Measurement and Management University of Toronto Fall 2009.
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Measurement and Management
University of Toronto
Fall 2009
Fall 2009 page 2Strategy & Measuring Performance University of Toronto
Performance Management and Success
Study by Hewitt—437 Companies
Companies that used performance management processes compared to those that did not showed:• Greater profits• Better cash flow• Stronger stock market performance• Greater stock value• Higher sales per employee
* 1994 study of 437 companies in USA 1990-92 (as described in Harvard Business Review, May/June 1995)
Fall 2009 page 3Strategy & Measuring Performance University of Toronto
Performance Management and Success
Companies with performance management processes compared to those in the same industry without performance management processes showed:• Total shareholder return increased by 24.8%
• Productivity increased by 94.2%
Fall 2009 page 4Strategy & Measuring Performance University of Toronto
Performance Management and Success
Study by William Schiemann & Associates - 203 Firms - Conference Board
“Measurement Managed” firms significantly outperform their competitors, regardless of size, on key indicators such as industry leadership, financial ranking and capacity to make organizational or operational change
* Conference Board, Using Measurement to Transform the Organization, 1996
Fall 2009 page 5Strategy & Measuring Performance University of Toronto
Organization of the Future and the Implications for People and Programs
Key philosophy is that people are rewarded for results
What counts is what you do and what you accomplish
Managers should be rewarded for how they focus and direct the efforts of their employees
Fall 2009 page 6Strategy & Measuring Performance University of Toronto
Edward E. Lawler
Key factors that determine Organizational Success:• Knowledge of the work, business and the total
work systems
• Information about processes, quality, customer feedback, events and business results
• Power to act and make decisions about the work in all its aspects
• Rewards tied to business results and growth in capability and contribution
Fall 2009 page 7Strategy & Measuring Performance University of Toronto
Performance Measurement Frameworks
• Traditional Financial Reporting
• Multi-Dimensional Measurement Framework, e.g., Balanced Scorecard
TraditionalFinancialReporting
Customers
Financial
People
Innovation
Quality
Internal Processes
Other (?)
BalancedScorecard
LOW HIGH
Usefulness of Reporting
Fall 2009 page 8Strategy & Measuring Performance University of Toronto
Why Use Multi-DimensionalMeasurement Frameworks?
Using financial data only has significant limitations. It looks at the past. Does not help to predict the future
Financial measures are not relevant for important indicators such as customer satisfaction, cycle time, risk management, new product introduction, etc.
Significant “noise” in accounting numbers caused by accounting process, e.g., overhead allocation
GAAP allows significant use of judgment which can impact results
Fall 2009 page 9Strategy & Measuring Performance University of Toronto
Multi- Dimensional Performance Management Model
THE GOAL
To implement a consistent performance model that objectively measures achievement towards set goals
Fall 2009 page 10Strategy & Measuring Performance University of Toronto
Why Use Multi-DimensionalMeasurement Frameworks?
“What gets measured gets done”
Or
“Tell me how I’m measured and I’ll tell you what I’ll do”
Fall 2009 page 11Strategy & Measuring Performance University of Toronto
Key Questions When Choosing a Model for Performance Measurement
1. How does it allow you to understand the drivers of financial performance?
2. How does it allow you to understand relationships with customers?
3. How does it allow you to understand the effectiveness of internal processes?
4. How does it allow you to assess the organization’s performance in innovating and growth for the future?
Fall 2009 page 12Strategy & Measuring Performance University of Toronto
Key Questions When Choosing a Model for Performance Measurement
5. How does it allow you to assess operational risk factors?
6. How does it assist you in planning for the organization’s future?
Fall 2009 page 13Strategy & Measuring Performance University of Toronto
Alternative Measurement Frameworks
Balanced Scorecard - Kaplan and Norton
Quantum Performance Management System - Anderson Consulting
Performance Pyramid - Cross and Lynch
Fall 2009 page 14Strategy & Measuring Performance University of Toronto
The Generic Four Dialsof a Balanced Scorecard
Balanced ScorecardBalanced Scorecard
Financial
Customer/Markets
Innovation/ Learning/Growt
h
Internal BusinessProcesses
Fall 2009 page 15Strategy & Measuring Performance University of Toronto
The Performance Pyramid
Objectives Measures Financial
Business Units
Business Operating Systems
Departments and Work Centres
External Effectiveness
Internal Effectiveness
Operations
Corporate Vision
Market
Customer Satisfaction Flexibility Productivity
Quality Delivery Cycle Time Waste
Source: Lynch, R.L. and Cross, K.F., “Measure Up!, Blackwell Publishers, 1994.
Fall 2009 page 16Strategy & Measuring Performance University of Toronto
Quantum Performance Matrix and Model Application
Marketing and
selling
New product
development
Cycle time
Number of parts
used
Number of
vendors
Desirability Actual cost to budget
Increase speed to market by
50% over next 2 years
Develop 2 new products each
year
Get 25T of company profits
form new products in 2
years
Conceptual design
Product
design
Prototyping Target costin
g
Maintain customer loyalty through rapid product introduction
Maintain customer loyalty through rapid product introduction
Corporate Strategy
Goals
Critical Processes
Output Measures
Key ActivitiesProcess Measures
Number of steps in the
manufacturing process
Supplier involvement by X day?
Cross-functional
input?
Design standards upheld?
Number of common
parts
People Measures1. Are the right people
involved?2. Do they have the right
number of skills?
People Measures1. Are the right people
involved?2. Do they have the right
number of skills?
Source: Hronec, S.M., Vital Signs, AMACOM, 1993
Fall 2009 page 17Strategy & Measuring Performance University of Toronto
What is a Balanced Scorecard?
A multi-dimensional set of performance dials for measuring strategic health and performance
A vehicle for enriching dialogue about the business at all levels
A rigorous approach to translating vision, strategy and tactics into concrete performance targets and measures
A vehicle for communicating what’s important to everyone in the business
Fall 2009 page 18Strategy & Measuring Performance University of Toronto
BusinessStrategy
Balanced Scorecard
Financial
Innovation
PeopleProcesses
Market
OperationalPerformance
What Does a Balanced Scorecard Look Like?
Fall 2009 page 19Strategy & Measuring Performance University of Toronto
Why Use a Balanced Scorecard?
It is simple, easy to understand and easy to communicate
It translates the organization’s mission and strategy into a multi-dimensional/comprehensive set of performance measures that provides the framework for a strategic measurement and management system
It retains emphasis on achieving financial objectives but also includes the performance drivers of these financial objectives
Fall 2009 page 20Strategy & Measuring Performance University of Toronto
Why Use a Balanced Scorecard?
It is unique to each organization
Assessments of performance will generally be against targets and will reflect the organization’s success in improving performance over time
Targets may come from benchmarking, historical data, markets, business plan, stretch goals, strategic plan, etc.
Fall 2009 page 21Strategy & Measuring Performance University of Toronto
A Management-Driven Business Process for Strategy Execution and Cultural Change
Strategy
Culture and Values
Strategy
Culture and Values
Critical Success Factors
(“what it takes to
win”)
Critical Success Factors
(“what it takes to
win”)
Measurement and
Management of Performance
(individual, team, unit, work process,
company levels)
Measurement and
Management of Performance
(individual, team, unit, work process,
company levels)
Company Performan
ce
Company Performan
ce
Fall 2009 page 22Strategy & Measuring Performance University of Toronto
How Do We Start?
1. Define/Articulate the vision/mission/strategy
2. Develop lists of measures based on strategic capabilities
3. Refine measures» may have transition and end state
4. Develop implementation plan for gathering and reporting required information and assign one person with key accountability for coordinating and delivering the regular report
5. Use information as a key focal point in the management processes for the organization/unit
Fall 2009 page 23Strategy & Measuring Performance University of Toronto
“Long list”of measures
“Critical few” measures
FinancialCustomers/Market
Internalprocesses
Innovation& learning
Business Strategy
Operational Performance
Balanced ScorecardMethodology
Fall 2009 page 24Strategy & Measuring Performance University of Toronto
Key Questions
“So what?”• Does the measure tie into strategic capabilities?
• What are the cross-functional implications?
• Does it impact on line of sight?
“As measured by…”?
What’s the right blend of measures? What are the right dials?
How often should we measure/monitor?
Fall 2009 page 25Strategy & Measuring Performance University of Toronto
Key Questions
Should we/how do we cascade the objectives/ measures down into the organization?
How far can/should we go in the first version?
Fall 2009 page 26Strategy & Measuring Performance University of Toronto
Department Business Planning
Division/ Program Business Planning
Individual Performance
Planning
Individual Performance
Individual Compensation
Individual PerformanceManagement
StrategicManagement
Process
Integration of Balanced Scorecard into Business Planning Process
Fall 2009 page 27Strategy & Measuring Performance University of Toronto
Balanced ScorecardBalanced Scorecard
Customers/Markets
Financial
Internal Processes & People
Innovation, Learning &
Growth
Traditional Corporate Performance Measurement Program
Efficiency
CustomerService
Community Impact
Balanced ScorecardBalanced Scorecard
Balanced Scorecard for Public Sector Organization
Fall 2009 page 28Strategy & Measuring Performance University of Toronto
Balanced ScorecardBalanced Scorecard
Community Impact• Safety• Innovation
Customer Service• Quality• High Performance
Teams• Staff Contribution• Internal Customer
Satisfaction• External Customer
Satisfaction
Efficiency• Operating Costs• Timely Completion of
Capital Projects
Balanced Scorecard for Public Sector Organization
Fall 2009 page 29Strategy & Measuring Performance University of Toronto
Operations and Maintenance% of Departmentoperating costs
System Operations% of Division
operating costs
RoadsCost/Lane km
UtilitiesCost/Pipe km
Division
Section
Unit
Cascading Division Measurement: Example
Fall 2009 page 30Strategy & Measuring Performance University of Toronto
Municipality/ Department
Division Programs
Focus AreasGaps and Issues
Priorities
Priorities and Targets by Scorecard Dial
EfficiencyCommunity Impact Customer Service
Assessments and Plans submitted by Division and Program Managers
Long list of priorities identified
Narrowed to “Critical Few” priorities
Department/Division/Program $$ targets
identified
Building the Department Business Plan
Fall 2009 page 31Strategy & Measuring Performance University of Toronto
• Commits to deliverables and deadlines• Organizes work to deliver• Regularly reports accurate information to monitoring and tracking re. progress against deadlines and issues/changes to objectives and plan• Consults with Department Head in advance when changes to deliverables or deadlines will be required
Department Head
• Conducts reviews on consistent basis• Reviews accuracy and timeliness of reporting• Reviews progress against interim deadlines• Reviews quality and timeliness of final products• Suggests improvements and corrections• Reinforces good performance
Monitoring and Tracking
• Acts as agent of Department Head• Designs tracking mechanisms in consultation with affected executives• Receives regular information from executives re. progress against deadlines and issues/changes to deliverable and plan• Issues regular report of compiled information• Alerts Directors and Department Head as to issues and potential problems
Department Head
DirectorDirector DirectorDirector DirectorDirector
Structure of the Monitoring and Tracking System
Fall 2009 page 32Strategy & Measuring Performance University of Toronto
Lessons Learned
Concerns over whether or not Scorecards are “perfect”
Aversion to moving from traditional financial-based incentives - not sure they understand the levers to affect results
Positive impact of group work to ensure commitment and alignment
Fall 2009 page 33Strategy & Measuring Performance University of Toronto
Linkages to Information Systems
Issues• Most information systems limited beyond financial
data and even this has limitations
• Existence of information within the organization
• Cost effective ways of capturing and reporting» Spreadsheet» PB Views» Alacrity
• May need transitional Scorecards and use of proxies in the short term
Fall 2009 page 34Strategy & Measuring Performance University of Toronto
Summary
No “Magic Bullet”
Iterative process/continuous learning due to:• Limitations of information systems
• Subsequent input by employees and other managers into what should be measured
• Organizational learning in terms of knowing how to use the instrument
But…!!!
Fall 2009 page 35Strategy & Measuring Performance University of Toronto
Summary (cont’d)
Structured, rigourous approach to performance management
Encourages new insights into the underlying dynamics of the business
Helps people to think “outside of the box”
Increases focus on key drivers of the business
Facilitates linkages with Human Resource programs
Fall 2009 page 36Strategy & Measuring Performance University of Toronto
Questions for Reflection
1. How would this approach change the way you manage your organizations? What kinds of conversations might you have?
2. Where in the organization, i.e., what level, would you start implementation? What dials (and measures) would be most useful for your organization?
3. Should this type of approach be tied to your individual performance management system? Should there be implications for compensation?
Fall 2009 page 37Strategy & Measuring Performance University of Toronto
Appendix A
Approach to Balanced Scorecard(Source Kaplan and Norton, The Balanced Scorecard, Harvard Press, 1997)
Fall 2009 page 38Strategy & Measuring Performance University of Toronto
Strategic Framework for Action
Balanced ScorecardBalanced Scorecard
Planning and Target Setting
• Setting targets• Aligning strategic
initiatives• Allocating resources• Establishing
milestones
Strategic Feedback and Learning
• Articulating the shared vision
• Supplying strategic feedback
• Facilitating strategy review and learning
Communicating and Linking
• Communicating and educating
• Setting goals• Linking rewards to
performance measures
Clarifying and Translating the Vision and Strategy
• Clarifying the vision• Gaining consensus
Fall 2009 page 39Strategy & Measuring Performance University of Toronto
A Different Management System for Strategic Implementation
Clarifying and Translating the Vision and Strategy
Communicating and Linking
Strategic Feedback and Learning
Planning and Target Setting
Balanced Scorecard
Balanced Scorecard
• The strategy is the reference point for the entire management process
• The shared vision is the foundation for strategic learning
• Stretch targets are established and accepted• Strategic initiatives are clearly identified• Investments are determined by the strategy• Annual budgets are linked to long-range plans
• Goal alignment exists from top to bottom
• Education and open communication about strategy are basis for employee empowerment
• Compensations is linked to strategy
• Feedback system used to test the hypotheses on which strategy is based
• Team problem solving• Strategy development is
a continuous process
Fall 2009 page 40Strategy & Measuring Performance University of Toronto
Appendix B
Scorecard Examples
Fall 2009 page 41Strategy & Measuring Performance University of Toronto
Insurance Case
Balanced Scorecard Implementation• Use of Senior Management team to develop
divisional Balanced Scorecard
• Focus on divisional strategy - what do we need to do to be successful
Fall 2009 page 42Strategy & Measuring Performance University of Toronto
Insurance Case
Use of retreat methodology (1 day) to build Scorecard• Homework: “What does my area need to do to be
successful?”
• Confirm strategy/CSF identification
• Key goals/themes/drivers for success
• Use of ‘Strawman’ Scorecard » confirmation of appropriate dials/buckets» confirm/identify measures/indicators
Fall 2009 page 43Strategy & Measuring Performance University of Toronto
Insurance Case
Balanced Scorecard Implementation• Post retreat
» asked Senior Management group for feasibility on indicators
» developed template for reporting» development of senior management monthly
meeting agenda to incorporate reporting on Balanced Scorecard basis
Fall 2009 page 44Strategy & Measuring Performance University of Toronto
Insurance Case
Balanced Scorecard Implementation• Second retreat - half day
» purpose - weighting of scorecard and dealing with feasibility issues
» presentation of proposed integration with variable compensation
– cascade of divisional Scorecard into Scorecard for Senior Management group
– threshold on Financial measures
Fall 2009 page 45Strategy & Measuring Performance University of Toronto
Balanced ScorecardBalanced Scorecard
Internal Processes and People
• Cycle time by product• Employee satisfaction• Risk management• Claims leakage
Innovation/Learning/Growth
• % sales from new products/services
• # of new products to market
• Intellectual capital
Customers/Markets• Brand awareness• Customer satisfaction• Customer retention• Market share• Proportion of sales by
distribution channel
Financial• Return on capital
employed• EVA• Asset accumulation• Profitability by line of
business
Insurance Case Balanced Scorecard
Fall 2009 page 46Strategy & Measuring Performance University of Toronto
Telecom Case Balanced Scorecard
Pre Balanced Scorecard Implementation• Initiated because of change in organization
structure
• Variable incentive compensation linked to financial results» operating profitability for profit centre» cost goals for cost centre
• Maximum incentive payout - 40%» averaging 20-30 %actual but
– poor financial results– loss of customer franchise– poor stock performance
Fall 2009 page 47Strategy & Measuring Performance University of Toronto
Telecom Case Balanced Scorecard
Balanced Scorecard Implementation• Used a bottom up methodology by working with
the divisions through a series of workshops to develop Scorecards
• Development of ‘Strawman’ Scorecard for review of senior management group» review of current strategy and CSFs for fit» development of feasibility plan for
measures/indicators» discuss/approve weightings
Fall 2009 page 48Strategy & Measuring Performance University of Toronto
Telecom Case Balanced Scorecard
Balanced Scorecard Implementation• Incorporated project completion bonuses
• Incorporation of Scorecard into monthly senior management meetings
• Cascade plan down to the Director level within the organization
Fall 2009 page 49Strategy & Measuring Performance University of Toronto
Telecom Case Balanced Scorecard
Balanced Scorecard Implementation• Posting of the Scorecard results with monthly
financials available on the network
• Slow down of market share loss
• Improvement of financial operating results, cash flow and stock performance
Fall 2009 page 50Strategy & Measuring Performance University of Toronto
Balanced ScorecardBalanced Scorecard
Internal Processes• Internal Service Levels• Product Intro Cycle
Time• IS/IT Effectiveness• Efficiency
Employee/Organizational Learning
• New Products• Employee Satisfaction• Competency• Organizational
Leadership
Customers/Markets• Share of Wallet• Customer Satisfaction• Customer Retention• Market Share
Financial• Free Cash Flow• Operating Cash Flow• Value Created/SVA• Revenue• Net Income
Telecom Balanced Scorecard
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