Business performance measurements have existed ever since the first grain merchant scratched some notes to himself on a clay tablet. Traditionally, performance measurements have implied only levels and trends, and have focused on outcomes. During the last two decades, measurements have moved from outcomes to activities and, more recently, have included inputs and supply chains. Since the 1980s, businesses have improved by using methodologies such as total quality management, ISO 9001 and Six Sigma, and the results have been astonishing. During the 1960s, overall business performance yielded about 50 to 60 percent, compared to 80 to 90 percent in recent years. Such gains come with a price. These days, most improvements in business performance must involve cost-cutting, which means some tough decisions for CEOs.
How does one measure, communicate and perpetuate improvement? Does improvement alone make a business successful? Experience shows that cost-driven improvement can shrink business, while capability-oriented improvement can lead to growth. Among the current issues surrounding business performance measurement are layoffs, severance compensation, outsourcing and reducing employment in developed economies. To implement the best measurements for their organizations, CEOs must examine the relevance, purpose, adequacy, effectiveness and outcomes of all possible decisions.
When a growing company appoints a new president or chief operating officer, it often hires reliable professionals to help manage growth and plan for expansion. The direction in which the company is headed seems clear, and forecasts are generally positive. During this phase, the company flourishes and everyone is happy. With a struggling business, however, a new president usually cuts jobs first, then figures out what to do to stay in business. Prospects don’t improve right away. Times are tough for employees, who worry about losing their jobs as they compete with their co-workers and friends to stay on the payroll. Both types of organizations focus on the bottom line, either to improve profits or simply to survive. When measurements that can guide decision making toward sustained growth and profitability are lacking, the cycles of growth and cutbacks will continue irrespective of leadership.
During a growth phase, a company shouldn’t simply monitor growth, and during a decline it shouldn’t simply cut costs and jobs. In either case, top management must plan for sustained profitable growth. To achieve this, a growing company must focus on profit, while a declining business must focus on growth. Thus, any company must look seriously into implementing measurements for ensuring steady improvement during both good and bad times. During good times, improvement measurements can ensure profitability, and during a decline they can provide resources for turning the business around.
Recently, organizations have implemented focused improvement methodologies such as lean and Six Sigma. However, measurements for the effectiveness of these implementations haven’t been directly related to the methodologies’ purposes. For example, when an organization implements Six Sigma, it rarely measures its corporate sigma level. Or, when it implements a lean initiative, its effectiveness in terms of specific objectives hasn’t been determined. In other words, the ideal state of either Six Sigma or lean hasn’t been defined, targeted or measured to ensure its optimum realization. The table in figure 1 summarizes Six Sigma and lean initiatives for most organizations.
One can see that the objectives and ultimate measurements used by top management are unrelated items. The measure of head-count reduction communicates to employees that somehow they’re part of the “waste” to be reduced. Similarly, in the case of Six Sigma, performance improvement implies financial improvement that can be adversely affected by many factors unrelated to the methodology. If the bottom line is negatively affected due to adverse marketing conditions or a poor business growth strategy, for example, Six Sigma is blamed for the poor performance. So the question is, “What should we measure to determine the effective implementation of Six Sigma or lean?”
After 15 years of creating scorecards that balance financial and other measures, organizations still have too many measurements that are of little use. As a result, a new industry of business intelligence has appeared. Conferences abound that focus on business process management, performance measurements and information sharing. Obviously, the need exists for establishing the right measurements. Toward this end, let’s take a look at the difference between performance and improvement-related matters as outlined in the table in figure 2 below.
We can see that performance-driven measurements are more passive than improvement-driven ones. Simply gathering information without transforming it into intelligence is a waste of critical resources.
Organizations need to have a better understanding of their strengths, a better-defined improvement initiative, direct measurements to drive improvement, effective methods of communicating improvement and an effective plan for continuous improvement. To determine the improvement opportunities that may exist in an organization, consider the following:
• Loss of market share
• Ineffective outsourcing
• Lack of business intelligence
• Organizational problems
• Operational inefficiencies
• Product or service problems
• Customer complaints
• Growing competition
• Outdated employee skills
Measurements must be geared toward realizing business objectives. Many times, business objectives aren’t clearly spelled out, and the focus instead is on meeting month-to-month or quarterly goals. Therefore, it’s critical to communicate the fundamental business strategy, which in most cases must be concerned with achieving sustained profitable growth.
To establish cost-effective and meaningful measurements, an organization’s leaders must first establish a value stream to the fundamental business strategy of achieving sustained profitable growth. The five elements required to achieve the fundamental business strategy include benchmarking, business scorecards, Six Sigma or lean, innovation and good process management. Benchmarking is required to understand an organization’s competitive position in the industry and establish goals for improvement based on opportunity and market position. Business scorecards are necessary to identify drivers and establish measures for ensuring progress. The scorecard should consist of financial, nonfinancial, objective and subjective measurements throughout the organization. Six Sigma or lean initiatives are implemented to reduce waste, and innovation produces new products or services for realizing growth. Finally, good process management is necessary to sustain improved performance.
Improvement measurements must indicate improvement in various aspects of business. One of the dilemmas with this is “measurement madness,” or too many measurements. Thus, measurements for improvement must identify key areas and key opportunities, and link them back to the overriding goal of achieving sustained profitable growth.
These main measurements take into consideration leadership, management, employees, key areas and processes. Some of the measurements also relate to Six Sigma and lean improvement initiatives. For example, to measure process quality identify key processes and calculate their individual quality levels in defects per million opportunities (DPMO) to determine overall DPMO and the sigma level. Similarly, for key parts, one looks into the critical parts and ensures their quality to the highest level.
Note that areas such as employee recognition, idea management and rate of improvement aren’t often measured. However, these factors do play a significant role in an organization’s success, and more companies are using such unconventional measurements. Organizations are realizing that along with improvement, innovation will help them grow and improve their bottom lines. On the other hand, innovation is still a little-understood process and, consequently, one that’s difficult to measure. However, idea management, a process that feeds into innovative products or services, isn’t an unknown process, and it can be measured and improved.
Due to the increased demand for innovation, companies need many more ideas than their research and development departments can supply for new products and services. Thus, it’s critical to involve all employees and solicit their ideas for new products and services. Fortunately, new software tools with built-in filters and improved analytical capability have been developed to manage the volume of new ideas.
To generate innovative ideas, it’s necessary to look beyond simply good ideas. I’ve developed a four-step process to help organizations do this. Typically, companies hold brainstorming meetings that tend to be dominated by a few individuals and suppress others in the room. The four-step process ensures that everyone has an opportunity to contribute. To do this, the team leader takes four sets of 3 × 5 in. cards of different colors—green, yellow, red and purple. First, hand each participant a green card and give them three minutes to write down their “good” ideas. After the allotted time, turn the cards over. Next, give them the yellow card, on which they will take three minutes to write down their “crazy” ideas. Repeat the process for the red card (“stupid” ideas) and the purple card (“funny” ideas). The thinking time per idea will be equal to three minutes divided by the number of ideas.
As seen in figure 3, this exercise demonstrates that the thinking time per idea (along with the extent of innovation) increases from “good” to “funny” ideas. Experience shows that so-called “good” ideas are captured without much thinking. Real innovation begins with the “crazy” ideas and maxes out with the “funny” ideas, which are the hardest to uncover.
Generating new and innovative ideas is fundamental to driving improvement. Having established a business model consisting of key processes, and mastered the technique to generate innovative ideas, top management can focus on driving improvement in every department. Focusing on improvement will create a more exciting environment, and lead to employee engagement and a forward-moving, growing organization. This can create new opportunities for employees by the use of additional resources gained through improvement initiatives such as lean or Six Sigma.
Once improvement becomes part of an organization’s culture, measurements can be established to monitor and sustain it. Usually the tendency is to establish financial measures for keeping top management informed and preventing the initiative from being dropped. However, direct measures of improvement will improve an initiative’s success rate as well as the organization’s bottom line. After talking to many Six Sigma professionals, I’ve noticed a reluctance to measure the corporate sigma level and a tendency to focus on financials instead. However, financials depend on many uncontrollable internal or external factors. If market conditions change, management strategy must also change, and financials could be affected regardless of the Six Sigma initiative. Thus, to monitor total progress, a corporation implementing Six Sigma must measure its sigma level at the process as well as corporate level unless the implementation is local or project-
specific. Similarly, for lean initiatives local measurements such as kanban, inventory levels and cycle time are necessary.
Measuring overall improvement can be done by monitoring the rate of improvement. Each department should be asked to improve quality, timeliness and cost at a certain rate. If the improvement isn’t realized as expected, appropriate action can be taken to sustain the improvement rate. To establish the right measurements, organizations must answer three questions:
1. What’s the purpose of the improvement initiative?
2. What’s the expected outcome of the improvement initiative?
3. What’s the measure of its adequacy and outcome?
Once the measurements are identified, the organization can decide how it will establish direct and indirect measurements. When measuring improvement, the organization mustn’t forget its fundamental business objective—which is to achieve sustained profitable growth.
Too often, a new management team will walk into a company, lay off 10 percent of the work force right away, shuffle the remaining people around, bring in its buddies and within a year leave the company worse than when it arrived. Companies that use cost-cutting alone to create profit will not last long. Leadership must drive change to grow the business profitably, and create opportunities for current and potential employees. Establishing the right measures of key processes for driving improvement is critical to achieving sustained profitable growth. Any corporate improvement initiative and related measures must demonstrate improvement to the overall culture as well as the bottom line.
Praveen Gupta has worked in the business performance improvement field since the 1980s. He founded Accelper Consulting in 1989 to provide training and consulting services to businesses. Accelper Consulting focuses on improving business performance through quality methods and new tools such as the 4P model for sustaining process excellence. Gupta, an ASQ Fellow and a Six Sigma Master Black Belt, is the author of Six Sigma Business Scorecard (McGraw-Hill, 2006), The Six Sigma Performance Handbook (McGraw-Hill, 2004), Business Innovation in the 21st Century (Accelper Consulting, 2007) and Stat-Free Six Sigma (Accelper Consulting, 2007).