Real‐Time and Predictive Insights

The pilot and crew of this aircraft are not asked to blindly fly the mission and then be handed a series of narratives and reports after the flight to tell them how it went. The crew is able to monitor the performance of the aircraft in real time.

The instrument panel provides real‐time insight into the performance of every major system on the aircraft, from engine performance to fuel levels and consumption, hydraulics, and landing systems. The cockpit has a number of alerts (flashing lights or sound alarms) to call the pilot's attention to potential problems or threats.

High Visual Impact

This pilot does not have to interpret long‐winded narratives or Excel spreadsheets to see how things are going. With a quick scan of the instrument panel the pilot can see how every major system is performing and what's happening in the external environment. The pilot is not flying blind, only to then be presented with a 50‐page report of Excel spreadsheets after the plane has landed.

Initially this instrument panel is complex, but you can be assured that the commander knows where every dial and reading should be. This illustrates an important concept in BPM, now generally described as “data visualization.” Transforming important data into visual presentations that allow the user to quickly identify trends, scale, direction, and variances has great utility. The use of graphics and dashboards has greatly increased the effectiveness of reviewing business results.

Focus on the Important Measures

The instruments are measuring what's important and relevant to the mission. The pilot has confidence that a lot of thought, 100 years of aviation experience, and substantial tax dollars went into selecting the measures that are vital to a successful mission.

Providing Insight into External Factors and Environment

The instrument panel also provides insight about the aircraft's position and relationship with the external environment. There is external radar for potential threats, a navigation system, wind speed, altitude, and attitude. The pilot can identify storms and alter course. In many planes the pilot will be alerted that an adversary has the aircraft in its sights or on missile lock!

Combining with Observation, Experience, and Intuition

Finally, the pilot doesn't rely on the panel exclusively, but rather combines it with observation, intuition, and experience to complete the mission.

One of the biggest mistakes we make is to presume that performance measures, dashboards, and other aspects of BPM eliminate or replace the need for executive judgment, decisions, and even intuition. Instead, these measures should be utilized to better inform decisions and, where appropriate, to challenge intuition to ensure that the best possible decision is made by the executive.

A Nonbusiness Illustration

Let's assume that we have a goal to improve our health and fitness. We then decide that we want to measure our current state and future improvements by tracking our weight, cholesterol levels, and resting heart rate. We can measure our weight by jumping on the scale every hour, but we will not make progress until we identify and manage the key drivers, primarily food intake and our level of activity. The measures we have identified are really “results” or “outcomes” of our lifestyle (diet and exercise). To achieve different results or outcomes, we must identify, manage, and measure food intake and activity.

Fitness and nutrition journals have been used successfully by athletic trainers, weight‐loss programs, and nutritionists. They also underscore an important principle of BPM: that is, what gets measured gets attention.

By recognizing the likely cause‐and‐effect relationships among these measures, we can begin to track the results that our lifestyle changes have on the health indicators (weight, etc.). By capturing the activity levels and displaying the measures on a dashboard with outcomes, we create a visual that typically tells a compelling story. Figure 8.2 is an illustrated dashboard for health and fitness. By tracking the measures, we create a discipline that makes us more likely to achieve our targets for increased activity and reduced food intake. By building a dashboard, we provide the linkage required to connect the dots and reinforce the cause‐and‐effect relationship.

Developing Appropriate Measures

After documenting the key strategic issues and initiatives, assessing performance, and setting improvement goals in the context of valuation creation described in Chapter 7, we can begin to select the measures that will be important for monitoring performance and progress across the company. What measures will track our progress in achieving strategic objectives and goals for value creation? What are the critical elements of our business that I want to see on a daily, weekly, monthly, or quarterly basis? What measures will serve as leading indicators to alert us to potential problems in time to make meaningful adjustments? Guidelines for selecting and developing performance measures include the following:

• Relevancy. While it sounds obvious, many organizations track measures that are not relevant to important goals, objectives, or performance and value drivers.
• Objectivity. To the extent possible, performance measures should be quantifiable and objective. Qualitative assessments are necessary in certain cases. However, care must be taken to promote objectivity and to complement qualitative assessments with quantitative measures.
• Timeliness. Performance measures and dashboards must be available on a timely basis. This requires that systems and databases be maintained and updated on a current basis. This is generally not a problem for the primary business systems, but can be a problem in areas such as entering or updating sales leads or warranty experience or where outdated or poorly integrated systems inhibit real‐time access.
• Balance. Performance measures should be balanced to reduce the risk of optimizing performance in one area at the expense of the long‐term health and value of the organization. Said differently, the establishment of a seemingly benevolent measure may have unintended (and negative) consequences. For example, if inventory turns is selected as a key performance measure without a balancing measure such as on‐time deliveries, it may result in reductions in inventory at the expense of customer satisfaction. By balancing the two measures, the company will promote the development of healthy process improvements that lead to improvement in both measures.
• Emphasis on Leading Indicators of Performance. The systematic approach outlined in this chapter will provide confidence that the performance measures will be predictive of future operating and financial performance. More attention should be paid to measuring and improving the leading indicators of performance. For example, if a company sets a target of improving DSO from 75 to 55 days, it must develop targets and measure performance on leading indicators such as revenue linearity, quality, and collections.
• Measurement Definitions. Specific definitions must be developed and documented for each measure. For example, what is the definition of on‐time delivery to customers? Is it the date that the company committed to delivery or the date the customer originally requested? In one extreme case, we discovered that the date used to measure on‐time delivery was changed to the most recent internal schedule update. Since this measure is an important part of customer satisfaction, we want to view this measure through the eyes of the customer, generally the availability when the customer placed the ordered or received order confirmation. Definition of performance measures is important and must be consistent with the objective of the measure. These definitions should be documented and approved by management.
• Data Integrity. Implementing BPM without having the ability to generate performance measures and dashboards that present accurate data may be worse than not having a BPM at all. It is fairly typical for a company to encounter problems with data accuracy as it begins to use performance measures. In fact, this is a side benefit of the process: improving the accuracy of reported data. Each measure should be defined and approved by the appropriate managers. Data gathering and processing can be improved over time. It is a good idea to have performance measures reviewed by internal audit teams or the controller's staff to ensure the integrity of the measurement system.
• Unintended Consequences. As we focus on certain measures of performance with the best of intentions, we must be alert to the potential of unintended consequences. This potential should be considered before adopting any specific measure and the broad set of collective measures selected to be used.
• Less Is More. Since the team will focus on the performance measures we select, it is important to limit the number of measures utilized. We should emphasize key priorities, drivers, programs, improvement opportunities, and other important stuff. If we measure too much, the message is diluted and the team is overwhelmed. Generally, six to eight measures represent a reasonable number on which to focus attention for a team, department, or individual. Additional metrics may be used that are subordinate to these primary measures.

Several years ago, I met with an enthusiastic finance team that had begun the performance management journey. They had adopted a great practice of posting KPIs in the work area of the responsible team. The trouble was that I counted more than 40 measures for a team with a relatively straightforward mission and simple operating model. Most of the measures were not understood and were not associated with any specific projects or key business drivers. This organization lost an opportunity to select and emphasize a few very important measures, and likely confused the members of the team.

The selection of measures and building performance dashboards can be improved by using a performance measurement worksheet, illustrated in Figure 8.3. This worksheet forces us to define, identify the objective, address the critical success factors (CSFs), anticipate unintended consequences, and place the measure in context.