1. business and industrial
2. business operations
3. human resources

Chapter 11, Six Steps of
Performance Measurement
Our new corporate motto is
READY…FIRE…AIM
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Figure 11.1,
The Management
Cycle
Operating plans
and budgets
Project
management
Needs
Assessment
Performance
Measurement
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The perfect world
In a perfect world, a measurement
system will actively promote
performance improvement by;
• measuring what matters,
• providing corrective feedback and
positive reinforcement to enthusiastic
people who enjoy being measured and
take improvement on as a challenge.
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ATTRIBUTES OF A GOOD
MEASUREMENT SYSTEM
• An effective performance measurement
system should have the following attributes.
• FOCUS ON EFFECTIVENESS
– 1) We have a need to measure better.
– 2) We have a need to measure less.
• FOCUS ON THE FUTURE
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ATTRIBUTES OF A GOOD
MEASUREMENT SYSTEM
• FOCUS ON OBJECTIVES,
“KEY RESULT AREAS”
–KRAs are those functions or
divisions of performance in which
your organization must
continually improve to be
successful.
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EXAMPLES OF “KEY
RESULT” AREAS
•
•
•
•
•
•
•
•
•
Customer
Product/service
Public/society/natural environment
Marketing
Human Resources
Production
Maintenance
Operations
Finance
• Good measurement systems don’t just
measure things done according to the
organizational chart. Good systems measure
things done to satisfy stakeholders.
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Key Performance
Indicators “KPI’s”
• This is the essence of measurement. Let’s
make sure the concept of Key Performance
Indicator is understood.
– An “indicator” is a gauge or a measure that
reports information.
– “Performance” is the result or activity we are
looking for that fits in to strategic goals.
– “Key” means that this measure has been
pinpointed so carefully that management knows
precisely what to do.
– Measures are developed to capture both the input
and output elements of a business system.
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SPEED INDICATORS
•
•
•
•
•
response time records
turn around time records
cycle time records
project completion dates
meeting scheduled time records
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ACCURACY INDICATORS
• judgment based climate or opinion surveys
–
–
–
–
focus groups
comment cards
telephone surveys
advisory panels
• opinions of community leaders
• meeting design specifications or passing an
inspection point that ensures the product works.
• Customer returns or warranty claims.
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VOLUME INDICTORS
• Measures the amount (Number of) of
outputs or results from a specific
activity or program. number of units
produced
– number of completed transactions
– % market share
– Back order statistics
– Number of failed sales due to being out of
stock
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INVESTMENT INDICATORS
• Measures the amount of resources
expended on a specific program or
activity or the unit cost (cost/number of
units produced ($)).
–
–
–
–
operating costs per unit produced
capital costs per unit produced
cost per customer as to sales and marketing expenses
cost per unit of after sales service and customer support.
• Notice that the financial measures are
“per” something
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‘Six Steps’ of a
Measurement System
1. Separate Strategic Goals Into Input and
Output Dimensions
2. Develop Output and Results Measures for
each goal
3. Develop Input Measures for each goal
4. Check with SAVI to see if the set of
measures is complete
5. Use an Effective Recognition System
6. Build the Culture
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Step 1, Separate Strategic
Goals Into Input and
Output Dimensions
• Following from Vision, Mission and Values,
organizations create strategic goals that
identify “Key Result” areas of the
organization where change and improvement
is possible and desirable.
• Our first step in developing measures to
reflect the goal is to dissect the goal into its
input and output dimensions.
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Broad
measurement concept of
inputs
Figure 11.2,
unit cost efficiency
Input
dimension
How well are materials used, (excessive waste)
How well is labour used, (excessive idle time)
How well is overhead used (idle capacity)
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Broad
measurement concepts of
Outputs
Figure 11.3,
Internal
Results
maintaining and improving quality
lower consumer prices
Output
Dimension
External
Results
financial returns
improve market share
meet current and future demand
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Step 2, Develop Output
Measures or Each Goal
• Outputs are accomplishments. In most
organizations, accomplishments can be
categorized into three groups.
–Investment returns
–Customer Satisfaction
–Social Impacts
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Measures of
outputs or Results.
Figure 11.4,
OUTPUT MEASURES
CATEGORY
MEASUREMENT
CONCEPT
Financial
returns
Investment
Returns
Market
share
PERFORMANCE
MEASURE
PERFORMANCE GOAL
(changes of specific amounts over
specific time frames)
% return on
investment
% return on assets
employed
Profit margin on
sales
All should increase by a specific
% change, to be accomplished
by a specific date.
% market share
relative to the
competition
% market share
relative to total
market size
The proportion of the market
share against the competition
should increase.
The proportion of the market
share relative to the total market
should increase at a rate that is
faster than the rate of change in
total market size.
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Measures of outputs or
Results
Customer
Satisfaction
Product or
service
quality
Rejection rates in
the production
process
Sales returns
Both should decline by a specific
amount in a specific timeframe.
Deliver on
time and in
sufficient
quantity
Backorder and
delivery statistics
Backorders should decline and
delivery cycle times should
improve.
Consumer
prices
Retail price by
product
The retail price matched to value
should decline.
Child
development
Improvement in
reading skills
Children using these toys should
show a measured improvement
in reading skills
Environment
al impact
Impact on landfills
when the toy is
finished
The proportion of toys presented
for re-cycling should go up.
Social
Benefits
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Step 3, Develop Input
Measures For Each Goal
• We normally develop input measures
after we have developed output
measures because it is a good idea to
know where you are going before you
decide how to get there.
–Financial operating resources
–Financial capital resources
–Other organizational resources
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Measures of
Inputs or Efficiencies
Figure 11.5,
INPUT MEASURES for “UNIT COST EFFICIENCY”
CATEGORY
MEASUREMENT
CONCEPT
PERFORMANCE MEASURE
PERFORMANCE GOAL
Direct materials and direct
labour per unit, expressed in
both dollar and quantity terms
Material and labour cost and or
consumption per unit should
decline over a specified time
period
Overhead charged per unit
Overhead consumed per unit
produced should decline
% utilization of capacity
%capacity utilized should
increase to or remain at
optimal levels
Capital investment in
operating assets
Dollars of capital investment
per unit produced
Dollars per unit of capital
invested should decline over
time as capital resources are
used more efficiently
Non-financial
resources consumed
by the performance
area
Management estimates of the
resources of talent and
energy and other nonfinancial resources that have
been dedicated to this
performance area
The amount consumed will
increase as the project is
developed and decrease after it
is implemented
Materials and
labour
Financial
Operating
Resources
Overhead
Financial Capital
Resources
Other
Organizational
Resources
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Step 4, Check with SAVI to
see if the set of measures
is complete
• Before we can be sure that we have a
complete set of measures, we need to
apply the SAVI framework to categorize
the measures as to Speed, Accuracy,
Volume and Investment.
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Linking Output
Measures to SAVI
Figure 11.6,
OUTPUT MEASURES
CATEGORY
MEASUREMENT
CONCEPT
financial returns
PERFORMANCE MEASURE
% return on investment
% return on assets employed
Profit margin on sales
SAVI
Accuracy
Investment
Returns
market share
Product or service
quality
Customer
Satisfaction
Deliver on time and
in sufficient quantity
Consumer prices
Child development
% market share relative to the competition
% market share relative to total market size
Rejection rates in the production process
Sales returns
Backorder and delivery statistics
Retail price per product
Improvement in reading skills
Volume
Accuracy &
Volume
Speed &
Volume
Investment
Accuracy
Social Benefits
Environmental
impact
Impact on landfills when the toy is finished
Volume
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Linking Input
Measures to SAVI
Figure 11.7,
INPUT MEASURES for “UNIT COST EFFICIENCY”
CATEGORY
MEASUREMENT
CONCEPT
Materials and
labour
Financial
Operating
resources
PERFORMANCE MEASURE
SAVI
Direct materials and direct labour per unit, in
both dollar and quantity terms.
Investment
Overhead charged per unit.
Investment
Overhead
% utilization of capacity
Financial Capital
Resources
Capital investment
in operating assets
Other
organizational
resources
Non-financial
resources
consumed
Volume
Dollars of capital investment per unit produced
Investment
Management estimates of the resources of talent
and energy that have been dedicated to this
performance area.
Investment
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Testing the measures
• Once we are satisfied that the set is
complete we need to subject each and
every measure to a test.
Refer to figure 11.8
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Step 5, Use an Effective
Recognition System
• Use Measurement to Initiate Change
– An effective measurement system will use the
measured results as a management tool.
– Every result should have an automatic
intervention strategy.
– When results are as expected we should offer
congratulations and reinforcement to keep it
going,
– when results are less than expected we should
quickly isolate the cause and correct the process
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Step 6, Build the culture
• Good systems need good people. There is
no sense in examining a process unless at
the same time you examine the people
who govern the process.
• Improvement does not take place on paper.
• Improvement happens when people employ enthusiasm,
dedication, commitment, leadership and morale in their daily
routine.
• A good system on paper is a healthy beginning but if you want
results you need to follow up a paper system with a people
system.
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Closing remarks
• In the beginning of this chapter you were
challenged to find measures and see the
resulting behavior.
– So how about the 30 minute pizza delivery
guarantee. That promotes speeding and if a
delivery person has an order at 28 minutes and
another at 10, which does he deliver first? And
what happens if Pizza delivery people are offered
a cash bonus for every delivery made within 30
minutes, and what does this do to pizza quality?
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• People are curious beings. We bring our own
personal values to the job, we react differently to
control systems, we are motivated by different
things. A performance measurement system is a
uniform set of measures that is trying to motivate a
most un-uniform set of people.
• Chapter 12 will deal with how we need to manage
people as part of the performance improvement
process.
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