Keeping Score In World Class Organizations

5/26/99

Data, like hay, is usually dry And piled in stacks and measured by

the bit.

And how like the needle information is.

It always has a point and it needs an eye.

Thomas F. Gilbert

Mission, Vision, & Values

Key Success Factors& Core Competencies

Performance Metrics

Metric LevelsFor Metrics

Tactics

•What the organization Is•What the future goals are•What the organization stands for

•What the organization needs to focus upon to beat the competition and achieve its strategic vision

• Determine the Family of Measures•A balanced scorecard•Past Present Future

•Desired annual long term levels for each metric•SBU Process Team Individual

•Activities implemented to achieve goalsS

trate

gic

Measu

rem

ent

Model

TheMeasurement

Process

InnovationProductionPost SaleService

Role of Objectives• Strategy is a set of linked objectives

• Objectives are the interim goals

• Metrics assess goal attainment

RevenueGrowth

CostReduction

AssetUtilization

MarketShare

RetentionSatisfactionAcquisition

SatisfactionRetention

Productivity

Financial Customer Internal Learning/

Processes Growth

Strategy

Types of Metrics

Considerations in Choosing Metrics

• Specificity (Specific versus General)

• Productivity Level (Optimization versus Maximization)

• Closeness Goals (Descriptive, Behavioral, Accomplishment, or Organizational Effectiveness)

Considerations in Choosing Metrics

• Decision Focus (Judgmental versus Nonjudgmental)

• Perceptual Focus (Process versus Outcome)

• Reference (Absolute versus Relative)

• Number (Singular, Multiple, or Family of Measures)

• Strategy is a set of hypotheses about cause and effect

• Measurement systems should make relationships (hypotheses) among objectives explicit so they can be managed and validated.

Considerations in Choosing Metrics

Cause and Effect Relationship

ROCE

CustomerLoyalty

On-TimeDelivery

ProcessQuality

ProcessCycle Time

EmployeeSkills

Cause-and-Effect Relationships

Financial

Customer

InternalBusinessProcess

Learning andGrowth

Causal RelationshipsIf Then

Employees are paid well They will be more satisfied

Employees are more satisfied They will be more productive

Employees are moreproductive

There will be fewer bugs inprograms

There are fewer bugs in theprograms

The quality of the product willbe higher

When the quality of theproduct is higher

Customers will be moresatisfied

Customers are satisfied Sales will increase

If sales increase Revenues will increase

Lead Measures (Strategic Levers) Drive Performance

Lag MeasuresLet You Know

If You’ve Reached

Your Destination

A Metric Can Be BOTHA Lag and Lead

Indicator• Track performance through a linked chain

of cause and effect relationships

• Lag measure of earlier efforts

• Lead indicator of future performance

Setting The Level of Metrics

• Based on past performance

• Benchmarking o other companies

• Stretch goals

• Pilot testing

Analyzing the Data• Analysis of Data

–Level of performance

–Trend of performance

–Variability in performance.

• Strategically linked to key success factors AND the mission, vision, values

• Focused on past, present AND future• Linked to needs of ALL stakeholders

(customers, shareholders, employees)• Multidimensional • Vital Few versus trivial many• Clustered into overall indices of performance• Flexible to meet changing business needs

Characteristics

Effective Metrics

• TOO MUCH DATA!!!!• Not causally linked to

success factors• Short Term focus• Lack of specificity and detail• Measuring A while hoping

for B– Courtesy versus competency– Behavior versus Results– Outcome versus process

Problems With Metrics

Building The Scorecard

CustomerSatisfactionTangiblesReliabilityResponsivenessAssurancesEmpathyCustomer Value

MissionVision

StrategyGoals

Metrics

FinancialPerformanceEconomic Value AddedProfitsMarket ValueROI

Products, ServicesQualityQuantityPriceValueInnovation

ProcessPerformanceProductivityCycle timeSafetyReworkCost of Quality

SupplierPerformanceArrival TimelinessService QualityPrice/Value

EmployeeSatisfactionSurveysAbsenteeismTurnoverGrievancesIllness/Accidents

Strategically- Based Family of Measures

FinancialTo succeed

financial, howshould we appear to

our shareholders

Learning & GrowthTo achieve our vision,

how will we sustainour ability to change

and improve?

Internal BusinessProcesses

To satisfy ourshareholders andcustomers what

business processesmust we excel at?

CustomerTo achieve out vision, how should we appear

to our customers?

VisionAnd

Strategy

Financial Metrics

Key Characteristics:Financial Measures• Includes a few key overall financial

measures

• Balanced mix of short and long term measures

• Includes financial data on our major competitors

• Aggregated into summary financial measures– Economic Value Added (EVA)

– Return on Assets (ROA)

Strategic Themes:Financial Measures

• Revenue growth and mix

• Cost reduction/ productivity improvement

• Asset utilization/ investment strategy

• Shareholder value

Economic Value Added (EVA)

• Measure of financial performance based on a company’s profits adjusted for the cost of capital.

• Historical Focus

• Capital is money tied up in equipment, buildings as well as investments in training, research and development.

• A company can operate a profit but actually operate at a loss when one includes the cost of capital!!!!

Economic Value Added makes managers act like shareholders. It’s the true

corporate faith of he 1990s

William Smithburg,Quaker Oaks CEO

Market Value-Added(MVA)

• The Total Capital a Company Has Invested Since Inception Divided by the Market Value of the Company’s Equity & DebtCoca Cola

General Electric

Wal-Mart

Merck

Microsoft

Activity Based Costing(ABC)

• Measures true financial performance• Tracks direct and indirect costs

associated with producing a product. – Machine down times– Cost of inventory– Cost of rework and scrap

• Allocates costs to specific processes

Process Metrics

Key Characteristics:Process Measures

• Innovation

• Operations

• Post Sale Service

Key Characteristics:Process Measures• Includes a few key common operational

measures– Value added per employee– Cycle time

• Directly related to key components customers care about

• Allows company to prevent, rather than react to, problems

Common Process Measures• Value added per employee

• Cycle time

• Variability

• Down Time

• Bottlenecks

• Number of Process Steps

Product/ServiceMetrics

Key CharacteristicsProduct/Service • Relates to specific attributes

of the product or service.

• It is not the way an item is produced but what it actually does when received by the customer.

Common Product/ Service Metrics

• Quality

• Quantity

• Responsiveness

• Innovation

• Need

Supplier Metrics

Key Characteristics:Supplier Metrics• Includes a few key common operational measure

• Process measures directly related to key components organizational units care about

• Allow company to prevent, rather than react to, problems

Common Supplier Metrics

• Just In Time Delivery

• Variability

• Guarantees

• Return Rates

CustomerSatisfaction Metrics

Key Characteristics:Customer Metrics

• Linked to key organizational “drivers”

• Focus on Product and Process

• Include hard and soft measures

• Includes Customer satisfaction index

Key Characteristics Customers• Product/Service

Attributes

• Customer Relationship

• Image and Reputation

Market Share

CustomerRetention

CustomerProfitability

CustomerAcquisition

CustomerSatisfaction

Core Measures -- Customers

Customer Satisfaction Metrics

• Timeliness of Service

• Consistency of Products/Services

• Guarantees

• Reliability

• Customer Satisfaction Surveys

• Mystery Customer Surveys

EmployeeGrowth and DevelopmentMetrics

Key Characteristics Learning and Growth

• Employee Satisfaction

• Employee Retention

• Employee Productivity

Key Characteristics: Employee Metrics• Linked to key organizational “drivers”

• Focus on present and future

• Include hard and soft measures

• Includes employee satisfaction index (ESI)– Surveys– focus groups– stress index– Appeals for layoffs

Employee Metrics• Absenteeism

• Turnover

• Cost Per Hire

• Employee Satisfaction

• Grievances

• Cost of Labor

• Work Stoppages

Key Learning

s

Key Learnings:Measurement

System • Tightly linked to key successful factors– Differentiate self from competitors

– Make important decisions

• Measurement system was built with a plan rather than merely evolving

• Mostly consistent across organizational units– Facilitates benchmarking

• Balanced across metric areas

Key Learnings:

Metrics• An effective scorecard is more

than a collection of financial and non-financial measures

Tells a coherent story Mix of lag and lead metrics Provides a path to link metrics

BACK to financial performance

Key LearningsMetrics

• Develop global metrics for your organization

• Understand the relationships among measures

• Insure Scorecard is Balanced based on cause and effect relationships