Every
organization is in a different business- they're a manufacturer,
distributor, financial institution, professional services
organization, support
provider, or countless other variations- yet they all need to
measure how
well their business is performing. While the focus, frequency
and system
used may differ, effective business performance measurements
share many
of the same characteristics.
Clear Reason for the Measurement
Most
measurement systems aren't free- measures should never be collected
just because they're easy to do but not relevant, or because
they've always
been collected. Many measurements are mandated- by the SEC,
auditors,
financial backers, FDA, government agency, trade group, etc.;
collecting
these involves only following the rules provided. Internal
measurements for
tracking employee performance, forecast accuracy, supplier
performance,
etc. provide the most leeway in definition and the most danger
in collecting
inaccurate or misleading data, and making wrong business
decisions.
Data collection and
reporting for measurements mandated by a third party
is a cost of doing business; the cost of any other data
collection efforts must
be balanced against the usefulness in achieving company business
goals.
Many business application development efforts end up being
abandoned
because the sheer volume and cost of data collection outweighs
an intangible
or inadequately defined benefit.
Predictive of
Future Events
The best
measurements highlight a potential status or problem before it
occurs, allowing time for corrective action. Creating predictive
measurements
may involve the use of custom analytics, warning signals and
tolerance limit
definitions based on a knowledge base of previous experience.
Factory
process control systems can track instances where the production
measured
is currently acceptable but trending in an undesirable
direction, and can
sometimes be compared to previous occurrences of the same
readings for
corrective action if data on past history has been retained.
Similar signals
can be created for order, inventory, and financial systems when
the data
measured is consistent, can be frequently collected, and is
retained for
comparison to previous readings. Defining tolerance levels to
generate
warning signals before the condition becomes unacceptable
provides time
to take corrective measures.
Timely
Measurements
are often accurate but not timely- they provide a true status
report on an after-the-fact basis too late to research the
events that led up
the undesirable condition (ex.- the annual physical inventory
that correctly
reports an accuracy level of 74% but is of no use tracking what
caused that
level). Recreating all the transactions or data points that
created a yearly,
or even quarterly or monthly report can be impossible to review
to take
corrective action. When a status report is provided 3 months
after the date
being measured, conditions have often changed in the interim and
the
tendency is often to wait until the next status report, which
prolongs any
error conditions. Timely measurements are reported on a
recurring basis,
as soon as possible after the events being measured, and provide
the
background data to easily trace the sources of the
measurement.
Alignment of
Department and Organization Goals/Measurements
Individual
personnel and department measurements and goals must
directly support the overall organization measures, especially
when used in
reward and appraisal systems. A departmental measure that
encourages
maximum production may contradict the overall organizational
goal of a
target inventory level. If an action is being measured, an
employee will
naturally assume it's important both to his department and the
company
and the tendency is to maximize (up or down) the action unless
clearly
told the target and reason for the measurement.
Consistent
A common
reason for misleading performance measurements is a lack of
consistent baseline data and gathering methods. Business
conditions are
continually changing, yet true progress can only be measured by
identifying
and filtering unusual events, and correctly identifying trends.
A company
that sells Halloween candy will always show higher sales in the
October
quarter, and measuring the percent increase over the previous
quarter is
not helpful. Measuring against the previous year October quarter
means
retaining data in the same format and adjusting for customer and
channel
definition changes year-to-year in measuring true sales growth.
Retail
chains report same-store sales totals to accurately portray the
performance
of the existing business vs. the gains from the separate process
of adding
additional outlets. The effects of one-time events must be
filtered from
the base data to use that data on a consistent basis in the
future- the
sale of obsolete inventory at a reduced price should not be used
by the
forecasting system as demand that will also occur in the future.
Another challenge in maintaining consistency lies in aggregating
data from
multiple sources- a common situation in any large organization.
Reporting
an overall customer order fill rate of 95% is accurate only if
all reporting
entities use the same terminology and data-gathering techniques
and
'adjustment' policies are clearly spelled out.
Automation and
Visibility
What number
do you want? is an old accounting joke that still rings true
in many measurement situations. Ideally, measurements should be
an
automatic byproduct of the process being measured and not
require an
additional manual reporting activity. Human nature leads to not
reporting
data or incidents that reflect negatively against performance
unless the
process provides automatic visibility, or methods to highlight
inconsistencies
or data elements that don't aggregate to expected totals.
Measurements that
are taken but never included in reports, posted on a
wall or otherwise made visible soon lose any sense of importance
or
urgency. Manual reporting steps done to create the measurement
may
soon stop 'just to see if anyone notices'. In general, if it's
worth collecting
and measuring, it's worth reporting and creating
visibility.
Comparison to
the Competition
Creating accurate
measurement systems that report fiscal year sales growth
is important; equally important is knowing how the competition
is doing.
While many companies consider themselves unique to some extent,
they
usually have a set of peer group companies that sell many of the
same
products and services. It may be premature to hand out
management
bonuses for increasing top line growth to 7% from 5% if the
competition
consistently generates 20% growth.
Benchmarking and
best practices provide targets and operational methods
for business performance improvement; it's up to each
organization to
define what constitutes success (25% market share? #1 or #2 in
each
business segment? 15% operating margins? Winning the Big Ten, or
just
beating your biggest competitor?). First define the goal, then
create the
measurements and systems that monitor your internal status and
progress
against your competition.
Source: Bridgefield
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permission of the Bridgefield Group Inc.
