In this chapter, the design of an individual performance measure is discussed. First, the criteria for considering a measure as successful are emphasised. Then, some aspect on a measure’s equation and other necessary specifications are made. Finally, the concept of measure types is presented followed by a discussion of a measure’s positive and negative properties.
7.1 What characterises a successful measure?
In order to be able to design a successful performance measure, one should first question what requirements a performance measure should fulfil to be consid- ered as successful. A simple answer could be to say that a performance meas- ure is successful when the income generated from the benefit by using it ex- ceeds the cost from measuring it. However, this may in most cases be very difficult to calculate. A more useful but somewhat subjective answer to the question is when the performance measure fulfils the following two require- ments.• When the information from the performance measure is considered as
being beneficial to the organisation. The term beneficial should in this context be interpreted as a combination of quality and usefulness. Thus, information that is not useful or do not have an acceptable qual- ity can never be beneficial to an organisation.
• When the information from the performance measures is used by the organisation. Thus, to collect information that is not used is a waste of resources. This criterion is highly dependent on that the information re- trieved from the measure goes to the right person at the right time. In other words, it is in this doctoral thesis suggested that the success of a per- formance measure increases with increased information benefit and increased
7.2 How to design a performance measure
The design of an individual performance measure is not about answering the question “What to measure?”. That is an issue that should already have been solved at the system level when the requirements of a PMS are considered. The design of an individual performance measure is mainly about the question “How to measure?” when “what to measure” has already been decided. One should note that “what to measure” usually is only specified to a limited degree on the system level, meaning that a number of prerequisites for the perform- ance measure have been defined (such as the main purpose of the measure) but the equation to use is still not fully defined.
Consequently, the first step to take when designing a performance measure is to start forming an equation that may suite the particular purpose of the meas- ure that has been clearly defined on the system level. This is possibly the most important and difficult activity when it comes to performance measurement. The list of things to consider in order to suite the purpose of a measure is long and sometimes it will even not be possible to find an appropriate equation (Kennerley and Neely, 2003), (Globerson, 1985), (Neely et al, 1997), (Kaplan and Norton, 1992):
• Objective criteria should be used in the equation before subjective. • Use ratios instead of absolute numbers.
• Use group measures rather than measures based on individual perform- ance
• The equation should stimulate improvement.
• The equation should be designed in consultation with people whose performance is measured.
• The equation should be easily measured and easily understood. • The equation should be as accurate as possible.
• The equation should have an appropriate precision. There are also several common failures or pitfalls to avoid: • The equation is based on misleading “weightning”. • The equation indirectly supports negative behaviors.
7.2.1 Examples of various equations
The equation that a performance measure is based on can take many different shapes. The simplest one is to use the absolute value of a plain variable, for example, the number of products produced or the time it takes for process to
complete its task. However, the usefulness of such equations is rather limited. A better approach can be to use simple ratios where different variables are re- lated to each other. Ratios are often more easily understood than absolute num- bers when their values are being analysed.
An exemplary way to convert an equation consisting of the value of an absolute variable to a ratio is to include the target of the measure directly into the calcu- lations and present the measure’s value in percentage of its target. In this way, the user of the measure will instantly know when the target is reached (=100%) as well as when it is not reached (<100%) or exceeds its target (>100%). Such a ratio will of course be slightly different designed depending on if the objec- tive is to maximise its value (equation 7.1) or minimise its value (equation 7.2).
t x max
PM = (7.1)
where
PMmax= The value of the performance measure [%] x= The measured value of the variable [unit] t= The targeted value of the variable [unit]
x t min
PM = (7.2)
where
PMmin= The value of the performance measure [%] x= The measured value of the variable [unit] t= The targeted value of the variable [unit]
7.2.2 Necessary specifications
The design of an individual performance measure is not just about forming an appropriate equation. A performance measure must also fulfil certain functional requirements so that its user is able to measure it as well as understand the re- sults from the conducted measurements. In other words, it is vital that the measure comes with the necessary specifications in order to avoid confusion. Without specifications there is a major risk that the measure will not be meas- ured correctly. A performance measure should, for example, have a clear pur- pose and be defined in an unambiguous way. It must also contain instructions of whom that will use the measure and how (e.g. collect the data, to what fre- quency). Furthermore, for improvement work it may be necessary to give in- structions of how to analyse the results from the measurements (i.e. how to act on the measure). This includes issues like how to specify the target for the per- formance measure and a timeframe that the target has to be reached within. For this purpose the measure specification form (Table X) has been developed based on the thoughts originally presented by (Neely et al, 1997) and (Midori and Steeple, 2000). This form enables the user to make sure that the necessary specifications are made when a performance measure is designed. The form can also be used for describing all available information about an existing per- formance measure, which can be of help when it is going to be evaluated. The form consists of several important parameters grouped into three catego- ries:
• General information about the performance measure. • Instructions of how the measure is measured and by whom.
• Instructions of how the results from the conducted measurements should be analysed and used.
In this way, a performance measure will be well specified and confusion can be avoided.
Parameter to specify Example
General information 1. Title 2. Equation 3. Purpose
4. Connections to other measures 5. Date of last / next review 6. Other notes and comments
Labour productivity in line B
Number of produced units / number of worked hours To maximise labour productivity
None January-2004 / January-2005 Measurement instructions 7. Who measures? 8. Source of data 9. Frequency of measurement 10. How is the measure displayed?
Foreman at line B
MRP-system and work schedule Each week
On billboards at the line Analysis instructions
11. Who acts on the data? 12. Type of measure 13. Target
14. What do they do? 15. Known limitations
Improvement group (line B) Type A
Increase 20% (2004-2005)
Initiate discussion with management if decreasing Do not consider capital, Can be affected by supplier performance
Table X Measure specification form
Parameter 1: Title
A performance measure should have a clear title, which indicates what it is and why it is important. A title facilitates communication and reduces the risk that different measures are mixed up.
Parameter 2: Equation
As previously stated, this is the most important but also the most difficult pa- rameter to specify, which in turn means that the most efforts must be placed here. The challenge here is to define an equation that both gives relevant and accurate information as well as have a positive influence on people’s behav- iour. Attention must also be paid to specify the equation to a proper grade of detail. The information from a performance measure should not be too rough or
too exact. One must also keep in mind that some things cannot be measured and also that it may be necessary to make compromises when forming the equation.
Parameter 3: Purpose
A performance measure must have an explicit purpose and the people who use it must be fully aware of what it is. Without a relevant purpose, the existence of a measure will just consume resources.