Balancing Performance Metrics
By: Mark Henderson
|Mark Henderson is Senior Vice President of The CLEMMER Group, a North American network of organization, team, and personal improvement consultants based in Ontario, Canada. His web site is http://www.clemmer.net/|
Typically, organizations involved in creating new performance measurement systems rely heavily on results-oriented measures. Often, however, measures focused exclusively on results represent lagging indicators of performance which afford limited predictive capability to management. Effective measurement systems should encompass a blend of both results and process measures so organizations can not only keep score and measure progress each day, week, or month; but also so they can more reasonably predict what the score will look like.
If we look at an automobile dashboard, we can easily draw a useful analogy to make this distinction operational. For example, the odometer in the car basically tracks results-how many miles the car has traveled during any given trip. While this is clearly a useful measure to track, monitor, and review regularly, it does not provide a complete measure of your car's performance. If you chose to drive from Toronto to Vancouver, monitoring only the odometer could certainly put the result of arriving at your destination in question. Many other key processes which allow a car to make such a trip must be tracked and monitored all along the way to ensure you reach Vancouver.
For example, if your gas gauge is teetering on the brink of EMPTY, you could reasonably predict you would be left stranded somewhere between the two cities. Alternatively, if your oil pressure were low, you could reasonably predict the result of arriving in Vancouver would be in jeopardy. While your car's dashboard only has several key indicators, they are a proper blend of process and results measures which allow you the comfort of knowing that should something go wrong, you will be alerted. The dashboard may not prompt you as to what specifically is wrong, but it will help you and your mechanic work to find the root cause of the problem.
Balancing Results and Process Measures
Results measures generally reflect indicators which are strategic in nature. In other words, results or outcome measures are reflective of the key predictors of the company's performance and long-term health. Process measures are slightly more tactical in nature and typically reflect a predictive element of the results measures. Often a process measure has a significant influence on, or is a major contributor toward, the ultimate performance of a results measure. As in sports, knowing the score at the end of game is useful but limited information. By tracking the key processes which make up the game as it is played, you gain much better insight into what timely actions are required to provide you the outcome you want when the results are tallied.
Several concrete examples from organizations experienced in the development of such measures are instructive. The organizations from which the following examples are drawn have successfully implemented corporate-wide measurement systems which track, monitor, and report on a series of indicators of financial, operational, and quality performance. Each of these systems contains a proper balance of results- and process-oriented measures.
The first set of examples comes from an organization which provides home health care services in multiple locations across several states in the southeastern region of the United States. For this organization, one of the critical results measures in the financial area is Gross Revenue. Gross Revenue is a fairly universal results measure most companies look at each month. Yet, without a corresponding measure of the billing process (among many other processes which impact revenue generation), it is difficult to predict what the revenue number will look like each month. In this example, the crucial process measure is something called Final Bills On Hold. The operational definition of this measure is number of claims and total dollar value of accounts placed on hold from remittance to the payer (Medicare). This process measure not only highlights the performance of the billing process (i.e., cycle time), but also several of the other major processes involved in delivering patient care (i.e., Start of Care, Clinical Documentation, and Discharge Processes) which allow appropriate and accurate billing to take place. By tracking and reporting this measure, reasonable prediction of the Gross Revenue results measure is made far easier, the cause and effect correlation being very clear.
One other example from the Operational area will prove useful in highlighting the interplay between results and process measures. In the home health care business, Patient Census is clearly a results-oriented indicator. It is operationally defined as the number of active patients at the end of the month derived by taking the current month's beginning census, adding all new admissions for the month, and then subtracting all discharges which took place in the month. However, due to the reimbursement structure of this particular industry, a measure called Utilization Rate is also very important. This reflects the number of chargeable visits made in a given month divided by the month-ending patient census. In essence, this gives the number of visits made per patient per month. As mentioned, the reimbursement structure of the industry incents companies to maximize the number of clinically appropriate and legal visits (i.e., as ordered and signed for by a physician) performed. Ineffective and inefficient patient care processes lead to low Utilization Rates, thereby directly impacting financial performance. In this instance, Utilization Rate serves as an excellent indicator of performance for the patient care delivery process. It is equally important to track this process measure along with the results measure of Patient Census. Low Patient Census clearly limits utilization potential so, by measuring both, the cause and effect linkages are made evident.
If we shift gears to examine an international provider of transportation and logistics services, we can see a similar pattern of balancing process and results measures. Clearly, a key results-focused quality metric for organizations is Customer Satisfaction. This company is no different from most and thus has put in place a sophisticated set of methods for measuring Customer Satisfaction using an index approach which provides detailed data from a variety of perspectives (for example: by product, region, specific service location). Yet they go one step further by knowing the key processes and their attendant outputs which impact most significantly the scores on the Customer Satisfaction index. One such process is the pickup and delivery of international packages. This is a premium service line which is very lucrative for the provider, while involving considerable expense for shippers. It also involves substantial documentation requirements to allow packages to move freely across borders in a timely and efficient manner.
This organization knows a key driver and predictor of customer satisfaction for those customers shipping internationally (potentially the most profitable customers of all those they serve) is on-time delivery of their shipments. Interestingly, the process measure they use to track this activity is something called International Shipment Delays. It has been operationally defined as the raw number of international shipments by service location which could not be sent due to incomplete shipping documentation. They track this indicator in this manner because they know from root cause analysis that most, if not all, of these "held" packages could be averted through a joint effort between themselves and their customers. However, from the customer's point of view, the only people to blame when their important (and expensive) shipment does not arrive at the right destination at the right time are the people who picked the package up. This critical pickup process, which includes securing all the necessary documents needed for international transport, directly influences the ultimate results measure of customer satisfaction. And, since they can see this data by product/service line and service location, it is not difficult for the spotlight to shine intensely when there are process problems which impact satisfaction scores.
The final example originates from a major financial institution based in Canada with operations around the world. One of the key operational results measures they pay close attention to is Productivity and Cost Management, defined for strategic purposes as Return Per Employee. In other words, for every dollar (fully loaded to encompass all costs including but not limited to salary and benefits) invested in an employee, is the return greater than the one dollar invested? Basically, this organization thinks about the equivalent of a Human Resources Balance Sheet, where they want a better than average return on perhaps their most strategic investment.
In terms of process metrics which directly impact this Productivity results measure, they track variables such as cost, efficiency, speed, or cycle time for transaction processing. Specifically, one key operational process measure for this financial services company, which heavily influences their overall Productivity outcome measure, is Transaction Cycle Time. This is operationally defined as the amount of elapsed time it takes to complete a series of routine or standardized financial transactions. Experienced, well-trained employees obviously compress the throughput time on transaction processing, thereby enhancing their return to the corporation. Similarly, the organization clearly sees a direct cause and effect link between a highly-trained, long-term employee and the ultimate performance of a key result measure like Return Per Employee. Once again, the balance between Process and Results measures provides a broader picture on the scoreboard, allowing this organization to prudently select the right improvement initiatives to achieve the measurable outcomes they require.
Measurement and Compensation Alignment
The purpose of aligning performance measurement and compensation systems is to ensure the proper incentives are firmly in place to drive appropriate quality and customer-oriented behavior. Other management systems (reward and recognition, performance management, and internal communications all come to mind) will also need tight linkages to the measurement system so all available reinforcement levers work to shift the culture as required toward a new standard of performance and competency. Typically, incentive compensation serves as the best means for tying pay and measurable performance together.
Usually an organization chooses three to five critical performance measures and uses the improvement of these indicators over a set period of time to align incentive compensation with. For example, if the strategic objective was to grow revenue, one component of the incentive compensation scheme could be tied to the percentage growth from some agreed-upon baseline number. If the total compensation program consists of 80% base salary and 20% incentive or variable compensation, the 20% can be divided either equally or in a weighted fashion to accommodate measurement across the three to five critical performance indicators. When the correct metrics are chosen as the basis for incentive compensation, they exert significant influence over behavior.
By altering the performance measures by which people are held accountable, and tying incentive pay to improvement in these metrics, you will fundamentally shift focus and attention. The incentives will drive change and improvement into the organization. Managers will be forced to reexamine their approach to day-to-day management. Their roles will, by definition, shift to become more strategic in nature, pulling away from the fire-fighting around daily routine operations. Instilling a sense of ownership will be a natural outgrowth as managers and employees alike are incented to lead the business forward, actively seeking ways to profitably change, grow and improve. Their outlook becomes more strategic, no matter their function, as they search for new sources of revenues or new products, or ways to contain costs, improve quality, and enhance value to customers through superior service.
There is a clear and obvious dynamic relationship between results measures and process measures. Neither is sufficient on its own and any good measurement system will seek to find an appropriate balance of both kinds of indicators. Knowing what the score is at the end of the game is critical; knowing how the score got that way is just as important. Process measures provide a predictive capacity to let you know how the game is going and the opportunity to intervene as necessary to adjust events in the direction you desire them to go. Aligning incentive compensation to a carefully selected set of balanced metrics simply adds compelling and persuasive influence for everyone to do his or her part in ensuring victory.
© Copyright 2000 The CLEMMER Group
|Other Articles by Mark Henderson|
The author assumes full responsibility for the contents of this article and retains all of its property rights. ManagerWise publishes it here with the permission of the author. ManagerWise assumes no responsibility for the article's contents.
Would you like us to consider your own articles for publication? Please review our submission and editorial guidelines by clicking here.