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Frank Buytendijk is one of the world's most respected authorities on business intelligence and performance management. Over the last two decades, through his research and his presentations worldwide, Frank has built a strong recognition. Currently, Frank is Vice President of Strategy for Oracle Corp.

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Your guidebook to the next level of performance management

In a field dominated by finance and control, performance management authority Frank Buytendijk takes a breakthrough approach, focusing on people's behaviors within the organization and beyond. Performance Leadership outlines his breakthrough approach, providing a practical Performance Leadership Framework that enables your organization to build a common purpose, effectively bridge conflicting objectives, and achieve results through all stakeholders.

In an environment dictated by heavy regulations on compliance and transparency, a global economy, social pressures to behave responsibly and many business innovations, Performance Leadership is an insurance policy for successful performance management of the future.

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PERFORMANCE Leadership

The McGraw-Hill Companies, Inc.

Contents

Chapter One

Not everything that counts, can be counted. And not everything that can be counted, counts.

—Albert Einstein

Measurement Drives Behavior

Measurement impacts on our personal lives every single day. If we want to lose some weight, we start by standing on the scale. Based on the outcome, we decide how much weight we need to lose, and every other day we check our progress. If there is enough progress, we become encouraged to lose more, and if we are disappointed, we're driven to add even more effort in order to achieve our goal. In short, measurement drives our behavior. For many people, buying a house is an emotional decision based on how comfortable and "at home" they feel. However, before you sign a contract, you need to talk to the bank and do the calculations to see whether the house is affordable for you. Measurement helps you act with confidence.

Watching sports is no fun without keeping score. Imagine just watching people playing tennis outside the frame of a game, set, and match or watching a soccer game where two teams just kick the ball around for 90 minutes without keeping score. Measurement is part of our daily lives. It guides the decisions we make and the goals we set for ourselves.

In the business world this is no different; measurement also drives our professional behavior. Once your business starts measuring the results of a certain process, your employees will start focusing on it. There are numerous examples: If the CFO starts tracking the days-sales-outstanding (DSO—i.e., the average number of days it takes customers to pay their bills) on a daily basis, instead of assuming that customers will pay within 14 days or so, the people in the accounts receivable departments are more likely to pay attention and exert greater effort to make collections. If hotel managers and their front desk staff are held accountable for the percentage of guests that fill out the customer satisfaction survey, they will be more likely to remind guests of the survey. The marketing manager of a professional services firm whose objective is to generate leads will structure the firm's Web site in such a way that it collects customer feedback.

Measurement helps us not only to focus on our goals and objectives, but also to balance our actions. If you measure production speed alone in a manufacturing process, it is likely that quality issues will arise. For balance, you also need to measure how many produced units need rework. If a procurement department is only measured on how much additional discount it can squeeze out of contract manufacturers, it becomes hard to avoid unethical practices, such as the use of child labor in low-wage countries and the use of cheaper and environmentally unfriendly materials and production processes. Procurement departments need to identify a balanced set of metrics that includes ethical issues as well as price. When evaluating a management-level employee for promotion, human resources managers need to identify a set of metrics that evaluates candidates on more than just "accomplishments," such as how respected that person is within the organization.

In each of the functional disciplines within an organization—finance, sales, marketing, logistics, manufacturing, procurement, human resources (HR) or information technology (IT)—measurement is a key element of management, and ultimately of bottom-line performance.

I am not suggesting that measurement is the only driver of performance: Business processes are crucial in creating an efficient organization that makes few mistakes and makes optimal use of resources. Leadership is important in order to create a culture in which people feel motivated to give their best. And a good overall strategy is needed to distinguish a company from the competition. However, measurement cannot be ignored, even if it is only to check if the other drivers for performance are doing the job.

PERFORMANCE MANAGEMENT, OR PERFORMANCE MEASUREMENT

Academics prefer the term performance measurement because its scope is clearer. Performance measurement may be defined as the process of quantifying past action, in which measurement is the process of quantification and past action determines current performance. Another definition states that strategic performance measurement is the integrated set of management processes which link strategy to execution. However, people in the business world seem to prefer the term performance management, perhaps because it sounds more actionable or broader in scope.

The analyst firm Gartner defines performance management as the combination of management methodologies, metrics, and IT (applications, tools, and infrastructure) that enable users to define, monitor, and optimize results and outcomes to achieve personal or departmental objectives while enabling alignment with strategic objectives across multiple organizational levels (personal, process, group, departmental, corporate, or business ecosystem).

Performance management is deeply rooted in the domain of management accounting and control, typically the responsibility of finance. For instance, the balanced scorecard, the best-known performance management methodology, originates in management accounting.

From a management accounting and control point of view, performance management usually is a top-down process. Most "best practices" point out that it is important to start by understanding the corporate strategy and to translate that into objectives or goals.

Then, key performance indicators (KPIs) need to be put in place to track progress, and a program of improvement activities needs to be created to make sure the goals are achieved. Lastly, a process in which managers are made responsible for these goals, KPIs, and any improvement activities is set in place and linked to the managers' compensation plans.

Unfortunately, the top-down way of implementation often does not take people's behaviors into account, in other words, how people will react when confronted with performance indicators. Measurement drives behavior, and if we don't understand how, it drives behaviors in mysterious ways.

The consequences of not understanding the behavioral effects of performance management can be witnessed in most organizations on a daily basis. One of the most common mistakes people make is focusing on what is easy to measure, not what is important.

For instance, salespeople in many businesses are compensated on the basis of the revenue that they bring in, instead of on their contribution (revenue minus the cost of sale). The reason for this is that it is harder to measure the cost of sales than it is to measure revenue alone. At the end of the quarter the revenue measurement may very easily lead to excessive discounting, undermining the company's margins.

Often managers care more about the numbers than about the business. Over the years, managers have created an endless collection of number games to play. Numbers are easy to manipulate. We can change definitions; we can decide to count certain things while ignoring others; we can make the numbers look perfect on paper. If you make your target early, it makes sense to push new business to the next quarter. If there's money left in the budget toward the end of...