Powerpoint Report

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University of Toronto
Measurement and Management
Fall 2009
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Performance Management and Success

• Study by Hewitt437 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)

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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

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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

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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

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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

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Performance Measurement Frameworks

• Traditional Financial Reporting
• Multi-Dimensional Measurement Framework, e.g.,
  Balanced Scorecard

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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

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Multi- Dimensional Performance Management Model
THE GOAL To implement a consistent performance
model that objectively measures achievement
towards set goals
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Why Use Multi-DimensionalMeasurement Frameworks?

• What gets measured gets done
• Or
• Tell me how Im measured and Ill tell you what
  Ill do

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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
  organizations performance in innovating and
  growth for the future?

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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
  organizations future?

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Alternative Measurement Frameworks

• Balanced Scorecard - Kaplan and Norton
• Quantum Performance Management System - Anderson
  Consulting
• Performance Pyramid - Cross and Lynch

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The Generic Four Dialsof a Balanced Scorecard
Financial
Innovation/ Learning/Growth
Customer/Markets
Balanced Scorecard
Internal Business Processes
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The Performance Pyramid
Objectives
Measures
Financial
Source Lynch, R.L. and Cross, K.F., Measure
Up!, Blackwell Publishers, 1994.
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Quantum Performance Matrix and Model Application
People Measures 1. Are the right people
involved? 2. Do they have the right number of
skills?
Corporate Strategy
Goals
Critical Processes
Output Measures
Key Activities
Process Measures
Source Hronec, S.M., Vital Signs, AMACOM, 1993
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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 whats important to
  everyone in the business

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What Does a Balanced Scorecard Look Like?
Balanced Scorecard
Business Strategy
Operational Performance
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Why Use a Balanced Scorecard?

• It is simple, easy to understand and easy to
  communicate
• It translates the organizations 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

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Why Use a Balanced Scorecard?

• It is unique to each organization
• Assessments of performance will generally be
  against targets and will reflect the
  organizations success in improving performance
  over time
• Targets may come from benchmarking, historical
  data, markets, business plan, stretch goals,
  strategic plan, etc.

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A Management-Driven Business Process for Strategy
Execution and Cultural Change
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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

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Balanced ScorecardMethodology
Business Strategy
Long list of measures
Operational Performance
Financial
Customers/ Market
Critical few measures
Innovation learning
Internal processes
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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?
• Whats the right blend of measures? What are the
  right dials?
• How often should we measure/monitor?

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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?

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Integration of Balanced Scorecard into Business
Planning Process
Department Business Planning
Strategic Management Process
Division/ Program Business Planning
Individual Performance Planning
Individual Performance Management
Individual Performance
Individual Compensation
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Balanced Scorecard for Public Sector Organization
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Balanced Scorecard for Public Sector Organization

• Efficiency
• Operating Costs
• Timely Completion of Capital Projects

• Community Impact
• Safety
• Innovation

• Customer Service
• Quality
• High Performance Teams
• Staff Contribution
• Internal Customer Satisfaction
• External Customer Satisfaction

Balanced Scorecard
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Cascading Division Measurement Example
Operations and Maintenance of
Department operating costs
Division
System Operations of Division operating costs
Section
Roads Cost/Lane km
Utilities Cost/Pipe km
Unit
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Building the Department Business Plan
Municipality/ Department
Division
Programs
Assessments and Plans submitted by Division and
Program Managers Long list of priorities
identified Narrowed to Critical Few
priorities Department/Division/ Program
targets identified
Focus Areas Gaps and Issues Priorities
Priorities and Targets by Scorecard Dial
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Structure of the Monitoring and Tracking System
Department Head
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
Director
Director
Director
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
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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

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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

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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!!!

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Summary (contd)

• 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

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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?

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Appendix A

• Approach to Balanced Scorecard
• (Source Kaplan and Norton, The Balanced
  Scorecard, Harvard Press, 1997)

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Strategic Framework for Action

• Clarifying and Translating the Vision and
  Strategy
• Clarifying the vision
• Gaining consensus

• Communicating and Linking
• Communicating and educating
• Setting goals
• Linking rewards to performance measures

• Strategic Feedback and Learning
• Articulating the shared vision
• Supplying strategic feedback
• Facilitating strategy review and learning

Balanced Scorecard

• Planning and Target Setting
• Setting targets
• Aligning strategic initiatives
• Allocating resources
• Establishing milestones

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A Different Management System for Strategic
Implementation

• The strategy is the reference point for the
  entire management process
• The shared vision is the foundation for strategic
  learning

Clarifying and Translating the Vision and Strategy

• Feedback system used to test the hypotheses on
  which strategy is based
• Team problem solving
• Strategy development is a continuous process

• Goal alignment exists from top to bottom
• Education and open communication about strategy
  are basis for employee empowerment
• Compensations is linked to strategy

Communicating and Linking
Strategic Feedback and Learning
Balanced Scorecard
Planning and Target Setting

• 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

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Appendix B

• Scorecard Examples

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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

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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

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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

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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

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Insurance Case Balanced Scorecard

• Financial
• Return on capital employed
• EVA
• Asset accumulation
• Profitability by line of business

• 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

Balanced Scorecard

• Internal Processes and People
• Cycle time by product
• Employee satisfaction
• Risk management
• Claims leakage

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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

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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

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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

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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

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Telecom Balanced Scorecard

• Financial
• Free Cash Flow
• Operating Cash Flow
• Value Created/SVA
• Revenue
• Net Income

• Employee/Organizational Learning
• New Products
• Employee Satisfaction
• Competency
• Organizational Leadership

• Customers/Markets
• Share of Wallet
• Customer Satisfaction
• Customer Retention
• Market Share

Balanced Scorecard

• Internal Processes
• Internal Service Levels
• Product Intro Cycle Time
• IS/IT Effectiveness
• Efficiency