Aligning Objectives and Performance Measures
by Mike Bourne and Andy Neely
It is highly inadvisable to set performance objectives and then let the measures take care of themselves. Mike Bourne and Andy Neely show how easily dysfunctional behaviour can result from a lack of forethought.
Books and articles on the balanced scorecard and performance measurement usually describe how firms set key business objectives, but most of them do not explain how to design the performance measures themselves. This is the missing link in scorecard deployment.
Consider the following case as an example of under-performance when it comes to defining performance measures. When an airline became concerned that a crucial aspect of customer satisfaction concerned how quickly the passengers retrieved their luggage after landing, it set an objective to improve baggage delivery and introduced a new performance measure. The day after this was introduced, senior managers watched in astonishment as one of the teams of baggage handlers unloaded the cases from an incoming flight.
Initially, the team members stood chatting together as they waited for the tractor to bring the baggage trucks from the aircraft. When it arrived, the team leader grabbed one small bag and threw it to the youngest member of the team. The youth caught the bag and sprinted across the tarmac with it. He reached the conveyor belt, threw on the bag, hit the start button and then sauntered back to the group. None of the others had moved. They continued chatting for several more minutes before eventually starting to unload the rest of the bags.
Inappropriate behaviour resulting from a poorly defined performance measure is something that happens all too often. The measure had been defined as the time taken for the first bag to hit the conveyor after the aircraft had landed. This was what the baggage handlers had minimised, but it was not what the customers and the company actually wanted.
A lot of performance measurement problems stem from a lack of attention to detail at the definition stage, but they can be easily overcome. The performance measure record sheet is a useful tool to help you do this. This template for recording definitions is designed to make you consider why an aspect of performance is being measured and think about the link between the measure and the objective your business is trying to achieve (see table). When reviewing the completed performance measurement record sheets there are two questions to ask:
- What kind of behaviour will result from the implementation of this measure?
- Will this behaviour be desirable?
If you work through the record sheet consistently with a small team of colleagues, many of the unexpected problems of implementing new performance measures can be avoided, as the following examples shows.
A division of a major motor parts manufacturer was redefining its sales measures. One of its key objectives was to increase the value of sales to existing customers. This was not going to be easy, but one opportunity had been identified. The sales team had noted that for a certain type of quotation request only the quickest responses seemed to be considered. It seemed that the company had a much greater chance of winning business if it could respond within seven days, so it decided to design a measure to track the speed of response to requests for quotations.
In completing the record sheet there were few problems when it came to deciding the title of the measure, the objective to which it related or why it was being measured.
The discussion then moved to the calculation of the seven days. It was suggested that the clock should start as soon as the quotation was requested. It would then be stopped when the quote was sent to the customer. But the sales manager was not happy with this. He argued that most initial quotation requests did not come with all the supporting documentation. He wanted the clock to start only when all the necessary paperwork was received. If this did not happen, his staff would be held responsible for events beyond their control.
This created a debate about the type of behaviour that the measure would encourage. Nobody wanted it to result in a pile of quotation requests "awaiting further information". The management team concluded that, although the sales staff could not control when the full set of documents arrived, they could influence matters by chasing up customers. So the measure defined the clock as starting the moment the quotation request was received.
Someone also questioned whether the definition of when the clock should stop was correct - sending a quote last thing on a Friday might meet the seven-day requirement of the measure, but it would be of no use if the buyer was no longer there to receive it. Other people were concerned that, although the speed of the quotation was being measured, there was no control over quality. So they thought again about stopping the clock. They eventually decided that a quote would be deemed complete only after someone in sales had confirmed that the customer had received the quotation and that it had met their needs.
In practice the new measure did have a considerable influence on the speed of quotations and the amount of contact the sales team had with customers. In particular, misunderstandings in the brief were picked up more quickly when the sales staff confirmed with the buyer that the quotation had been received. These could then be swiftly rectified, whereas in the past they had been missed until after the business was lost. Buyers would often also pass on further quotation requests at this stage - before sending them out to the competition.
There were two unexpected side effects, one from designing the measure and the other from implementing it. First, the sales manager was worried about the effects of implementing the measure. Although he knew the reasons for defining it so stringently, he still feared that his team would be held responsible for events outside its control. He explained that, although requests for quotes came to the sales office, they were passed to engineering for the estimation of time and materials, and then to the commercial function for costing. Only then did they return to sales for completion.
Then someone asked whether it was really necessary to involve the other departments. It wasn't. The procedure was therefore changed so that simple requests were estimated in sales, and only the most complicated jobs were passed on. This significantly reduced the workload for the other two departments and meant that their response times improved.
The second unexpected side effect was that many more requests for quotes were being declined. When the sales manager investigated this, he found that his team was no longer wasting time working on quotes that the company had no chance of winning. These were quickly rejected and therefore counted as quotations processed in seven days.
The design of performance measures greatly influences behaviour in the organisation - sometimes predictably, sometimes less so. How the objective is measured is an extremely important factor. When you start using the record sheet, you will be surprised how hard it is to come up with your first measure. But it will be time well spent, because it will help you to avoid some of the worst of the dysfunctional effects of performance measurement.
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Mike Bourne ACMA is a lecturer at Cranfield School of Management's Centre for Business Performance, United Kingdom, where Andy Neely is director. This article is contributed by CIMA, The Chartered Institute of Management Accountants, and it first appeared in Financial Management, CIMA’s monthly magazine for accountants in business.
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