Home Budget 2007 Company Profile Services Accountancy Zone Business Zone Tax Zone IR35 Update News Articles Feedback Search Legal Notice How To Find Us Measuring your performace Imagine watching a cricket match where the score isn’t kept. It’d be rather boring wouldn’t it? Yet many organisations fail to properly "score" the performance of their business. Conversely, other managers use statistics as a drunken man uses a lamppost – for support rather than illumination! In this booklet, we will divulge "six of the best" ways for you to ensure that you create the right measurement framework to tell you how your business is doing. What do you measure? Many organisations have a mission and/or vision statement intended to unite employees and to polarise efforts in a common direction. Unfortunately, many fail to work because they imply a clarity of management thinking, a sense of direction and a commitment to action that does not actually exist. The naivety and hypocrisy in the words is quickly spotted by employees and, instead of a sense of unity, they inspire cynicism and disbelief. Furthermore, traditional measures of performance have a number of drawbacks: They are often not in tune with strategic objectives. Measurement is conducted in isolation rather than systematically. They are not customer driven. Financial measures are presented too late for any meaningful corrective action to take place and also tend to encourage a short-term focus. Many key non-financial indicators are ignored. They are often used for punishment rather than learning. To combat these weaknesses, many organisations are developing measurement systems which link activities to strategic objectives, integrate a balanced set of financial and non-financial indicators and focus business activities on the customers and their needs. The customer perspective When people first make a purchase they convert from prospects to customers. If nothing happens to disappoint them, they may become supporters. But until they do, they are vulnerable. It is not good enough simply to match the rest. Even a satisfied customer may switch to an alternative supplier on the basis that there is nothing to lose, and conceivably, something to gain. The key to service leadership is delighting the customer. Do we know what wins the loyalty of our customers? Do we improve the processes of our business to ensure we keep their loyalty? Do we track how well we are doing? What becomes of customers if we fail to please? Research has shown that out of every 100 dissatisfied customers: only four complain; 91 say they will never buy from that supplier again, although, encouragingly, 87 would remain loyal if only the supplier tried to solve the problem; each unhappy customer tells 12 others. So the danger is that, unless companies ensure that customers views are sought, they will remain blissfully ignorant of the dissatisfaction they are causing. All they will note is a few complaints and an inexplicable lack of repeat buying. But there is worse. Where there are displeased customers, there is usually a great deal of wasted effort as well. For example, fire-fighting, checking, correcting errors, issuing credit notes and so on. Therefore, it is essential to understand the critical success factors, those things the organisation must get right to be successful. They need to be expressed in the customers’ language which leads to a performance measure that indicates whether the critical success factor is being met. The financial perspective The traditional measure of performance is profitability. The danger in paying too much attention to this measurement is that it adds nothing to improving business performance and indeed may lead to management behaviour characterised by short-term actions to "adjust" profit. Budgeting in some organisations seems to be an iterative process of revisions until such time as the total of the departmental budgets is no higher than the figure in the top-down strategic plan. This results in managers taking the view that the whole process is a gesture and has no real relevance to the real world of customers and no links to any company approach to improve processes. To gain real knowledge of how a business is performing requires an understanding of the relationship between cause and effect throughout the business. The needs of customers varies dramatically in respect of their service requirements, such as: Frequency of delivery; Number of order lines; Quantity per order line; Customer location; Discounts given; The number of salesmen’s visits. In order to provide the most efficient and profitable service, costs need to be aligned to individual customers. The key cost drivers within the business should be understood to provide a means of modelling the effect of future plans. The business also needs to understand the nature of the activities undertaken within processes so that effort can be directed in a meaningful way to process improvement and unit cost reduction. The process perspective Processes do not acknowledge departmental boundaries. Inadequacies in any department which contributes to a business process can adversely affect the entire process - it is only as strong as its weakest link. Traditional management accounting systems reflect the needs of a hierarchical, functionally organised structure. They do not recognise or support the effectiveness of key business processes. That is not to say that existing management control systems are redundant, but they are insufficient. Improving business processes can result in enormous benefit, both in relation to customers who will see a more efficient, responsive service, but also in respect of unit cost reduction as unnecessary steps in each process are highlighted and eliminated. Activities in each process fall into three categories: A - Core activities are those which add value to the business and, therefore, provide a service to internal or external customers. B - Support activities make it possible for the core activities to take place. For example, a salesman’s time spent negotiating an order with a customer is a core activity whereas travelling to and from the customer is a support activity. This type of activity must be undertaken as efficiently as possible, by using, for example, the most appropriate systems. C - Diversionary activities are caused by inadequacies in the organisation. Examples include correcting errors and chasing other people for information. They have many causes, for example: Poor documentation; Inadequate training; Poor suppliers (internal and/or external); Inadequate understanding of customer needs; Inter-functional barriers. Diversionary activity cannot be eliminated entirely, but must be minimised. This is done by identifying the root cause of problems and eradicating them. A key outcome of Activity Based Management is to change the mix of core, support and diversionary activities in order to optimise the efficiency of the organisation and the quality of service provided to customers. The people perspective The lack of empowerment is the biggest single reason why businesses fall behind their competitors. The combined knowledge, ability and ingenuity of all the staff represents a huge latent force for improvement that many organisations fail to utilise. Management styles also need to change. A conventional poor management style will have developed a number of common characteristics: A belief that quick decisions based on minimum knowledge are a measure of successful management; Fire-fighting (dealing with symptoms), rather than tackling the root causes of problems; Failure to co-operate across functional barriers; A widely-held view of subordinates as individuals who make mistakes, rather than as victims of processes that lack robustness; Appraisal systems that reward individual performance, rather than share the rewards of improved business performance resulting from everyone’s contribution to a team effort; A reluctance by staff to propose process improvement or highlight what appears to be their own failure in a poor process (the fear factor). In an ideal process, multi-competence teams would work in robust processes without any requirement for conventional management activity. The change from "manager" to "leader" becomes crucial if the improvement is to be realised. The leader will be: Involving the people that work in the processes, because they have the greater knowledge of the detail; Co-operating across multi-competence groups to improve the effectiveness of the whole process; Understanding process performance through measurement; Feeding back the concerns of current customers; Encouraging the increase in variety and levels of competence within the group; Ensuring that the team is motivated through recognition of its collective efforts to grow the business. Getting the balance right The type of measurements that you come up with depend greatly on what your business is trying to achieve. Try to identify two or three indicators in each of the four headings above and monitor those closely. Remember, if you have too many indicators you are likely to dilute the impact of the most important ones. Conclusion Measurement managed organisations have a very different cultures from non-measurement managed organisations. In general, they have more co-operative, teamwork orientated cultures, employees are more risk-seeking and more able to self-monitor their own performance. Strategic performance measurement is a necessary step in the transformation of any business to a high performing organisation. We hope that this brief guide will provoke some thought. It touches on a few of many ways in which your business can succeed. We would love the opportunity to put words into action. Please contact us for further information. [ Business Zone Home · Previous - Managing Your Debt · Next - Business Links ]