Performance Dynamics Briefing 1

Designing Effective Measures

Performance Management is the process of linking Strategy to Results. This is done through influencing actions and behaviours by using appropriate performance measures and targets in combination with people, information and enterprise management processes.

Performance Dynamics is focused on improving Performance Management by deploying analytical approaches in the following areas:

• Holistic measure set development
• Target and tolerance setting
• Diagnosis (root cause analysis)
• Action planning (impact analysis)
• Support and training

Do the performance measures used by a company make a real difference? If so, how do you recognise a good set of performance measures? What is the best way to construct a good set? What are the risks? How do we maximise the value from using our measures?

Performance Dynamics answers these questions by:

• Using Systems Thinking to link strategies to the business drivers and the behaviours that will deliver them
• Using qualitative models to bring rigour and understanding to the design of performance measures
• Using quantitative analytical techniques to help clients set realistic targets
• Using dynamic models to simulate the future impact of performance interventions

In this edition we describe why performance measurement is critical within a recession to bring about tangible performance improvement. We also discuss how to capture the dynamics of an organisation with an integrated set of performance measures.

Managing in challenging times

As we experience a period of great uncertainty in the business and global environment there is a need to ensure our performance management is truly in order. We need to ensure that we are focusing on what is truly important and allocating our resources to support this. Rationalisation is a word on many lips – but how to rationalise and not jeopardise delivery of strategic objectives? Are you falling into the temptation of sacrificing future performance for pleasing but unrealistic results now? Are you sure that you are truly achieving all that you can or, getting only what you deserve due to inadequate uncoordinated performance management?

Most people would agree that, used on their own, financial measures of performance tend to be backward looking, slow to respond, and often do not expose the factors which are driving the business. Recognising this, many businesses now monitor a variety of non-financial measures, such as their innovation pipeline, speed of customer service, or quality.

The problem is that these measures have often been added to an existing set simply as the need arose. The measures are not integrated, and consequently do not provide a well-rounded view of how the business is performing today, and the direction in which it is heading.

Having the right measures is essential when analysing alternative cost-cutting proposals. Having the right measures and understanding the relationships between them will highlight the benefits and trade-offs of each proposal so that cost cutting measures can be implemented whilst not letting the company lose focus on its strategic direction.

A common problem with world-class performance management systems is that they are too expensive. For most organisations, adherence to basic principles is what is required. For this we have developed a self-assessment maturity profile (see next page) that you can use to assess the health of performance management in your organisation and so to focus attention on the areas where improvement is most required.

The most important principle at the heart of performance management is the performance measures them-selves. Bad measures can only reinforce bad behaviours and poor performance.

Our process for developing a measurement set uses Systems Thinking to develop a common understanding of the drivers and how the drivers inter-relate to impact the organisation's strategic objectives. The structured workshop approach uses cause and effect modelling to develop a measure set that is a robust consensus of the organisation's management team. This can be readily communicated to others within the organisation to ensure organisational alignment.
Rationalising initiatives

Having developed a set of performance measures, the measures can be used to identify current projects/initiatives that are not aligned to the strategic direction of the organisation. This can be achieved by a simple mapping of initiatives against measures as in the table shown. This will enable the organisation to focus on the projects/initiatives that have the biggest impact on achieving and sustaining its long-term objectives.

• The impact of each project should be analysed against all the measures in the measure set.

• For each measure we need to capture the nature of the impact. Is it positive, negative, strong or weak?

This will highlight the projects with little, no or negative impact on the measurement set. These projects can then be considered as candidates for rationalisation. In the diagram Project 4 should be further investigated and potentially dropped.


The history of the Balanced Scorecard

The Balanced Scorecard was introduced in the beginning of the 1990s by Dr. David P. Norton, and Professor Robert S. Kaplan, a Harvard Business School professor. The Balanced Scorecard facilitates strategy implementation by focusing on the key measures that are the critical drivers for achieving the organisation's strategic objectives. To achieve a holistic view of an organisation the Balanced scorecard has four inter-related perspectives: financial, customer, internal processes, and learning & growth.

Over the years the Balanced Scorecard has become an important tool in performance management and although the underlying perspectives haven't changed the approaches to determining what measures should be included on the scorecard have become more structured and robust. Today the balanced scorecard is seen in many firms as critical to management because it not only highlights the performance of individual areas but also the relationships between the areas.


Self assessment maturity profile

The self-assessment maturity profile enables an organisation to rate its competence on a scale from Innocent (process not established) to excellent across a whole range of performance management capabilities:

• Select measures - Are we confident that the measures used are the appropirate measures and clearly linked to strategy?
• Cascade measures - Have the measures been cascaded throughout the organisation or are the measures used solely at board level?
• Align processes - have the HR and Financial systems been aligned to the measure set?
• Deliver information - do you have confidence that the information systems can deliver the required information on time and fit for purpose?
• Act to correct - are there processes in place to diagnose and correct problems and reward successes?

Systems Thinking

We use systems thinking to develop cause and effect diagrams which show how one factor influences another. An arrow shows the direction of influence, and indicates whether the influence works positively (solid) or negatively (dashed). Sometimes there is a delay before the influence is felt.


In the diagram on the right, an increase in workforce training leads to an immediate increase in costs, but - via a delayed increase in morale and reduction in staff turnover - a delayed reduction in costs
How confident are you that your performance measures are the right ones?

If a measure set or scorecard is going to be used as the basis for rationalising projects and initiatives then it must be clear how they were established, how they link to the strategic objectives of the organisation and how they inter-relate.

When we are asked to review a scorecard or a measure set the first question is always the same – “can we see the audit trail?” – the document which explains why certain measures have been chosen and others ruled out. It rarely materialises. Most organisations grow their scorecard on the whims of managers – they measure what is easy to measure not what really counts. In challenging times it is doubly important to only measure what counts, as measurement can be a very expensive and wasteful activity in its own right. Also with projects and initiatives being rationalised the reasons will need to be clearly communicated and justified. In the last recession one of our clients justified the expense of a performance management redesign project entirely on the basis of the cost reductions that resulted.

So how do we know that we have measures that count?

1. Measures are aligned to strategic objectives
2. They are based on good knowledge of all the business drivers which impact delivery of our objectives, and all the cause and effect inter-relationships which exist between them
3. There is a clear line of sight from each measure to the strategic objectives ie it is clear that there is a pathway of strong cause and effect relationships linking the measure to the objective
4. Measures can be influenced by the organisation – this is very important. Ultimately measures should be capable of being linked to reward. Would you be happy if your reward was linked to results you could not influence?
5. Measures are holistic and balanced. The set of measures must cover the whole system. This includes all the pathways to the delivery of the overall strategic objective: the enablers and the results, efficiency and effectiveness.
6. Coverage is achieved with the vital few. That is the minimum number of measures satisfying the above criteria. This is critical to achieve focus.
7. Measures are unambiguous and actionable – the meaning of a change in value is clear.
8. Measures are cost effective. The value realised by using a measure is greater than the cost of measuring it.

How confident are you that your measures would pass the test?



Strategy mapping

Before designing measures it is important that the managers who will be using the measures have an agreed understanding of what they are striving to achieve (over-riding objectives) and how they are planning to achieve it (key strategies). A strategy map is a useful tool for capturing and documenting managers views.

A strategy map is a visual representation of an organisation's strategy on one page. The map shows how the key strategies (required steps) drive the company's main objective (destination).

The strategy map was developed by Kaplan and Norton (see HBR article "Having Trouble with Your Strategy? Then Map It") around the Balanced Scorecard (also developed by Kaplan and Norton). Like the Balanced Scorecard, a strategy map is generally split into four perspectives – financial (or results), customer (or market or external), internal processes, learning and growth (or people). Within each perspective there will be a number of strategies that are linked to other strategies within the same perspective and with other perspectives.

Together the strategies and their relationships will tell the story of how the company's objectives will be achieved, as shown below.


How do we design measures that meet these principles?

We use cause and effect modelling or Systems Thinking at the heart of a consensus building workshop-based approach called DPM (Dynamic Performance Measurement).


Firstly, we use Systems Thinking to understand the factors or drivers that affect delivery of strategic objectives and the relationships between them. Often we will use a strategy map as the basis for identifying drivers. This is usually done before the workshop(s) and is based on strategy documents and interviews with the right people.

Although at first the Systems Thinking approach seems complicated - often the diagrams are referred to as spaghetti diagrams! - once the methodology has been explained most people become converts.

Within the workshop we filter the drivers, to identify those that really count. These are our HI drivers. Where H indicates that they have a HIGH impact on strategy delivery, and the I indicates that they are INSIDE the organisation’s sphere of influence. All HI drivers are potential measurement points.

We consider the workshop to be critical to the successful development of the scorecard as it builds consensus between a wide variety of views. The participants also usually find the process to be enjoyable and informative. Comments from the previous participants include "This is fantastic", "Excellent methodology - why not before?", "Tremendous work - very solid support"

We then use driver trees to show how the HI drivers inter-relate to deliver objectives and also as a focus for selecting and refining measurement points.


We look for coverage of all branches of the tree (routes to objective delivery) together with a balance of enablers (drivers further down the tree) and results (drivers closer to our objectives).
We aim to achieve this with the minimum number of measures – the so-called “vital few” to achieve focus.

With this approach it is possible to deliver a scorecard of agreed best practice measures with an audit trail very quickly. It also ensures that your management team can confidently use the measures set to secure the future of your business through the uncertain times ahead.

The workshop approach brings the process alive and builds consensus between disperse parties with often very different views on what is important and so what should be measured. The process allows all participants to see why a certain measure was chosen over another. This means by the end of the process there are multiple champions/sponsors who can communicate the results back to their teams.


Case Study - Large Retail Company

The company had suffered a lengthy period of under performance in the retail sector, with consistent rumours of take-over. As a result they had been assessing options to support the creation of a more responsive, customer focussed, dynamic business. They saw a proactive system of performance management as critical to developing responsiveness.

A joint team designed and implemented a Balanced Scorecard for UK Management. This involved developing a Systems Thinking model that reflected their understanding of how the business operated. From this model the drivers were filtered to reflect their importance on achieving the organisation's objectives and on whether they were within the organisations sphere of influence. From the remaining drivers the UK management team selected an appropriate set of measures that would help them manage and drive the business to achieve their strategic ambitions.

Upon the success of the initial UK Management scorecard the Systems Thinking model was enhanced and used as the basis for a cascade to all of the business units within the organisation.

The company viewed this exercise as a key tool in changing managers’ attitudes to the future, focusing on what matters and building a new culture of success within a challenging time. They gained insight into the cause and effect of factors within their business and were able to develop a Balanced Scorecard that highlighted these links.


Cascading measures

A single scorecard in isolation will rarely achieve an organisation’s ambition for alignment and agility. Our systems thinking approach can also be used to cascade measures throughout an organisation. The key to this is an exercise we call “haring out the pack” First of all we need to ensure a truly comprehensive model. Then we identify who in the organisation influences each of the HI drivers we identified at the filtering stage. These will then become separate long lists of drivers for further consideration by the units in question. Alternatively if a complete KPI framework is sought then our briefing number 2 explains our point of view.


Next Steps

Once the measure set has been agreed a detailed definition for each measure is required. For this we use Index Cards which specify the objective, calculation steps, data source, dimensions, aggregation rules and measure owner. These documents are then used to implement the measures within specialised Balanced Scorecard packages such as SAS, SAP SEM, or InPhase PerformancePlus or simply within Excel.

Following the detailed definition of each of the measures, targets and tolerances need to be established. The Performance Dynamics Briefing No 3 discusses this in detail.

Establishing a measure set is only the first part of the Performance Management process. To ensure long-term sustainable benefit from the measure set Performance Management needs to be seen as an ongoing management process rather than a periodic reporting process.