Performance Measurement And The Strategic Context Position Paper

Current Focus on Performance Measurement
Lately, management literature has included many references to organizational performance. Performance measurement, performance consulting, and performance improvement are all examples of hot topics in management literature. A recent web search for information on “performance improvement” resulted in 1,603,678 hits on one search engine. More and more internal corporate trainers are trying to transition from training to performance consulting. Many managers have adopted performance improvement as their battle cry for the new millennium. “Faster, better, cheaper” is the mantra of many of today’s managers.

But will all of this apparent attention to performance improvement have any permanent, positive impact on the bottom line of corporate converts? Unfortunately, it probably will not produce the desired results for many organizations that undertake it. The simple reason for this is that performance improvement issues are being managed outside the context of the organizational vision, (if a vision even exists). This creates a disconnect between long‐term strategy and short‐term goals and measures. Managers need to address this potential disconnect in their planning and performance measurement. This paper provides an overview of performance measurement. It also outlines an approach managers can use to keep performance measurement relevant.

Examples of Performance Measures

There are a variety of measures that managers can employ to monitor performance. They fall into three broad categories:

• Financial;
• Non‐financial; and
• Combinations of financial and non‐financial.

Financial
Most executives are familiar with performance measurement in one form or another. Some examples include:

• Progress toward sales goals;
• Cost of labor input as a percentage of sales revenue; and
• Return on sales.

One thing that these measures have in common is that they are financial metrics—measures of dollars and cents or relationships of dollar values to one another. The traditional accounting system provides this information.

Nonfinancial
Managers are likely to monitor other, nonfinancial performance measures as well. Some examples of non‐financial measures include:

• Tracking units of labor or units of constructed output against a project time schedule on a construction project;
• Monitoring billable hours in a professional services firm; and
• Measuring customer satisfaction.

Gathering this information may require systems and procedures outside the traditional accounting arena.

Combinations of Financial and Nonfinancial
Nonfinancial measures may be combined with financial measures to monitor performance. Some combination measures might include:

• Direct labor dollars per unit of output; or
• Overhead costs divided by units of output.

These measures require integration of the traditional accounting system with other management information systems and procedures.

The Disconnect In Performance Measurement
Many managers, often with the help of consultants, implement performance measurement and monitoring systems that provide extremely accurate and timely measures of performance. The problem is that they may not be measuring what is really important for the future success, or even survival, of the organization. The measures may be mathematically accurate, but they are not integrated with the company’s long‐range vision and strategies. This is similar to the managerial practice of preparing incremental annual operating plans and budgets that do not reflect the major strategic initiatives the firm is pursuing.

The Strategic Context

The strategic context is the “big picture” that management constantly defines and interprets for the company. It includes the following elements:

• Organizational vision;
• Strategic objectives; and
• Tactics and implementation.

Organizational Vision
In my work with organizations of all sizes, I have found that a large percentage of them do not have a consciously developed, focused vision of the future. By not having a clearly developed picture of the ideal future, managers automatically create a disconnect for performance measurement initiatives. If a management team does not have a shared vision of the future, how can it know what to measure? For example, some members of the management team may believe a particular direction is the answer to certain strategic issues. Others may feel that a different direction is appropriate. The two competing visions will likely result in different performance measurements. Neither set of measurements may be exactly what management needs to monitor progress.

An organizational vision answers the question of what life will look like at the firm for the employees and other stakeholders at some point in the future. It paints a clear and vivid picture of how good things could be. It provides an element of stretch for all involved. The vision drives the strategies that management will pursue. One of my clients has identified as their vision the transformation of their company to a global industrial solutions provider. Would the performance measures used to monitor progress toward this vision differ from those required for a vision that involves becoming the leading provider of infrastructure in a particular market? The answer, of course, is that they most likely would be different.

Strategic Objectives
After developing a vision of the future, management will identify areas of misalignment with the vision. This alignment work identifies policies, procedures, structures and systems that support the vision and those that detract from it. In prior strategic planning parlance, we referred to this as performing a “gap” analysis. The difference between the desired future state and the present, actual state represents a gap that the organization must bridge for success. As an example, a professional services firm has a vision that includes working in cross‐functional teams to serve clients of the firm. At the present time their practice is characterized by “silos,“ where each partner has his own book of business and there is little cross‐functional work on clients. This represents a misalignment with their vision. It points to a strategic objective the firm’s partners must address. Strategic objectives identify areas that the organization must deal with in order to achieve the vision of the future. Savvy managers will choose a handful of strategic objectives with a potential for high‐impact outcomes. Careful attention to tactical plans and implementation is required to see that objectives are addressed adequately.

Tactics and Implementation
Tactical plans comprise the steps that individuals or groups must follow to implement strategies. A tactical plan, (sometimes referred to as an “action plan”), contains specific, measurable actions, with individual responsibility assignments and due dates. Many plans stop at the development of tactical plans. The only problem with this approach is that, even if tactics are carried out precisely as planned, the company may not achieve what it desired from the actions. Monitoring implementation progress will only tell the executive whether or not the steps for implementation have been followed. It will not disclose whether the implementation is having an impact or not. This is where performance measurement adds value.

Outcomes Are Important
As difficult as strategy development and action planning may be, getting a clear fix on desired outcomes may be even more difficult for some managers. Defining what success looks like, (identifying outcomes) is a key ingredient of a good strategic plan. Yet when I ask executives how they will know if they are successful, some may struggle initially to define measurable outcomes. How will management measure its progress toward transformation to a global industrial solutions provider? What critical measures must management institute to monitor progress toward the transformation?

Removing the Disconnect in Performance Measurement
Identifying where a management team wants to take an organization in the future is the foundation for developing a performance measurement and monitoring system. This strategic context is imperative to assure that the organization is paying attention to the right things. Given the increasingly competitive business environment, scarce labor resources and growing sophistication of competitors, managers cannot afford to divert attention from extremely important measures to relatively inconsequential (or simply irrelevant) measures.

The top management team should conduct a visioning process to develop a shared future vision and build support for it. Based on the shared understanding of the future that results from this process, management can identify alignment issues that require broad strategies to move the organization toward the vision. Management can use these strategies to identify desired outcomes, or performance measures, that report on true, bottom‐line progress toward the vision and the strategies. This will help assure that performance measurement is focused on what is really important. Exhibit No. 1, attached to this paper, illustrates the concept of setting performance measures within the strategic context.

Establishing Performance Measures

Generally, managers should look at key results areas related to their strategic objectives. These key results areas typically define broad functional areas of importance to the company in achieving its objectives. They might include customer satisfaction, employee satisfaction or development, operations, marketing, and finance, for example. (Some managers refer to these key results areas as critical success factors; the label is less important than their relevancy to attaining the vision.) Within each of the relevant key results areas, managers must search for key performance indicators that will measure progress toward the desired outcomes affiliated with the strategic objectives. This process may take some time, but it is absolutely essential.

Establishing Performance Measures—An Example
XYZ Construction Managers is a 100+ year‐old construction management organization, specializing in commercial construction, while performing some industrial construction. It conducts much of its work under design/build contracts, with the rest done under a variety of different delivery systems. The management team has developed a vision of the future that would have the company growing at a controlled rate for the next ten years. The vision focuses on strengthening one niche of the company, developing and retaining high‐impact employees, and continuing to build on its financial strengths.

These elements of the vision have been chosen as strategic issues by management. Specific strategies have been developed to support the vision. One strategy has been summarized as maintaining controlled growth of the company. To this set of managers, “controlled growth” means continued growth in annual contracting revenue, with consistent gross margin and overall return on sales. Management has consciously decided not to grow for growth’s sake. However, management has identified a desired annual rate of growth of xx% per year in its top line. Because of present and projected overhead structure, it has targeted growth in net profit at a somewhat higher rate. These targets represent the measurable outcomes related to this strategy. A key results area for this strategy is the financial performance arena. Possible metrics might include monthly and year‐to‐date, as well as annual measures of:

• Contract revenue growth;
• Total gross margin growth;
• Gross margin as a percent of total revenue: and
• Net operating income as a percent of total revenue.

Additionally, continual monitoring of sales and contract revenue, as well as contract backlog, will be helpful. Other related issues might concern what kind of work the company wishes to pursue— bidding and proposal guidelines to channel effort toward obtaining the appropriate types of jobs, for instance. Metrics might identify numbers and dollar value of jobs by type. Another strategy relates to further development of an existing niche. Management wants to parlay its present successes with construction services for a particular industry niche into something bigger and better over time. This equates to increased market share in this niche, while maintaining appropriate margins on the work. The work is particularly complex and technically challenging. Continued success in this work will require personnel retention and development in an extremely competitive hiring environment. Targets for this strategy include an xx% increase per year in work performed in this niche, with maintenance of gross margins at or above present rates for this line of work. Key results areas for this strategy will include the financial, customer concentration and human resources areas.

Possible metrics for this strategy might include tracking the company’s share of market in its niche, as well as its contract growth rate and the gross margin rate for this niche. Share of customer as well as share of market should be monitored. Similarly, measuring the success or “hit” rate of proposals and bids is important to this business.

Measuring turnover among different levels of employees and ascertaining reasons for turnover could provide useful information in the human resource area. Maintaining an inventory of skill sets and identifying where they reside in technical individuals would be helpful. This would be particularly true if this inventory were to be kept up over time through routine monitoring.

Conclusion
The above example illustrates some of the performance measures that could support a particular corporate vision and related strategies. Other measures could be equally useful. What is important is that managers have a clearly articulated vision, and that performance measurement initiatives support the organizational vision and strategy. Managers need to keep performance measurement within the strategic context.

Dom Cingoranelli, CPA, CMC is a management consultant specializing in business strategy, growth and performance issues. He helps managers articulate their vision for the future and develop strategies and plans to achieve their vision and improve organizational performance.

PERFORMANCE MEASUREMENT WITHIN THE STRATEGIC CONTEXT