Are your performance measures costing you money?

Performance measures and key performance indicators (KPIs) are a powerful part of a Singapore manager’s tool kit but when applied inappropriately their cost can actually outweigh the benefit they provide. Are you using your performance measures appropriately or are they costing you money?

Performance measurement is important in any business. An old adage, which still stands true today is ‘you can’t improve what you don’t measure.’ By informing us of where we are at, performance measures play several key roles. They:

- Provide control: management can measure current levels of activity and see where improvements can be made
- Enable decision-making: they provide important information and visibility across the organisation, helping executives make timely and effective decisions
- Provide direction: performance measures link activities to the business strategy and provide employees at all levels with information about what is required to drive the organisation towards its aims

A well-designed and well-executed performance measurement process can drive a company towards its strategic objectives and provide that competitive edge. Unfortunately, there are a number of pitfalls awaiting the unwary organisation, and in the worst-case scenario, the costs associated with establishing and generating performance measures can even outweigh the benefits.

Some of the most common issues with performance measurement are:

1. Lack of alignment across the organisation
All performance measures need to be for the overall improvement of the organisation and should not drive conflicting behaviour. Within some organisations departments and individuals find themselves in conflict, as the targets they have been set have a negative impact elsewhere. For example, a product development group may be measured against number of production trials, but production trials inevitably have an adverse impact on plant uptime, and maximising uptime could be the performance measure for the manufacturing department. This can cause conflict between the two departments and a sub-optimal outcome for the organisation.

2. Gaps in the measures applied through the organisation hierarchy
A good test to see if an organisation is using performance measures to effectively deploy and drive strategy, is to ask an individual at the lowest level in the organisational hierarchy to explain how the performance measures used for their role or the processes that they work on, link to the achievement of the overall business strategy.

For example, a KPI for completion of planned maintenance activities. This should have an effect on machine availability and thus on master production schedule performance, and subsequently on the ability to deliver in full on time (DIFOT), which is fundamental for achieving a business strategy of becoming a reliable business partner.

This example illustrates the cause-effect relationship between the measures applied at the different levels of hierarchy within the organisation. Understanding how the different measures affect one another helps to highlight any gaps in strategy and can be useful in identifying improvement activity, particularly if higher level measures aren’t achieving their targets. Providing visibility throughout the organisation also allows different departments and individuals to see how they contribute to the success of the business, giving them more incentive to do well and consequently greater job satisfaction.

3. Not being used to drive improvement
Many organisations devote considerable time and resource to the preparation of performance data and brightly coloured charts and presentations each month, but not all of them do anything with the outcome. It’s no use displaying performance measures on the wall if they don’t provoke any action – in this case some attractive wallpaper will do the same job, for considerably less cost! A significant effort is required to measure performance properly and to get full value, organisations need to include targets and control limits to drive better performance going forwards. Performance levels should be analysed and in the event targets are not being achieved root cause analysis undertaken to understand why, and then corrective actions agreed and monitored. Improvement without measurement is impossible, but measurement that is not used to drive improvement is a waste in itself.

Stuart Harman, Partner, Oliver Wight