Performance Management Measuring Performance

1. MEASURING PERFORMANCE
CHAPTER 6

2. MEASURING PERFORMANCE
 Managing performance begins by defining expectations in terms of targets, standards and capability
requirements.
 Brings improvements to performance and personal development programmes.
 It identifies strengths to be enhanced as well as weaknesses to be overcome.

3. MEASUREMENT ISSUES
 In some jobs what is meaningful is not measurable and what is measurable is not meaningful.
 Often what is easy to measure is what gets measured.
 What should be measured?
 Be clear about what is important and relevant before defining what measures should be used.
 Organizations should be value-driven, not cost-driven (Hope 1998)
 Understand what creates value in an organization and then to develop measures that are aligned to the business
strategy.

4. MEASUREMENT ISSUES
Hope (1998) points out the following measurement problems:
 there are sometimes too many measures;
 measures do not relate to strategy;
 measures are results-biased and do not tell managers how the results were achieved how they got there;
 reward systems are not aligned to performance measure
 measures do not support a team-based management structure

5. MIXED PERFORMANCE MANAGEMENT MODEL
Output
Measures
Measure of delivery
of service
Measure of quality
delivered
Volume,
throughput, sales
etc.
Input Measures
What people bring
to their roles
Knowledge, skills
and capabilities

6. CRITERIA FOR PERFORMANCE MEASURES
Performance measures should (Armstrong and Baron, 1998):
 be related to the strategic goals and measures;
 be relevant to the objectives and accountabilities of the teams and individuals concerned
 focus on measurable outputs, accomplishments and behaviours that can be clearly defined and for
which evidence can be made available;
 indicate the data or evidence that will be available as the basis for measurement;
 be verifiable information that will confirm the extent to which expectations have been met;
 be as precise as possible in accordance with the purpose of the measurement and the availability of
data;
 provide a sound basis for feedback and action;
 be comprehensive, covering all the key aspects of performance.

7. CLASSIFICATION OF METRICS
Metric Includes
Finance income, shareholder value, added value, rates of return,
costs.
Output units produced or processed, throughput, new accounts.
Impact attainment of a standard (quality, level of service, etc.),
changes in behaviour (toward both internal and external customers),
completion of work/project, level of take-up of a service,
innovation.
Reaction judgement by others, colleagues, internal and external
customers.
Time speed of response or turnaround, achievements compared
with timetables, amount of backlog, time to market, delivery times.

8. TYPES OF MEASURES ORGANIZATIONAL
Different approaches to measure performance in an organization are:
1. Balanced scorecard;
2. The European Foundation for Quality Management (EFQM) model;
3. Economic value added (EVA) and other economic measures of value;
4. Traditional financial ratios

9. BALANCED SCORECARD
 Developed by Kaplan and Norton (1992).
 Can be developed on a corporate level, business unit/dept. level or team/individual level.
Benefits:
 It gives top managers a fast but comprehensive view of their business of both financial and operational
measures.
 Puts strategy and vision at the center. Not focused solely on control.
 Link company’s financial budgets with its strategic goals
 Align employees individual performance with the overall strategy
 Used as a performance management process at individual, team, unit and corporate levels.

10. BALANCED SCORECARD
The scorecard requires managers to answer four basic
questions
Financial perspective
How do we look to shareholders?
Innovation and learning perspective
Can we continue to improve and create value?
Internal Perspective
What must we excel at?
Customer Perspective
How do customers see us?

11. EXAMPLE OF BALANCED SCORECARD – CLOTHING STORE
Perspective Objectives Performance Measures
Customer
(How do customers see us?)
• right product,
• Image,
• ideal shopping experience
• average annual purchase
growth,
• premium on branded items,
• customer surveys.
Internal
(What must we excel at?)
• brand dominance,
• sourcing and distribution,
• shopping experience,
• market share,
• out-of-stock incidence
• sales per square foot
Financial
(How do we look to
shareholders?)
• profitable growth,
• increased penetration
• improved productivity
• operating-income growth,
• sales per store,
• expenses as a percentage of
sales
Innovation and learning
perspective
(Can we continue to improve and
create value?)
• developing strategic skills
• providing strategic information
• Periodic survey of skills
developed
• Annual reports

12. THE EUROPEAN FOUNDATION FOR QUALITY MANAGEMENT
(EFQM)

13. THE EUROPEAN FOUNDATION FOR QUALITY MANAGEMENT
(EFQM)
Benefits to performance management:
1. Develops a fuller understanding of how business results are achieved and processes continually
improved;
2. Offers mechanisms for tackling problems in the workplace’s system;
3. It promotes performance management as a two-way dialogue;
4. Provides a positive and universal framework for the description of jobs and roles;
5. Aligns individual and business objectives;
6. Pointing the way to identifying, defining and building the capabilities that the organization needs its
people to demonstrate.

14. ECONOMIC VALUE ADDED
 EVA is the difference between a company s post-tax operating profit and the cost of the capital invested
in the business
 The cost of capital includes the cost of equity what shareholders expect to receive through capital gains

15. OTHER ECONOMIC MEASURES OF VALUE
 Other economic measures focus on the shareholder value and are not concerned with other
performance measures of the organization.
1. Added value:
the difference between the market value of a company’s output and the costs of its inputs.
2. Market value added
the difference between a company’s market capitalization and the total capital investment; if the result
of the subtraction is positive, it will indicate the stock market wealth created.
3. Cash-flow return on investment (CFROI)
a comparison between inflation-adjusted cash flows to inflation-adjusted gross revenues to find cash-
flow return on investment.
4. Total shareholder return
what the shareholder actually gets, i.e. changes in capital value plus dividends.

16. TRADITIONAL FINANCIAL RATIOS
 return on equity,
 return on capital employed,
 earnings per share,
 price/earnings ratio,
 return on sales,
 asset turnover,
 overall overheads/sales ratio,
 profit or sales or added value per employer, and
 output per employee (productivity).

17. TYPES OF INDIVIDUAL MEASURES
Measure Example
quantity unit sales, contribution, new accounts
quality the level of service provided to customers in terms of
response to requests for after-sales service
productivity sales and contribution per sales representative
timeliness achievement of delivery deadlines, order processing
times
cost control ratio of selling costs to sales/contribution

18. DEFINING PERFORMANCE MEASURES FOR INDIVIDUALS
The following are guidelines for defining them:
 Measures should relate to results and observable behaviours.
 The results should be within the control of the team or individual and be based on agreed targets.
 Behavioural requirements should be defined and agreed.
 Data must be available for measurement.
 Measures should be objective.

19. THE END