Traditional performance measures need upgrading

As recession clouds gather on the horizon, chief executives are turning their backs on clever strategies to focus on the humdrum tasks of maintaining earnings and propping up share prices.

Suddenly, managing performance is back in fashion, which means digesting a decade or more of acquisitions, e-commerce and other new systems and ventures, so long-promised results are realised and the bottom line benefits. That, as the consultants who specialise in this field admit, is no more than managers are paid to do every working day. But their success is doubtful.

According to recent research by Bain, the consultancy, 90 per cent of management teams in the UK will never obtain the growth they forecast; internationally, 90 per cent of companies do not achieve what Bain considers to be profitable growth.

The Balanced Scorecard Collaborative, a US-based voluntary certification network, also believes that nine out of 10 companies (not the same ones, presumably) fail to execute their strategy - six of them do not even link their budgets to strategy.

The rise in popularity of the balanced scorecard (a comprehensive set of performance measures covering every aspect of the company's activity against which it can gauge its progress) indicates that chief executives are taking performance more seriously, encouraged, no doubt, by impatient and nervous investors.

"What I observe in industry is a much stronger focus on measurement," says Mr Alon Shlarek, head of the ASP consultancy, headquartered in Vienna. "Organisations are realising that traditional performance measures are not enough to run the company."

Alignment of targets, horizontally as well as vertically, is at the heart of the process, in the public sector as well as in the private. It is not too difficult to produce, for example, a set of financial targets that look convincing, but relating them at the same time to both hospital waiting lists and GPs' workload, say, or to customer satisfaction and volume growth, is where the trouble comes.

Mr Peter Bebb, head of business alignment in the Cedar software group and a specialist in the field, says: "All the organisations that I have ever seen have problems tying these (things) together."

The failure to resolve the conflicts at the outset means that teams and individuals are thrust into Catch 22 situations as they try to reconcile the irreconcilable - improving customer care while cutting the number of branches, increasing staff motivation, reducing response times and so on. The result, not surprisingly, is cynicism - with individuals setting priorities according to their individual preferences or advantage - along with poor performance.

The remedy can only begin with the chief executive. McKinsey gives the example of the response of the top team of one important client, when asked to list the company's 10 highest priorities. The five executives in the team produced a total of 23 priorities, only two of which appeared on every list. More than half appeared on only one list each.

Mr Richard Elder, the McKinsey principal who heads the consultancy's "performance ethic" practice in North America, advises top executives to stick to "a shortlist of measures that really capture the essence of the business". He puts the maximum at "a dozen", but other consultants say even that number is too high.

The main issue, however, is consistency. Mr Shlarek, at ASP, finds that "getting agreement on conflicting objectives is very hard" and he refuses to take on any project if the top executives fail to agree and to sign up to a set of overall strategic goals. To an entrepreneurial company, of course - as it twists to meet new challenges or slips in a cheeky bid for a rival - last week's objectives may be irrelevant and consistency a luxury. The appeal of performance management is, rather, to well established organisations where bureaucratic confusion is blocking the corporate arteries.

In these cases, what is needed, in the experience of Mr Bebb, "is a big culture change. Motivating people round a single set of goals is the most difficult management challenge."

But once they are motivated, improved performance flows not from blind cost-cutting but from their personal, direct engagement in the value-creation process.

"It encourages you to think clearly about what you can do to help and allows you to tailor improvement plans to local conditions," says Mr David Aplin, head of costing and systems at Parcelforce.

Carrying more than 140 million parcels a year, Parcelforce is part of Consignia's logistics and solutions business. Some four years ago, the group decided that the balanced scorecard was the way to move itself forward. But on its own, the scorecard is simply a statement that applies at the top level. Delivery throughout the organisation is another matter. For that to happen, says Mr Aplin, data, however prompt, are not enough: "What you need to know is: 'What does this mean?' and 'How can we improve on it?'"

You also need that information at the team and individual level. The Balanced Scorecard Collaborative finds that only 5 per cent of the average workforce understands corporate strategy - and Parcelforce has 13,000 employees in 93 depots in the UK. The depots all do very similar work. Better information and comparisons on, for example, costs per customer, or air versus surface transport, would reveal where the potential added value lay, while better communication with the teams in the depots would allow them to concentrate on developing it. "The trick," Mr Shlarek says, "is to make the strategic goals relevant to the individual" - in the consultant's jargon, to give him something he can own and commit to. That entails breaking the strategic goals down layer by layer so that managers and their teams know how their contributions fit with everyone else's and with the group's.

Key performance indicators are provided for each, whether for "soft" issues such as leadership development or harder ones such as net profit per transaction - everything, in fact, that contributes to performance.

Mr Elder, at McKinsey, adds the American perspective: "Successful companies have a base target and a stretch target and there has to be a consequence if you don't hit the base. You may be given another chance - it's up to the company - but if you fail again, you'll be asked to leave."

Disseminating the strategy and targets, and weekly or monthly achievement against them, demands a lot from IT systems, and it is no coincidence that a number of the consultancies working in this field are primarily software houses.

Cedar saw the difficulties its clients were having in realising the potential of their IT investments - too much data, too little information is a common complaint - and it bought Renaissance Solutions, a small US firm set up by Mr Robert Kaplan and Mr David Norton, the balanced scorecard pioneers. Parcelforce's adviser is Hyperion, based in California, a specialist in business analysis and the balanced scorecard.

The additional software is not that hard, says Mr Aplin. It is primarily designed to collate the company's existing information and present it in a way that is readily understood and used, where changes, comparisons and what-ifs can be made instantly. Whether the managers use it effectively is another matter.

As the consultants warn, the moment performance management turns into a system, the battle has been lost. But the evidence is that in the private as in the public sector, existing standards of goal achievement are so low that any improvement would be welcome.