This chapter is from the book
This chapter is from the book
This chapter is from the book
Business Performance Evolution
According to Dean Spitzer, the author of Transforming Performance Measurements, performance measurement has evolved into a purely technical area using methodologies (i.e., the dashboard). Measurement specialists lead the measurement initiative, and everyone else in the organization just becomes an observer of performance measurement. The complete cycle of performance measurement must instead be implemented effectively to realize its dual purpose of organizational learning and business transformation.
According to documents at the Performance Measurement Resources Center at The Enterprise Solutions Competency Center, which provides support for the Department of Defense Executive Branch, the current business environment is very different from what it was ten years ago. Performance measures drive accountability, visibility, and transparency; inspire and motivate all employees; provide direction for the organization; and encourage alignment from top to bottom. Strategy sets the direction for execution, and performance measurement allows for improvement. In a nutshell, performance measurement is the process of developing indicators using metrics for driving progress toward business goals.
Fundamentally, enterprises realize that their primary challenge is the disconnect that exists between strategy and execution. Strategy, initiatives, resources, and risk are addressed at the senior executive level of an organization, but they are not directly tied to the day-to-day activities. As a result, organizations can measure performance, but they are unable to manage it.
One of the reasons an organization has a performance measurement system without a significant impact on the bottom line is a lack of understanding of the role of measurements. Table 1.1 shows how the measurements have historically been utilized. These measurements were reviewed for various aspects such as basic purpose, driver, methodology, type, example, outcome, challenge, and beneficiaries. The need for a different set of measurements is apparent when you study the trend from the industrial age to the knowledge age. Interestingly, even the purpose of establishing measurements subtly changed from productivity, quality, and profit to profitable growth.
Table 1.1. Evolution of Performance Measurements
|
Aspects |
Industrial Age |
Quality Age |
Information Age |
Knowledge Age |
|
Objective/Scope |
Increase productivity |
Improve quality |
Improve bottom line |
Sustained profitable growth |
|
Driver |
Basic needs |
Expectation |
Shareholders driven |
Customer value driven |
|
Methodology |
Metrics |
KPIs |
Balanced Scorecard |
Business Scorecard |
|
Type |
Output |
In-process |
Organization wide |
Supply Chain |
|
Purpose of Establishing Measurements |
Quantity—Units (Cost per unit) |
Yield % Good (Defects per unit) |
% Profit (Profit per unit) |
% Profitable Growth (Value per unit) |
|
Outcome |
Fulfill customer needs |
Get customer business through quality |
Increase market value through profit |
Achieve business growth through innovation |
|
Challenge |
Orders shipped |
Quality received |
Financials achieved |
Performance achieved |
|
Beneficiaries |
Producer |
Consumer |
Shareholder |
Stakeholders |
Productivity increase was required to keep up with the customer demand, which led to sacrifices in quality and resulted in focusing on quality improvement. The quality improvement was related to the cost of poor quality deducted directly from the profit, thus leading to a focus on profit. Excessive focus on profit led to adverse actions, such as layoffs, outsourcing, supplier squeeze, price wars, and the eventual demise of the business.
While the business progresses through its life cycle, experience and information are gained, technology is developed, and responsiveness becomes critical. Now customer delight—not just customer satisfaction—is expected. The explosion of knowledge has led to informed customers, intense competition, and more demand for better, faster, and more (not cheaper) value. This shift requires operation optimization, continual innovation, and mass customization. As a result, the leadership must become adept at multitasking, comprehending business complexity, and responding optimally.
All of this evolution in business development highlights the need for profitable growth, which requires measurements that represent all segments of the business—objective and subjective, machines and people, and strategy and execution. Kaplan and Norton's Balanced Scorecard was designed to improve the bottom-line performance of companies by focusing on nonfinancial measures of the vision, strategy, objectives, targets, and actions. Experience shows that most Balanced Scorecard measurements follow the "SMART" (specific, measurable, action, realistic, and target) principle. However, the real business also consists of difficult-to-measure, difficult-to-quantify, knowledge-driven, and subjective measurements. Service industries and operations are bound to have more subjective performance measurements.
The Six Sigma Business Scorecard book (Gupta, 2006) presented a holistic business scorecard framework consisting of seven categories and ten measurements. The seven categories and measurements are shown in Table 1.2.
Table 1.2. The Six Sigma Business Scorecard
|
Category |
Measurements |
Significance (%) |
Comments |
|
Leadership and Profitability |
Profit |
15% |
12% profit implies 100% score. |
|
CEO Recognition |
15% |
CEO recognition is accorded for significant value creation. |
|
|
Management and Improvement |
Rate of Improvement |
20% |
Each department must set an aggressive goal for improvement. |
|
Employees and Innovation |
Number of ideas per employee |
10% |
Idea generation implies employee engagement; thus, it is critical that employees continually input their ideas for improvement. |
|
Purchasing and Supplier Management |
Quality (Sigma) |
5% |
The aim is to have suppliers achieve higher quality. |
|
Cost of Purchase |
5% |
Cost of Purchase is measured as % of sales. |
|
|
Operational Execution |
Quality (Sigma) |
5% |
Internal operations must aim toward established performance targets. |
|
Cycle time variance |
5% |
Cycle time variance requires setting delivery or activity completion targets. |
|
|
Sales and Distribution |
% new sales |
10% |
Emphasis on new sales for revenue growth. |
|
Service and Growth |
Customer Satisfaction |
10% |
This could be a measure of multiple internal measures leading to customer satisfaction and loyalty. |
As with any scorecard, the Six Sigma Business Scorecard needs to be adapted to various industries. The seven categories are applicable to most businesses; however, measurements need to be customized to represent needs of various industries. For example, in banking industries or similar service industries, physical inventory may not exist; thus, the purchasing performance could be measured differently.
Evolving business conditions continually highlight the outsourcing processes, growing collaboration or partnerships trends, and intellectual engagement of employees. In addition, service processes do have different dimensions and attributes of their own, especially in terms of the roles of people and machines. Unlike in manufacturing, which is equipment- or machines-heavy, service processes are more people-driven. Table 1.3 demonstrates the differences between service and nonservice businesses.
Table 1.3. Service and Nonservice Business Differences
|
Business Attributes |
Nonservice Businesses |
Service Businesses |
|
Customers |
Customer requires tangible outputs, measurable performance, and ability to easily get it corrected; customer is less engaged from operations. |
Customer requires intangible outputs; it is difficult to measure performance and easier to redeliver rather than repair; customer is likely to be involved in the delivery operations. |
|
Outputs |
Products, parts, or systems create experience. |
Experience creates the output. |
|
Processes |
Series of operations involving machines, material, method, and people. |
Series of activities involving people, material, tools, and methods. |
|
Inputs |
Tangible raw material. |
Intangible information. |
|
Suppliers |
Many suppliers depend upon the complexity of the solution. |
Fewer suppliers with stronger relationships. |
Recent emphasis on business governance, such as the Sarbanes Oxley (SOX) Act, has imposed compliance requirements regarding the business performance. Accordingly, public companies are required to evaluate and disclose the effectiveness of their internal controls and be audited by a third party to disclose their performance specifically relating to financial reporting. Privately held firms, on the other hand, have not been affected by the SOX Act. Industry perceptions of the SOX Act indicate it has an associated cost that has adversely affected business performance. However, the general perception is that SOX has improved awareness of the dependability of the reported business performance. Thus, having effective performance measures will help any type of governance regulations.
The post-information age trend is to use information or extract business intelligence. This initial emphasis on using the information led to the concept of dashboards. While dashboards remain, the necessary business intelligence is lacking without a comprehensive business scorecard model. Most of the dashboards are creative in displaying and reporting the information; however, they are difficult to utilize on the operations side due to an inability to extract business intelligence from them.
Thus, there is a growing need for intelligent scorecards that can predict information. According to Jeff Hawkins in his On Intelligence book, intelligence implies the ability to predict. Therefore, holistic and comprehensive business scorecards that include leading indicators (rather than lagging indicators) provide the intelligence to optimally manage business performance.
The Six Sigma Business Scorecard, as shown in Figure 1.1, offers a predictive indicator of business performance, called BPIn (Business Performance Index), that is determined based on a set of ten measurements used to identify areas for improvement and to set goals to achieve overall business performance. The BPIn, which is based mainly on the operational measurements, can provide a good indicator of the company's financial performance. An operations-based index can predict the financial performance, so the management team can take preventive actions to achieve the desired financial results.
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The BPIn can also be used to determine the corporate sigma levels, which are essential to sustain Six Sigma initiatives at a corporation. In the absence of the business-level performance measures, any corporate strategic initiatives become difficult to track, thus affecting their chances of success. According to Kaplan and Norton, only about 10 percent of strategies are successfully executed.