Better Metrics Improve Performance
In the approximately 15 years since Xerox popularized benchmarking as a tool for improving performance, companies have regularly benchmarked a variety of business functions. In many organizations, it is not uncommon for the customer service, procurement, logistics, manufacturing, marketing, and human resources functions to each measure and benchmark their own performance. Each function picks the internal metrics—generally productivity- and cost-related—that seem most pertinent to its goals. They then measure overall performance against these functional metrics, and congratulate themselves when results improve. Given the esteem in which metrics are held, it is no surprise that they often affect organizational behavior. Many managers routinely operate their businesses against internally established metrics. Regardless of other outcomes, they generally are rewarded when performance improves, and are penalized when poor performance is evidenced.
Clearly, benchmarking helps organizations focus on incremental operational improvements relative to a single function. But, benchmarking can be short-sighted since it may overlook important concerns, such as:
• Setting performance targets
• Assessing true competitive advantage
• Understanding how the company has achieved operational improvements
• Incorporating proven best practices
• Determining which technology solutions truly deliver value
• Improving performance across the supply chain, instead of within a particular functional silo.
Common Shortcomings
When companies focus tightly on functional or department-specific metrics, the typical outcome is detailed operational metrics, such as average hourly calls handled by a service rep or orders picked in a warehouse. Unfortunately, the goals of one function, such as inbound logistics, often are achieved at the expense of another function, such as inventory management. Simply put, functionally oriented metrics usually fail to address the cross-functional nature of supply chain management, and therefore can lead to local functional optimization and global supply chain suboptimization.
For example, purchasing agents often are measured on cost per unit purchased, and thus are more likely to buy extremely large volumes to drive down unit cost. The result, of course, is bloated inventories. Similarly, logistics and distribution staff—compelled by incentives to minimize transportation costs—may be inclined to use rail service rather than truck. In some cases, that will translate into diminished reliability and compromised customer service.
Another problem is that organizational groups often resist change solely because their performance is linked to status quo metrics. (Conversely, well-selected, evolving metrics often can be the basis of positive, well-supported change). But even when business-change issues are not involved, benchmarking can be disruptive. It can also be time-consuming and costly. Significant investments can be required, since many companies lack the systems to capture and analyze the comparative metrics they deem important. In addition, when managers try to compare their performance with competitors and non-industry players, they frequently discover that each company measures performance differently. In effect, they have no choice but to compare apples with oranges. Benchmarking helps to answer the question "how are we doing compared to others," but it usually fails to answer (or even ask) why. Similarly, problems often stem from viewing collected data in isolation—apart from best practices and enablers. This may tell the organization that there is a performance gap, but it doesn't indicate why the gap exists or how to close it. Either way, benchmarking ends up falling short of linking superior performance to the technologies, business practices, capabilities, and outcomes that provide competitive advantage.
The bottom line is that benchmarking (metrics-gathering) efforts need to go beyond the operational indicators of performance to the critical technology and process enablers that underlie and drive that performance. When this happens, metrics analysis can provide a real foundation for technology-enabled, strategic decisions about the direction of the business. Following are six principles that can help companies develop and apply metrics in a more productive and strategic way.
Accept Performance Gaps in Some Areas
Contrary to common belief, a company doesn't have to be number one on every measure. In fact, a company should not be number one on all metrics. Striving to be number one across the entire span of performance metrics usually bifurcates organizational focus and resources, and creates unrealistic expectations for managers. Moreover, such an approach inevitably creates conflicting behaviors that, in turn, sabotage the company's ability to align performance with strategic corporate objectives.
Rather than striving to be number one on all metrics, a company should first crystallize its strategic objectives, and then acknowledge that certain accepted metrics simply will not align with those objectives. For example, a company that offers its customers one-day delivery as a competitive strategy will have to incur higher transportation costs than its peers that offer three-day delivery. It is both appropriate and necessary that an organization not be the number-one performer in every metric-related category.
Develop Measures Focused on Enterprise-wide Performance
The notion of acceptable performance gaps implies that performance-related compromises at the functional level may be needed to maximize enterprise-wide performance. In other words, the best parts don't necessarily produce the best whole. Consider that "new product introduction" and "order-to-cash" are two business processes that span several functional domains. However, they also require coordination of activities across multiple business domains (Figure 1). Therefore, it is critical that a company selects operational metrics that spur multiple business domains to cooperate. The point here is that, in certain areas, even peak performance indicated by some enterprise-wide metrics may not provide strategically desirable results. For example, it may be necessary to increase stocking levels, warehousing costs, and transportation costs to increase perfect orders delivered within a three-day period.
Figure 1—Coordination of activities across multiple business domains.
Emphasize Balanced and Comprehensive Metrics
As the previous principles demonstrate, balanced and comprehensive metrics—not uniform excellence—should be a company's key measurement goal. However, balanced and comprehensive metrics must be pursued along four seperate dimensions: financial, customer, internal, and innovation/learning. Addressing each dimension can help companies pursue comprehensive and synergistic improvements, and constructively mediate the conflict that often exists between functionally-focused operational excellence and strategic goals.
The financial dimension refers to metrics such as hourly wage rates, manufacturing cost per unit, transportation cost per mile, and distribution cost per ton. Financial metrics certainly are needed to gauge, baseline, and compare operating performance, but they almost never provide a complete picture.
The internal perspective addresses non-financial performance measures, such as manufacturing adherence-to-plan, level of forecast error, and manufacturing quality. The principal measure is increased performance from one time period to the next.
The customer dimension includes metrics such as on-time delivery, order fill rate, and perfect order fulfillment. In the past, this dimension often was overlooked, but recently it has begun to incur more and more attention from progressive companies.
The innovation (and learning) dimension has rarely been considered at any but the most pioneering companies. Jack Welch, the former CEO of General Electric, has stated that the ultimate competitive advantage is "the ability of an organization to continuously learn from any source, anywhere, and to rapidly convert this learning into action." The innovation and learning dimension is the quantification of this capability—measuring the effectiveness of a company in learning domains such as new product development.
Figure 2—What is behind the metrics is what promotes improvement.
Link Metrics to Business Strategy
As noted earlier, evaluating operational metrics in isolation is a common misapplication of performance-related data. Comprehensive, balanced, multi-dimensional approaches are built by starting with a strategic perspective and working backward to identify operational performance metrics that support the strategic goals of the organization.
Create "Enablement" Relationships
Companies must learn to tie operational performance metrics to enablers, such as technology usage, best practice usage, and e-business capabilities. This linkage is the only way to determine what must be changed to improve performance against certain value-driving and strategically linked operational metrics. This, in other words, is the source of the "why" and "how" that accompanies the "what."
Take a Broader, Multi-Industry View
Statistically speaking, chances are excellent that many innovative practices are in use in other industries, which is why progressive companies must work to identify best practices in companies outside their industry. The key is to examine an entire peer group of companies with similar manufacturing processes, distribution channels, and other factors that allow a like comparison, but that also provide fresh ideas and out-of-the-box thinking.
Moving Forward
Simply put, benchmarking and metrics development involves putting a process in place that captures the breadth and depth of information needed to support organization-wide decision-making. As noted, this requires a comprehensive, balanced, and synergistic process built upon strategic, enterprise-wide views and multi-industry ideas. Because of the need for this all-encompassing perspective, benchmarking efforts ideally are driven by a corporate-level organization with the "altitude" needed to see across the enterprise. Benchmarking efforts undertaken at the departmental level are seldom effective, unless that department's energy and enthusiasm can be dramatically amplified to produce a coordinated, enterprise-wide effort. When that happens, the result is a genuinely new approach characterized by:
• Metrics that evaluate progress at implementing the best practices and technologies that optimize operational performance (Figure 2).
• Benchmarking that is conducted routinely to accommodate changes in technological capabilities.
• Ownership at a strategic level, by those that are positioned to look across functional silos and align with the relevant strategic goals of the business.
• A balanced set of customer-focused metrics that are linked to business strategy, with performance measured consistently against that strategy.
All in all, benchmarking provides unique and valuable ways to focus the organization. However, even the most dedicated organizations often focus on the wrong things. Perhaps the reason they do is because the metrics simply evolved in lockstep with the organization. Or, maybe the metrics used are those that are commonly accepted in the industry. It also is common to see companies measure what their existing information systems are best equipped to capture or analyze.
Nevertheless, companies must work to focus not so much on doing things better, but on first doing the right things, and then doing those right things progressively better. The right metrics and the right approach are key to making the right results happen.
