Measuring success

Performance Management – Breaking the code

How the right performance metrics can drive profitability

In the changing world of management, full of acronyms and buzzwords, it is encouraging that, after all, there are still concepts with so much substance to them that they are just as relevant today as they were 10 or 20 years ago. However, they are often underestimated – perhaps because they are so obvious.

Performance Management - Breaking the code

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An example is performance management, which in our opinion is one of the most powerful leadership tools available, especially in relation to changes calling for organisations and thereby human behaviour to change. No matter how long and deeply the less fit and healthy among us consider the best strategy for achieving a healthier life, it is most likely that the end result will be a regimen of eating less and exercising more. It is not difficult to arrive at that insight.

Step on the scales and recover from the shock

It is, however, difficult to carry out the strategy in real life, and this is where performance management comes in. It is – as with any other behavioural change – incredibly difficult to work towards achieving a healthier life without first stepping on the scales, recovering from the shock and subsequently measuring whether the changes made have an effect.

If we look at major organisational changes or large-scale system implementations, basic effect measurements are often ’forgotten’. Projects are typically implemented with the intention to ease the administrative burden, raise the level of quality or increase productivity. However, often the metrics supporting attainment of the desired effects, corresponding to the scales in the above example, are not established early enough or, even worse, are not established at all.

A key challenge in this context is that the rules have to be defined first. If we are to measure productivity, we have to define the actual state of play in each instance, which is not necessarily an easy task. In addition, performance management, including establishment of the metrics system itself, is not the primary focus of an organisation in a change process. Typically, this is regarded as a separate project to be tagged onto the change project ad hoc. However, this is not possible – effect measurements and change are inextricably linked!

What happens when you have no system for effect measurement?

With no system for effect measurement in place, there is a tendency to assess the project in isolation in terms of the planned individual project deliverables. We forget the main purpose and find it difficult to answer as to why we launched this particular initiative. This makes us reluctant to make adjustments to the project content. Furthermore, the idea was to learn during the realisation of the project, but instead there is a great risk of ending up in a situation where the operation was successful but the patient died.

This is why performance management is a watertight solution to this day. Whether we call it management by objectives, key performance indicators or performance management, it is essential to measure success using indicators which tell us how we are doing and act accordingly, of course. It gives food for thought that it all starts with the little word why. Why do I need to weigh any less? Why do we need a new vision, a new ERP system or a new strategy? Why is an amazing word, which we constantly need to have at the back of our mind when working with strategic changes. This is one of the central points of this article.

Jan Lythcke-Jørgensen
Jan Lythcke-Jørgensen
+45 2338 0017
Peter Jørgensen
Peter Jørgensen
+45 233 80 047

Identifying key performance metrics that drive profitability

In our last newsletter, we focused on the elements of successful strategy development. One of the unavoidable consequences coming from the stra­tegy process is the need to redesign the current performance management metrics in order to match the new strategic journey. The logic being, how can we expect to succeed with the strategy if we do not measure our progress? Or, as W. Edwards Deming once said:

In God we trust; all others must bring data.

However, translating strategy into a set of performance metrics is not easy. Very often we end up having too many metrics to be able to focus on what truly drives value creation, or too few of them to be able to take the right corrective actions before it is too late.

One might say that performance management is the art of translating strategy into action by finding the few metrics that really matter in the hay stack of potential. Therefore, we feel passionate about introducing this analytically founded framework to ensure simplicity and focus on the ultimate purpose of performance management: true value creation.

Our framework is designed to provide clarity and simplicity to performance management by addressing the five major challenges associated with designing and implementing performance management structures.

Maintaining balance

Creating balance in the performance management framework is never an easy task, and very often one will tend to rely on metrics that everyone understands and that can easily be measured. This may lead to an over representation of financial metrics resulting in spending too little time on “changing the business” and too much time on “running the business”. Consequently, this may lead to a short sighted quarter by quarter focus that reduces strategic agility significantly.

Understanding value creation

The wish to measure a wide variety of areas, e.g. learning & development, customer satisfaction and strategic direction, leads to an inability to focus on the factors that truly drive value in the organisation, leading to falling margins in the worst case. Understanding value creating metrics is key to avoid a misguided focus on secondary metrics that do not truly drive competitiveness and differenti­ation.

Selecting process metrics

Core process metrics are crucial in any performance management framework, and measuring on the wrong metrics can easily disrupt otherwise efficient core processes. This is particularly true when process metrics are to be consolidated to higher levels in the organisation. Consequently, middle management might end up trying to take corrective actions on misleading performance metrics.

Listening to the customer

Measuring customer satisfaction is an important area for most companies. However, if the measurements are based on internal definitions of what drives customer value rather than true customer experience driven metrics, there is an imminent risk of measuring the wrong things.

Bringing it alive

When designing performance manage­ ment frameworks, there is often a strong focus on concrete Key Perfor­mance Indicators (KPIs). However, in our experience, a more holistic approach is often beneficial, looking at rules, regulations, processes and steering mechanisms that may “push” the organisation in the right direction.

Having said that, the actual launch of a new performance management structure is a complex change process. Not only are people in the organisation often reluctant to be measured on new things, they are also often unaware of how to influence the new metrics they are measured and incentivised on.

In this article, we will elaborate on how to design a performance management structure that takes these challenges into account and present five core design principles ensuring that the performance management metrics support the strategic direction without losing sight of key operational metrics.