Measuring Performance

A Toolkit of Traditional and Alternative Methods

David Jenkins

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317099154
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Contabilidad gerencial

Do your performance measures seek primarily to detect and control undesirable activities, rather than sharing and rewarding productive behaviour? Every organisation needs to measure its performance and that of the people it employs; David Jenkins shows you how to make more productive use of such measures. For measures to be accurate and reliable there are fundamental rules that need to be applied. Ignoring or misapplying them undermines performance and impedes the achievement of the corporate goal. For any enterprise, data must be available across the whole spectrum of activity in which it is engaged. The quality of that information will depend on the way it is measured. In some commercial organisations data is regularly gathered at local level. Instead of being used at this point, it is often fed into a corporate information system which, having recycled it, issues the result in a form that does not always meet needs. In Measuring Performance, David Jenkins examines the more traditional measures of performance and highlights their shortcomings as well as assessing the merits of the alternative approaches that are currently available. The book concludes with a step-by-step guide to reviewing the effectiveness of your organisation's existing systems for measuring performance and identifying ways of improving them.

CHAPTER 1
Common Sense About Measures

Getting Measures Right

MEASURES AS A POTENTIAL SOURCE OF INTELLIGENCE

The purpose of this chapter is to highlight the risk that those in charge inadvertently cut themselves off from.

Sydney at the Confessional

I had an appointment with Sydney, a divisional general manager of Norfax, a company making carbon products and employing 1,400 people in total. As I entered his office I could see that Sydney was looking glum. I asked him how things were going.

‘Things are pretty dire, Dave,’ he began. He went on to explain: ‘Earlier this year things seemed to be going so well. As we approached Christmas things slackened off, but they often do at that time of the year. But they haven’t picked up since. We have had to shed some people.’

‘Did you have no inkling that this was likely to happen?’ I asked.

‘No. There were no warning signs – nothing to indicate that this was going to happen. Sales simply fell off a cliff.’

Now, I had known Sydney for a long time and I was familiar with the business in his charge. I also knew that, short of the financial cataclysms that happen twice a century, sales rarely fall off a cliff.

‘Didn’t somebody notice a decline in orders and sales enquiries?’ I asked.

Sydney shook his head.

‘Didn’t your salesmen pick up some signals out there in the market?’

‘No.’

I decided to try a different tack. ‘Sydney, can I ask you how often you talk with your salesmen?’

‘To be honest Dave, not that often. They are like all salesmen – always bellyaching about how hard life is and the advantages their competitors have, that our prices are too high. I have heard it all so many times. You should know, Dave, you have worked with some of them. So really I don’t go out of my way to talk to them.’

I didn’t reply directly. Although I judged that some of his observations about his salesmen were justified, I knew that because most people I knew in the company felt that bad news was always unwelcome at the top, there was a tendency to both withhold information and to massage the data that was fed into the system.

Eventually I said, ‘Yes, Sydney, I know salesmen can be a pain, but who else is in a better position to let you know how the market is looking?’

Sydney shifted uneasily in his chair.

‘I know. But you know what Alan (the Group Managing Director) can be like. Nobody wants to be the messenger. I think the reports we were getting from the field tended to be over-optimistic.’

Sydney was opening up now.

‘There is something else, Dave. I have to plead guilty on one count. Last year we had a lot of problems with a big order for Brazil. Everything that could go wrong with it did go wrong. The way things were going at one stage it looked as though we would make no money on it at all. It was a headless chicken episode. Fortunately we were able to rescue it, but we were working around the clock for weeks on end. I have to admit in retrospect that we did take our eyes off the ball, and for too long. You know as well as I do that when you get problems of that magnitude the adrenalin tends to take over and you can lose sight of the things that matter. Really there probably were some signals and perhaps there were some people trying to tell us but we were all just too busy.’

The principal purpose of measuring performance is to acquire the information needed to run an organisation. In the case of Norfax it was evident that there were flaws in the way the system worked. There was a reluctance to report figures that were believed to be unwelcome to those in charge. Those in senior positions like Sydney did not seek to gain intelligence about the market from those who were in a position to provide it. Finally, insufficient attention was being given to the data that was being reported. The problems Norfax was experiencing with the Brazil contract were no excuse for according insufficient attention to this data – and Sydney knew it.

However, there was nothing unusual about these events at Norfax. A roll call of companies that have reached a premature demise for these same reasons runs into many hundreds and includes some great names like Marconi (formerly GEC) and BTR (now restyled Invensys). It was a reason for the recent early departure of the chief executive of BP, previously better known within that company as ‘the Sun King’.

The information that Norfax lacked was, of course, critical to its operation, but what it required extended more widely than this. For any enterprise, data must be available across the whole spectrum of activity in which it is engaged, and the quality of that information will depend on the way it is measured.

To be able to measure information and any part of it there are three things that have to be done:

• the right things must be measured;

• the measures used must be the right ones;

• they must be applied correctly.

The purpose of this and the other introductory chapters that follow is to consider their implications.

There are three issues:

1. The need to avert the risk of measuring the wrong things.

2. The need to elicit the right behaviour.

3. The need to respond to whatever needs to be done.

Measurement of the Wrong Things

The right things are first and foremost those that have to be done in order to achieve the corporate goal. This is a fundamental rule and it is the rule that is most commonly breached. As will be seen in Chapter 3, different parts of any organisation are apt to pull in different directions. When this happens, of course, the collective effort to attain the common goal is undermined. Yet the results of this divergent activity are often measured: worse still, they are also often rewarded.

Measures and the Way People Behave

THE NEED FOR CLARITY

Overall, the way people behave is strongly influenced by the measures by which their performance is being judged. If the measures are not explicit, people will guess what they are. Sometimes there is a wide discrepancy between what are made known as the official measures and those that are perceived to be applied. If people are told, for example, that they will be judged on the quality of their work, but they know or suspect that it is the quantity produced that counts, they will draw their own conclusions. So both official measures and what are believed to be the actual measures that are used have a powerful influence over the way people behave.

The way measures affect behaviour is not uniform – it varies according to the personal and organisation platforms at which performance is measured. These are at four levels:

1. that of of the basic tasks;

2. that of supervisors;

3. that of managers;

4. that of the organisation unit within which they work, for example a branch, department store or factory.

AT THE LEVEL OF BASIC TASKS

In the past I have taken part in surveys in which people working at this level have been asked in face-to-face meetings how they see the measures used to monitor their performance. The principal features of the picture that has emerged are a limited understanding of what these were and, partly as a consequence of this, apprehension lest any information gathered might be used against them or their interests. As a result, the way they generally behave is best described as defensive.

AT SUPERVISOR LEVEL

Most supervisors have risen from the ranks of those executing the basic tasks. Their managers often leave them unsure as to the measures by which their performance is judged (see Chapter 4). So, like the people in their charge, their behaviour too is often defensive.

AT THE LEVEL OF MANAGERS

In looking at the behaviour of managers in response to measures, the majority can be divided into two broad categories. In many corporations there is a magic age – often somewhere between 35 and 40 – at which the thrusting young executive is transformed into the manager who has missed the boat and is now seen as having limited career prospects. The result is a minority of those who are still ambitious and the majority that have reluctantly settled for a less lofty perch.

It is a characteristic of the aspirational minority that they can be counted on to sniff out the criteria (often unofficial) by which their performance will be measured. As a result, their single focus will exclude all others, even if – as is sometimes the case – they can see that these are crucial to the achievement of the overriding corporate goal. This has other consequences, which are often overlooked. As is well known, it has been common practice for many corporations to periodically introduce programmes, or ‘initiatives’, usually accompanied by a loud fanfare, which are said to be designed to improve the way things are done. There are a number of reasons why these rarely succeed, but one is the fact that the implementation of such campaigns is not included amongst the measures by which performance will be judged.

Managers at the Top

It is often assumed that those at the apex of the organisation have a substantial degree of autonomy in determining the measures by which their own performance will be measured. The reality is the converse. As will be seen in more detail in Chapter 3, the power of City-based pundits actually imposes tight constraints on their freedom of action.

Measuring Response

Prominent amongst the right things that should be measured is the readiness to respond to whatever needs to be done. By far the most pressing amongst these is prompt action where the data tells you that the organisation or any part of it is underperforming. It is essential that the measures used reveal both the need for corrective action and the extent to which this has been forthcoming.

The Dangers of Being Dazzled by Numbers

A predominant concern is with numbers, regardless of other dimensions of the work done. This is a practice with a long history. For the best part of a century it was the norm across industry, where it was best known as payment by results (or PBR). Then, in the 1970s, it fell out of favour in the UK, with the motor car industry leading the way (it was replaced by a practice called ‘measured daywork’, which was a form of hybrid; this had a brief lifespan). However, just as it was disappearing from the lower reaches of manufacturing concerns, it began to gain favour in company boardrooms and its attractions caught the eye of those in charge of organisations in the public sector, such as universities – it has long been common to measure departments by the number of articles published regardless of their quality.

The commercial sector has a distinct advantage in this respect. Take the world of book publishing. One book editor may go for numbers: another puts a premium on quality and publishes a smaller number. Leave it at that and it is difficult to judge which is the better policy. However, the key factor in publishing is the number of books that find buyers. So long as the same marketing muscle is applied to the promotion of each book, it is the revenue it brings in that is the ultimate arbiter.

It should be evident to all that any system for calculating corporate performance should focus on measuring the elements that are key to achieving the corporate goal. That this link is not always there should give those in charge pause for thought and an incentive to re-evaluate practices currently employed.

Views as to what constitutes the right measure to apply in order to assess performance have evolved in line with changes in technology.

Visible Results

Historically, the primary virtue sought by employers was that of hard work. In general, assessing how hard people work is notoriously difficult, but there were and still are a few exceptions. When agriculture provided large numbers with employment, the area ploughed in a day was easily measured. Some relics of early measurement practices still survive. Laying bricks is one of the few trades where an objective measure (the number of bricks laid in an hour) is recognised at law. Nowadays the opportunities to use such yardsticks are less common. With banks of computers and armies of workers spending the day peering into their screens, the relevance of the notion of judging how hard people are working has faded.

Measuring by Observation

As will be seen shortly, Frederick Taylor, the world’s first efficiency expert, ordained that the only way to measure performance was by close observation – watching work being done and checking the result. This was feasible when technology was primitive, with most work done by hand. Nowadays the nature of work has changed to the extent that observation is rarely feasible or relevant.

Using Personal Experience

A method of measuring work that is often overlooked is that of applying personal experience. Despite textbook admonitions to the contrary, a criterion often used in promoting a workman to the position of supervisor is personal experience of the work to be supervised. If a pavement has to be renewed with new paving stones, it is still common for this to be done by hand. Somebody has to estimate how long it will take. Few are in a better position to work this out than somebody who has sufficient experience of executing this work. He can estimate the time it will take (it is sometimes done by a white collar official, often called a clerk of works, whose estimates of the time required for such work to be done are often a source of contention).

The Quest for Objective Measurement

For a long time the inherent subjectivity of assessments made by managers of the performance of individuals in their charge has been widely recognised. Reducing the scale of this risk was the trigger for a formula known as management by objectives (or MBO) popularised by Peter Drucker in his book The Practice of Management (1951). The core of the concept is a practice in which a manager and their subordinate meet at regular intervals – usually once a year – to set the underling’s objectives for the next period. It was a prescription that attracted a following in the UK for a decade or so before it faded from view, but which is still widely applied in the USA.

Well before the idea of MBO emerged, the practice of setting targets had long been favoured in standard accounting textbooks, and in recent years this has spread rapidly from the private to the public sector.

As already noted, what is measured – or seen to be measured – has the potential to exert a strong influence on behaviour. It needs to be recognised that the employment of both objectives and targets harbours risks that can lead to unintended consequences which are not in the corporate interest. Some of these will be reviewed in the next sections.

The Function of Data

Nowadays how good your measures are is entirely dependent on the quality of your data. This in turn depends on how well your system for generating and handling data works. The ubiquity of computerised systems can cloud a picture which in reality should be very simple. The essentials for the operation of a data handling system are these:

Data has to be collected. There is as yet no escape from dependence on human beings. Even with the most advanced computer systems available, somebody has to enter the information. Hence the importance of doing everything possible to ensure that the inputs are accurate. In discussions held with people at the workface the average estimate of such accuracy provided by workpeople has been 75 per cent.

Next, of course, performance data has to be delivered to whoever is said to be in control of the work that has been measured.

There are two key issues:

1. What happens to the data between collection and distribution? In a typical corporation it will be recycled, ostensibly to make it more useful to the recipient.

2. The second central issue is this: measuring performance is one thing, pinpointing the causes of underperformance is another. Clearly the two should be indissolubly linked.

Wherever a target set has been matched or exceeded, all the recipient needs to do is to deliver more of the same. If the data you receive shows you are underperforming, you need to take corrective action. But first you have to track down the cause of the mismatch between target and achievement.

The Value of Data – the Acid Test

It is worth asking this question: as recipient of data, what is it that you need in order to be able exercise total control of the activity your charge?

These are the conditions that must be met:

• Data has to be presented in a way that you can understand, without having to seek explanations of what terms or figures mean.

• You can be confident that the data is accurate, relevant and up to date.

• You are provided with the data needed to measure performance in achieving what has been planned.

• The reasons why performance is worse or better than expected should be crystal clear, without your having to spend time digging deeper for the information you need.

• The data provides enough information for you to be able to determine what needs...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Introduction
• Chapter 1 Common Sense About Measures
• Chapter 2 An Introduction to Standard Accounting Doctrine
• Chapter 3 Measures in Practice
• Chapter 4 Measurement of Performance
• Chapter 5 Reforming Measures
• Chapter 6 A New Model – Productivity
• Chapter 7 Spreading Measures
• Chapter 8 The Measurement Toolkit
• Chapter 9 Conclusion
• References
• Index