STRATEGIC PERFORMANCE MEASUREMENTS

By Kathleen K. Brown

There's a new industrial revolution taking place in manufacturing companies. In today's business environment, management has been reevaluating its methods and processes. Some of the tools being used include total quality management, just-in-time inventories, and activity-based costing. Forward-thinking businesses know that to compete, they must define their strategies in terms of customer satisfaction and continuous improvement.

Given this, how does a business maintain continuous improvement? Modern management theory dictates that all employees must be made aware of the strategies espoused by top management and, with the help of the employees, examine and improve the system. Usually, mistakes and under-productivity do not occur because employees are not working hard enough, but because the system needs correcting.

In order to know which processes in the system need correcting, one must remember the old saying, "You get what you measure." If a product needs to be delivered to customers on time, every time, then delivery times must be measured. If costs need to be lowered, then costs must be accurately measured. Strategic performance measurements applied to these processes, both before and after any changes are made, help in determining the more efficient methods to apply. Most conventional financial measurements do not adequately meet this need. These measures focus on giving management historic information--the results of past performance. What is necessary are measurements of current processes and current results. It is essential to focus on processes that fulfill company strategies and goals.

The 13-Step Process

1. To begin the process of "inventing" strategic performance measurements, top management must define the company's business strategy. They must spell it out so that employees at all levels understand it.

2. The company then must select a project team to accomplish the task of defining the measurements to use. The team should consist of personnel from each department or division in order to achieve a balanced set of measurements. This mix also tends to promote teamwork, and the project does not become the property of any one department.

3. Next, the team must expand on this definition of the company's strategy in its own words and agree on the basic components of the strategy.

4. At this point, it is very important that the team take its results back to top management for verification. This will prevent the team from having to start over as a result of going off in the wrong direction.

5. With its list of component strategies in hand, the team determines which processes must be measured to determine the level of success in achieving each goal. It helps here to think of the value chain and how each proposed measure fits into it. The value chain involves continual improvement at each new step of the product development process.

6. The number of measurements to choose as the final set will vary according to the size and complexity of the company and its statement of strategies and goals. In "Is Data Scatter Subverting Your Strategy?" authors John H. Lingle and William A. Schiemann advise using only 12 or so measures. To test that they all fit the company's strategies, the authors recommend showing someone just a list of the proposed measurements. The next step is to see if an individual can determine the strategies from the list of measures. The authors further emphasize measuring results, not just activities. "The most crucial information is whether the race is being won, not how fast a runner's legs are moving."

7. The team must be aware that improvements in one area can cause problems in another area (i.e., increased productivity that may come at the expense of employee burnout). Both sides need to be included in the final set of measurements.

8. Assure that the measurements are more like early warning signals of processes going wrong rather than relying on historical data reported long after the fact (e.g., testing for problems during the manufacturing of a product versus hearing about problems due to customer dissatisfaction).

9. Make sure real problems are reported during the normal course of business, while minimizing extraneous information that is not representative of the underlying process.

10. In "Why Not Reengineer the Management Process Itself?" authors Daniel P. Keegan and Susannah Pesci recommend that the project team rank each proposed measurement according to the following:

* Relevance to the company's desired performance linked to goals and strategies;

* Reliability in helping to identify strengths and weaknesses of the business processes;

* Naming each measurement in a way that is understandable to all (i.e., "days' supply of inventory" rather than "inventory turnover"); and

* Availability of obtaining the data at a reasonable cost.

11. The next step is to define exactly how each measurement will be calculated. For example, to measure the time a mixing manufacturing process takes, it would make sense to start the timing with a clean mixer, time the entire mixing process, and end after the mixer has been cleaned out. This is because the varying consistencies of different mixes would require a varying cleaning time.

12. The reporting format also must be determined. Reports in the form of charts and graphs, accompanied by a listing of the raw data and a narrative written by the resident "expert" in that area, are most informative and easy to understand.

13. After all the decisions have been made and approved by top management, the company must convert the plan into action. Implementation, review, and continual updating of the measurement set will be an ongoing process. The company will begin to see the rewards of using certain measures, and perhaps over time will cease to need some of them. Managers also will see that using the measures will motivate employees to achieve corporate objectives.

Bibliography

Deming, W. Edwards. Out of the Crisis. Cambridge: Massachusetts Institute of Technology, 1986.

Kaplan, Robert S. Measures for Manufacturing Excellence. Boston: Harvard Business School Press, 1990.

Keegan, Daniel P. and Susannah Pesci. "Why Not Reengineer the Management Process Itself?" The Business Controller (Summer 1994).

Lingle, John H. and William A. Schiemann. "Is Data Scatter Subverting Your Strategy?" Management Review (May 1994). *

Kathleen K. Brown is the controller of Chemical Dynamics Inc. in Plant City, FL.

Reprinted by permission from the Florida Institute of CPAs. Copyright 1995.

Editor:
Michael Goldstein, CPA
The CPA Journal

OCTOBER 1995 / THE CPA JOURNAL