P1M7 Other Performance Measures

So far, in Pillar 1 on Your Key Numbers… I have concentrated on how you can measure your profit, cash flow and the factors which drive profitability into a business.

In this module I will share a few ideas about other ways to measure your performance and explain how the measurements process drives increased performance when used in the right way.

Fred Reichheld The Ultimate Question

Over the years a lot of research has been done on how you can measure customer satisfaction.

The idea is sound.

Happy customers should lead to a successful business.

Fred Reichheld is a customer service guru who works for one of the big (very expensive) strategic management consultancy firms and he came up with one question which is an excellent predictor of success.

Read: The Ultimate Question

The Balanced Scorecard

If the Ultimate Question is simple, the balanced scorecard has revolutionised performance measurement in big companies.

The idea is very simple.

The business should be managed for today and tomorrow across four perspectives with four or five key measures in each area:

  • The Finance Perspective – How the business looks to its shareholders and investors
  • The Customer Perspective – How the business looks to the customers
  • The Internal Business Process Perspective  – How is the business performing on its internal non-financial metrics?
  • The Learning & Growth Perspective – How well is the business managing for tomorrow by developing new products, markets and capabilities.

Read: The Balanced Scorecard

I’m not saying you should implement a balanced scorecard but it is worth asking yourself whether you should have measures in place for the four perspectives.

I’d definitely encourage you to do it for finance and customers (the Ultimate Question is ideal) and if you have more than a handful of employees, put in some measures for internal processes.

The Performance Pyramid

The Balanced Scorecard has been criticised for the four perspectives with others proposing changing the names or adding extra categories to pick up employee issues and environmental measures.

The Performance Pyramid is an interesting idea which looks at the business from three dimensions – shareholders, customers and employees.

Quality guru Joseph Juran talked about the measurement of money and the measurement of things.

While top management is concerned with money, lower levels of management and the employees are much more focused on things.

  • Is quality up or down?
  • What proportion of deliveries are on time and what proportion are late?
  • How many widgets can we make in an hour and what can we do to make more?

What is very clever is that the Performance Pyramid links all the measures together in a way that makes sense.

Feedback Control Systems

The value in a measurement system is not from the measures themselves.

The value comes from understanding the way your business works and recognising the important factors that drive performance.

The value comes from looking at the performance numbers and deciding they are not good enough… and knowing what actions you can take to make them better.

The value comes from comparing measures against a target and if performance isn’t up to standard, going back and reviewing the actions.

Perhaps what should have happened didn’t happen?

Or perhaps things were done right… they just didn’t work.

It was Albert Einstein who said the definition of insanity was doing the same thing over again and expecting different results.

The competitive environment means the bar of required performance is always being raised.

If you are not getting the results you want, you need to do something better and different.

The feedback control system which you will also see in everyday equipment like thermostats lies at the centre of financial control and performance management.

  • Establish the target
  • Then decide what you need to do… and do it.
  • Then compare results with the target.

If the target was met, you do what you did before but if results weren’t up to standard, you go back and change the actions.

It works for the thermostat because you set the room temperature you want as the target, the thermostat checks the actual temperature and if that’s below target, the central heating fires up in a continuous cycle of action,  feedback and reaction.

What To Do?

I have covered a lot in Pillar 1 and I’ve mainly told you about the Balanced Scorecard and the Performance Pyramid for when you loop back at the end of the program.

Developing your business is a continuous process and I expect in eight to twelve months you will have a new set of goals.

Because you will have learnt so much, going through the modules again will show you how much you missed the first time.

I would like you to adopt the Ultimate Question.

Use it to ask your customers how happy they are with what your business delivers to them.

You can track your scores with averages and by customer.

Anything less than a nine represents either a problem or a missed opportunity.

Wouldn’t it by nice to see a customer who starts by scoring you as a 6 move through the numbers until you get to 10 because your business is more focused on delivering what they want?

And can you imagine what that will do to your profit?

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