PERFORMANCE MEASUREMENT - Nice formula, where's the data?

“You get what you measure.” Hard-nosed American managers were once fond of recommending this as a crude-but-effective business philosophy that was sure to deliver results. The logic was simple: if you wanted an aspect of your business’s performance to improve, you measured it. In the glare of the spotlight, even the most recalcitrant corners of a business soon excelled. That was the theory anyway. In practice, what managers usually excelled at was either manipulating figures or events so as to show the areas in question in a better light; or prioritising the performance of the area in question over other aspects of the business. You want inventory levels down? Fine – down they go. But overdue orders, manufacturing overtime and unhappy customers soon increase. You get what you measure – but you also get a nasty dose of something else. Consequently, performance measurement is a notoriously inexact art. As the past few years have amply demonstrated, companies that seem to be doing well one month can be in the arms of the receivers the next. And if financial measures can be so misleading – and money, after all, can be counted – how can companies monitor those less precisely definable aspects of a business, such as its innovativeness, the customer satisfaction that it generates, and the skills and capabilities of its people? “Soft” measures such as these are all just as valid indicators of a business’s performance – yet are almost entirely overlooked by conventional finance-based approaches. Hence the attraction of some of the alternative approaches to performance measurement that have evolved in recent years – such as the “balanced scorecard”, an approach stemming from work undertaken by influential US academic Dr Robert Kaplan of the Harvard Business School, who, in a telling phrase, pointed out that running a business solely on financial criteria was “like driving a car just by looking in the rear view mirror.” The concept was then further augmented by another academic, David Norton, who, in a groundbreaking article in the Harvard Business review in 1989, showed how the idea might actually work in practice. Proponents of the balanced scorecard believe that businesses need to track four perspectives of their performance, each of which impacts on the other, in the way that, for example, employee morale influences innovation and customer satisfaction. Firstly, there is the business process perspective, which takes a hard look at the things that really matter to the business in terms of the way that it works and the value that it adds to its stakeholders – these are items such as quality, cycle time, speed of delivery, and productivity. A second perspective, organisational learning, then examines whether the business can sustain innovation and improvement. What are its intellectual assets and how ready are they for exploitation? The third part of the scorecard, the customer perspective, revolves around the marketplace. It explores issues such as how do customers see the business? What is the perceived quality of its products and services? Is its cycle time short enough – and its service slick enough? Only with the fourth and final perspective do traditional financial metrics creep into the equation: the financial perspective reviews issues such as strategy, value analysis and market share. How valuable is the business to its shareholders? Is it giving them an adequate return on investment? Can that be sustained in the long run? Where are the gaps in market performance and strategy? Much as the present trend for businesses to examine their knowledge management processes has made Kaplan and Norton’s insistence on examining organisational learning – which was considered very radical when first proposed – appear remarkably prescient, the intervening decade has seen many of the doubts about the validity of the balanced scorecard approach appear premature. “There has been a remarkable change of mood in the past few years,” confirms Elizabeth Amos, director of the Foundation for Manufacturing & Industry, a research body associated with the University of Cambridge’s Institute for Manufacturing. “Industry now realises that it has to take its eyes off the financial numbers a little, and look at some of the softer issues as well. We’re seeing companies express a lot of interest in the balanced scorecard.” But interest, no matter how eloquently expressed, is not the same as active adoption. Although the balanced scorecard may well provide a good indication of the health of a business – as well as a forward-looking prognosis on its prospects – it only begs the question as to where the data will come from to create such a perspective. This has been the dilemma that businesses have wrestled with in turning theory into practice. The data could be found – as early adopters such as the NatWest Group have demonstrated – but only by regarding the new approach as a special project, and by creating ad hoc software systems (generally complex PC-based systems) to handle the number-crunching. But the drive to attach meaningful numbers to new business concepts has increased as alternative – or supplementary – perspectives on the same performance measurement issue have evolved. For example, there is economic value added (EVA), which is associated with New York consultancy Stern Stewart, whose two partners, Joel Stern and Bennett Stewart, have ratcheted up an impressive reputation and an even more impressive client list. Like the balanced scorecard, EVA’s attraction is simply stated: it provides shareholders with a simple indication of how well the managers and directors into whose care they have entrusted capital have actually husbanded it. Or there is activity-based management (ABM), which has in recent years developed out of the activity-based costing notion put forward in the late 1980s by Kaplan, one of the fathers of the balanced scorecard. Rather than looking at costs in isolation, ABM (on which Kaplan worked with British academic Dr Robin Cooper) looks at the activities that drive those costs. “ABM generates pertinent information on a lot of parameters that would have a place in any balanced scorecard,” asserts Rupert Booth, a director with KPMG Consulting. “By providing data, it makes the balanced scorecard approach much more relevant.” Spotting an opportunity, software firms have consequently begun to provide tools to enable businesses to transform data into balanced scorecard and ABM formats. One such company, US-based CorVu Corporation, has parleyed its expertise in decision support software (with over 2,000 global blue chip clients) into a claimed leadership of the nascent balanced scorecard software market. Over fifty customers have implemented, or are in the process of implementing, its balanced scorecard application, says the company’s president and CEO, Justin MacIntosh. CorVu’s performance measurement reports use a traffic light alert system – green for on-target performance, amber for a questionable and red for an urgent warning. According to MacIntosh, a key factor in the company’s success has been the ability of its software to combine customers’ own data, extracted from enterprise databases such as those of Oracle Corporation, with externally-acquired data, such as customer perception, market share and so on. “We’ve followed the balanced scorecard model very closely,” says MacIntosh. “When you’re drilling down through the metrics to why things are going wrong, it’s important to have all the pieces of the jigsaw.” It was this ability to drill down using the the balanced scorecard components of CorVu’s package, that played an important part in the decision by Lancashire-based ARM Ltd (a cabling and utility services contracting company owned by the Sketchley Group plc) to opt for the software, asserts the company’s balanced scorecard manager, Peter Myatt. But such “bolt-on” business intelligence solutions beg an important question. In this era of business-wide enterprise resource planning (ERP) systems that embrace every aspect of a business’s operations, why opt for a bolt-on solution at all? With the vast databases that such applications create and continually update, surely much of the information that a modern performance monitoring tool would need is already waiting on tap. What is to prevent SAP, for example, from simply declaring that the whole area will come under the provenance of a new R/3 module? Nothing at all, it seems – although, rival ERP software vendor PeopleSoft’s chairman and co-founder, Dave Duffield, crows that it is his company that has left the starting gate first, with a suite of enterprise performance measurement analytical applications. “It’s a real value-add for all those companies with massive databases packed with transactions,” he says. “It’s been a big investment – we’ve had a hundred people working on it alongside experts from KPMG, as well as Robert Kaplan and Robin Cooper – but customers had already signed up before we even launched it.” Structured around their Enterprise Warehouse database, which holds the relevant information, the ABM module was released in October 1998. Early results appear promising. KPMG, which worked with PeopleSoft on its design, reckons to have carried out the majority of the implementations, and is, according to implementation specialist Dick Beresford, “PeopleSoft’s preferred implementation partner for the enterprise performance measurement product as a whole.” All of the firm’s beta-implementations, he points out, have progressed to full implementation status – additionally sniping that little progress seems to be discernible on the beta-test carried out by rival Andersen Consulting. Typical of the implementations to date is that of US financial institution American Century, which has some 13 PeopleSoft applications licensed. “We’d already been working on activity-based costing, but using spreadsheets,” explains the company’s director of information technology, Roby Shay. The results, he says, have been an quite an eye-opener – and, in the part of the business that had been examined, really helped to explain why the company’s costs were rising faster than its revenues. Dramatic decisions concerning cost control and alternative revenue streams, he explains, can be tracked back to those preliminary findings. But these were for just a part of the business, and related solely to costs rather than revenues as well – activity based costing, in other words, rather than full activity based management. “So there we were, interested in an activity based management application, and already possessing the relevant IT skill sets, the people, and the relationships with a software vendor – and then along comes that very software vendor with an activity based management application,” says Shay, who faced a simple decision. Once the decision had been made to proceed, the beta-implementation went “exceptionally well – one of the smoothest we’ve done,” he adds. The only issues – perhaps predictably, given the product’s nascent status – were niggles concerning the shortage of training material and so forth. The beta’s task was to replicate the earlier PC-based ABC analysis, in order both to update this and to prove that the two approaches were measuring the same things, and that they were following the same methodologies. Once that had been demonstrated, says Shay, the go-ahead button was pressed. But the ultimate destination isn’t ABM – it’s a balanced scorecard, which the company intends to use to incentivise key executives. “It’s a longer term goal, but we’re committed to it – and we’re now convinced that the PeopleSoft product will take us there,” says Shay. Once again, the company will co-operate with the software vendor on a beta pilot. Again, the logic is simple: “Being involved in the beta gives us a chance to influence the shape of the finished product,” explains Shay. The balanced scorecard module is due out by the end of 1999, adds PeopleSoft’s Duffield. But part of the delay between the release dates of the two applications is attributable to the problems associated with capturing the externally-sourced information that the balanced scorecard perspective requires. These, explains Mark Nittler, the senior vice-president in charge of the product, “could come from benchmarking companies, or consultancies. Or we could do it ourselves. But it’s got to be done – because that’s where a lot of the value lies.” Indeed. And it is also, of course, one of the major stumbling blocks on the road to creating a balanced scorecard in the first place. Enterprise-wide data capture has brought genuine performance measurement a significant step closer, but the ultimate prize lies with the ability to then tie this into the qualitative measures used by outsiders. On this aspect, the jury is still out.