Value based performance metrics
Many organizations are attuned to the need for performance metrics. Without a doubt they are a key mechanism for analyzing the effectiveness of a business. However what constitutes a metric may vary from one organization to another and these may vary yet further if viewed from the perspective of value add.
A recent survey by Capgemini(Pulse survey) showed 61% of respondents reporting that Business Intelligence was the number one priority for the company’s IT infrastructure over the next 2-3 years. A common goal for those implementing this type of new technology is improved management information – however many organizations fail to introduce management information that is linked to corporate strategy and as a result organizations become swamped with data – with much of it unable to assist in propelling an organization forward. Only 16% or respondents scored Management Strategy as the most important target of there scheme – clearly then not everyone who embarks on a management information project does not align the end result with business strategy. But how should metrics be aligned with strategy?
Traditional metrics are often typified by their origins in manufacturing and supply-chain environments and these have typically been focused on ‘historical’ financial indicators. e.g. Sales Turnover, Profit indicators, performance against budget. All of these view a snapshot of time and none focus on the customer’s requirements or business strategy (other than the strategy to remain profitable!).
These types of metrics often try to assemble meaningful information from the myriad of transactional data that has been assimilated – however the slant is one of performance of the company – e.g. it’s profit, it’s turnover – there are often no links towards performance against customer objectives or requirements and organizational strategy. These types of traditional metrics do little to indicate whether a customer was left satisfied or not or how an organization is faring against it’s critical success factors.
So what of the value based metrics – perhaps to start this we should look at the balanced scorecard and the work popularized by Robert Kaplan and David Norton in the early 1990’s who conceptualized the tool. By focusing on four attributes, financial, customer, business process, learning and growth the balanced scorecard went someway into developing metrics that were strategically focused and captured some semblance of the benefits the organization was providing to the customer – most importantly these measures were not purely financial. However these still do not answer the question of value add.
The key questions for organizations is whether “management understand how companies create value”. There has to be a level of understanding of what the value chain means to the business before metrics can be developed – there is not a one size fits all panacea – performance metrics are not a cookbook that can be followed. Creative strategic thinking is required in order to develop an effective performance metric system with no two organizations are alike.
The balanced scorecard helped organizations management information evolve primarily from financial analysis to something more holistic but was still not primarily focused on the needs of the customer.
However where a business fully understands how and where it derives value, value based programs can focus not only on the performance of the originating business but on the performance towards satisfying the customer – targeting benefits provided by the service or process to the end customer with metrics tuned accordingly.
Many value based metrics utilize the QCD – Quality Cost and Delivery model. Common metrics may include process cycle efficiency, lead time, delivery performance or value add time ratios. Defects or errors incurred are measured (both internal and externally captured) as an indicator into how customer requirements were met. This is further amplified by measuring customer satisfaction results. Rather than the traditional measure of inventory valuations- inventory turnover, batch sizes and safety stock are analyzed. Metrics have evolved into output focused tools that provide information on the performance of a business against the specified needs of the customer. Performance metrics study the process broken down into it's constituent steps analyzing defects, cost and productivity indicators.
Example of traditional and value based performance metrics.
Deploying a comprehensive performance metric system within a business is time consuming and complex. It requires top-level support and commitment to act on the results. There is a clear difference between traditional measures and those that look at the value chain – and while there is no one answer; most businesses may adopt a hybrid of the two. With many organizations now spending significant sums on performance metrics systems, businesses should think carefully about the metrics they use. With traditional metrics focusing on the performance of the business there needs to be a counter balance which looks at the performance produced to the end user – who after all without which the business would not exist.