Developing Key Developing Key Performance IndicatorsPerformance Indicators

Tom FreasPrincipal

October 6, 2004

Sustainable high performance & measuring what is important to success…

Dean Smith,

Coach, University of North Carolina, Most wins in College Basketball

“We played and graded what each player did on each possession…we handed out awards for the players who performed best in the categories that helped us succeed…offensive rebounding, assist/error ratio, deflections, charges drawn, screens set, blocked shots…” Dean Smith, The Carolina Way

Lance Armstrong,

Cyclist, Six Tour de France victories

"You have to be a slave to data. You have to measure everything. You have to be willing to examine any small part of your body or bike to find extra time.” Lance Armstrong

Developing Key Performance Indicators - Agenda

Performance Measurement Today Issues & Responses Performance Measurement Framework Performance Measurement Techniques Knowledge Management as an Enabler Performance Measurement Tools

Performance Measurement TodayPerformance Measurement TodayPerformance Measurement TodayPerformance Measurement Today

In Today’s World, we keep it simple and expect staff to rally around a few bottom line measures….that way, we are all on the same page…Right?

Our market capitalization has declined, therefore we must improve ROCE, EVA,

EBITDA...

I wonder how Aunt

Eva is doing?

So, what does ROCE have to do with whether I get these drawings to

the customer?

EBITDA, hah!, most of the folks who get these reports cannot

spell EBITDA!

Wrong!…organization complexity increases the chances of the bottom line measures getting “lost in the shuffle”, ignored and…

Issues & ResponsesIssues & ResponsesIssues & ResponsesIssues & Responses

The Issue - When performance measures get ignored, employee focus declines causing the organization to expose itself to issues that negatively impact sustainable performance.

Issues Impact

Employee Turnover What is the cost of hiring a new employee?

Poor Customer Service How many customers have walked?

Low productivity How many more people do you have to hire?

Lawsuits Is the lack of focus causing an exposure to risk?

Management Burnout Are your managers just plain tired?

Employee Theft Who’s minding the store?

The Response – Many organizations have had limited success in implementing performance measurement programs. Unsuccessful programs sometimes resemble…

K.I.S.S. Program: The Company is asking the entire organization to keep it simple and focus on a “select few” measures.

“Have it Your Way” Program: The Company allows each function to select their own performance measures for success

Program Result

Most of the organization does not know what these few measures really mean.

Functions pick the “self-serving” measures and walls between departments grow.

Performance Measurement Performance Measurement FrameworkFramework

Performance Measurement Performance Measurement FrameworkFramework

Question: – How can Executive Leaders build a performance measurement program where staff are given a more clear understanding of what is strategically important?

Answer: Build a performance management framework that includes:

1. A set of performance measures that…• all levels in the organization can understand• are clearly linked to the corporate strategy and goals • can be measured

2. A consistent process for capturing, tracking, monitoring and disseminating these performance measures throughout the organization (typically business intelligence tools).

3. A culture that is willing to reward individual performance based upon these performance measures. (typically incentive compensation programs).

So, how can an organization determine the right set of measures for a successful program?

Strategies represent executable statements defining key focus areas that position the

company to meet its long term vision and overall mission

Goals are measurable and time bound targets that support the company strategy

Competencies describe how the company differentiates itself from its

competition to achieve it’s goals

Critical Success Factors define what activities the company must do well to

successfully excel at their competencies

Goals

Competencies Competencies Competencies

CriticalSuccessFactors

CriticalSuccessFactors

CriticalSuccessFactors

Strategies

Performance Measurement Answer – Build a performance measurement framework around the “performance building blocks” unique to your company.

ResultsMeasures

CascadingPerformance

Measures

Link

ed

6

5

Goals

Competencies Competencies Competencies

CriticalSuccessFactors

CriticalSuccessFactors

CriticalSuccessFactors

2

3

4

Strategies

1

(Tier 1: Sr. Executive)

(Tier 2: VPs/Directors & Tier 3: Managers)

Performance Measurement Answer – and link the building blocks to performance measures.

• Executive level measures• Typically financial metrics• Results measures

Tier 1

• VP/Director level measures

• Typically a combination of financial and non-financial metrics

• Competency level measures

Tier 2

These measures involve setting the strategic goals and metrics regarding organizational results which are managed by the most senior executive level. These are considered results based and typically contain a strong financial component.

These measures are identified and set around those things a company must do well to compete and succeed in the market at the division level. They may be both financial and non-financial in nature.

• Manager and Supervisor level Measures

• Some financial and most non-financial metrics

• Operational

Tier 3 These measures relate to Critical Success Factors that define what activities a company must do well to successfully excel at their competencies . These measures are at an operational level. They may be both financial and non-financial in nature.

Accountability – The results and performance measures can be stratified into multiple tiers for assignment of staff accountability

ResultsMeasures

PerformanceMeasures

5

6

Goals

Competencies Competencies Competencies

CriticalSuccessFactors

CriticalSuccessFactors

CriticalSuccessFactors

2

3

4

Strategies1

Results – Using this approach allows organizations to select a set of performance measures for the enterprise scorecard that…

1. Are linked to all levels in the organization via a set of concrete critical success factors that are in a language the organization understands

2. Are linked to the corporate strategies via a set of organization competencies that link the critical success measures to the organization goals.

3. Contain a set of distinct measures that are linked to the critical success factors and the results measures.

Performance Measurement Performance Measurement TechniquesTechniques

Balanced Scorecard – is a strategic management system used to drive performance and accountability throughout the organization

• The scorecard balances traditional performance measures with more forward-looking indicators in four key dimensions:

• Financial• Operational Excellence• Employees• Customers

• Benefits include:• Alignment of individual and

State of Ohio objectives• Accountability throughout

the organization• Culture driven by

performance• Support of shareholder

value creation

• The scorecard balances traditional performance measures with more forward-looking indicators in four key dimensions:

• Financial• Operational Excellence• Employees• Customers

• Benefits include:• Alignment of individual and

State of Ohio objectives• Accountability throughout

the organization• Culture driven by

performance• Support of shareholder

value creation

Strategy Mapping – methodology translates high level strategic vision into measures, and ensures alignment of objectives throughout the organization

World-class cost structures

World-class cost structures Focused InnovationFocused Innovation

Simple and rewarding

experiences

Simple and rewarding

experiences

Best return on information

technology (RoIT)

Best return on information

technology (RoIT)

State of Ohio Objectives

Capture the XYZ market potentialCapture the XYZ market potential

Establish organization as a

leader in technology

Establish organization as a

leader in technology

Build direct business

capabilities

Build direct business

capabilities

Protect Supplies Business

Protect Supplies Business

Department A Objectives

Financial Strategies

Customer Strategies

OperationalExcellenceStrategies

Sam

ple

Dep

artm

ent A

Str

ateg

ies

EmployeeStrategies

Improve brand performance

Attract the diversity, skills and competencies

we need

Maximize market share while meeting current year revenue &

profit commitments

Develop effective, sustainable marketing

programs

Develop new products / solutions

Sample Department Balanced Scorecard

• Revenue / Total market

• Operating profit

•Marketing spend / Revenue•% increase in marketing reach

•Brand recognition rating•New product ramp rates•New product revenue/Total revenue

•Global diversity rating•Meeting employee retention plans

.

Sample “Department A” Strategy Map

Strategy Mapping - Use consistent terms and definitions throughout the strategy mapping process for communication across departments and functions

Objectives support the overall vision and provide areas of emphasis for the organization to focus its activities

Objectives support the overall vision and provide areas of emphasis for the organization to focus its activities

Strategies break down the objectives into more actionable elements and in aggregate should represent the overall organizational focus

Strategies break down the objectives into more actionable elements and in aggregate should represent the overall organizational focus

Measures are directly linked to strategies of the organization and should include all major performance drivers for each strategy.

Measures should be:•Timely, accurate, focused and relevant•Leading indicators of performance•Linked to controllable events•Cost effective to collect and compute•Easy to communicate broadly to the

organization

Measures are directly linked to strategies of the organization and should include all major performance drivers for each strategy.

Measures should be:•Timely, accurate, focused and relevant•Leading indicators of performance•Linked to controllable events•Cost effective to collect and compute•Easy to communicate broadly to the

organization

To monitor progress, targets are set for each measure in given time period. Targets should be based off the strategic planning financials and assumptions.

To monitor progress, targets are set for each measure in given time period. Targets should be based off the strategic planning financials and assumptions.

Knowledge Management Knowledge Management as an Enableras an Enabler

• Which subprocesses do we do (well)?• Where do we need to focus?• Who owns or manages each one?• What human and technical enablers apply?

Capture/ Capture/ StoreStore RefineRefine DistributeDistribute UseUse MonitorMonitorCreateCreate

Knowledge Management - is a process; and is closely linked to Performance Measurement

How do we assure a continuous and natural flow of information?To the benefit of performance improvement.

Personalized Information – The right information to the right Audience

The web application is fully automated and interactive, providing a personalized combination of push and pull information sources:

• Information about company’s products and services• Industry and firm specific applications, services,

articles, market studies, financial information etc.• Personalized data and content from other existing

WebSites / Portals / Marketplaces etc...• Computer based training (WBT)

Information Information

Performance Measurement ToolsPerformance Measurement Tools

Balanced Measures – A personalized Dashboard shows at a glance the performance of any department across a balanced set of performance measures

The Service Operations Dashboard has been selected--Dashboards can also be constructed for Call Centers, Dispatch Centers, Network Operations, etc.

Actual results for selected organizational unit

Results for the rest of the company

Management specified targets point in desired performance direction and change color to reflect positive or negative results

The user can select any organizational unit and period for performance results

Note: Dashboard measures are fully customizable.

24

Distribution Channel Production Line Geographic Area Period

Return on EquityReturn on EquityReturn on Equity

Assets Turnover

0.503Equity$ 2,389

Leverage36.14%

ROE18.09%

ROA6,54%

OperationalMargin

13,09%

Net Profit$ 36

Sales$ 277

Assets$ 6,610

Liabilities$ 4,222

!

!

Change the Value !

Simulatethe

Effect !

Simulatethe

Effect !Simulate

the Effect !

Monitoring Tools – provide management with the operational information, required to make strategic decisions

25

Tomorrow – The organization has a clearly defined approach to linking what people should be doing to what is important for the organization.

Now we can focus on measurements of success...

Now that we are buying the

right PCs, I can help finish this job faster

If I get these annual plans done

accurately, they will get approved today, and we will

be able to…

Thank goodness Bob quit asking for those crazy reports,

now I can start following up on our past due inquiries

Contact Info.

Thomas Freasthfreas@deloitte.com

CFO Principal, Deloitte Consulting LLP

Questions and AnswersQuestions and Answers