Challenge of Implementing of Effective Performance Measures
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Neely et al. (1997) states that, 'traditionally performance measures have been seen as a means of quantifying the efficiency and effectiveness of action.'
Business managers usually use different types of performance measures to judge the production levels, demand, operating efficiency and results in order to determine how well their business is operating and whether anything needs to be improved.
In this essay I have been asked to, discuss the challenges of designing and implementing effective performance measures and support my discussion with research-based evidence, referring to one or more organisations or examples of my choice.
When it comes to measuring something the first perception that comes to mind is that things that are measures should be tangible. But how would you go about measuring something that is intangible, such as organisations. Organisations are measured by checking how well they are performing.
However, you cannot just say that an organisations performance is doing well, or some part of operations is not very good, in order to determine how well an operation in an organisation is doing, they need to use some sort of methods that have been used before to prove that it is doing well.
One detailed measure that an organisation can use is the balanced scorecard method. This is a performance measurement framework that adds strategic non-financial performance measures to traditional financial metrics to give managers and executives a more balanced view of organisational performance.
To take the balanced scorecard route, an organisation needs to know their mission statement, the strategic plans and vision, the financial status of the organisation, how the organisation is currently structured and operating, the level of expertise of their employees and the customer satisfaction level.
Once an organisation has analysed the specific and quantifiable results, the balanced scorecard approach can be used to improve the areas where they are deficient.
One company that took the balanced score card approach was, Rockwater, a global engineering and construction company who are a worldwide leader in underwater engineering and construction. In the late 1980's the industry started changing and Rockwater had to respond to this. Many leading oil companies wanted to develop long-term partnerships with their suppliers rather than choose suppliers based on their low-price competition.
The senior management team decided to develop a vision, 'as their customers preferred provider, they shall be the industry leader in providing the highest standards of safety and quality to their clients.'
With this vision they also created a strategy which they transformed into the balanced scorecard's four sets of performance measures, which can be seen below.
For short term financial results Rockwater wanted to implement return on capital employed and cash flow, while profit forecast reliability showed the desire to reduce the historical uncertainty caused by unexpected variations in performance. Project profitability will provide focus on the project as the basic unit for planning and control, while sales backlog helps reduce uncertainty of performance.
The company's strategy on customer satisfaction was to emphasize value-based business. An independent organisation conducted an annual survey to rank customers' perceptions of Rockwater's services compared to its competitors. In addition, tier 1 customers, such as oil companies, were asked to supply monthly satisfaction and performance ratings. Executives felt that having these ratings gave them a direct tie to their customers and a level of market feedback unsurpassed in most industries.
The internal business measures emphasized a big shift in Rockwater's thinking. The new focus was based on measures that integrated key business processes. The development of a comprehensive and timely index of project performance effectiveness was viewed as a key core competency for the company, as well as safety which was also a major competitive factor.
Rockwater's improvements came from product and service innovation that would create new sources of revenue and market expansion, as well as from continuous improvement in internal work processes. (HBR 1993)
The balanced scorecard has helped highlight a process view of operations, motivate its staff and integrate client feedback into its operations. It created an agreement on the need of creating partnerships with important clients, the importance of safety within the company and the necessity for improved management at every stage of long projects. Rockwater's senior management team see the balanced scorecard as a vital tool to help achieve its vision.
The balanced scorecard tool is seen as an effective way to measure the performance of an organisation if the implementation is done correctly and executives recognise that it is a long term commitment.
However, when organisations use the balanced scorecard as a quick fix many things can go wrong and organisations will receive disappointing results. Some issues that can cause a balanced scorecard to fail include, poorly defined metrics. When creating a balanced scorecard metrics need to be clear and relevant and need to be collected when decision making is being done and they need to be applied across the organisation consistently.
The balanced scorecard encourages an internal focus. This can affect the way organisations put this into practice. To stop this from becoming a problem, organisations should always put external focuses first. (bpminstitute 2015)
I believe that even though the balanced scorecard can be a very effective tool if used properly by organisations, however, this is just a framework that has been developed to assist organisations in measuring their performance and is not a panacea, so shouldn't be a go to method for companies.
Likierman (2009) claims to have found the five most common traps in measuring performance. The five traps are; measuring against yourself. To measure how well you're doing, you need information about the bench marks that matter most.
Looking backward, beating last year's numbers is not the point, a performance measurement system needs to tell you whether the decisions you're making now are going to help you in the coming months.
Putting your faith in numbers, metrics in your performance assessment package all comes as numbers. The problem is that number-driven managers often end up producing reams of low-quality data.
Gaming your metrics, you can't prevent people from gaming numbers, no matter how outstanding your organisation. The moment you choose to manage by a metric you invite your managers to manipulate it. Someone who has learned how to optimise a metric without actually having to perform will often do just that. To create an effective performance measurement, you have to work with that fact rather than deny it.
Sticking to your numbers too long, in the earliest stages, performance is all about survival, cash resources and growth. Comparisons are to last week, last month and last year. But as the business matures, the focus has to move to profit and the comparisons to competitors. You have to be very precise about what you want to asses, be explicit about what metrics are assessing it and make sure that everyone is clear about both.
To avoid the first trap, companies need to find out the information externally, such as from customers and not internally, where they look at numbers from the last quarter.
One company who did this where, Rockwater, they implemented doing customer research into their strategy and hired an independent organisation to conduct annual surveys to rank customers' perceptions of the company. This is one efficient way of avowing falling into the first of Likierman's traps. Another way of avoiding this trap is to go to professionals outside your organisation and get them to judge the progress of your company. (HBR 1993)
Anticipating changes in the market and then responding positively to the changes can be a good way to avoiding the second trap. As the years go by and new products and services are being created, the markets are always changing, so adapting to the change and offering a better service or product than your competition will give you an advantage. Because markets are changing, looking back at previous performances over the previous years would be pointless. Rockwater are also an example of how they responded to change in the construction and engineering market. They realised that their industry was changing and came up with a whole new vision and strategy to cope with this change and remain a top competitor within that industry, rather than analysing their previous performances and trying to expand on that. (HBR 1993)
Rather than focusing on maximising revenues and profits, organisations also need to focus on customer satisfaction to avoid the third trap. This is said to be the biggest factor in making more profit, the better customer satisfaction you have the more likely you are to make more revenue and more profit. By focusing on customers, you're giving them what they want and meeting their requirements, therefore you're not only retaining the same customers but at the same time attracting new customers from your competitors who aren't offering them the same as you and aren't meeting their requirements. Rockwater realised this when it came to adapting to the changes in their industry. They set out a vision of providing the best safety and quality services to their clients. From this vision they hoped to become the industry leader, because they knew that clients would prefer them because of their vision to provide customer satisfaction to the fullest extent. (HBR 1993)
In order to avoid the fourth trap, you have to try and diversify your metrics because it's a lot harder to game several of them at once. Clifford Chance, a law firm, replaced its single metric of billable hours with seven criteria on which to base bonuses; respect and mentoring, quality of work, excellence in client service, integrity, contribution to the community, commitment to diversity and contribution to the firm as an institution. This means that in order for staff to gain bonuses, they have to meet each criteria. If they don't they don't get their bonus. This is effective because it clearly states what each staff member has to do in order to get their bonus and also its measured fairly and clearly, so no employees can complain they don't know what the criteria is. (Likierman 2009)
An organisation needs to know what their client's requirements are and also what they mean. This cannot be determined by the amount of revenue or profit that has been made by the organisation previously. Customer satisfaction should be the number one priority for an organisation, because without customers they won't be able to function. Addleshaw Goddard, a law firm, found out from a survey that their clients valued responsiveness most, followed by pro-activeness. For most organisations responsiveness would mean getting back as quick as possible, but the mangers dug deeper and found out the response time varies for different clients, some clients like responses in 10 minutes and some in 2 hours. This shows that sometimes a little bit of research is not enough and you have to go that extra mile for the customers to find out what they really want. (Likierman 2009)
In conclusion, when it comes to designing and implementing a successful performance measurement plan, there are lots of approaches you can take and there are lots of things to consider. Organisations have to be wary of the mistakes that can be made when trying to measure performance, such as Likierman's traps. They have to constantly be on their feet when dealing with these problems. Organisations have to bring together managers from all sectors in order to benefit from the ideas that can be generated from each manager.
The balanced scorecard tool is also a useful technique to use when it comes to a company succeeding and there are many advantages and disadvantages to this tool. Organisation have to realise that it cannot be used as a quick fix and must be ready to have the correct metrics to be able to handle this long term strategy.
Neely, A. Huw, R. Mills, J. Platts, K. Bourne, M. (1997). Designing Performance Measures: A Structured Approach. MCB UP Ltd
Likierman. A. (2009). The Five Traps of Performance Measurement. Harvard Business Review
Kaplan, R. Norton, D. (1993). Putting the Balanced Scorecard to Work. Retrieved from: https://hbr.org/1993/09/putting-the-balanced-scorecard-to-work
BPM Institute. (2015). Problems Implementing a Balanced Scorecard. Retrieved from: https://bpminstitute.org/resources/articles/problems-implementing-balanced-scorecard
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