Performance Measurement System: A Leadership-Driven Methodology (LDM)

Bryan Shane
Vol. 33, Issue 3, Sep 2003

A balanced performance measurement system requires that certain principles be followed to define the scope and provide a philosophy of operations.

Introduction

The ability of any private or public sector organization to function effectively or even to survive without knowledge of financial performance, programs/services, client concerns, employee issues or new innovations is highly doubtful. Yet, many organizations function without effective information to reward accomplishment or to identify issues that threaten their ability to perform.

There are few holistic approaches to measuring the performance of programs and services in either of these sectors. The Balanced Scorecard provides an excellent conceptual overview and framework for performance measurement, but does not provide a methodology for developing, implementing and maintaining a performance measurement system (PM system). There is no performance measurement methodology that ensures a step-by-step approach, while building understanding, commitment and transferring the necessary skills to staff who must maintain it.

The leadership-driven methodology (LDM) outlines the prerequisites, approach, principles, stages, and integration strategies necessary to develop, implement and maintain a fully functioning PM system.

Performance measurement defined

Under the LDM, performance measurement is defined from four points of view:

1. A philosophy of continuous learning in which feedback is used to identify achievements and to make ongoing adjustments to agreed-upon strategies/initiatives to ensure continued excellence of services (in response to ongoing changes arising from internal and external environment).
2. A process that begins with the development of a business plan and that includes the mission, objectives and strategies/initiatives. It is followed by the development of performance measures. This is a phased process in which one step should be completed before moving onto the next. The step-by-step approach is necessary to reduce resistance to what may be perceived as a highly threatening project and to build support for performance measurement across the organization.
3. A structure in which business and operational plans are linked through a feedback process. The PM system provides the feedback necessary to improve decision making in order for the organization to progress towards the attainment of its vision, mission and objectives. This is a continuous and ongoing process.
4. A management system that provides a balanced/systematic attempt to assess the effectiveness of an organization’s operations from multiple points of view: financial; business performance; the client and the employee. It is used to provide the feedback at all levels – strategic, tactical or operational – on how well strategies and initiatives are being carried out. This performance information provides the essential feedback to improve decision making within the organization by enabling proactive problem solving and by institutionalizing continuous improvement

Prerequisites

There are a number of LDM prerequisites for the development and implementation of PM system including:

Business planning and performance management framework (BPPMF)

The BPPMF provides a frame of reference in which the business plan elements are directly linked to a series of performance measures. The performance measures provide the feedback in terms of identifying accomplishments needed to reward merit and outlining issues that interfere with the attainment of the organization’s strategic direction (as embodied in its mission and objectives). The BPPMF provides a framework for decision making in which management and staff, working together using a common language, can adjust their operations through ongoing and balanced feedback, to sustain excellence in service delivery to their clients.

The business planning and performance management framework provides a complete and balanced approach to measuring organizational performance. It includes the following elements:

1. mission statement: This is a brief, clear statement of the goal of the organization that defines the need to be filled, its clients and how service will be provided.
2. objectives: These are broad, time-phased, measurable targets related to finances, business results, clients and employees. Attainments of these are required to realize the successful achievement of the mission of the organization.
   • financial objectives that outline the cost effectiveness or cost recovery purposes of the organization;
   • business results that outline the purpose in terms of programs and services to be delivered;
   • client focus that delineates its purposes related to serving its customers; and
   • employee focus that states its purposes in maintaining an effective workforce.
3. strategies: These define the tactics needed to move forward to attain the objectives and ultimately the overall mission.
4. initiatives: These are the programs, services, policies, projects, plans, etc., used to carryout strategies.
5. performance measures: A set of performance measures must be developed that will provide a balanced view of financial performance, business results, client needs and employee concerns.

Approach

A process-oriented approach must be used at each phase in the development and implementation of the PM system. It consists of the following elements:

• Development of PM system elements must be done cooperatively within the organization using
  • structured interviews: this technique ensures complete and multiple opportunities for input from all concerned stake holders;
  • “straw dogs”: this technique allows the review of draft material by multiple stake holders and ensures the tailoring of the PM system to the organizational environment in a non-threatening manner; and
  • facilitation: this technique allows the achievement of group acceptance of the different components of the PM system.
• A planned and phased approach to development and implementation of the PM system. Each phase must be successfully completed and agreed upon by all relevant parties before proceeding with the next. The phases in the development of the PM system are outlined later in the article.
• Employ pilots for financial performance, business results, client and employee satisfaction to tailor the PM system to the unique requirements of the organization. These pilots are used to develop many of the performance measurement business processes for gathering, analyzing, interpreting and reporting on performance. They are also used to provide evidence of the effectiveness of the performance information generated. Where problems are revealed, remedial strategies can be developed before more widespread implementation across the organization.

This LDM process-oriented approach to developing and implementing a PM system ensures its acceptance through a gradual process of change in organizational culture. Stake holders begin to understand that the focus is on identifying and dealing with issues that are interfering with attainment of the organizational mission, linking business plans with operational decision making, and on identifying and rewarding achievement with the organization. As the development process continues, stake holders in the organization shift their attitudes from awareness to understanding and from acceptance to use of the PM system. Over time this approach allows the development of an organizational culture which values and supports balanced and comprehensive feedback as an essential element in both rewarding achievement and providing the information necessary for effective business and operational decision making.

Principles

Using the LDM approach requires that a number of principles be followed to provide a philosophy for its development, implementation and operation:

1. It must support the organization’s mission and its objectives.
2. A formal champion for performance measurement must be established to lead the development and implementation of a PM system across organization.
3. Development, implementation and integration of the PM system requires time, effort, skills/expertise and perhaps most importantly, the active support of senior management.
4. Performance measurement is designed to highlight achievements and reveal strategic and operational issues that hinder progress toward the attainment of the organization’s mission. It is not designed, nor intended, for use in assessing performance at the individual level.
5. Performance measures must be organized around the organization’s planning and budgeting cycles. Performance measurement must be a continuous function, providing meaningful information at all times during the fiscal year.
6. A balanced set of performance measures must be developed that will provide a view not only of financial performance, but also of business results, clients and employees.
7. A clear set of roles and responsibilities must be established for the planning, implementing and maintaining the ongoing operation of the PM system.
8. A phased implementation process should be used to develop and implement the PM system, where one phase must be completed and approved before beginning the next.
9. There must be a cooperative and shared approach to the development and implementation of the PM system across the organization which specifies a common set of objectives, performance measures, and an agreed upon project plan. This approach must also specify methods to collect, analyze, interpret and report the performance measurement information.
10. Performance measurement business processes must be adapted or created for collecting, analyzing, interpreting and reporting the performance measurement information for financial performance, business results, client and employee focus. These performance measurement business processes must become a routine part of the organization’s ongoing operations.
11. A “just do it” mentality must be adopted in developing and implementing a PM system. This involves using existing sources of information, avoiding costly development of information systems and employing workaround strategies when delays occur in the development and implementation of a PM system

LDM phases in the development and implementation of a PM system

There are a number of LDM phases required to develop and implement a PM system. These phases should be carried out in the order described with each being completed and approved before beginning the next.

Project orientation: (phase 1) is designed promote a consistent understanding of performance measurement in terms of its definition and benefits and to alleviate fears associated with performance measurement, what it is and what it is not. This step is mandatory to improve understanding and to begin to build support for the project among the uninitiated members of the organization.

Readiness assessment: (phase 2) is used as a risk management tool to:

• identify the potential barriers to and opportunities for the development, implementation and acceptance of a performance measurement system within the organization;
• provide recommendations to enable the organization to correct any barriers to successfully develop and implement a PM system; and
• provide a high-level work plan for the development and implementation of a performance measurement system.

The readiness assessment must provide a clear picture of the organization and assess whether or not there is an appropriate planning and performance measurement framework, a supportive organizational culture, an effective organizational structure, a staff skilled in performance measurement and a management team committed to leading and supporting the project. The absence of any of these criteria requires remedial actions be taken.

A successful method for dealing with any outstanding issues in a holistic/integrated manner and for guiding the performance measure effort during the remaining stages of development and implementation involves the development of a performance measurement strategy (PMS).

Performance measurement strategy

The elements of the PM strategy (phase 3) include:

1. the principles and values under which the development of a fully supported PM system would proceed;
2. an organizational structure for planning and performance measurement that permits full cooperation and coordination towards common goals;
3. a definition of the role and responsibilities for all staff involved in planning and performance measurement in all parts of the organization;
4. a methodology outlining all of the necessary phases of development including a project plan, necessary to develop and implement a PM system; and
5. integration strategies to ensure that performance measurement becomes a stable, ongoing and essential element within the management regime.

The PM strategy provides a cooperative, process-oriented approach across the organization to develop and implement a PM system. It provides a blueprint to mange the expectations of all stake holders and to measure progress in the development and implementation of a highly threatening project.

PM architecture development

This PM architecture (phase 4) specifies the design, content and structure of the PM system prior to its implementation based on the organization’s mission, objectives and strategies. It also provides the means to establish an accurate determination of the workload required to complete the remaining phases of the PM system

The development of the PM architecture can only be undertaken from the top down as follows:

• the organizations mission must be developed first;
• objectives and strategies are then designed that support the business directions (this information is contained in the business planning and performance measurement framework);
• performance measures/indicators are derived for each of the organizational measurement perspectives based on input from across the organization. The performance measures/indicators developed should:
  • be objective, simple, quantifiable, outputs/results oriented and (to the extent possible) based on existing sources of information. The use of existing sources of information avoids costly development of information systems;
  • include qualitative and quantitative information; and
  • use indices that magnify the complexity of information generated about any of the measurement perspectives. It allows the combination of qualitative and quantitative information yet provides the ability to quantify both so that all measures become output/results oriented.

The process-oriented approach taken during the development and validation of the PM architecture ensures that the involvement and participation of the organization is focused and time efficient. Once approved, the PM architecture must be placed under change control to allow for structured evolution as measures are implemented and feedback on their effectiveness is received. Diagram 1 provides a graphical illustration of a sample PM architecture for a human resource management organization.

Development of a measurement profile

The fifth phase in the development and implementation of a PM system is the construction of a measurement profile for each performance measure identified in the PM architecture. The measurement profile provides:

• an assessment of the degree to which existing business processes must be developed or adapted in order to generate the performance measurement information for each performance measure in the PM architecture. It indicates areas where information and processes related to the performance measures exist and where information and processes must be adapted and/or created (gap analysis);
• the basis upon which to schedule the implementation of different measures, together with an estimated degree of effort;
• who is responsible for providing the information, the audience for whom it is intended, and the frequency of reporting;
• the identity of any historical information that can provide a baseline to interpret trends in any of the measurement perspectives; and
• any existing benchmarks related to financial performance, or business results to provide a comparative external reference point for interpreting the performance information generated by the PM system.

For each performance measure in the PM architecture, the following elements must be identified:

• the source of the information such as an information system, status report or questionnaire or survey;
• a definition of the performance measure, e.g. client satisfaction index;
• the responsibility for providing the performance measurement information;
• the audience for whom the performance measurement information is intended;
• the frequency of reporting the performance measurement, e.g. monthly, quarterly, annually;
• the performance targets defining the level of acceptable achievement for that performance measure within the organization, e.g., turnover rate of less than two percent per annum;
• any baseline information identifying the existence of any historical information regarding that performance measure, e.g. prior year financial information on revenues and expenditures; and
• any benchmarking information that provides an external comparison of the performance measure with similar organizations, e.g., staff turnover rate as compared to a similar organizations.

The completion of the measurement profile provides a complete inventory of the information required to support the PM architecture along with a determination of which business processes must be adapted or created to supply performance information. It provides the basis to complete a detailed project plan to develop or adapt business processes required to generate information for each performance measure in the PM architecture.

Development of implementation strategies

Implementation strategies (phase 6) are required to provide the guidelines to implement and operate the PM system. The development of an implementation strategy for each of the measurement perspectives in the PM architecture defines:

• the objective for each measurement perspective (derived from the PM architecture);
• the roles and responsibilities of participants;
• the frequency of reporting;
• the data collection methods;
• the methods of analyzing information;
• the methods of interpreting the information including performance targets;
• the reporting formats for each of the five measurement perspectives; and
• the issues that may impede progress for each measurement perspective.

These implementation strategies assist in creating a common understanding and acceptance among the stake holders of all the required elements needed to collect, analyze, interpret and report performance information for each measurement perspective prior to implementation and use of the PM system. They assist also in the development of remedial strategies to deal with issues that hinder the implementation of any of the measurement perspectives.

Selection and implementation of pilots

The seventh phase in the development and implementation of a PM system is the selection and implementation of pilots for finances, business results, client satisfaction and employee satisfaction. The employment of performance measurement pilots is necessary to tailor the PM system to the unique requirements of the organization. More specifically, it is required to

• develop and/or adapt many of the performance measurement business processes for gathering, analyzing, interpreting and reporting on performance and to provide evidence of the effectiveness of the performance information generated;
• identify problems and constraints that impede the effective implementation of these performance measures more widely across the organization;
• provide evidence of the utility of this balanced, process-oriented approach to developing and implementing a PM system;
• build acceptance/support for the PM system; and
• build the performance measurement competencies of staff.

Each of the five pilots to be implemented is briefly described below.

• Financial pilot: This pilot will be implemented according to the financial implementation strategy usually for a period of six months to a year. It is a pilot involving the capture of financial information on revenues, expenditures and capital expenditures to determine the level of financial performance in the achievement of the financial objective in the business plan.
• Business results pilot: This pilot will be implemented for six months to one year according to the business results implementation strategy. It involves the collection of information on business results to determine the quality of service performance.
• Client satisfaction pilot: This pilot will be implemented on a one-time basis according to the client satisfaction implementation strategy. It involves the collection of information on client perceptions of programs and services to determine the level of client satisfaction.
• Employee satisfaction pilot: This pilot will be implemented on a one-time basis according to the employee satisfaction implementation strategy. It involves the collection of information on employee perceptions on such areas of operations as recruitment and retention to determine the level of employee satisfaction.
• Continuous improvement pilot. This will be implemented on a one-time basis according to the continuous improvement implementation strategy. It involves the collection of information on rewards/recognition, staffing, professional development and technical innovations related to the business.

The high level steps needed to implement these pilots include:

Step 1: Construction or adaptation of existing business processes

This is required to generate the required information based upon the PM architecture. The exact requirements for using existing business processes or adapting/creating new ones to generate the information required in each of the pilots will be specific to each organization.

Step 2: Collection of performance information

Once business processes for each measurement perspective have been adapted or created, the information generated from these processes must be captured in each of the pilots. The performance measurement information captured for each measurement perspective will be specified by the measures in the PM architecture.

Step 3: Analysis of the performance information

The performance measurement information captured in each of the pilots must be analyzed to determine achievements and identify issues.

Step 4: Interpretation of the issues

The interpretation of the issues revealed by the data analysis is necessary to determine their relative and comparative importance. Within each of the pilots, the implementation strategy provides interpretation guidelines. Five methods are used: baseline information, service standards, rating scales (for employee and client satisfaction), benchmarks and organizational context. The most effective interpretation of performance measurement information can be obtained by using as many of these techniques as possible, in combination.

Evaluation of pilots

The eighth phase in the development and implementation of a PM system is the evaluation of pilot projects for finances, business results, client satisfaction, employee satisfaction and continuous improvement. These pilots must provide evidence of an effectively functioning PM system. More specifically, these pilots must demonstrate:

• a broad based acceptance/support for this potentially threatening project;
• a smoothly functioning system for gathering, analyzing, interpreting and reporting performance information in each pilot;
• improved performance measurement competencies of staff through participating in the pilots;
• the development of remedial strategies to deal with the ongoing implementation issues in each pilot; and
• the provision of the performance information necessary for effective decision making, proactive problem identification, assessment/correction and thus continuous improvement.

Where there is clear evidence to support the achievement of these criteria in a pilot, then more widespread implementation across the organization is justified. Where there are significant problems in a pilot, it should remain in pilot mode until they can be rectified.

Phased implementation across the organization

The ninth phase in the development and implementation of a PM system is the phased implementation across the organization. Each phase must be completed and approved before moving on to the next. This development and implementation of a PM system usually takes from 18 to 24 months in most organizations. Diagram 2 provides a graphical illustration of all the steps to develop and implement a PM system.

LDM Phases in the Development, Implementation and
Maintenance of a Performance Measurement System

Integration strategies

LDM integration strategies are essential to ensure that the PM system becomes a self-sustaining and integrated element within the organization’s operations. These strategies must be used at each phase in the development and implementation process. They include:

Communications

The communication challenge within the organization is to change the systems of shared beliefs, values, attitudes and behaviors to support the PM system. The PMS represents change to the organizational culture, in some cases an incremental change, in others a major adjustment. Such change generally does not happen easily. It requires leadership of senior management to provide a supportive environment for the change. Management must communicate the necessity for the PM system and provide managers with the motivation to accept and use this innovation. It will also require the informed support and participation of managers who must use it for decision making. In order for communication regarding the PM system to be effective, attitudes and opinions must be freely exchanged in an ongoing two-way flow of communication across the organization.

Effective communications regarding the development, implementation and use of a PM system will deliver the following benefits:

• a common understanding of performance measurement as a philosophy, process, structure and a management system and an increased awareness of the benefits to be accrued by participating in its development, implementation and use;
• an increased awareness within the organization of the potential and power of the PM system for improved decision making;
• an understanding of the roles and responsibilities of all major participants during its development, implementation and use;
• an improved understanding of the cooperative and shared approach to development and implementation of the PM system across the organization that specifies stages of development and proposed timeframes;
• a common base of performance measurement knowledge and competencies from which all could draw and contribute;
• a sharing of performance measurement lessons learned and the development of best practices; and
• a fostering of an environment of continuous learning and growth.

Development of a supportive organization culture

The development of an organizational culture within the organization that is supportive of a PM system is absolutely essential to break down both the organizational and individual resistances to change. The following techniques will gradually reduce/eliminate these resistances and increase ownership of the PM system. These techniques include:

• Ongoing leadership and communication by senior management to promote understanding, acceptance and provide financial support in the development and implementation of a PM system. This role creates a climate of acceptance within the organization by stressing the importance of performance measurement and the need for staff to participate and cooperate fully in this endeavour.
• Assessment of the readiness to develop and implement the PM system raises the awareness of management and staff of the importance of performance measurement, the opportunities and barriers to its development/implementation and provides recommendations to correct any weaknesses. The readiness assessment is an indicator to staff that change is underway and may well raise their expectations for the organization.
• The PM strategy increases the level of understanding and support for performance measurement by providing a framework for communication. It outlines the principles under which the project will be undertaken, the roles and responsibilities of all stake holders, a methodology which must be followed in the development and implementation of a PM system, and integration strategies to ensure it becomes self sustaining.
• A process-oriented approach to the development and implementation of a PM system helps to ensure its acceptance by following a defined development process as specified in the PM strategy in which each step must be completed and approved before beginning the next. Further, this process-oriented approach allows staff members across the organization to participate, examine, review and revise all elements of the PM system thereby increasing their ownership, commitment, and their expectation of continued involvement in the process.

Use of pilots in the development and implementation of a PM system is essential not only to build the competencies of staff, but also to adapt or develop many of the business processes needed to collect, analyze, interpret and report performance information. Pilots will assist in the building of acceptance for this project throughout the organization.

• Use of regular weekly meetings helps to deal with ongoing development/implementation issues and increases the involvement of staff in supporting the project.

Knowledge transfer

The transfer of knowledge regarding the development and implementation of the PM system from subject matter experts to staff is required to make the organization self-sufficient and self-sustaining in its ability to operate and update the PM system.

The employment of pilots as a means to develop, implement and test the PM system over a period of six months to a year will greatly aid in developing the performance measurement competencies of staff members. Staff members who participate in the development and implementation of the PM system become the repository of this performance measurement expertise in the organization.

Orientation and training sessions should also be provided for the staff members in the organization. This will facilitate the transfer of performance measurement knowledge and skills throughout the organization, thus encouraging and supporting staff growth and development.

Benefits

Many public and private sector organizations are committed to ensuring their programs and services are affordable, accessible and responsive to the needs of their customers. Yet, very few have the performance information needed to maintain their competitive advantage because they lack the knowledge related to products/services, dealing with client and employee concerns, new threatening innovations or even basic financial performance. As well, up to 90 percent of all efforts to develop PM systems fail. This LDM addresses this need by providing a step-by-step formula, which builds commitment and support of management and staff at each stage of the development process. As a result, the success rate of the LDM to develop, implement and maintain a PM system is extremely high with all its attendant benefits.

The unique benefits of the LDM include:

• a multifaceted definition of performance measurement, conveying it as a philosophy, a structure, a process and a management system. Successful development of a PMS is based upon a clear understanding of performance measurement both in terms of what it is, and what it is not.
• a step-by-step approach coveys a graduated yet purposeful progression to the development of a performance measurement system that can be tailored to the rate of learning and growth in the particular organization. Each step must be completed and approved before moving onto the next. This builds both understanding and commitment from the top down and through the organization to what can be perceived as a highly threatening project.
• a planning and performance measurement framework (PPMF), which creates a direct link between the business plan – its mission, objectives, strategies, initiatives – and its performance measures. It provides a frame of reference in which management and staff working together, using a common language, can adjust their operations through ongoing and balanced feedback to sustain focus on the goals and to enhance excellence in service delivery to clients.
• a process-oriented approach based upon structured interviews, “straw dogs”, facilitation, step-by-step progression and pilots, refining the PMS based upon the unique requirements of the organization, while breaking down individual and group resistance to performance measurement
• index-based performance measures to capture the complexity of the function being measured by using a combination of quantitative and qualitative measures. Yet the index provides the ability to quantify both so that an overall score can be obtained. The index approach to measurement matches the complexity of the phenomena to be measured with a set of measures that provides an accurate determination of its actual condition at any point in time and can be applied to may diverse functions in many different types of environments.
• multiple means to properly interpret performance information using the five methods previously described. Many PM systems provide a great deal of performance information but are difficult to use effectively because the manager can’t answer a simple question. “What is normal for my environment?”
• a relatively inexpensive way to develop and implement with costs ranging from one to two percent of the salary budget based upon actual use of the LDM approach in different environments.

Bryan Shane is a senior partner with BPC Management Consultants. For more than 20 years, he has provided services in strategic management, information technology and performance measurement to a wide variety of public and private sector organizations.

Robert S. Kaplan and David P. Norton. The Balanced Scorecard, (Boston: Harvard Business Review School Press, 1996).