4 performance indicators that will transform your business

Historically, businesses have obsessed over financial statements, considering them the oracle towards profitability and growth. Financial statements, though important, give us an incomplete view of the health of a business. They are a snapshot of our past successes or failures and are the worst kind of indicators. The dreaded lagging indicators.

By measuring our financial situation, problems are discovered far down the process of delivering products or services. For example, decreased sales may be a result of overworked employees, producing more defective material, which slips through more inspections, and is delivered to our customer. By the time we see lowered sales in the financials because of decreased quality, a lot of damage has already been done The job of righting the boat is that much harder.

Keywords: Financial Myopia, Lagging Indicators Limitation

How to choose our key performance indicators?

To choose the indicators that interest us, the balanced dashboard is the ideal tool. The balanced dashboard offers four perspectives that give us a balanced view of the health of our business. Our four key performance indicators will come from these perspectives.

Once the scorecard is methodically applied, we have control over the success of the business. We are no longer at the mercy of the exchange rate or price of fuel or housing starts. Instead, our decisions, alone, make us or break us.

Keywords: Balanced Dashboard Selection, Proactive KPI Strategy

The Financial perspective

The performance perspective

If we succeed, how will we look to our shareholders? I prefer the following question. If we succeed, how will we look to our stakeholders? The shareholders have a monetary stake in the business, but every employee, client and supplier also has a stake in the business’ success.

1. Our suppliers are stakeholders because they rely on our business to earn a living. (And if we do it properly, to thrive) The more we sell; the more we leverage we have.

2. Our employees are stakeholders because they count on us to supply honorable work, in a respectful, stimulating environment, for a fair wage. The more we sell, the more we can recognize effort.

3. Our clients are stakeholders because we work as partners. They have made commitments and promises to their customers, relying on us to know their needs and to properly fulfill these. The more we sell, the more effort we can put into customer experience.

Keywords: Stakeholder Value Perspective, Financial Performance Impact

The Customer perspective

The customer satisfaction perspective

First, we need to ask ourselves, who are our customers anyway? A customer is anyone downstream from you in the creation of a product or the rendering of a service. I know, this definition is a tad more encompassing than the traditional definition. It's supposed to be. How often have you seen employees shrug responsibility because they are a few steps removed from the final consumer?

Now that we have a new customer definition, how do we find out what they expect from us? We spend a day doing their job. We live their anxieties and commitments; their frustrations and their successes. No excel spreadsheet can ever replace hands on experience. No report, no graph, no rumor; nothing. The truth is out there....

Keywords: Customer Expectations, Satisfaction Perspective

The Internal process perspective

The efficiency perspective

There can be more than one, but be careful. During the 1980's and 1990's, companies were notorious for having dozens of indicators. Eventually, it was realized that companies that focus on a limited amount of indicators are better equipped to identify pertinent actions to take in response to change. That is, we don't waste our time fixing something that is a mild annoyance; we concentrate on the big ticket items first and when we run out of time, we will have maximized our impact by doing what's most important.

Being operations people we tend to put a lot of emphasis on processes. Personally, i can probably name 10 operational process metrics for every organisational capacity metric. This doesn't necessarily make me an evil person, but it does reflect the challenge faced by hardcore ops people. We are comfortable working on processes. Developing people.... not so much.. Knowing this, we can be careful and limit our process metrics to the most important ones.

Keywords: Process Efficiency Focus, Operational Excellence

A few process group examples:

Planning and managing inbound material flow

Operating warehouse

Managing inventory

Operating outbound material flow

Managing reverse logistics (returns)

Managing customer service requests

Managing customer complaints

The Organizational capacity perspective

The Knowledge and innovation perspective

The much maligned organizational capacity perspective often goes unloved. Hardcore ops people will have a tendency to find this one a waste of time because it doesn't have an immediate impact. Guilty.

In fact, the attention we place on the organisational perspective today, builds the company of tomorrow. Let's say we expect to double our volume next year. Do we simply double our staff? No. We have to ramp up and prepare.

How do we prepare?

A quick fit-gap is one way:

How good is our current capacity fit to our future capacity needs?

• We identify Full-Time Employee (FTE) future needs

• We identify future skillset needs

• We measure our current organisational capacity.

• We identify FTE fits

• We identify skillset fits

• We identify FTE gaps

• We identify skillset gaps

• For each we create a plan. For example, training, hiring, outsourcing....

Keywords: Organizational Capacity Planning, Innovation and Learning Strategy

Objectives

“Having lost sight of our objectives we need to redouble our efforts.”

Anonymous military

Set your objectives to the height of your ambition, and then document them. Start wide. Set big picture goals first and drill down, company wide, once it’s appropriate. Don’t forget, we’re going for the biggest bang for the buck first, optimization will come later. You can use general objectives like “make money” or “cut costs” but you won’t get very far in your execution.

Objectives examples for all four perspectives

Financial: To increase revenue by 10% by year end.

Customer: Guarantee same day delivery for A products by year end.

Process: Eliminate errors and decrease time required for the receiving process to 4 minutes per pallet.

Organizational capacity: Increase cross-training by 1 hr per employee, monthly.

Measures and Indicators

Indicators don’t necessarily grow linearly. If you need 1 IT support technician for 30 PCs; the ratio is 0.03333. Applying the ratio on a company of 30000 PCs, you’d expect 1000 IT support technicians would be required. That’s not quite true. With 30000 PCs, there’s probably a team to develop training programs to reduce the need for IT support in the first place; a team to render software more user friendly, a team to study the most common problems and automate solutions, etc. Something 1 support technician would not be able to do. It’s about going beyond simple economies of scale.

KPI phraseology

How do we put indicators together? Here are the magic formulas.....

Costs

___1____ cost to/of ___2____ per ____3______

Examples

Salaries, Overhead, Fringe benefits, Systems cost to service customer per customer.

Salaries, Overhead, Fringe benefits, Systems cost to service customer per Full Time Employee (FTE).

Salaries, Overhead, Fringe benefits, Systems cost to service customer per volume managed.

Salaries, Overhead, Fringe benefits, Systems cost to service customer per weight managed.

Quality

___1____ of ___2____ per ____3______.

Examples

Defects of product X per FTE.

Defects of product X per hours worked.

Defects of product X per 1000.

Time

Time to ____1____ per ____2____

Examples

Months, weeks, days, hours, seconds to manage sales orders per active customer

Months, weeks, days, hours, seconds to manage sales orders per FTE.

Months, weeks, days, hours, seconds to manage sales orders per inbound call.

Beware perverse effects

What are the potential side effects of measuring processes? People do what you inspect, not what you expect.

To avoid the perverse effects of measuring, balance must be maintained between cost, time and quality. I look at this as if it were a triangular water-filled balloon. One corner is costs, another is quality and the last one is time. As i hold the balloon and squeeze the time corner, the other two want to pop out. I can let either pop out to relieve the pressure, or a mixture of both.

For example, i tell my call center agents that i expect them to handle 100 calls a day instead of 80. Time squeeze...

To compensate for the time squeeze, they can:

Increase costs

Hire, train, outsource

Drop the quality

Stop up-selling

Stop cross-selling

Both.

The best way to avoid the perverse effects, is to be reasonable in your expectations.

Cost: $0

Initiatives

Initiatives are the projects we have identified to reach the goals.

We'll address project selection criteria some other time. But for now, suffices to say, if you have projects that don't address a goal on the balanced scorecard; you are misaligned and wasting resources.

IMHO a misaligned employee is pretty easy to spot. I compare them to a dragster spinning its tires. It look really good with all the smoke and noise. It looks really busy, but essentially isn't moving forward. If the initiatives are clear, they need to be priority 1. If they aren't clear, clarify them.

Keywords: Goal-Oriented Projects, Strategic Initiatives

Here's an example of a completed scorecard for the quarter.

A balanced scorecards for everybody

Yes and no...

Once the executive team has put the strategic goals and measures and initiatives into the company wide balanced scorecard, it's time to spread the balanced scorecard to the next level down.

A quick example

To keep my example brief, i'll only look at the customer perspective.

The executive team has decided to increase the company's service level. To do so, our company-wide initiative is to eliminate back orders through availability of material for top 20% of products. The customer perspective looks like this:

Executive balanced scorecard

The replenishment team, turns this strategic goal into a more tactical/operational one. They decide to increase Inventory of A products by 1.5 months (their local goal) to support the executive team goal of improving customer service. Their customer perspective looks like this:

Replenishment balanced scorecard

The warehouses, though sharing the same goals as the replenishment team, need to put their own initiatives into place. To support the replenishment initiative, the warehouses will need to make room available. Their customer perspective looks like this:

Warehousing balanced scorecard

The rest of the company's balanced scorecards are designed following the same process all the way down the organisational chart.

The algorithm to create the balanced scorecard is:

To build on our previous recipe...

For the executive team:

Identify a goal to reach for each perspective.

Identify metrics to set a baseline and measure progress for these.

Identify at least on project designed to reach the perspective's goal.

Then loop until every team player has a balanced scorecard to commit to:

Determine analogous goals for all teams, one step down in org chart.

Adapt measures and initiatives where required.

Always 4 perspectives?

If a perspective of the executive balanced scorecard doesn't touch your department, you can still have goals and initiatives. For example, the executive team has decided to have a goal of increasing the skill set of sales reps in the organisational capacity perspective. As a warehouse manager, this doesn't touch me. I can decide to not have an organisational capacity goal (NO) or come up with one myself (YES).

Conclusion

I know, this document is a high level overview of the process. Regardless, i hope that you see the value in such a tool. We've seen how the balanced scorecard can improve corporate alignment by cascading corporate perspective goals down the org chart so that everyone has a clear view on how they are doing. We've seen how to create your goals, measures and key performance indicators. What we haven't mentioned is that, by simply increasing awareness of the four perspectives and our goals, the impact on any company is immediate and non negligible. Try it. You won't go back.