January 30, 2008
News & Opinion: Excerpt from Beat the Odds
The following excerpt is Chapter 9 of: Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise by Robert A. Rudzki.
From the publisher: "Rudzki's crisp message on the nine principles for success, which are profiled with excellent current real-life case examples, provides clear direction for managers on how to ensure their companies win and remain healthy and successful long-term."
PRINCIPLE 7: MEASURE ONLY WHAT YOU WANT TO ACHIEVE
"You get what you measure."--Author unknown
Early in its history, Southwest Airlines lived by a metric that made a big difference in its performance. The metric was its "20-minute turnaround" time, a commitment that it would turn around its planes at an airport gate in 20 minutes, cleaned, restocked, and ready to fly again. The metric proved to be a powerful internal operational discipline that resulted in cost savings, as well as a powerful marketing tool with customers
By contrast, one U.S.manufacturer that will go unnamed began focusing on the wrong kind of measurement. The company had been going through a protracted period of downsizing. Over time, management seemed to adopt the view that head count reduction was synonymous with improved bottom-line performance. In fact, one of their most talked-about, measured, and reported "objectives" was head count. Indeed, the managers were so experienced in achieving head count objectives in successive waves of down sizings that they received benchmarking requests from major companies that were starting their first rounds of staff cuts.
Almost too late, the company began to notice examples where its effectiveness to accomplish important business functions had been eroded. It had become an example of "corporate anorexia." The objective and measurement of head count reduction (efficiency) had almost superseded the factors to which management should have given prominence in its performance measurement process (measures of effectiveness).
Communications equipment leader Cisco Systems got the wrong end of the measuring stick when it became overly enamored with its own acquisition prowess. A November 1999 Fortune magazine
article about Cisco's acquisition system was headlined "Forty-Two Acquisitions and Counting."1 Just a few years later, when Cisco fell afoul of the bursting of the high-tech bubble, its management team came to realize that a focus on "number of deals done" was shortsighted in
the new world. In fact, Cisco had grown in an uncoordinated manner, resulting in enormous waste and inefficiency.
By late 2002, Cisco had formed a corporate-wide initiative, under the leadership of the senior manufacturing executive, to identify and eliminate waste. This effort, plus other core initiatives focusing on how to run a business well in good times and bad, reflected a maturation of Cisco's approach to measuring and guiding its business activities.2
The lesson here: Since you will only reliably get what you measure, you must measure what you want to achieve. The right performance measures drive appropriate focus, behavior, and results. Too many performance measures risk diluting focus, and thereby risk being counterproductive.
The Hackett Group points out that the use of key performance indicators is not a choice between focusing on effectiveness and focusing on efficiency. The strategic advisory firm's research shows that "world-class firms use efficiency as a means to free up funds to invest in high-impact people and technology--not as an end unto itself."3 To say it another way, they use efficiency gains to fund adding additional resources to those activities (e.g., strategic themes), which can then drive fundamental business performance.
Performance metrics are either leading indicators or lagging indicators of performance. Examples of leading indicators include the following:
Employee satisfaction and commitment
Adherence to core values
360-degree feedback on leadership practices
The number of supply chain alliances designed and implemented
Following are some conventional lagging indicators:
Last quarter's net income
Last year's return on assets
Last year's cash flow
The number of purchase orders processed per employee
The average cost to process an invoice
Leading indicators give a clue to the likely future success of the organization. They indicate whether or not you are "building for the future," and can provide an early warning signal of future problems. For instance, persistent indications of customer dissatisfaction are an alarm bell about future order rates and revenues. Employee dissatisfaction can be a leading indicator of future key employee departures. Customer and employee indicators are among the strongest leading indicators of future performance. Lagging indicators are like looking in the rearview mirror. It's useful information about where you've been, but it's dangerous to steer by it. Financial performance, by its nature historical, is typically a lagging indicator.
Of course, metrics are nothing new. Stopwatch in hand, scientific management expert Frederick Winslow Taylor was gathering productivity data before the First World War. In recent decades, parts-per-million quality data helped drive the Total Quality movement in the 1980s just as net-promoter scores now help determine customer satisfaction at corporations such as General Electric.
Supply chain metrics have gathered pace as supply chains have become the system to optimize; at the executive level, strategic measurement methods such as the Balanced Scorecard and newer financial metrics such as return on invested capital (ROIC) have become commonplace. Technology
systems are enabling far more data-driven decision making, certainly in terms of data gathering, data analysis, and data mining but also in the form of easily managed business-intelligence "dashboards" that give executives key metrics at a glance. Recent research by consultancy Accenture reveals that the use of data analytics for decision making has increased significantly since 2002. Organizations are now actively exploiting their enterprise IT systems to facilitate decision making. More than 30 percent of managers responding to Accenture's survey said they are using their enterprise systems for "significant decision support or analytical capability" compared to 19 percent four years ago. Importantly, the leading companies are taking care to measure only the performance factors that will truly distinguish them in their markets.4
Figure 9.1 The hierarchy of metrics
So what's the best way to organize the internal discussion of goals and measurements so it facilitates the achievement of the right objectives and the right priorities--and does not inadvertently hurt your strategy and internal alignment? One useful framework is to recognize that there are three major categories of objectives.
At the top are the overarching "business-level," or strategic, objectives. These are the objectives that your corporation's senior executives and business unit leaders should be thinking about regularly. Prime among them are adherence to purpose and core values and vision; and two classic financial metrics: ROIC and earnings per share (EPS).
In the middle, supporting the strategic objectives, are "process-level" objectives. These provide indications of whether core business processes are performing well in support of near-term achievement of strategic objectives (typically measured with lagging indicators) and other indications of likely future performance (typically measured with leading indicators). Examples include leading indicators like customer satisfaction and employee satisfaction, and current levels of quality, cost, and working capital as lagging indicators.
If the metrics relating to processes indicate some unhealthiness, or a degree of suboptimization, then you should introduce the third level of metrics, sometimes referred to as "diagnostic" metrics. These enable management to identify and analyze underlying problems or root causes that are having an adverse effect on the process-level metrics (and that, in turn, impact the strategic objectives). Diagnostic metrics are also helpful during the early stages of innovation or process change, when you want to monitor adoption rates, and also measure how individual activities are changing as a result of the transformation you have initiated.
It is useful to measure both leading indicators and lagging indicators. But it is important to focus on just a few key objectives to which everyone can relate their activities. These measures should be highly visible and easily understood. They must be discussed regularly and monitored by all levels of the organization. One example of a measurement and management system that links it all together is value-based management (VBM).5 Adopted by such leading organizations as Danaher and
VBM is expressed publicly as a "management system," and it becomes the tool that managers at all levels use day to day to gauge whether their units are on track against agreed-upon goals. It is also a tool for measuring the performance of the managers themselves. Here's how Danaher describes its system: "Success at Danaher doesn’t happen by accident. We have a proven system for achieving it. We call it the Danaher Business System (DBS), and it drives every aspect of our culture and performance.We use DBS to guide what we do, measure how well we execute, and create options for doing even better--including improving DBS itself."6
The "Take This Job, Please" Index
On a humorous note, one of my former colleagues suggested a new index as a true leading indicator of employee alignment, commitment, and morale. It was to be based on the prevalence of office lottery pools. The suggested title was "Take This Job, Please"--a more refined form of the reaction to be expected from someone who had just won the big one. The TTJP Index would be measured by the number of office lottery pools established when lottery prizes exceeded a predetermined level--$50 million, say. Two or more office workers pooling their purchase of lottery tickets would constitute one office pool. The metric is particularly interesting in a multifloor office building or a multibuilding office campus. If you noticed a growing number of lottery pools at your organization, what might that indicate? After some watercooler debate, a refinement was suggested for the TTJP metric. Add this additional dimension: After the participants of a lottery pool are notified
(by e-mail or phone) to contribute their share for the next round of the lottery, how much time elapses before the first person shows up with cash in fist? The metric and its analytical conclusions could be tabulated as follows:
First Person Arrives >> Comment
(a) Next day: >> Not to worry.
(b) Within one hour: >> You have reason for concern.
(c) Within 10 minutes: >> Your employees are desperate to get out.
(d) The participants prepay: >> Don't you wish your employees were similarly energized and committed to your company?
WHO MEASURES UP AT MEASURING WELL?
Metrics gauge the performance of every kind of organization, public or private, for-profit or nonprofit. To the extent that they are heeded, and to the extent that they are the metrics that matter, they also help to govern the corporate performance. So who deserves kudos for measuring well?
Alcoa has historically received high marks for its focus on appropriate measurements, and for its application of those measurements to fundamentally alter the company's culture. In the late 1980s, Alcoa began to introduce a discipline of measuring nonfinancial and financial metrics, combined with accountability for achieving objectives. That proved to be a powerful combination. In Alcoa's experience, a focus on improving safety proved to be a leading indicator of future productivity improvements and world-class operations. These, in turn, contributed to improved financial performance.
Similarly, General Motors, regularly in the financial doghouse during much of the 1980s and 1990s, began to show some signs of renewed vigor under the leadership of Richard Waggoner. Part of the Waggoner approach has been a focus on key measurements, to much more detailed levels than in the past. But it's not just the measurements themselves that add value. A critical step has been the utilization of monthly meetings of his 14-person management committee to actively discuss performance and to focus on process improvements and personnel (both of which were evidently understood to be leading indicators for future performance).7 GM
still faces plenty of significant challenges, including renewing top-line growth so that its business model math has hopes of working. Nevertheless, its attention to Principle 7 is an important element in its managing for the future.
Robroy Industries reached its 100th birthday in early 2005 and is being managed by the fourth generation of the founding family. In a bylined article, Robroy
You can't know what you don't know. We have placed a premium on measurement and accountability. This is good business practice during the best of times and a life-saver during the worst. Over 100 years, we have made mistakes--some of them potentially catastrophic. However, in those instances, when our self-evaluations told us we had erred, we consciously worked to set aside egos and to promptly change our direction.
For that reason, I urge all businesses to be metric-focused. If you cannot immediately--and I do mean immediately--summon statistical information specific to your top-line sales, the bottom line of your balance sheet and daily measurements of all vital production performance, you're at serious risk of going astray. Similarly, if your personnel have not been properly positioned with performance-based on-the-job objectives that can be accurately and fairly measured, you are at jeopardy of being lost without even knowing it.8
As you consider whether or not your organization is doing an effective job of measuring only what you want to achieve, ask yourself these questions:
Do we rely on, and measure, only a few significant objectives?
Do we measure mostly leading indicators, or are we looking mostly in the rearview mirror?
Do we act on what we measure, or do we measure for measurement's sake?
Are our measurements highly visible to all employees?
Are our measurements easily understood by all employees?
Are all of our employees linked to the same few performance measures?
YES, BUT . . .
"Yes, it sounds great to talk about measuring only a few important indicators, but my business is complex. I need to monitor lots of factors, both internal and external."
I've heard that response before. So have you, I'm sure. The desire of most leaders and managers to monitor many factors is not necessarily in conflict with the theme of this chapter. But the distinction is this: It is essential to measure a few key indicators that relate to corporate objectives. These key indicators need to be widely understood and highly visible, and embedded in the personal objectives of employees at all levels. They are the "super metrics," if you like. If you do this properly, these indicators will help drive appropriate focus and behavior throughout the organization and contribute to alignment.
So the monitoring of other factors by individual managers is fine, as long as it does not conflict with the organization's focus on the preselected "super metrics." To say it another way, each manager has full flexibility to acquire and evaluate all sorts of data for diagnostic purposes, but he or she must not let those metrics dilute the organization's focus on the few key objectives that have been determined to be strategically important. Monitoring of other factors serves the organization's overall purposes when it is used to gain insight and trigger relevant questions about what is happening internally and externally--and to get at the root cause