Statements on Management Accounting

BUSINESS PERFORMANCE MANAGEMENT

TITLE

Tools and Techniques for

Implementing Integrated
Performance
Management Systems

CREDITS
This statement was approved for issuance as a
Statement on Management Accounting by the
Management Accounting Committee (MAC) of the
Institute of Management Accountants (IMA), IMA
appreciates the collaborative efforts of the Cost
Management Competency Center at Arthur Andersen
LLP and the work of Dr. C. J. McNair, CMA, of Babson
College, who drafted the manuscript.

Published by
Institute of Management Accountants
10 Paragon Drive
Montvale, NJ 07645
www.imanet.org

All rights reserved

IMA Publication Number 98332

ISBN 0-86641-269-7

Special thanks go to Randolf Holst, CMA, Knowledge

Manager at Arthur Andersen, for his continuing oversight during the development of the Statement. IMA
also thanks the members of the Management
Accounting Committee for their contributions to this
effort.

Copyright 1998 in the United States

of America by Institute of Management
Accountants and Arthur Andersen LLP

Statements on Management Accounting

BUSINESS PERFORMANCE MANAGEMENT

Tools and Techniques for

Implementing Integrated
Performance Management Systems
TABLE OF CONTENTS
I.
II.
III.
IV.

Rationale . . . . . . . . . . . . . . . . . . . . . . . 1
Scope . . . . . . . . . . . . . . . . . . . . . . . . .1
Performance Management Overview . . . . .2
The Role of the Management Accountant .4

V.

Phases in Implementing Integrated

Performance Management Systems . . . . .5
VI. Tools and Techniques for Implementation 6
Conceptual Design Phase . . . . . . . . . . . .6
Ensuring Senior Management Support
and Commitment . . . . . . . . . . . . . . . .6
Creating Implementation Teams . . . . . .7
Understanding the Organizations
Goals and Strategies . . . . . . . . . . . . . .9
Developing a Draft Performance Model 14
Defining the Critical Success Factors .15
Defining the Key Performance Indicators16
Finalizing the Integrated Business
Performance Model . . . . . . . . . . . . . .20
Planning KPI System Design and
Implementation . . . . . . . . . . . . . . . . .22
Detailed Design/Implementation Phase .22
Developing Scoreboards . . . . . . . . . . .23
Integrating with Corporate Information
Systems . . . . . . . . . . . . . . . . . . . . . .25
Identifying Training and Education
Requirements . . . . . . . . . . . . . . . . . .26
Developing an Implementation Plan . . .27
Carrying Out Cost/Benefit Analysis . . .29
Establishing the Underlying Technology 29
Converting to the New System . . . . . .30
Ongoing Support Phase . . . . . . . . . . .31
Ensuring Continuous Improvement . . . . .31
VII. Implementation Pitfalls & Key
Success Factors . . . . . . . . . . . . . . . . . .31

VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . .32

IX. Appendix . . . . . . . . . . . . . . . . . . . . . . .33
Key Performance Indicators Definitions 33
Scoreboard Terminology . . . . . . . . . . .33
X. Bibliography . . . . . . . . . . . . . . . . . . . . .33

Exhibits
Exhibit 1:
Exhibit
Exhibit
Exhibit
Exhibit

2:
3:
4:
5:

Exhibit
Exhibit
Exhibit
Exhibit

6:
7:
8:
9:

Exhibit 10:
Exhibit
Exhibit
Exhibit
Exhibit
Exhibit
Exhibit
Exhibit

Integrating Financial and Nonfinancial

Performance Measures . . . . . . . .3
GE Performance Measures . . . . .4
I-PMS Implementation Phases . . .5
The ABO Continuum . . . . . . . . . .7
Division of Responsibility in I-PMS
Implementation Process . . . . . . .9
A Generic Business Model . . . . .13
Draft Performance Model . . . . . .15
Ishikawa Cause-and-Effect Diagram18
Pareto Analysis of Manufacturing
Delay . . . . . . . . . . . . . . . . . . . .19
Integrated Business Performance
Model . . . . . . . . . . . . . . . . . . .20
Cell or Team Scoreboards . . . . .22
Scoreboard Report . . . . . . . . . .23
Graphical Format to Display KPIs 24
Incident Log . . . . . . . . . . . . . . .25

11:
12:
13:
14:
15: Training Principles . . . . . . . . . .26
16: Individual Action Plan . . . . . . . .27
17: Example of an I-PMS
Communication Plan . . . . . . . .28

Exhibit 18: The Dos & Donts of I-PMS

Implementation . . . . . . . . . . . .32

BUSINESS PERFORMANCE MANAGEMENT

I . R AT I O N A L E
Measurement is at the heart of the organizational process. What is measured becomes visible,
what is rewarded gets done. Measurements
define the playing field for organizational members, signaling how well the firm is playing the
competitive game and linking past, present, and
future actions into a cohesive whole. A firms values, strategies, and progress are all reflected in
what it chooses to measure and how those
measures are used to influence behavior.
The global market and its rapid pace of change
have increased the demand on measurement
systems in modern corporations. The command
and control function (previously served by performance measurement systems) has been
transformed into a need to predict and prepare
the organization to meet the next challenge and
to create the next opportunity. Changes to the
business context are also changing the nature of
measurement. Process management emphasizing value and service to the customer is replacing traditional vertical and functional structures.
Decision-making is increasingly being moved
lower in the organization; self-directed workteams rather than individual managers now
make decisions. Virtual corporate structures are
creating the need to manage and measure performance across the value chain.1 Each of these
shifts has implications for the performance management system and its ability to effectively
serve the organization and its stakeholders.
Since the key stakeholder in modern business is
the customer, customer requirements have to
play a pivotal role in defining the measurements
used by an organization. Business processes
should be designed to meet customer
1 John Shank and V. Govindarajan describe the value chain
for any firm as the value-creating activities, from basic raw
material sources and component suppliers through to the ultimate end-use product delivered into the final consumers
hands.

requirements, and performance measurements

should be selected based on those requirements. As customer requirements filter through
the organization the performance measures
developed at the process and subprocess levels
should reflect the customers perspective and
should also ensure high levels of customer
satisfaction.
The performance management system must satisfy the following important objectives: measure
performance against key customer requirements, make strategic objectives clear, focus on
core processes, focus on critical variables, signal where performance is headed, identify which
critical factors require attention, and provide an
unambiguous basis for assessing and rewarding
performance.

II. SCOPE
This Statement on Management Accounting
(SMA) has been written to facilitate the process
of designing and implementing an integrated performance management system (I-PMS). This
structured approach is founded on the principles
of participatory management. The methods and
principles presented in this SMA supplement the
Institute of Management Accountants SMA,
Developing
Comprehensive
Performance
Indicators, which describes the series of steps
an organization would take to implement comprehensive performance indicators.
The objective of this SMA is to detail key phases
in implementing an I-PMS. This Statement
includes tools and techniques that can facilitate
these efforts and cites some common key success factors to guide the process, as well as
common pitfalls. Deployment of strategy is the
underlying focus and assumption for these
recommendations.

BUSINESS PERFORMANCE MANAGEMENT

The discussion assumes an organization with

some experience in developing and using performance measurement practices. It emphasizes
issues of interest to organizations seeking to
introduce new performance indicator concepts, as
well as to those aspiring to integrate and improve
existing performance management systems.
The information in this SMA will help management accountants and others:
comprehend the basic issues in designing and
implementing effective, customer-driven performance management systems;
discern the pitfalls and key success factors in
implementation;
understand the tools and techniques that can
be used to implement integrated performance
management systems;
appreciate their roles and responsibilities in
the new performance management process;
and
broaden employee awareness and obtain their
buy-in for the new performance management
system.

I I I . PERFORMANCE MANAGEMENT
OVERVIEW
Performance management provides a systematic
link between organizational strategy, resources,
and processes. It is a comprehensive management process framing the continuous improvement journey, by ensuring that everyone understands where the organization is and where it
needs to go to meet stakeholder needs.
Performance measurement is an integral part of
performance management, but it is not enough
simply to measure. Performance measurement
in isolation is incomplete.
Traditional approaches to performance measurement fail for several basic reasons. First, traditional output measures alone are incomplete as

management tools. They fail to tell executives

how to improve. Second, traditional methods of
performance measurement often do not help
identify or increase understanding of the core
issues driving current performance. Third, in
most cases, these measures tend to be retrospective rather than proactive. While knowing
the score is undoubtedly important, it would be
better to be able to change a poor outcome.
Finally, traditional methods of performance
measurement review results instead of causes
for those results.
These acknowledged weaknesses in traditional
performance measurement are driving organizations to implement performance management
systems. This implementation brings several
major benefits. First, a performance management system helps management deploy and
institutionalize its strategy. Second, a performance management system provides focus for,
and measures the success of, reengineering or
total quality management (TQM) efforts. Third, a
well-designed I-PMS helps coordinate efforts
across other key management processes by providing a well-defined set of objectives that are
cross-functional and process driven. Fourth, a
performance management system provides a
link between the efforts it measures and the
achievements it rewards. Finally, an effective
integrated performance management system
helps an organization gain a competitive advantage by keeping everyone, at any level or in any
job, focused on gaining and maintaining a core
competence.
An I-PMS can be envisioned as an enterprisewide management system that links strategic
objectives, core business strategies, critical success factors, and key performance indicators. An
I-PMS is an ongoing process that focuses priorities on results, integrates measurement,

BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 1.

INTEGRATING FUNCTIONAL AND NONFINANCIAL

PERFORMANCE MEASURES

Source: Adapted from Lynch and Cross, 1991.

facilitates analysis and action, encourages continuous improvement, and defines and reinforces
accountability. Moving beyond traditional financial and productivity measures, an I-PMS emphasizes the core dimensions of performance as
defined by strategy requirements. It also assists
financial management by providing cost indicators as reliable estimators of downstream financial performance.
As suggested in Exhibit 1, integrated performance management systems rely on a comprehensive, integrated set of key performance indicators (KPIs) that manage performance throughout and across all levels of an organization. By
integrating financial and nonfinancial performance measures, an I-PMS provides manage-

ment with the leading indicators and timely feedback required to identify opportunities, as well
as to take corrective action when problems
arise. It also provides an unambiguous communication channel within the organization that
facilitates effective action at all levels and
functions.
Performance measures should be accessible to
every member of the process or production team,
thereby promoting ownership and improving motivation. By providing a balanced mix of measures,
an I-PMS reduces organizational myopia and
gamesmanship. The focus is on promoting an
environment of continuous improvement by
involving all members of the organization.

BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 2. GE PERFORMANCE MEASURES

Individual organizations should develop their own

unique set of performance indicators that reflect
their strategy, structure, and needs. While no
one right way to measure is applicable in all settings, for many organizations the core performance indicators provide information on environmental indicators, market/customer indicators,
competitor indicators, internal business process
performance indicators, human resource indicators, and financial indicators.
An I-PMS should be simple in design, containing
only those measures needed to direct attention
and action. For example, at General Electric (GE),
performance indicators are linked directly to a
specific strategic objective as illustrated in Exhibit
2. A key shareholder concern, profitability, is
measured by residual income. Personnel development, essential to GEs long-term growth, is captured by the measure inventory of promotable
people. Measurement at GE provides the vital
link between current and future performance.
An effective I-PMS should make visible the primary drivers of superior performance. It should
focus attention on those critical activities that, if
done well, will lead to a sustainable competitive
advantage and long-term growth.
Some of the best companies in the world cite
their I-PMS as one of the key drivers of their suc-

cess. AT&T, BellSouth, Bristol-Myers Squibb, Dun

& Bradstreet, DuPont, Emerson Electric, General
Electric, Hewlett-Packard, Johnson & Johnson,
Merck, Motorola, Pepsico, Wal-Mart, and Xerox
are just a few of the organizations that are using
an
I-PMS
to
achieve
superior
performance.

I V. T H E R O L E O F T H E
M A N A G E M E N T A C C O U N TA N T
The implementation of an I-PMS requires the
commitment of senior management as well as
the support and involvement of individuals from
all areas of the organization, including accounting, marketing, product and process development, procurement, operations, distribution,
sales, service, and information systems. The
management accountant should play an active
role in the design and implementation of the
I-PMS. Specific ways the management accountant may be involved in the implementation and
downstream maintenance of the I-PMS include:
identifying the need for an integrated performance management system and educating
others about that need;
working with the I-PMS champion or team in
assessing the performance of the current
measurement system against the organizations critical success factors;
assisting in developing the performance indicator architecture;

BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 3. I-PMS IMPLEMENTATION PHASES

reviewing and assessing current financial

measures and reports for consistency and
compatibility with overall I-PMS design, structure, and objectives;
analyzing the potential behavioral impact of
the performance indicators;
developing methods for ensuring the integrity
of the data used by the system;
supporting the implementation by developing
training and education programs;
participating in planning and completing the
conversion to the new system;
participating in reevaluating the performance
evaluation and the reward system; and
identifying and implementing methods to
ensure continual improvement of performance
and the I-PMS that tracks it.

As part of the management team, management

accountants should bring their unique talents,
experience, and perspective to the challenging
task of implementing a new performance management approach.

V. P H A S E S I N I M P L E M E N T I N G
I N T E G R AT E D P E R F O R M A N C E
MANAGEMENT SYSTEMS
The design and implementation of an I-PMS typically follows a three-phase approach as illustrated in Exhibit 3. Specific steps need to be completed during each of these phases.
The conceptual design phase focuses on understanding the way the organization currently operates, and develops a shared vision of the way it
intends to operate in the future. This phase uses
modeling tools to develop consensus and
assess the gaps between as is and to be
environments.

BUSINESS PERFORMANCE MANAGEMENT

The detailed design/implementation phase

includes efforts to flesh out the details of the
I-PMS design, architecture, and technology, as
well as the issues surrounding full-scale implementation. Activities conducted during this
phase should include the implementation of
high-visibility, high-return pilot projects, training
and education, change management, and, finally,
system conversion.
The ongoing support phase focuses on realizing
the full benefits of implementation by supporting
and fine-tuning the newly changed environment,
as well as facilitating continuous improvement in
systems and performance.

VI. TOOLS AND TECHNIQUES

F O R I M P L E M E N TAT I O N
The implementation of performance management systems has been formalized by leading
organizations. These firms use an integrated,
systematic approach reflected in the following
tools and techniques.
Conceptual Design Phase
The main objective of the conceptual design
phase is to identify a preliminary set of KPIs for
each operating unit or organizational subunit
being included in the performance management
effort. To ensure that this effort yields effective
measures for all users, the conceptual design
process should take concurrent top-down and
bottom-up approaches.
During the top-down analysis the focus is on
becoming thoroughly familiar with the firm and
its marketplace. Based on a review of existing
documents and reports, as well as interviews
with key individuals in the various organizational
subunits, the top-down analysis ensures that the
I-PMS addresses the customer perspective and
the strategic issues confronting the organization.

During the bottom-up design efforts, attention

shifts to identifying core activities and drivers
that define operations. Process focused, the
bottom-up analysis seeks to understand what
factors affect cost and what major problems in
the process or organization may act as barriers
to meeting performance objectives. The final
conceptual design for the I-PMS must combine
these two organizational perspectives to ensure
development of a consistent, unambiguous,
strategically oriented set of measures.
Specifically, measures need to be developed
matching decision-making requirements at the
lowest level of the organization with decisionmaking requirements in the corporate boardroom. This ensures the I-PMS addresses needs
throughout the organization, aligns all performance measures, and achieves strategic and
operational business objectives.
The conceptual design phase has eight primary
steps. They are:
ensuring senior management support and
commitment;
creating implementation teams;
understanding the organizations goals and
strategies;
developing a draft performance model;
defining the critical success factors;
defining the key performance indicators;
finalizing the integrated performance model;
and
planning KPI system design and
implementation.
Ensuring Senior Management Support and
Commitment
Senior management can often exhibit significant
reservations about implementing an I-PMS. The
reasons for this resistance include: (1) they may
be very familiar and comfortable with deeply

BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 4. THE ABO CONTINUUM

Source: Vital Signs, Steven M. Hronec.

entrenched measurement systems; (2) they are

unsure how new measures will affect the actions
and behavior of subordinates; (3) they know how
to tie existing measures to overall financial performance to ensure that stakeholder expectations are met; and (4) existing measures provide
time-tested, understandable signals of problems
and opportunities within the organization.
A new performance management system cannot
succeed without senior management support
and commitment. To ensure this vital support,
organizations can employ a technique known as
the Awareness, Buy-in, Ownership (ABO)
Continuum2 to gauge the level of support and
commitment among senior managers.
As illustrated in Exhibit 4, the first step in the
ABO Continuum, awareness, occurs when executives show interest in the initiative and seek to

2 The ABO Continuum is a term coined by Arthur Andersen

and should not be used without the companys knowledge and
appropriate attribution to the original source.

gather more information about its implementation and potential benefits. During the buy-in
stage, the executives begin to commit time and
resources to the project, using performance
measurement concepts in daily activities and
actively and visibly supporting the I-PMS effort.
Finally, when executives take ownership of the
I-PMS, they take responsibility for the success of
the performance measurement initiative and
become role models in the process.
The ABO Continuum operationalizes the fuzzy
concept of management commitment by assessing current levels of senior management commitment and by asking, What steps need to be
taken to move them to ownership?
Creating Implementation Teams
In structuring an I-PMS project, an overall steering team and an implementation design team for
each operating unit need to be created. The
steering team should be made up of the senior
management of the organization and should
include the chief executive officer, chief financial

BUSINESS PERFORMANCE MANAGEMENT

officer, and functional area executives. One

steering team member should be selected as
the leader of the team.
The steering team is responsible for leading and
coordinating the effort throughout the organization. Team members must revisit and/or develop
the organizations vision and strategy, identify
performance goals and measures, and create
awareness, buy-in, and ownership of the new performance measurement system among all
employees.
The effective design and implementation of the
I-PMS also calls for the use of a dedicated
design team. This teams objective is to deliver a
company-wide I-PMS in a timely manner. The criteria the design team should use to guide its
efforts include ensuring that the final measurements meet company objectives and reflect current strategies and that the measurements
seamlessly integrate both the top-down and
bottom-up perspectives.
The design team should not be overly large, no
more than three to five people. The composition
of the team should be based on a careful assessment of where performance information is most
needed to ensure performance improvements.
For instance, at Labatt Breweries of Canada, the
design team included a marketing manager, a
sales manager, a finance manager, and two manufacturing managers. In a company where profitability was directly driven by market share,
ensuring that the right beer was available in the
right markets at the right times was critical.
Marketing defined the critical success factors for
the company; manufacturing ensured effective
execution of the defined plans. The I-PMS had to
serve both these management groups if company objectives for market share and profitability
improvements were to be achieved.

Tasks that are the direct responsibility of the

design team include:
interviewing key personnel/resources;
documenting factors that affect an areas overall performance;
designing specific performance measures to
meet unit objectives and reflect performance
drivers for the area;
performing detailed cost and problem analysis;
developing business models to help define
KPIs;
writing user procedures;
developing a communication plan for the
implementation;
training/educating users; and
supporting the system after implementation.
Soliciting the active involvement of the organizations key process or production teams through
each phase of the implementation process will
improve the design of the I-PMS. Participation
will also promote ownership and commitment to
the finished product at all levels and areas. The
ideal scenario is to have the process or production teams design and install the performance
management system for their area with the support and guidance of the steering team and
design team. Exhibit 5 shows some of the activities that need to be performed and who is
responsible for each activity in the implementation process.
The conceptual designs for all levels and areas
affected by the I-PMS initiative should be developed concurrently. A concurrent approach
enables the design team to identify the unique
information needs at each level of the organization and understand their interrelationships. It
also enables personnel at each level to provide
input on the performance indicators for the

BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 5. DIVISION OF RESPONSIBILITY IN I-PMS IMPLEMENTATION PROCESS

Source: Vital Signs, Steven M. Hronec.

levels both above and below them, as well as for

their own operating unit.
It is imperative that people from all levels of the
organization be actively involved in each phase
of the process. The personnel who work in each
area best understand the factors and problems
that affect performance in their work cell or area.
They will determine whether the full benefit of
the effort is realized by how completely they
adopt the new system.
Participation and communication help ensure
consistency and integration of the measurements throughout the organization. They also aid
in increasing the understanding of what the
measurements mean, how they will be used, and
how they link to support the attainment/achieve-

ment of organizational goals. This approach can

reduce the uncertainty and risk people feel as
the new system is implemented.
Understanding the Organizations Goals
and Strategies
Before new performance measurements can be
seriously considered, the design team must thoroughly understand the business and the marketplace. Both success factors that affect the
majority of operating units, such as process quality, and the unique factors that affect only a single unit, such as availability of a key material or
downtime of a critical machine, must be considered in the analysis.
Integrating these diverse measures into an effective, elegant I-PMS design can be facilitated by

BUSINESS PERFORMANCE MANAGEMENT

careful review and analysis of the relationships

among strategic objectives, core business
strategies, critical success factors, and key performance indicators. The following elements are
potential sources of information for identifying
the strategic objectives and critical success factors that are the foundation of an integrated
business performance model:
vision and mission statements;
strategic objectives;
customer requirements; and
compensation and reward systems.
Ensuring that these deployment mechanisms are
consistent across functions and processes, as
well as from one management level to the next,
is critical if the I-PMS is to provide the desired
benefits. In the following discussion, these vital
components are developed in more depth.

Vision Statements
A vision statement describes the basic goals,
characteristics, and philosophies that will shape
the strategic direction of the organization. The
vision guides future improvement actions and
aids in isolating opportunities to enhance the
firms competitive advantage. An effective vision
statement also aligns actions throughout the
organization by providing a clear signal to guide
decisions and effort on a daily basis.
A vision statement is important because it helps
employees focus their efforts on achieving the
overall goals of the organization. It also improves
coordination and communication with suppliers
and customers, assuring that these stakeholders
work with the organization. The vision defines
what the organization is about, why it exists, in a
way that all stakeholders can understand.
A well-defined vision statement has three major
components. First, it contains a focused concept

or value-creation promise that people can visualize. Second, it must have a sense of noble purpose. The vision statement must emphasize
something that is worth doing, something that
can create value for stakeholders, make a
defined contribution to achieving stakeholder
goals, and help the organization win peoples
commitment to the attainment of its strategic
goals. Finally, an effective vision statement
should have a plausible chance of success. The
vision must represent something that people can
realistically expect to achieve. The following illustrates examples of good vision statements:
Starbucks: to be the premier purveyor of the
finest coffee in the world.
Microsoft: to create software that empowers
the users of personal computers.
Each of these vision statements is an accurate
reflection of the primary driving force of excellence within these unique organizations. They
communicate quickly and precisely what the firm
is about and how it is seeking to provide value to
its customers. These are effective vision statements because they so clearly capture the
essence of the organization in terms all stakeholders understand. Achieving the vision,
though, requires a more elaborate definition of
the how, what, who, where, and why questions
that create a framework for action. The mission
statement provides these answers.

Mission Statements
An effective mission statement includes a clear
statement about the specific customers needs
the organization is attempting to meetnot what
products or services are offered. To accomplish
this goal, the mission statement has to define
unambiguously who the organizations primary
customers are as well as how the organization
plans to go about its business (e.g., what its primary technologies are). The mission statements

10

BUSINESS PERFORMANCE MANAGEMENT

used by Johnson & Johnson and Southwest

Airlines Company are good examples of these
points.
Johnson & Johnson is the worlds largest and
most comprehensive manufacturer of health
care products serving the consumer, pharmaceutical, and professional markets.
Southwest Airlines Company is the nations
low-fare, high customer satisfaction airline. We
primarily serve short-haul city pairs, providing
single-class air transportation which targets the
business commuter as well as leisure travelers.
There are several criteria for evaluating the effectiveness of a mission statement. First, the mission statement should be a cultural reflection of
the values, beliefs, and philosophy of the organization. It should reflect who the organization is,
not what it does. Second, the mission statement
needs to be clear, brief, and understandable to
all employees. If people do not understand the
mission, they cannot use it to guide their activities and decisions.
Next, the mission statement should specify
clearly what business the organization is in. It
should leave no one in doubt about the organizations focus relating to its markets, customers,
and products. Fourth, the mission statement
should motivate the organization, serving as a
source of energy as well as a rallying point.
Finally, the mission statement should reflect the
distinctive competence of the organization. It
must set the organization apart from its competitors in ways the customer recognizes and values, if strategic objectives are to be met. When
the overall mission of an organization is well
defined along each of these dimensions, the
organization can proceed to evaluate performance in a meaningful way.

Strategic Objectives
At the heart of the performance management
process is a clear, unambiguous set of strategic
objectives that shape current and future actions
and results. These objectives should reflect critical success factors along the primary dimensions of the competitive puzzle: people, customers, quality, financial performance, operation,
products, and marketing as well as the organizations mission and vision.
Examples of strategic objectives for each of
these primary dimensions of performance are
illustrated on the next page.
Each of these strategic objectives will direct
employee attention to different elements of the
business and define unique ways for enhancing
performance. Bundled in a consistent way, they
can help integrate the diverse activities of the
organization into a powerful, focused, competitive force.
The strategic objectives of McDonalds illustrate
these linkages. McDonalds strategic objectives
are defined for the value it delivers to customers, the definition of quality service, the location where this value is delivered, the criteria for
the foods offered, the goals for the customer
experience, and the focus of the management
process. Specifically, McDonalds strategic objectives are:

Low prices and a quality experience;

Fast, accurate, friendly, and hassle-free;
Wherever customers live, work, shop, or
gather;
Good, hot, and easy to eat;
Relationships and experiences with McDonalds
that exceed customer expectations; and

11

BUSINESS PERFORMANCE MANAGEMENT

Potential Strategic Objectives

People

Customers

Quality

Financial performance

Operations

Products

Potential Strategic Objectives

Develop a highly skilled workforce
Minimize employee turnover
Increase customer satisfaction
Minimize lost customers
Increase customer base
Quality the first time, every time
Minimize product returns
Minimize product cost
Maximize profitability
Lead industry in sales per employee
Minimize product lead time
Minimize inventory levels
Reduce the number of setups
Be the recognized market leader in new products
Reduce the product development cycle

Ongoing performance improvement through

creative leadership and management
processes.

tions should ask, How do we do that here, and

what are the important aspects of performance?

Harvard Professor Robert Eccles developed a

framework for assessing the fit between a company's vision, mission, and defined strategic
objectives. Driven by a recognition that employee
skills and competence are the primary defining
and constraining resource, his framework
emphasizes the relationship between the organization's capabilities and its ability to create
shareholder value by providing products and services that meet customer requirements. Using a
generic business model based on this framework, as illustrated in Exhibit 6, can help managers focus on the key elements of the business. For each element in the model, organiza-

In addition to the review of the firms vision and

mission statements and strategic objectives, the
design team should conduct a series of interviews with key unit and subunit managers, engineers, supervisors, and other employees. A performance measurement questionnaire should be
developed and used to understand the importance of various areas in the company and the
applicability of possible performance measures.
The questionnaire should be completed by all
affected employees and the results compiled by
the design team. The intent of this tool is to
involve managers and functional employees in
the design process and to use their input to cre-

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 6. A GENERIC BUSINESS MODEL

ate effective, actionable, and informative performance measures appropriate to the needs of
I-PMS users.
The design of this performance measurement
questionnaire should include such elements as:
general dataclassifies the respondents;
production improvementfocuses on competitive priorities and the current performance
measurement system related to the core activity of the organization or department (for
instance, manufacturing); and
personal performance measuresfocuses on
the respondents perceptions of the most
important measures for assessing individual
performance. These measures should be
judged in each of five time frames: daily, weekly, monthly, quarterly, and annually. Space
should be included for general comments, so

respondents can voice their feelings and opinions about the process.
The questionnaire can be supplemented by facilitated group sessions. These sessions can be
used to debrief the survey results, seek clarification on specific issues and measures, and judge
the overall reaction to the survey within the
organization.

Customer Requirements
Addressing the customer perspective is a critical
part of understanding the goals and strategies of
the organization. To identify customers key service and product requirements and to gauge current performance against these needs, customer
interviews should be conducted to identify the
following:
performance requirements;
critical success factors;

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BUSINESS PERFORMANCE MANAGEMENT

relative weight/importance of various performance criteria;

a performance baseline; and
opportunities for improving.

Requirements identified during customer interviews typically focus on delivering high-quality

products and services on time, and at a competitive cost, while maintaining a flexible organization responsive to changing customer needs.
For example, during the implementation of the
I-PMS at Edmonton Telephone, their design team
initiated an assessment of stakeholders needs,
focusing specifically on the expectations and
requirements of customers. Specific customer
needs were categorized on three dimensions:
time, quality, and cost implications. The identified needs formed the basis for developing the
core entity performance measures used to
define the type, number, and focus of measures
deployed throughout the organization.

Compensation and Reward

Compensation and reward systems should not
exist in a vacuum but should be related to the
organizations strategy and short-term, mediumterm, and long-term goals.
An important factor is the strategic role, in particular, the responsibilities of each organizational
unit. Once the responsibilities of these units are
determined, performance measures can be developed. Performance can be measured for the individual, a division, or the entire organization.
Some companies, believing that tying financial
compensation to performance is a powerful
lever, have established such a linkage. For example, a major American oil company uses its performance measurement system as the sole
basis for computing incentive compensation.

The company ties 60 percent of its executive

bonuses to their achievement on ambitious targets for a weighted-average of four financial indicators: return on capital, profitability, cash flow,
and operating cost. It bases the remaining 40
percent on indicators of customer satisfaction,
dealer satisfaction, employee satisfaction, and
environmental responsibility.
As attractive and as powerful as such a linkage
is, it nevertheless carries risks. For instance,
does the company have the right measures?
Does it have valid and reliable data for the selected measures? Could there be unintended or
unexpected consequences from the way the targets for the measures are achieved? These are
important questions the design team should ask.
Developing a Draft Performance Model
The results of the questionnaires, interviews,
and document reviews are combined to create a
draft business performance model. A draft
model makes the performance initiative come to
life and become real to the persons using it.
Effort should be taken to ensure that the identified measures are unambiguous and that the
linkage between measures used at different levels of the organization is clear. An example of a
draft model for the order fulfillment process is
illustrated in Exhibit 7.
Both financial and nonfinancial measures should
be included in a draft performance model.
Reporting and measuring frequencies should be
noted as well as who (e.g., what area) is to
receive the reports or use the measures. The
more complete the draft model, the more effective it will be in communicating the focus and
structure of the new performance management
system to individuals at all levels of the organization. It is a draft model, though. This fact
should be clearly communicated so that people

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 7. DRAFT PERFORMANCE MODEL

feel free to challenge it and participate in modifying measures that fail to meet their needs.
Defining the Critical Success Factors
Critical success factors (CSFs) focus attention
on the key dimensions of performance the firm
must excel at if it is to achieve its goals and
meet customer requirements. Limited in number,
CSFs emphasize the activities and processes
that will have the most impact on total performance and that will drive accomplishment in
supporting areas.

to reflect the relative importance of the different

aspects of performance, as identified by the critical factors.
Typical enterprise-wide CSFs include:
producing products that customers perceive to
be of the highest quality;
designing new products quickly;
keeping the cost of the product or service low;
and
responding quickly and fully to customer
requests.

The emphasis is on the reporting system at the

organizations highest levels. This system needs

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BUSINESS PERFORMANCE MANAGEMENT

Defining the Key Performance Indicators

KPIs are the quantifiable performance measures
that make the critical success factors actionable
and understandable. They allow the organization

to monitor and communicate performance continuously against desired results. Essential characteristics of KPIs and the questions they suggest include:

Characteristics

Related Questions

They are linked to strategic objectives.

Can the measure be aligned with an objective or specific customer need?

The measured results are controllable.

Can results be controlled or significantly influenced under a

specific span of control?

The measures can be acted on.

Can action be taken to improve performance on the measured dimension?

The KPI can be accurately measured.

Can the desired performance measures be quantified in a

meaningful, realistic way?

They are simple and few in number.

Can the measures be explained easily and clearly by employees? Do the measures focus employee attention on key areas?

The measures are credible.

Are the measures resistant to manipulation?

The measures are integrated.

Can the measures be cascaded or linked down through the

organization? Are they compatible with related
processes/functions?

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BUSINESS PERFORMANCE MANAGEMENT

To be effective in coordinating and directing

action within the organization, KPIs must reflect
a balance between cost, quality, time, or other
key strategic categories. Balanced measures
provide insurance against dysfunctional behavior
by visibly tracking relationships that could be
manipulated to reach desired ends. For example,
achieving a cost objective can result in impaired
quality or delivery unless cost improvements can
be compared to their impact on other critical
strategic imperatives. An airlines airport operation shows how these issues are played out
through a well-balanced set of KPIs. Key dimensions of performance and related measures for
this type of operation might be:

KPI
Timeliness
Quality
Cost

Related Measure
On-time departure
Number of lost/misplaced bags
Cost per passenger boarded

If only one of these dimensions was measured,

it could result in some very undesirable consequences. For instance, an overemphasis on timely departures might cause baggage handlers to
rush and ultimately lose or misplace more baggage. Unintentionally, it might mean more passengers with short connection times miss their
flights. In both cases, it is likely that costs would
ultimately be driven up.
If, instead, the measures placed an overemphasis on eliminating lost or misplaced baggage, it
is quite likely costs would increase and the probability of late departures would increase. Finally,

a lack of balance might play out through an

overemphasis on customer service and safety.
Only by keeping all three measures clearly in
sight (visibly linking the interrelationships among
the critical success factors) can an organization
reduce or eliminate undesirable consequences.
Balance is not the only issue that needs to be
addressed in the development of an effective
I-PMS. To achieve its strategic objectives, an
organization must focus on identifying the right
KPIs as well as on placing the right amount of
emphasis on each specific measure. Areas to
focus on when defining critical success factors
and their corresponding KPIs include:
What are the cost drivers in todays business
and where are they controlled? If a company
does a poor job identifying actual cost drivers,
then it will be very difficult to develop effective
KPIs.
Which factors have the biggest impact on cost?
It is imperative that the KPIs target those
areas where improvement is needed the most
and the resulting impact will be greatest.
Some areas that might be explored would be
scrap, raw materials, and labor.
What are the major problems in the process or
organization that act as barriers to meeting performance objectives? Problems such as excessive or unplanned machine downtime, absenteeism, and production or process bottlenecks
can inhibit or prevent the attainment of strategic objectives.
What things do we have to do correctly to retain
our current customers? Specifically, the organization needs to understand what factors are
critical if desired growth objectives are to be
met and what factors are really not very important in this regard.
While many different tools and techniques can
be used to gather the information required to

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 8. ISHIKAWA CAUSE-AND-EFFECT DIAGRAM

answer these questions, several specific

approaches have been found most useful: (1)
the Ishikawa cause-and-effect diagram; (2)
Pareto diagrams/analysis; and (3) targeted
reviews of existing performance measures.

In Manufacturing Plant Floor

Manpower
Machines
Methods
Materials

The Ishikawa Cause-and-Effect

Diagram

In Administration
People
Equipment
Procedures
Policies

The cause-and-effect diagram illustrated in

Exhibit 8 is also known as a fishbone diagram.
This diagram was developed to represent the
relationship between some effect and all the
possible causes influencing it. The effect of the
problem is stated on the right side of the chart
and the major influences or causes are listed to
the left.
Cause-and-effect diagrams are drawn to illustrate clearly the various causes affecting a
process by sorting out and relating the causes.
The major causes might be summarized under
four categories referred to as:

Typical of costly categories of root causes are:

processes that require sequential processing
by many individuals;
incompatible or redundant systems;
organizational structures that distance work
from its customers;
unreliable operating capacity with frequent
unplanned downtime; and
lack of training or versatility in the workforce.
Once the fishbone diagram is developed and the
most likely causes are identified and selected

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 9. PARETO ANALYSIS OF MANUFACTURING DELAY

for further analysis, the design team should ask

why each of the causes is occurring. By asking
why, the design team can target recurring problems with their recommended KPIs.

Pareto Diagrams/Analysis
Designing an effective, elegant performance management system builds from a deep understanding of what needs to go right to meet customer
expectations and what things are most likely to
go wrong. Where the Ishikawa fishbone identifies
the drivers of performance and performance
shortfalls, Pareto analysis, illustrated in Exhibit 9,
details the frequency of specific problems.
Specific performance measures should be created to target and eliminate the most common
causes of performance shortfalls and problems.
Reflecting Paretos principle, namely that 80 percent of the problems can be traced back to 20
percent of the variables/causes, Pareto analysis
aids in the selection of KPIs that will provide the
greatest improvement against organizational
goals and customer expectations.

Review of Existing Performance

Measures
Another approach for identifying KPIs is to review
existing performance measures. This review
often reveals key measurables that may not have
been identified in the draft model but that play a
vital role in tracking some key element of performance. The goal is to understand what is measured currently, why, by whom, and where. These
measures should be evaluated to determine if
they encourage constructive activity, support
management strategy, are controllable within the
operating unit, and are easily understood.
Measures that are clear, actionable, controllable,
and accepted should be identified and considered for inclusion in the draft model.
The combination of these tools allows the design
team to identify and develop KPIs that will move a
unit or process rapidly toward its performance
goals. Much of the information needed to develop
the analysis can come from questionnaires or current operating information (e.g., cost accounting
systems, incident logs, and existing performance
measures). The objective is to identify factors critical to the success of the organization that may
not have surfaced during the top-down analysis.

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 10. INTEGRATED BUSINESS PERFORMANCE MODEL

Finalizing the Integrated Business

Performance Model
After reviewing current performance measures
and performing the root cause and Pareto analysis, the design team should review the draft business model to identify any issues that may have
been overlooked in the earlier design. It is important at this point to develop a systematic review
process, in which critical success factors are
matched against the KPIs in the draft model to
identify overlaps, holes, and ambiguities. A KPI
checklist may include details for all critical success factors, as well as the measures being proposed to track them within each unit or for the
organization as a whole. Care should be taken to

ensure that measures supply vital information to

track and motivate performance measurable
against strategic objectives and related critical
success factors.
Having ensured that logical, actionable measures are present for each critical success factor,
the design team needs to turn its attention to
integrating the objectives and information gathered from the top-down and bottom-up analyses.
The draft model should be revised when necessary to reflect high-priority factors to be tracked
with focused measures. The integration should
deal specifically with the types of measures
used at various levels of the organization (finan-

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 10. INTEGRATED BUSINESS PERFORMANCE MODEL

cial versus nonfinancial), potential performance

baselines (historical average, standards, or best
practice benchmarks), and the aggregation of
measures both vertically and horizontally to support management analysis and control.
An integrated business performance model
requires a clear definition of the firms strategic
intent. From this intent, the core business
processes that will be used to gain the desired
performance goals, the objectives they must
deliver against, and the related critical success
factors and KPIs must be identified. An integrated business performance model for a manufacturing firm is illustrated in Exhibit 10. As the sub-

sequent detail suggests, each core business

process is fleshed out, resulting in a comprehensive set of measures that define and coordinate
performance across the organization.
The resulting integrated business performance
model can be used in a variety of ways, including:
as a starting point to identify areas to focus on
during initial interviews;
during subsequent interviews to stimulate discussion and identify factors omitted from the
draft model;
as a key input to the definition of KPIs by identifying the limited number of critical variables
that must be monitored and managed to

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 11. CELL OR TEAM SCOREBOARDS

achieve strategic objectives; and

as a framework during the design of the presentation vehicle for the KPIs and to remind end
users of the key objectives being addressed as
well as the context in which the measures
should be interpreted.

Planning KPI System Design and

Implementation
After the initial determination of KPIs for each
operating unit is completed, KPIs must be analyzed to define their data requirements. The first
step is to isolate what data elements are needed to do the required calculations and where
these data elements may be available. The
design team should investigate where the
required data already exists on a current system
or if it is being gathered from any existing manually prepared reports. If the required data does
not exist, routines for collecting it, including
responsible individuals and the time interval for
input, need to be developed.
Controls to ensure data integrity, such as periodic audits, should be added to the design at this
point. Examples should be provided illustrating
key points and potential areas of misunderstand-

ing. Reconciling the collected data against information on another reporting system can also provide an effective way to catch errors or flaws in
the system. The data collection and manipulation
procedures developed should clearly identify:
what needs to be done;
who is to perform the task;
when it is to be performed; and
what tools should be used (such as data logs).
Detailed Design/Implementation Phase
After a preliminary set of operational KPIs has
been identified, the implementation of the I-PMS
turns toward the creation of a detailed design.
Focused on identifying the specific KPIs that will
be implemented at the firm, this phase yields the
scoreboard, data collection and manipulation
procedures, cost/benefit analysis, key training
and education needs, and conversion to the new
system. It is often best to address these issues
at the cell or work team level before moving up
to the process, subplant, and organizational levels. This allows for maximum flexibility and learning with minimal disruption of the organization.
The lessons learned and steps undertaken are
very similar as the scope of the detailed design
widens.

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 12. SCOREBOARD REPORT

Developing Scoreboards
Once the KPIs have been selected, a cell or team
scoreboard becomes a useful tool. Scoreboards
display information related to the key performance indicators, providing a highly visible, easily interpreted integration of the key measures
driving performance in an area. As suggested by
Exhibit 11, the scoreboard can also display or
include the following items:
Title. Each scoreboard should have a heading
identifying what cell or team it is measuring.
Mission statement. Identifies the function and
objectives of the cell or team, how it contributes to the end product or service, and
the critical success factors for the area, providing useful information to help team members and others interpret the scoreboard.
Team roster. A list of team members can be
included to reinforce an atmosphere of
teamwork and recognize the members of the
team.
General bulletins and notices. Posting information on the scoreboard of general interest to

team members encourages them to view the

board on a daily basis.
Action items. A team to-do list reinforcing the
continuous improvement focus can be a useful addition to the scoreboard format.
Stop light chart. A stop light metaphor is frequently used to attract attention to KPIs that are performing unsatisfactorily. This visual technique
is based on the principles of management by
exception. Performance meeting these goals
is considered green, indicating all systems
are go. An acceptable level of variation from
the goal is determined. Performance outside
of the green range but within the acceptable
level of variation is considered yellow, indicating caution. This level is not desirable and
indicates the process must be closely monitored. Finally, any performance considered red
or out of control demands immediate corrective action. The process must be stopped and
corrected immediately. Exhibit 12 illustrates
an exception report for a subplant that shows
this system.

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 13. GRAPHICAL FORMAT TO DISPLAY KPIS

A scoreboard serves many useful functions. For

instance, it can act as a source of information
for the entire cell team as well as for any visitors.
The scoreboard also promotes management by
walking around by providing a visible, succinct,
up-to-date status report. The scoreboard encourages participatory management as information
is disseminated to the entire team. Teamwork is
encouraged as team goals and achievements
are stressed. Finally, a well-designed scoreboard
broadcasts success stories and provides positive reinforcement of behavior through recognition of outstanding performance.
An I-PMS operates these scoreboards at several
levels. For example, there may be scorecards for
each product family as well as a senior management scorecard that summarizes the entire
organization. By allowing this change in scope,
this feature helps departments, process teams,
and individuals focus on the measures and
actions for which they are accountable.
When placing individual KPIs on a scoreboard,
measures with close relationships should be

grouped, providing for a simultaneous review of

their trend lines. These visual comparisons can
lead to improved diagnostic and core problem
analysis. While many different methods can be
used to post measures, graphical presentation
is the preferred approach. Placing a forecast line
on the graph creates a visual trace of effectiveness of improvement efforts.
Exhibit 13 illustrates a graphical format used to
display cell level performance to schedule for
a machining cell in a manufacturing firm.
Although higher-level scoreboards are very similar to those designed at the cell or team level,
several key differences should be kept in mind:
data on subplant and plant scoreboards tends
to be updated less often than cell or team
scoreboards;
subplant and plant scoreboards are viewed by
more people than their cell or team counterparts;
they are less interactive than on cell or team
scoreboards; and

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 14. INCIDENT LOG

they serve as public relations tools, as well as

performance management tools. It may be
important to make the board more attractive to
make a positive, professional statement.

Organizations can choose from several scorecard

approaches. Popular systems currently include
Robert Kaplan and David Nortons Balanced
Scorecard, the Vital Signs approach from Arthur
Andersen, and the Baldrige Award criteria. Many
organizations develop their own scoreboard/card
approach that may be based on one of these systems or on their own unique perspective.
A useful tool to be used in conjunction with
scoreboards is an incident log, illustrated in
Exhibit 14. This tool provides a useful way to
record problems that affect cell or team performance. By recording a description of the problem
and its resulting solution on the log, cell or team
members build a history or knowledge base that
can help them identify recurring problems and
determine their sources. Going beyond a simple
measurement of the problem, incident logs allow
the team members to take actions to improve

performance by highlighting the root causes for

ongoing problems.
As the functional and technical designs are being
completed, attention focuses on the integration
with the organizations information systems,
developing an implementation plan, cost/benefit
analysis, and the training/education needs of
affected individuals and teams. Specific details
about each of these areas follow.
Integrating with Corporate Information
Systems
The information used by the I-PMS needs to be
integrated
with
the
organizations
information/operational systems. If the I-PMS is
not directly integrated with the organizations
operational systems, the information in the performance measurement system is likely to be
inaccurate and out-of-date. Moreover, a great
deal of time will be spent reconciling performance numbers with operational numbers, leading to waste and ineffectiveness. The I-PMS
should derive its information directly from the
organizations operational systems. Enabling

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 15. TRAINING PRINCIPLES

Source: Vital Signs, Steven M. Hronec.

technology should support the ability to integrate

information across various management areas.

hours. Therefore, immediate application is critical. Exhibit 15 illustrates these principles.

Identifying Training and Education

Requirements
New performance measurements can significantly affect the way many jobs are performed. Often
employees need new skills to meet the new
demands (such as statistical process control,
teamwork, communication skills, or data analysis techniques). These changes also affect the
compensation and reward process. Training and
education efforts can make or break the implementation because they affect individual and
team ability to complete new activities successfully. Effective training is based on a set of learning principles that indicate that people typically
forget 90 percent of what they learn within 72

In the exhibit, the C curve represents traditional

training (lectures). Awareness is high during the
training event, but the skills and issues are forgotten right after.
The B curve occurs when companies augment
lectures with case studies and practice sessions. The effectiveness of training increases,
as illustrated by the increase in performance.
The A curve represents all of the above traininglectures, case studies, and practiceplus
support after the training to enable people to
use their new skills immediately on the job.
Obviously the A-type training is most costly to

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 16. INDIVIDUAL ACTION PLAN

implement, but the benefits of the extra effort far

outweigh the costand therefore, the client
organization receives greater value. However, in
many situations, the most effective training can
be as simple as clearly communicated expectations and timely feedback on performance.
The design team should estimate the
training/education development costs based on
the number of employees requiring training and
the number of hours each will need to reach the
required skill level.
Developing an Implementation Plan
A detailed work plan needs to be developed to
guide the implementation process. This plan
should identify the tasks, the number of workdays to complete them, and the skill levels of
participants. The implementation plan provides
the basis for estimating the project costs, deliv-

ery timetable, and level of effort needed to meet

it. An example of an individual action plan is illustrated in Exhibit 16.
Gantt charts3 can be useful visual tools to coordinate the implementation across phases and
areas of the organization. Key completion dates
and deliverables should be clearly identified, and
responsibility for their achievement assigned to
key individuals on the team and within the affected area.
Meeting deadlines is key to keeping the I-PMS
implementation on track; missing deadlines can
destroy momentum. For this reason, it is important to ensure deadlines are reasonable and

3 A Gantt chart is an activity chart that lays out tasks of a

project in sequential order and shows when each must take
place. The activities are related to the steps defined in the
implementation plan.

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 17. EXAMPLE OF AN I-PMS COMMUNICATION PLAN

contingency plans are developed for handling

potential problems as they occur. Finally, communication plays a key role in the effective implementation of an I-PMS.
It is impossible to overstate the importance of
communication throughout the design and implementation of an I-PMS. New measurements bring
uncertainty and often meet with resistance. The

key to overcoming potential problems is to make

sure that everyone is kept apprised of the
progress, timetable, objectives, and results of
the measurement project. The design team
should ensure that communication takes place,
assigning responsibility and action as suggested
in Exhibit 17.

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Carrying Out Cost/Benefit Analysis

Many organizations require cost/benefit analysis
for all major projects. While the benefits of an
I-PMS may be difficult to quantify, tangible benefits such as reduction of scrap, increased
productivity, and reduced lead time and inventory levels can be estimated. Intangible benefits,
such as improved employee morale, better customer service, and improved information flow
can be estimated based on the problems (and
costs) these improvements will avoid (such as
recruitment, severance, training, and grievance
costs). The cost/benefit analysis that results
should be summarized in a concise format suitable for management review. In some organizations, performance measurement is seen simply
as a part of doing business; its cost is justified
as part of the ongoing effort to establish best
practices.
Establishing the Underlying Technology
Information gathered in the conceptual design
phase is useful in determining what delivery
mechanism (manual, PC-based, or mainframebased) would be most effective for the I-PMS.
Both manual and automated systems are viable
alternatives. The final choice should reflect the
requirements as well as the constraints of the
organization.
Several factors need to be considered when
selecting a specific delivery mechanism. For
instance, the breadth and complexity of the KPI
data, both in terms of data collection and manipulation, can make manual or PC-based deliveries
difficult. Relatedly, the roll-up, drill-down, and variety of management by exception needs the
system must meet can move the choice away
from manual and toward more sophisticated
delivery approaches.

Another concern is the span of control or scope

the I-PMS must incorporate. The broader the
span, the more likely the need for some form of
automated system. In a similar vein, the interactive feature requirements, such as integrated
user comments and action plans, influence the
choice of delivery mechanism. Integrated comments allow the person or team to explain performance variations. Action plans provide a way
to develop and communicate improvement
approaches. While improving communication
and promoting user support of the system, the
downside of these features is that they require a
sophisticated delivery mechanism.
Finally, graphical requirements impact the choice
of technology. If the design team feels manually
prepared graphs may not be clear enough to
read and simple enough to prepare, an automated approach may be chosen. Relatedly, if the
underlying data are so complex that an automated solution is required to facilitate clear presentation in an effective, efficient manner, manual
systems are an unlikely alternative.
A popular underlying technology today is the data
warehouse, whereby the relevant information is
extracted from the operational systems and
loaded into a database. This technology makes
data access easier, but the information needs to
be processed and analyzed to create the
required performance measurement reports and
analysis.
Other organizations purchase a fully integrated,
enterprise-wide system from a single software
vendor. The functionality of these systems in
such areas as performance measurement and
knowledge management is generally limited to
executive information systems and report writers. Adapting these systems to changes in the
corporate structure or data flows can be complex

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BUSINESS PERFORMANCE MANAGEMENT

and time consuming. These systems can do an

excellent job of integrating the organizations
business processes and supporting financial
and cost accounting methods, but they are not
generally designed to support a flexible and
strategically based performance management
I-PMS approach.

Building an in-house performance measurement

system is a route some organizations take.
However, these can be expensive and time consuming to develop. They usually do not have the
same flexibility and design integrity as systems
that have been designed and developed by specialists in the field of performance management.
The ongoing cost of the maintenance and support of these kinds of systems can be very high.

Management must be visibly involved and committed during the conversion phase. They should
take an active role with the design team to coordinate the rollout and to define tangible targets
for each KPI, as well as action plans for achieving them. The targets should encourage continuous improvement and reflect industry best practices where possible. It is also important to
ensure that production or process teams be
empowered and given the resources needed to
achieve the identified goals to avoid downstream
frustration and discontent.

A detailed cost/benefit analysis may prove useful when determining the best delivery mechanism for a specific company or application. It is
relatively easy to analyze the difference in cost
between manual, PC-based, and mainframebased systems. The related benefits are more
difficult to quantify but may be captured through
estimates of the time required to develop, complete, and interpret information from a manual
versus automated system. Relatedly, the cost
savings from avoiding waste and reducing
nonvalue-added activities can be used to estimate the benefits of one alternative over another. Once a choice is made, attention shifts to
conversion to the new system.
Converting to the New System
Conversion to a new I-PMS involves a variety of
tasks that span the organization and that, if mishandled, can impair the effectiveness of the
measurement initiative. Conversion requires the
development of documentation and tools to help
institutionalize the new system. Tasks making up
the conversion phase are:

finalizing functional and technical designs for

manual or automated solutions;
installing the system, including hardware and
software, for automated systems;
doing unit testing and system development;
and
developing user training and education.

Implementing an I-PMS means more than putting

new KPIs in place. Full benefit can be gained
from the measurements initiative only if the new
measures become part of everyday life and if
they support team and individual continuous
improvement efforts. The true value of KPIs is
unleashed by ensuring a culture that is proactive
and encourages a participatory environment.
A key task to be performed during the conversion
to the new system is user training/education. All
members of the production teams (including
management) need to thoroughly understand
each KPI and the critical success factors it
addresses.
The cell or team manager must have sound communication skills and a thorough understanding
of proactive and participatory management principles. Other team members may require
training/education in areas such as:

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data collection techniques;

problem-solving skills including statistical
process control (SPC);
communication skills such as meeting
facilitation;
team building;
participatory management; and
world-class manufacturing techniques including just-in-time (JIT), SPC, and total quality
management (TQM).

Action and interaction support institutionalizing

KPIs. Meetings at all levels of the organization
should include a review and evaluation of performance against the KPIs as well as the progress
of improvement projects designed to have a positive effect on this performance. If a KPI proves
to be of no value, then that KPI should be eliminated or replaced with measures that the operational team feels will lead to improved decision
making and performance.
Ongoing Support Phase
After the I-PMS has been implemented, all members of the organization need to begin to rely on
and use the data to drive continuous improvement in all areas of the business. This goal
drives the ongoing support phase of the
I-PMS initiative.
Ensuring Continuous Improvement
The issues that need to be addressed during
this phase include:
human factors, such as subjective application
of evaluation programs with the I-PMS, the
adequacy of training initiatives to provide the
skills needed to utilize the system fully, and
the available resources needed to meet goals
and implement improvements identified by the
KPIs;
ongoing evaluation and updating of the KPIs to
ensure that they continue to reflect and ade-

quately measure critical success factors as

the business and its environment change;
focused measures to combat specific performance problems; these measures should
complement operational KPIs and be discontinued once the problem is solved; and
continuous revision of KPI targets to reflect
continuous improvement efforts.

The I-PMS is a dynamic system; KPIs must be

changed as the firm evolves. The ongoing support phase ensures the system remains relevant, providing timely information for decision
analysis and action to an ever-changing set of
users and requirements. The data collection,
analysis, and presentation efforts should be
made as flexible as possible, ensuring that building new measures and eliminating old ones can
be done with minimal impact on ongoing activities and on the effectiveness of the firm and its
management. Achieving this success starts with
avoiding as many implementation pitfalls as
possible.

V I I . I M P L E M E N TAT I O N P I T FA L L S
& K E Y S U C C E S S FA C T O R S
The pitfalls in any implementation strategy represent the donts, while key success factors are
the dos that can smooth the effort and ensure
success. Exhibit 18 summarizes these issues
for an I-PMS.
The essential message embedded in the
donts list is that the I-PMS must reflect a
solid, effective management control strategy
defined and supported by management.
Measures have to be designed to support
action, identify problems, highlight opportunities,
and communicate performance against customer expectations.

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BUSINESS PERFORMANCE MANAGEMENT

EXHIBIT 18. THE DOS AND DONTS OF I-PMS IMPLEMENTATION

Measures that dont add value or that confuse

users are worse than no measures at all. A bad
measure is one that is uncontrollable at the level
held responsible for its achievement. When people are held accountable for things they cannot
change, they become demotivated, often rejecting the whole measurement process as they
rationalize their ongoing performance problems.
Implementing a new or improved I-PMS requires
active attention to change management issues,
including providing solid attention to the risks
and resistance change represents.

The dos of implementing an I-PMS have been

detailed in the preceding pages. Linking performance evaluation and rewards to the KPIs is one
of the fastest and most reliable ways to ensure
the system is implemented and used. Aligning
individual goals, incentives, and rewards with
KPIs the employees can control is critical.
Finally, the design of the I-PMS and the measures it uses must foster and reflect continuous
improvement. Learning, not control, is the ultimate goal.

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BUSINESS PERFORMANCE MANAGEMENT

VIII. CONCLUSION
Performance measurement and management
define the current and future success of an
organization. Measurement done well and integrated across processes and units can support
the attainment of strategic and operational
goals. Measurement done poorly, in fragmented
ways, can destroy the momentum and culture of
an organization.
Reflecting strategic goals (top-down) and operational realities (bottom-up), of an I-PMS supports
the achievement of performance excellence at all
levels of the organization. An effective I-PMS
serves as a vital communication channel between
individuals, teams, processes, management levels, and units, ensuring that they deliver a coordinated, focused set of products and services that
meet or exceed customer requirements.
As companies take on new, competitive challenges in the global marketplace and create ever
more responsive and flexible product/service
bundles and delivery mechanisms, the importance of well-designed measurements will
increase. A living, dynamic snapshot of organizational health, an effective I-PMS should provide
information for managing todays activities and
planning tomorrows opportunities and growth
strategies.

Calculation

Calculation
year-to-date

Component

Data element used to calculate

a KPI

Formula

Frequency

Components, operators, and

constants used to calculate a
KPI
Time interval at which KPIs are
calculated and reported

Format

Direction

Direction for a KPI to improve

for

Numeric display of a KPI

Scorecard Terminology
Balanced Scorecard
Report displaying all
KPIs owned by an executive, manager, or team

Targets

Short-term and longterm KPI goals

Period Actual

KPI calculated for all

periods to date

Year-to-date

KPI calculated for all

periods to date for a fiscal year

Variance

Percentage a KPI actual

value is under or over
the short-term target

Status

Level of KPI performance in comparison to

the short-term target

Trend

Performance of a KPI in
comparison to the prior
period

IX. APPENDIX
Key Performance Indicators (KPIs)
Definitions
Performance levels for a KPI,
Thresholds
generally defined in relation to
the short-term target (high,
expected, warning, critical)

method

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