of theperformance management systems in place prior to the creation of the DLO, toevaluate the progress that the DLO has made, and to make recommendations on howto improve upon their latest thinking to create a world class system.

The DLO itself was formed early in 1999 to provide unified logistic support to thethree armed Services, and comprises some 41,000 staff responsible for around£4.5 billion of annual cash spend. It provides an interesting case example for tworeasons. First, it is tackling this task in a serious and concerted manner, whichhighlights some important learnings for other government departments. Secondly – incontrast to some of the other governmental organisations that other Panel reportsexamine – its focus is on providing a service to internal customers within the MoDrather than to the public at large.

A Framework for Performance ManagementThis report is based on a framework, describing the five main elements necessary foran effective performance management system. This framework was developed in thePanel’s early days, and refined in discussions with the Civil Service ManagementCommittee’s group on performance management1. The framework itself is based ontwo fundamental assumptions:

• Improved productivity is predicated on the creation of a well functioningperformance management system. In order to function optimally, all of the basicbuilding blocks must be in place. If essential parts of the system are not robust,others are not likely to work well either.

• There is a natural sequence in which these need to be addressed. In other words,some items need to be in place before others will be completely effective. Thismeans, for example, that it is very difficult to design an effective personalincentive system if meaningful business targets have not been set at all levels.

Targeting improved performance2

1 Performance Management, Civil ServiceReform: A Report to the Meeting of PermanentHeads of Departments, Sunningdale,30 September – 1 October 1999


The Building BlocksThe five building blocks, shown in Exhibit 1, are:

• A bold aspiration, to stretch and motivate the organisation

• A coherent set of performance measures, and a demanding set of targets based onthese, to translate this aspiration into a set of specific metrics against whichperformance and progress can be measured

• Clear accountability for these targets at an appropriate level within the organisation,so that the individuals who are best placed to ensure their delivery have realownership for doing so

• A rigorous performance review process to ensure that continuously improvingperformance is being delivered in line with expectations

• Meaningful reinforcements and incentives to motivate individuals to deliver thetargeted performance.

A more detailed description of the building blocks can be found in the Appendix.

Exhibit 1 Performance management framework

Boldaspiration

Clearaccountability at an

appropriate levelRigorous

performance review

Meaningful reinforcements

Coherent set of performance measuresand demanding targets

To stretch and motivate the organisation.

To motivate individuals to deliver the targeted performance.

To ensure that individuals who are best placed to ensuredelivery of targets have real ownership for doing so.

To translate the aspiration into a set of specific metricsagainst which performance and progress can be measured.

To ensure that continuously improving performanceis being delivered in line with expectations.

SECTION 1: Performance management in the DefenceLogistics Organisation

BackgroundThe Strategic Defence Review (SDR) recognised the fundamental importance of takingan integrated approach to defence across all three Services (Navy, Army and RAF).This applied not just to the execution of operations but also to their support. In linewith this approach, one of the SDR’s main conclusions was to extend the approachwhereby many support activities are undertaken either through a joint organisation(that is, an organisation acting on behalf of all three Services), or through a leadService acting on behalf of all three.

As a result, the Defence Logistics Organisation (DLO) was created on 1 April 1999 toassume overall control of the three separate logistics organisations supporting theNavy, Army and RAF. The aim was to create an organisation capable of responding to the specific needs of the three individual Services, whilst at the same timeallowing the maximum scope for the rationalisation of functions and processes on adefence-wide basis. Overall, this new organisation comprises some 41,000 staff andhas responsibility for around £4.5 billion of annual cash spend.

Creating a new organisation is an extremely complex undertaking, requiring not justthe design of new formal structures, but also many other changes to create a properlyfunctioning entity. The year to April 2000 has therefore been a transitional year forthe DLO, with work being undertaken on multiple fronts to complete the overallorganisational design.

Apart from the creation of the DLO, two further changes have occurred over the past12 months which affect the delivery of defence logistics support. The first is theintroduction of Resource Accounting and Budgeting (RAB) (Exhibit 2), under whichcentral government including the MoD will move from an accounting approach basedon cash expenditure to an accruals-based approach (in line with established practicein the private sector). RAB focuses on resources consumed, and not just cash spent,and takes account of capital expenditure in a way which better reflects its economicsignificance and places greater emphasis on outputs.

Exhibit 2 Moving from cash accounting to resource accountingApproachTraditional accounting and budgeting in the MoD*

Principle• Accounting based on

cash spent

Consequences• Expenditure is charged at the time it occurs, not when

the resources are consumed – e.g. full cash cost of ship is accounted for in year of purchase, disregarding how long it is going to be in service; stocks are accounted for in year of purchase, not year of consumption

• Cost of capital is not taken into account – e.g. no capital charge is made for stock of spares held

• There is no clear linkage of costs to outputs – e.g. it is not possible to determine accurately the cost of delivering a given output (for example, a ship at given state of readiness) because some of the costs which contribute to the delivery of that output are currently not appropriately allocated

• RAB – which is based on resources consumed – will address all these issues

• RAB is currently being rolled out on a government-wide basis• MoD is in the process of implementing RAB – initial implementation

should be completed by end Financial Year 2000/01


* Similar approach applied throughout centralgovernment


The second change is the introduction, under the banner of Smart Procurement, of afar reaching set of process and organisational changes affecting the whole of theMoD’s procurement system. These are designed to deliver £2 billion of acquisitioncost savings over 10 years (against an annual spend of £9 billion on equipment,spares and stores). At the heart of Smart Procurement are two critical organisationalchanges (Exhibit 3). The first is the clear definition and separation of the roles of the internal customer for the equipment being procured and supported, and thesupplier of procurement and support services. The second is the creation ofempowered cross-functional Integrated Project Teams (IPTs) responsible for procuringand supporting equipment on a “through life basis”. In all, some 50 IPTs have beencreated within the DLO. For example, the VC10 IPT is responsible for providing in-service logistics support for all VC10 transport/tanker aircraft, encompassingactivities that were previously part of five different entities.

Exhibit 3 High level summary of the Smart Procurement organisational model

Prior to these changes, the three support organisations took widely differentapproaches towards managing performance. Taken as a whole, all three of thesesystems fell far short of best practice. None had articulated a compelling performanceaspiration, for example. Performance measures were not based on a robustunderstanding of the drivers of performance (and in many cases the targets set forthese measures were insufficiently stretching). None of the support organisations hadany formal accountability to their customer for delivery of outputs, not least becausethere was no systematic identification of who the customer for each output was. Nor– within the organisations – was accountability for delivering targeted performancealways delegated to an appropriate level.

In addition, performance review processes and management reporting were of variablequality across the three organisations, and success or failure in delivering thetargeted performance had limited direct consequences – either positive or negative.Incentives – a critical element of any package of reinforcing mechanisms – wererudimentary, with severe constraints in particular on the use of financial incentives.

In the light of this, it was recognised that a new performance management systemwas needed for the DLO that would build on the best of the three previous systemswhilst also drawing on external best practice.

Lessons LearnedSince its creation almost a year ago, the DLO has made important progress in layingthe foundations for an effective performance management system, building on

Inte

rnal

Cus

tom

erSu

pplie

r

Procuring Equipment Supporting equipment in-service

Central customer• Defines overall defence equipment programme• Specifies requirements for individual equipment• Acts as customer for IPT as it procures equipment

Service end user (2nd customer)• Acts as customer for IPT's in-service support activities

(including specifying outputs required)

IPT answerable to relevant internal customer

IPT accountable to relevant supplier organisation

Integrated project team (IPT)• Cross functional (including industry)• Procures individual equipment and supports them in-service

Defence Procurement Agency (DPA)• Provides oversight for IPT's procurement activities

Defence Logistics Organisation• Provides oversight for IPT's in-service support activities

internal best practice and learnings from the private sector, as well as developingsome innovative approaches of its own. Particularly noteworthy are:

• Its recognition that a balanced set of performance measures and targets is requiredas a basis for managing performance. A balanced scorecard of performancemeasures and targets is currently in development, covering:

– Customers: delivery against outputs agreed in customer service agreements(CSAs)

– Finance: adherence to budget

– Internal processes: improvements in internal processes

– Innovation: success in hitting key change programme milestones

• Its innovative work in conducting a structured dialogue with its internal customersto define a clear set of outputs. Prior to the formal creation of the DLO, it wasrecognised that there was no real clarity – either within the three existing logisticsorganisations or amongst the users themselves – as to precisely what outputs theDLO was actually providing. The DLO has therefore undertaken a structured dialoguewith its internal customers to define and agree the outputs which it should deliver(Exhibit 4).

Exhibit 4 Structured dialogue with internal customers

– An initial set of some 200 CSAs enshrining these agreed outputs was concludedat the beginning of the 1999/2000 financial year: for example, a CSA for supportto ships was agreed between the two-star head of the DLO’s Ship SupportAgency and his two-star counterpart within Fleet (Exhibit 5).

Map out current outputs and customers

Agree "Part 1"CSAs with customers

Negotiate "Part2" CSAs withcustomers

Negotiatecosted CSAs

Negotiate CSAswith detailedoutput costs

Tim

ing

Acti

vity

Exam

ple

• Pre '98 • By Q1 '98 • By Q1 '99 • By Q3 '99 • ?

• Determine detailed outputs currently being provided, and customers, at "unit" level (e.g., ordnance depot, RAF station)

• Agree at a very high level what outputs are provided

• Agree specific scale of outputs and associated metrics

• Agree overall cost of delivering each CSA

• Agree CSAs with detailed costs associated with individual outputs

• Equipment support for frigates

• Number of frigates• Weapons fitted• Availability• Etc.

• Costs of providing overall ship support to Flag Officer Surface Flotilla (FOSF), but only approximate breakdown at level of individual outputs (e.g., support to frigates)

• Costs of providing overall ship support to FOSF, with detailed costing for individual outputs (e.g., support to frigates)

DLO Created



Exhibit 5 Profile of CSAs negotiated – “support to ships” example

– Although generally acknowledged to be of variable quality and with many roughedges, the balance of opinion within both the DLO and its key internal customersis that this process is already starting to have a significant beneficial impact(Exhibit 6) – most of those interviewed highlighted how the CSAs had helped toclarify outputs, initiate a culture change within the DLO’s customers, and providethe basis for a meaningful performance dialogue.

Exhibit 6 Illustrative views on CSAs*

– There was also general agreement that the next round of CSAs – to be concluded by April 2000 – would be likely to be much more consistent, granular andappropriately focused than those concluded for the 1999/2000 financial year. Anexample of the kind of refinement that can be anticipated is the plan to replacethe current availability measure for ships (“materially available vessel days”) with a more granular set of measures (“available force element days”, “available forceelement for scheduling” and “ready force element days”) (Exhibit 7).

• "Has really helped to clarify the outputs to be delivered"

• "Has already resulted in a culture change within the second customer"

• "Is already being used as a tool to manage performance"

• "Still very embryonic – light years away from being really robust"

• "Has only served to formalise the links which were already in place – another layer of bureaucracy"

• "Has been put on the shelf to gather dust – it is not being used as a tool for managing performance"

Positive Negative

Chief of DefenceLogistics

Frigates IPT

Commander inChief Fleet

Desk officerresponsible for

frigates

Supplier - DLO CSA for support to ships Internal customer

• One CSA concluded between each supplier/customer pair

• Total of 200 CSAs with MoD internal customers,as well as around 70 further CSAs between different parts of DLO

• One annex negotiated for each output – Negotiated at IPT

level (or equivalent)– Formally approved as

part of overall CSA

Annex Support to frigates

Overall CSAShip supportAgency

Flag OfficerSurface Flotilla

* Comments relate to current CSAs, which donot yet include costings

Overall balance of opinion

Exhibit 7 Ongoing development of CSAs – Frigates example

• Its progress in delegating accountability and authority down the organisation –delegations covering £2.75 billion have been made to the leaders of the 50 cross-functional integrated project teams (IPTs) which are directly responsible fordelivering logistics support to the Services.

• The direct engagement and involvement of the DLO’s top management in the entireperformance management process.

• Finally, the articulation of a stretching performance aspiration for the organisationat the end of this effort – to reduce output costs by 20% by 2005 whilstmaintaining both the quantity and quality of outputs required by customers.

Naturally, some very significant challenges still remain outstanding at this relativelyearly stage. The key priorities going forward are:

• To undertake a comprehensive diagnostic assessment of the drivers of itsperformance, and to refine and finalise its balanced scorecard of performancemeasures and targets in the light of this, ensuring consistency with other parts ofMoD.

• To institutionalise a coherent overall performance review architecture whichpromotes constructive dialogue on performance issues and involves both internalcustomers and DLO top management, building on the encouraging early work inthis area.

• To refine the CSAs it has already concluded with its internal customers, in particularpushing ahead swiftly with existing plans to develop robust and granular output-based costings.

• To continue to work with internal customers to develop their “intelligent customer”capability.

Curr

ent

CSA

(neg

otia

ted

in A

pril

1999

)Pl

anne

d fo

r ne

xt C

SA (

to b

e ne

goti

ated

by A

pril

2000

)Measure of availability• Materially Available

Vessel Days (MAVD)

Description• Total number of days when vessel is available for full military use

• Available Force Element Days (AFED)

• Available Force Element For Scheduling (AFES)

• Ready Force Element Days (RFED)

• Total number of days when vessel is available, but not necessarily for all programmes (e.g., vessel ready to move to an operational region, some weapon defects in the progress of being repaired during the transfer)

• Total number of vessels fully available for scheduling

• Total number of days when vessel is available at a certain degree of readiness (R0 to R10)



SECTION 2: Developing an effective performancemanagement system in the DLO

The DLO has already invested significant effort, and made important progress, inlaying the foundations of a new and more effective performance management system.In doing so, it has drawn on MoD best practice and learnings from the private sector,as well as developing some innovative approaches of its own. This section assesses inmore detail the progress made to date in establishing each of the five buildingblocks, and identifies the further work that is now needed in each area.

1. Bold aspirations for the future

DLO progress to dateOn formation in 1999, the DLO recognised the need to spell out the fundamentalpurpose of the new organisation, and therefore articulated a mission, a vision and aninitial set of objectives (Exhibit 8). As can be seen from the highlighted sections ofthis exhibit, a number of specific performance aspirations were embedded within its“objectives”, for example “to drive down unit costs through innovative arrangementsfor Non Project Procurement”. These were incorporated into the initial Business Planand disseminated widely throughout the new organisation.

Exhibit 8 DLO mission, vision and objectives

During the course of work with the Panel, the DLO made real progress in setting aspecific and challenging performance aspiration for the organisation, committing toreduce output costs by 20 per cent by 2005 while ensuring the continued outputdelivery and, where appropriate, improvement in the quality of the output (Exhibit 9).In support of this, the Corporate Plan now identifies seven Key Areas for long-termimprovement, which will be the subject of more specific performance targetsembodied in the annual Short-Term Business Plans.

Mission

• To deliver joint logistics support to our Armed Forces.

Vision

• To excel as an integrated and responsive defence logistics team.

Objectives

• To provide the logistic component of operational military capability, through a unified logistics organisation, with overall accountability to the Chief of the Defence Staff (CDS).

• To regard people as our most important resource; to invest in their Equality of Opportunity, Health, Safety, Welfare and Morale, Training and Career Management accordingly, thereby achieving early Investor in People (IIP) recognition throughout the organisation; and to communicate clearly and actively our policies for doing so.

• To advise Ministers, CDS, Chiefs of Staff and the Centre Staffs on strategic logistic policy.

• To meet the material capability and logistic requirements of the Front Line Top Level Budgets (TLBs), and other customers – through close and productive working relationships – within agreed time, cost and performance criteria.

• To exploit fully the opportunities of Resource Accounting and Budgeting, aligning responsibility, accountability and authority for delivery of output at all levels.

• To establish, as rapidly as possible, effective output-based costing mechanisms.

• To exploit synergies and drive down overhead costs through a continuous and dynamic programme of rationalisation, convergence and business efficiency improvement; with particular emphasis on the coherent development and exploitation of Information Systems.

• In concert with the new arrangements planned under the Smart Procurement initiative, to champion a whole-life approach to the procurement and support of military equipment, seeking constantly to drive down whole-life costs.

• To drive down unit costs through innovative arrangements for Non Project Procurement.

• To promote the identification and adoption of best practice throughout the organisation and with industry, and to achieve better value for money from the DLO's suppliers.

Objectives including some performanceaspiration


Exhibit 9 DLO Corporate Plan summaryThe DLO Corporate Plan sets the strategic agenda for the DLO and provides the keydirection against which the DLO Business Plan has been developed. Accordingly, thedefining elements of the Corporate Plan are reproduced below, to set the context forthe more detailed requirements in the subsequent parts of the Business Plan.

Further work neededHaving committed to an appropriately bold overall aspiration, the DLO must nowrelentlessly communicate this sharpened performance aspiration throughout theorganisation, with top management playing a leading role in aligning the organisationaround this.

2. Performance measures

DLO progress to dateThe DLO has taken some important – and in some respects innovative – steps todevelop a balanced scorecard of measures:

• It has made some progress in defining both a balanced and evolving set ofmeasures, and targets based on these (Exhibit 10), covering:

Mission

• To provide joint logistics support to our Armed Forces.

Vision

• To excel as an integrated and responsive defence logistics team.

Strategic Goal

• PeopleWe will provide training to develop the skills, competencies and behaviour needed to deliver the transformation required and to enable everyone to realise their full potential.

• InventoryWe will create a single Defence inventory, sharing information with our suppliers, and we will shorten and rationalise our supply chain.

• IndustryWe will transform our relationship with industry to engage them more effectively in delivering support to our Armed Forces.

• Capital Asset ManagementWe will reduce both the volume and value of stock held and ensure that all of our assets are exploited fully

• Engineering SupportWe will make radical improvements to engineering support, particularly in repair and maintenance,to ensure more complete and higher quality services are provided by both private sector and in-house agencies.

• E-BusinessWe will aggressively exploit the potential of e-business, which will be key to our business transformation programme.

• ConvergenceWe will rigorously examine all parts of the DLO against the principle of achieving maximumintegration of process and capacity across the organisation and remove overlap and duplication.

• To reduce our output costs by 20 per cent by 2005 while ensuring that we continue to deliver, and where appropriate improve, the quality of our outputs.

Key Areas


– Customers: delivery against outputs agreed in customer service agreements(CSAs), covering support to current operations and the performance of 50 IPTs.

– Finance: adherence to budget, including measures such as fixed asset and stockfinancing ratios.

– Internal processes: improvements in internal processes, as manifested inmeasures such as the stock cover ratio.

– Innovation: success in hitting key change programme milestones, for examplethe formation of a Non Project Procurement Office.

Exhibit 10 DLO emerging balanced scorecard, 2000-01

• It has also recognised the need for this scorecard to evolve over time:

– An early version of the scorecard has already been developed and is currentlybeing used by the DLO Board to manage performance of the organisation.

– Agreement has now been reached on a refined version of the scorecard whichwill be implemented for the coming financial year. Many of the measures andtargets (for example, “SDR stock reduction”) will be in place from the start ofthe financial year. A number of additional measures (for example “stock coverratios”) will be introduced during the course of the year when the necessaryunderlying work has been completed.

• Some progress has also been made on target setting, although further work is stillneeded. It is already clear that the two stretching targets relating to the DLOwhich were agreed in the Comprehensive Spending Review, published in the SDRand enshrined in the MoD’s current PSA will be included.2

Customers• Cost of unplanned unavailability

Finance• Gross Operating Costs to Budget (10/00)• Major projects forecast spend to budget• Output cost comparatives (e.g., Level of overheads)

Internal Processes• Demand fulfilment• Total procurement costs as per Supply Chain Integration

at the Point of Purchase• Internal suppliers' performance against internal CSAs

Innovation• E-Commerce• Trading Fund progress (DARA and ABRO)

Key: Currently available or planned to be available from April 2000.Likely to be progressively available during Financial Year 00/01.

Aspirational only at this stage.

Aspirational Additions to Scorecard

Customers• Support to Current Operations• Support to Operational Capability• Military Capability Support

Finance• Forecast of Out-turn against cash allocation• Fixed Asset and Stock Financing Ratios• Asset Delivery Schedule slippage• Forecast Gross Operating Costs against Resource Control

Total (12/00)• Forecast Capital Expenditure vs CAPEX Control Total

(12/00)

Internal Processes• SDR Stock Reduction (quarterly)• SDR Storage/Distribution Reduction• Sickness levels (civilian, proxy for morale)• Stock Cover Ratios (by Repairables and Consumables)• Supplier performance: – Number of suppliers (short-term measure only) – Supplier capability ratings • Fixed asset capacity (proxy for Asset Utilisation)

Innovation• Initiative monitoring• Non Project Procurement Office• Land Rover Public Private Partnership• Other Business Development Initiatives• Managing Under RAB• Whole Life Costing

Basic Scorecard agreed for 2000/01

2 A 20 per cent, or £2.2 billion, reduction inthe book value of stock over the next threeyears, and a 3 per cent annual efficiency savingin operating costs over each of the next fouryears.

• Finally, the DLO is planning to experiment with scorecards at lower levels of theorganisation. It is planning to pilot cascaded versions of the scorecard in the seaand air equipment support business units during the early part of the comingfinancial year. These will be consistent with, but not identical to, the top levelscorecard.

Further work neededOverall, notwithstanding this good early progress, a great deal remains to be done.The DLO should now push rapidly ahead in refining and implementing the balancedscorecard of performance measures and targets, and – as an input to this – in refiningand agreeing with internal customers the outputs it should deliver. Specificrecommendations are as follows:

• It should undertake a comprehensive diagnostic of its performance drivers to informthe overall design of the scorecard. To create a robust scorecard, a comprehensiveanalysis is needed of the performance drivers of the organisation, and theimprovement opportunity associated with each of these. A “top down” diagnosticanalysis of this kind is crucial for three reasons:

– First, it provides a basis for building understanding and alignment within theorganisation of what drives performance.

– Secondly, it provides a basis for identifying the input and output measures andpredictive indicators which should be included in the scorecard.

– Thirdly, it provides a basis for setting challenging improvement targets for bothcategories of measure, based on a realistic assessment of the scale of theimprovement opportunity.

The DLO has yet to undertake a comprehensive overall diagnostic of this kind, andtherefore does not have a robust picture of the key outputs and performance driversof the organisation, or the scale of the improvement opportunity associated withthese. As a result, whilst a number of the measures already identified in the draftscorecard are clearly appropriate for inclusion, it is not possible to say with anyconfidence that the overall set of measures identified thus far are the appropriateones. Nor will it be easy for the DLO to set appropriately challenging targets based onthese. The DLO therefore must undertake a diagnostic assessment of its performancedrivers as a matter of urgency.

• Based on this diagnostic work, it should specify in detail a balanced set ofscorecard measures, and a demanding set of targets to meet the overall 20 per centgoal, ensuring consistency with other areas of the MoD.

– Once a robust overall scorecard framework has been agreed, the DLO shouldpress ahead – as it is planning to do – with completing the detailed definitionof individual measures, and setting short term and medium term targets for eachof these (so far, in many instances an area of interest (e.g., whole life costing)has been identified, but no specific performance measure attributed).

– In doing this, it is important to remember that the DLO represents only oneelement in the overall MoD procurement system. Ultimately, a coherentperformance management approach – including a consistent set of measures andtargets – will be needed across all parts of this procurement system. This hasyet to be achieved. As the DLO finalises its overall scorecard structure and thedetailed definition of measures and targets, it will be important to ensureoverall consistency with those of other areas of the MoD.



• It should incorporate measures and targets agreed for the DLO into future versionsof the MoD’s PSAs.

• The DLO should continuously refine the current CSAs, in particular developing robustand granular output-based costings in line with RAB principles; and work with itsinternal customers to enhance their capability to act as “intelligent customers”.Based on the encouraging early work in developing CSAs, there is real potential forthese to become a major driver of improved performance throughout the DLO. Butthere is still much to do before this is achieved. It is apparent that the quality ofthe current CSAs varies significantly. Even the most well-developed of the CSAs isin need of considerable further refinement. One particular area where furtherprogress across the board is needed is in developing robust and granular output-based costings so that well-founded decisions can be made on required outputsand how best to satisfy these (the CSAs for the 1999/2000 financial year areuncosted, pending the introduction of the accounting systems necessary tosupport output-based costing).

• It should cascade the measures and targets down the organisation, creating acoherent set of lower level balanced scorecards as necessary. Once the overallscorecard has been finalised, the DLO should press ahead with its existing plans tocreate scorecards for its eight constituent business units, and possibly lower downthe organisation as well. These scorecards will not exactly replicate all aspects ofthe top level scorecard, but in all events they and the top level scorecard shouldbe consistent (and where necessary the top level scorecard should be adjusted toreflect this “bottom-up” input). The development of these cascaded scorecardsshould involve key individuals within the relevant business units. It will beimportant to ensure that the targets currently in place for the various agencieswhich form part of the DLO are harmonised with this overall framework (Exhibit 11).

• It should also review and reduce the number of change initiatives currentlyunderway. Some 240 change initiatives are currently underway in the DLO. Thisruns the risk of overstretching the organisation. Going forward, the DLO shouldfocus its energies on pursuing a manageable number of initiatives which offermaximum opportunity to improve targeted performance. Any initiatives which willnot contribute to improving targeted performance should be cancelled. The DLOhas already started to address this. It should now bring this review andprioritisation exercise to an early conclusion.

3. Ownership and accountability

DLO progress to dateThe DLO has already made some good progress in this area, and has decided on – andin some cases started to put into practice – a number of important principles:

• Each measure in the overall scorecard will have an overall “sponsor” at DLO Boardlevel. The sponsor will be responsible for the detailed definition of the measure,for ensuring that appropriate data collection mechanisms are in place to supportthis, and for advising the Board on performance issues relating to this measure.For example, Director General Equipment Support (Air) will be responsible fordeveloping the new “unplanned unavailability” measure.

• The accountability for delivering each top level measure will be clearly identified andcascaded down the organisation, and where appropriate matched with control overthe necessary resources to deliver targeted performance.

Exhibit 11 DLO structure

– A cascaded approach will be used in allocating accountability. For example,accountability for meeting the top level target for “forecast of out-turn againstcash allocation” (i.e., the forecast of cash that is actually spent in the yearcompared with the amount allocated at the beginning of the year) will be splitbetween each of the main DLO business units. Within each of these businessunits, accountability will then be cascaded further down the organisation – toIPT level in the case of the Equipment Support business units.

– Both accountability and authority will be pushed down the organisation.Although a comprehensive assessment was not part of this exercise, substantialformal delegations of accountability and control over resources are being madeto the leaders of those IPTs which have already been formed in the equipmentsupport business units of the DLO (sea, land and air) (Exhibit 12). In total, the50 IPT leaders have been given delegated authority over a support budget of£2.75 billion. This accords with the best practice “heavyweight project manager”model which was agreed as an integral part of the overall package of SmartProcurement recommendations. The leaders of established IPTs interviewed aspart of this effort have confirmed that these delegations are working in practiceand have expressed broad satisfaction with the degree of accountability andauthority that this model affords them.


Ship Support Agency (SSA)

Director General Equipment Support (Army) (DGES(A))

Naval Bases and Supply Agency

(NBSA)

Defence Communications Support Agency

(DCSA)

Director General Logistic Support

(DGLS)

Defence Storage and Distribution Agency

(DSDA)

Defence Clothing and Textile Agency (DCTA)

British Forces Post Office (BFPO)

Defence Transport and Movement Agency (DTMO)

Chief of Defence Logistics (CDL)

DLO HQ(inc. DG Communicationand Information Services

Business Unit)

Director General Support Mgt (RAF)

(DGSM(RAF))

Army Base Repair Organisation* (ABRO)

Defence Aviation Repair Agency*

(DARA)

Equipment support deciders

Support providers Specialist repair providers

*Both planning to move to Trading Fund Status within three years.

Agency, with formal targets endorsed by Ministers and reviewed by Public Accounts Committee (not yet consistent with balanced scorecard).


Exhibit 12 Authority and accountability of IPT leaders for provision of support services (delegated from two-star level in DLO*)

Further work neededAs the new organisation rolls out, the DLO should proceed as planned in allocatingaccountability for each measure and in driving accountability down the organisation.Specifically:

• As the overall balanced scorecard is refined and finalised, the DLO should firm upon the allocation of accountabilities for delivering each measure/target.

• It should also take steps to ensure that accountability is delegated to theappropriate level within the organisation.

– In the equipment support business units, it should continue to delegatesubstantial authority and accountability to IPT leaders as IPTs are formed andlaunched, as envisaged under Smart Procurement.

– It should also explicitly review the delegation of accountability and authority inother areas of the DLO to ensure that these have been driven down to the mostappropriate organisational level.

4. Rigorous performance review

DLO progress to dateThe DLO has made some encouraging early progress in defining a robust overallperformance review architecture:

• Targets will be set annually in the context of the departmental short term planninground. As part of the annual exercise to develop and agree the MoD’s Short-TermPlan, the DLO will agree overall performance targets for the organisation, as well asconclude revised CSAs with internal customers.

• The DLO Board has already started to monitor overall performance of the organisationon a monthly basis, using the preliminary version of the balanced scorecard. TheDLO plans to continue this monthly cycle of Board level performance review.

• There is evidence of regular performance dialogue with internal customers. Theprocesses and mechanisms for engaging internal customers in a dialogue aboutperformance have yet to be finalised, and approaches appear to vary significantly

• Financial: to commit expenditure within budgetallocated **

• Contractual: n/a (authority delegated to contractsofficer)

• Personnel: to decide on– Number and grades of most IPT posts– Disciplinary penalties for civilian staff and

dismissal/downgrading of staff in case ofinefficiency

• Other: to take all other day-to-day managementdecisions relating to IPT

Key authority

• Financial: to ensure– Economic, efficient and effective use of all resources– Adherence to agreed accounting and budgeting

requirements– Reporting of write-off losses

• Contractual: to observe a defence procurementpolicy/procedures/practices in regard to contracts/localpurchases

• Personnel: to ensure – Efficient, effective and economic use of manpower– Adherence to internal policies, e.g., equal opportunities

• Other: to ensure– Adherence to regulations of MoD, Treasury, Cabinet

Office and legal requirements– Proper management of assets (stores, equipment,

property)

Key accountability

* Also answerable to 2nd customer for delivery of outputs agreed in CSA.** Up to £100m, subject to a limit of £50m on development activites.

in different areas. However, leaders of the more established IPTs (and theirrespective customers) have given encouraging reports of the frequency and qualityof the performance dialogue, highlighting in particular extensive day to daycontacts between the IPT and the internal customer, both at an IPT member andIPT leader level; and regular (typically quarterly) formal performance reviewsinvolving senior staff from the internal customer organisation.

• There is also evidence that regular and constructive performance review mechanismsare starting to emerge within the DLO organisational structure. No settled approachhas yet emerged on the frequency and nature of the internal DLO dialogue betweenaccountable middle-tier managers and their superiors. However, early indicationsfrom those more established IPT leaders suggest that, in some areas at least, aconstructive approach is emerging. Two of the IPT leaders described constructive“one on one” meetings taking place every six to 12 weeks, focused around progressin delivering CSA targets, with the emphasis being on “light touch” coaching ratherthan heavy handed and directive intervention.

Further work neededThe DLO now needs to press ahead with institutionalising a rigorous performancereview process and developing supporting management reporting.

• The DLO should finalise the emerging performance review architecture and implementthis consistently across the organisation. It was clear from our discussions with DLOthat there is still considerable variation in approach across DLO, in particular onengaging internal customers in a performance dialogue, and undertaking internalDLO performance reviews. The DLO should now seek to define and implement aconsistent approach across the organisation, building on some of the encouragingpractices which are already evident.

• It should design appropriate management reporting to support this process, and putin place the necessary systems solutions to support it. There is still substantial workneeded to design appropriate management reports to support the performancereview process and put in place the systems solutions which will enable these tobe generated on a highly automated basis. The DLO should focus on this importanttask as soon as the overall suite of performance measures and targets has beenfinalised.

• It should also ensure that appropriate knowledge transfer mechanisms are in place tosupport this.

5. Reinforcements and incentivesGiven the early stage in the creation of the key components of a performancemanagement system for the DLO, this report does not emphasise reinforcements andincentives. This is, however, a critical issue, and DLO should conduct a thoroughreview of reinforcements (in particular incentives) once the other main building blockshave been put in place, referring to the detailed Public Services Productivity Panelmaterial on this topic3.

Implementation

Next StepsIn summary, the DLO has made an encouraging start on aspects of its overallperformance management system, but much still remains to be done.

The specific recommendations on next steps made throughout this section aresummarised in Exhibit 13. If these are addressed comprehensively and effectively,they should lead to the establishment of a truly performance-oriented culture in the


3 “Incentives for Change” – Rewardingperformance in national government networks.


new organisation. One critical requirement to deliver successfully on this programmewill be the sustained involvement of, and leadership from, the highest managementlevels within DLO. Assuming that this leadership and focus is forthcoming, the greatmajority of these recommendations can and should be successfully implementedwithin the next 12 months.

Exhibit 13 Recommended next steps

Early ProgressBased on these recommendations, the MoD has already taken the following actions:

• Most significantly, the Chief of Defence Logistics and the DLO Board havecommitted themselves to a single over-arching goal of achieving a radical costimprovement by reducing output costs by 20 per cent by 2005, whilst maintainingboth the quantity and quality of output required by customers.

• Furthermore, the MoD has now committed to develop its own balanced scorecardfor the Department as a whole, bringing together key measures from the DefenceProcurement Agency (DPA), the DLO and the Operating Commands.

Post-project evaluation approachThe following post-project evaluation approach has been agreed by the DLO:

• Minister Defence Procurement to review the DLO’s progress in implementing theserecommendations as part of the quarterly Smart Procurement Initiative review.

• DLO to report progress publicly in September 2000.

Communicate the sharpened DL0 performance aspiration 1. Relentlessly communicate this sharpened perfomance aspiration throughout the organisation.

Push rapidly ahead in refining and implementing the balanced scorecard of performance measures andtargets, and in refining and agreeing with internal customers the outputs it should deliver.

2. Undertake a comprehensive diagnostic of its performance drivers to inform the overall design of thescorecard.

3. Specify in detail a balanced set of scorecard measures, and a demanding set of targets to meet the overall 20 per cent goal, ensuring consistency with other areas of the MoD.

4. Incorporate measures and targets agreed for the DLO into future versions of MoD's PSAs.5. Continuously refine the current CSAs, in particular developing robust and granular output-based

costings in line with RAB principles; and work with its internal customers to enhance their capability toact as "intelligent customers".

6. Cascade the measures and targets down the organisation.7. Review and reduce number of change initiatives currently underway.

Proceed as planned in allocating accountability for each measure and in driving accountability down the organisation

8. Firm up on the allocation of accountabilities for delivering each measure/target.9. Continue to delegate substantial authority and accountability to IPT leaders.10. Explicitly review the delegation of accountability and authority in other areas of the DLO to ensure that

these have been driven down to the most appropriate organisational level.

Institutionalise a rigorous performance review process and supporting management reporting11. Finalise the emerging performance review architecture and implement this consistently across the

organisation.12.Design appropriate management reporting to support this process, and put in place the necessary

systems solutions to support it.13. Ensure that appropriate knowledge transfer mechanisms are in place to support this.

Review reinforcements14. Conduct a thorough review of reinforcements (in particular incentives) once the other main building

blocks have been put in place.

Appendix: The performance management framework

This section provides a detailed explanation of the five key components of aperformance management system.

Creating a bold aspiration for the futureA bold aspiration is needed to stretch and motivate the organisation. A number ofkey principles should be applied in developing this:

• It should be clearly linked to the core purpose of the organisation, stretching andtangible.

– It should flow directly from, and support, the overall mission and vision of theorganisation.

– It should be bold and stretching, in order to challenge and energise all levels ofthe organisation.

– It should focus on the key aspects of performance against which the success ofthe organisation will be judged (for example, customer satisfaction, unit costs,etc.) and should be sufficiently explicit to serve as a basis for setting concreteperformance measures and targets.

• It should be clearly articulated, and communicated relentlessly throughout theorganisation, with clear buy-in from the leadership.

Some specific examples of compelling performance aspirations are summarised inExhibit 14.

Exhibit 14 Bold aspiration – examples

Defining coherent performance measures, and a demanding set of targets based onthese A coherent set of performance measures, and a demanding set of targets based onthese, is required to translate this aspiration into a set of specific metrics againstwhich performance and progress can be measured. The following principles should betaken account when defining these:

• A balanced set of measures, and a demanding set of targets based on these, shouldbe developed and evolved as necessary over time.

– A mix of measures should be used:

• In recognition of the fact that the performance of the organisation will notbe judged solely in financial terms, both financial and non financial measuresshould be included.

"Our goal is to be the number one beverage, ahead of water"

"Be number one or two in every market in which we compete"

"One key objective – to be the world's premier packaging company"

"To better humanity as the world's leading healthcare company"

"Produce the highest quality products at the lowest relevant global cost"

"Encircle Caterpillar"*

"We'll put a man on the moon by the end of the decade" (early 1960s)

Coca Cola

GE

Jefferson Smurfit Group

Johnson & Johnson

Emerson Electric

Komatsu

President Kennedy

*Its leading competitor



• The measures should be both forward and backward looking. Specifically, thereshould be a mix of input measures, which focus on the availability andmanagement of the resources required to deliver the desired end result;output measures, which focus on current success in delivering the desired endresult; and predictive indicators, which focus on whether individuals withinthe organisation are taking the actions and adopting the behaviours requiredto deliver future performance, thus allowing any problems to be identifiedearly. An example of how these different types of measures link together insupport of the overarching outcome is set out in Exhibit 15.

Exhibit 15 Comparison of different types of performance measure

• A manageable number of measures should be selected to help managementfocus on the critical performance issues facing the organisation and makeappropriate trade-offs between the different performance levers available. Theappropriate number will vary depending on the nature of the organisation,but typically it is appropriate to focus on around 10 measures at eachorganisational level.

– Stretching multi-year targets should be set.

• In line with the overall performance aspiration, the targets set should bedemanding. They should reflect assessed opportunity, rather than incrementalimprovement on existing performance.

• Continuous performance improvement should be targeted for each of theseoutput measures and indicators: i.e., annual targets for each measure shouldbe set covering the current year, as well as medium-term (3-5 year)improvement goals.

• The suite of measures and targets should not be “set in stone”. Rather, theyshould be developed and changed as necessary over time to reflect theachievement of earlier targets and/or any changes in the priorities andaspirations of the organisation.

• The suite of measures and targets should be cascaded down the organisation in aconsistent manner, to the lowest possible level.

• Immediate result of activities

• E.g., number of "frigate days" available for scheduling

• Staff or physicalresources requiredto deliver an output

• E.g., operatingbudget to providesupport to frigates

• Current activities which directly impact on future delivery of outputs

• E.g., level of stock for spares held

• The ultimate result that the Government seeks to achieve

• E.g., military capability as outlined in the Strategic Defence Review

Input measure

Output measure

Predictive indicator

Outcome

• The suite of measures and targets should be used to drive the performanceimprovement agenda of the organisation. The focus should be on undertaking amanageable number of initiatives which are designed to deliver tangibleimprovements against the measures and targets set. Any initiatives which will notcontribute to improving targeted performance should be discontinued.

Some specific examples of the effective definition of measures and targets by privatesector companies are described in Exhibit 16.

Exhibit 16 Measures and targets – private sector examples

Establishing ownership and accountability, with clear responsibility for deliveringeach targetAssigning clear accountability for these targets at an appropriate level within theorganisation is an important requirement. The individuals who are best placed toensure their delivery must have real ownership for doing so. The following keyprinciples should be applied in developing an overall approach:

• Accountability for delivering against each target should be clearly specified.Accountability can be assigned to an individual, or a group of individuals or team,as appropriate.

• Accountability should be delegated to the level within the organisation where therequisite decisions can most effectively be taken: that is, to the level where the bestbalance of information and understanding exists in terms of detail, context andrisk.

Best practices Examples

• Both financial and • NW Mutual: uses "policy persistence rate" (percentage of non-financial policy owners who renew) as one of main goalsmeasures should be • GE: uses a combination of individual financial goals andincluded 'soft' values to determine performance

• The measures should • Oil Company: uses a mix of input measures (eg., be both forward and capex), output measures (eg., volumes) and predictivebackward looking indicators (e.g., finding cost, time to first oil)

• A manageable • Oil Company: 13 top level targetsnumber of measures should be selected

• The targets set should • Nucor: "Goals are set so that there is 60 per cent certaintybe demanding of achieving them"

• Emerson Electric: "Consistent high performance requiresambitious and dynamic targets"

• Continuous • Oil company: uses a combination of medium-termperformance targets (3-5 years) and annual milestonesimprovement should be targeted

• The suite of measures • Frito-Lay: "There is a constant updating of goals. Whenand targets should not one major target is met, another is immediately created"be "set in stone" • Navy Seals: "Always a new mountain to climb

• The suite of measures • HP: "Employees are expected to set 8-10 individual goalsand targets should be that derive from the overall company objectives"cascaded down the organisation



• In many cases, it is appropriate to align accountability with “authority” (that is,control over the resources required to deliver the targeted performance). In nocircumstances should authority be assigned without accountability.

Examples of effective definition of accountability in some private sector companiesare set out in Exhibit 17.

Exhibit 17 Private Sector examples of effective assignment of accountability

Defining a rigorous performance review processA rigorous performance review process is needed to ensure that continuouslyimproving performance is being delivered in line with expectations, and to enablecorrective action to be taken where necessary. The following key principles should betaken account of in designing such a process:

• A coherent overall performance review architecture is needed.

– A structured overall cycle is required which typically involves the following(Exhibit 18).

• An annual target-setting exercise.

• A regular cycle of performance reviews.

• Effective analysis of root causes of any under-performance, andplanning/execution of any required remedial action.

– The leadership of the organisation should be integrally involved. The performancereview process is a critical tool for guiding and driving the performance of theorganisation. Direct involvement of top managers is therefore essential.

– A constructive style and approach should be adopted in performance discussions.Put simply, the interactions should have a “board room”, not a “court room”,flavour.

BP Amoco - Exploration ABB

• Approximately 100 independent BUs reporting directly to Executive Committee.

• Performance contract with ExCo agreed, setting out performance to be delivered. BU leader fullyaccountable for delivering agreed performance.

• BU leader has control over key operating resources required to deliver this (specified in performance contract).

• 1,200 independent incorporated business units broken down into ~5,000 autonomous profit centres.

• Almost all profit centres have their own P&L and balance sheet, and are accountable for delivering agreed performance goals.

• Profit centre has control over resources required to deliver agreed goals.

Executive Committee (ExCo)

Performance Contract

BU BU BU

Corporate Staff (~150)

Group Executive Management (~8)

Regional Managers (~60)

Business Area Managers (~55)

BU BU BU BU

Profit centre

Exhibit 18 Rigorous performance review process

• The process should be supported by transparent management reporting. Wellstructured management information should be made available to everyone in theorganisation who needs it. In terms of report generation, “workarounds” may berequired initially as new management information systems are developed. However,it is important to ensure in the medium term that efficient automated systems forcapturing data and generating performance reports are put in place: cumbersome,manually driven systems run the risk of falling into disuse over the longer term.

• Effective mechanisms should be put in place to ensure transfer of best practicelearnings within the organisation.

Examples of the performance review processes in one private sector company are setout in Exhibit 19.

Key Element Objective Frequency Characteristics

• Set stretching • Typically annually • Rigorous, fact-based assessmeimprovement goals of opportunity

• Mix of top down stretch and bup input/analysis

• Often undertaken as part ofplanning cycle

• Identify performance • Regular cycle, • Reviews at multiple levels witshortfalls and ensure typically organisation (including topthat they are monthly/quarterly management)addressed • Focus on results, not activity

• Supported by transparent, conmanagement information

• Decide how to deliver • Variable • May be undertaken within exiimproved performance structures, or by ad hoc projec

teams (cross functional approoften needed)

• Should result in robust actionand agreement on resourcesrequired to deliver these

Targetsetting

Performance review

Root cause analysis/action planning



Exhibit 19 Rigorous performance review process – private sector example: General Electric

Implementing meaningful reinforcements and incentivesAn effective performance management system requires the creation of meaningfulreinforcements to motivate individuals to deliver the targeted performance. Thefollowing key principles should be taken into account when designing an effective setof reinforcements:

• A mix of reinforcements should be used, including:

– Creating meaningful incentives (both financial and non-financial).

– Creating opportunities for high performers to progress swiftly.

– Instilling strong values and beliefs capable of driving the behaviours ofindividuals within the organisation.

• Success or failure in delivering targeted performance should result in realconsequences at an individual level. This is crucial to focus individuals ondelivering the end result for which they are accountable.

• Incentives should be “graduated, not binary”. Incentives need to have a progressiveeffect – if they only focus on the extremes of performance (whether positive ornegative) they will not have any relevance for those “middle ground” performerswho are not at risk of seriously underperforming, and who regard an outstandingperformance as beyond their reach.

Key Element Objective Frequency Characteristics

• Set stretching • Annually (every • Stretch goals and targets are linkedimprovement goals June/July) to 3-year strategic plan

• Identify performance • Formally: once a year • A combination of formal and informalshortfalls and ensure • Informally: quarterly performance review processes usedthat they are • Critical business • Structured performance data enableaddressed units: monthly effective analysis and reporting to

corporate level

• Decide how to deliver • Varies • CEO Welch gets deeply involved ifimproved performance a unit "does not smell right"

• Regular follow-up is an essentialpart of GE's performance reviewprocess

Targetsetting

Performance review

Root cause analysis/action planning

As part of its comprehensive plan for modernisation, the Government hasbrought together a small team of senior managers and consultants, mainly fromthe private sector, to provide a new perspective on some of the difficult issuesthat public services face in their drive to improve performance.

Each member of the Public Services Productivity Panel is focussing on adifferent area of government, working with individual departments and agenciesto identify solutions that will increase productivity. In doing so, the Panelrecognises that there is no monopoly of wisdom in the private sector about howto raise productivity. Instead, the Panel hopes that its fresh perspective,coupled with learning from the good practice and innovation that is alreadywidespread in the public sector, will lead to improvements.

This report, by John Dowdy of McKinsey, reviews the performance managementsystem which is being developed by the newly formed Defence LogisticsOrganisation against the model developed by the Panel. The report summarisesprogress to date and identifies priorities for further action. It will be relevant tomany public services, in particular those which provide services to internalcustomers.

Further copies of this document are available from:

The Public Enquiry Unit

Room 88/2

HM Treasury

Parliament Street

London SW1P 3AG

Tel: 020 7270 4558

Fax: 020 7270 4574

E-mail: [email protected]

This document can be accessed from the Treasury’s Internet site:

http://www.hm-treasury.gov.uk