Performance measurement, the foundation of supplier performance management, scorecards, and outsourcing deals, is a key to supply chain success but, like everything else, it has to be done right. That’s why I enjoyed the article on the five traps of performance measurement (subscription required) that the Harvard Business Review published late last year. If you avoid your traps, you greatly improve your chances of success.
- Measuring Against Yourself
While you should measure against past performance and goals to insure that you’re improving, what ultimately matters is how well you’re doing against the competition. And besides, the historical numbers or estimates could be inaccurate (due to poor data collection or manipulation).
- Looking Backward
While you should look at year-over-year performance comparisons, beating last year’s numbers is not the point. The goal of performance management is to insure that you’re making the right decisions and following the right processes now, and not following the decisions and processes that were right for last year (and not now). Thus, you should focus on measures that lead, rather than lag, revenue and profit. For example, a smart healthcare insurer, who realized that the sickest 10% of its members accounted for 80% of its costs, offered customers incentives for early screening because preemptive treatments could save it a bundle and increase overall profits.
- Putting Your Faith in Numbers
The numbers are meaningless if they’re not accurate (and include good surveys as well as bad), not anonymous and independent, and, most importantly, not relevant to the goal you want to achieve. For example, the NPS (Net Promoter Score), is only relevant if recommendations play a dominant role in a purchase decision. So while it may be quite relevant to a baby-food manufacturer, it may not mean anything to an electricity supplier. An even better example is the application of financial metrics to nonfinancial activities. For example, to avoid outsourcing, IT, HR, and Legal cost centres often create meaningless ROI numbers.
- Gaming Your Metrics
Misguided pressures (billable hours for law firms, reserves for oil companies, security valuations for investment companies) and poorly thought out compensation packages can cause many executives and employees to try and “pad” their numbers to get results which are optimal for them but not for the business, which results in skewed metrics. Also, someone who has learned how to optimize a metric without actually having to perform will often do just that. You have to do your best to insure pressures and incentives align with the goals your metrics are trying to capture and then work with the fact that there will always be a select view who will still try to game the metric anyway. One way to do this is to diversify your metrics (so that they capture different aspects of your goal) as it is a lot harder to gain multiple metrics at once.
- Sticking to Your Numbers too Long
As your business evolves, your metrics have to evolve with the business. Before defining your metrics, be very precise about what you want to access and what the success criteria is so that you can not only re-evaluate your metrics in light of the goal on a regular basis, but also instantly recognize if the metrics need to change because the definition of the goal you are trying to measure has changed.
Finally, a really good assessment system must bring finance and line managers into some kind of meaningful dialogue that allows the company to benefit from both the relative independence of the former and the expertise of the latter. And if you avoid these traps, the chances of your performance measurement system meeting this requirement are greatly increased.
But of course, measurement is only the first step. The next step is to use those measurements and transform your way to value. And as I pointed out in my last post, you can start with The Hackett Group‘s current study.