Performance Measurement and Strategic Information Management Chapter 8 Performance Measurement and Strategic Information Management MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea A supply of consistent, accurate, and timely data across all functional areas of business provides real-time information for the evaluation, control, and improvement of processes, products, and services to meet both business objectives and rapidly changing customer needs. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Information Management If you don’t measure results, you can’t tell success from failure If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure If you can’t recognize failure, you can’t correct it MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Process Flow Information Analysis Data Measures and Indicators MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Use of Information and Analysis Validation Prediction Customer Requirements Measurements Control Processes Results Design Measurement supports executive performance review and daily operations and decision making. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Measurement-managed companies are more likely to be in the top third of their industry financially, complete organizational changes more successfully, reach clear agreement on strategy among senior managers, enjoy favorable levels of cooperation and teamwork among management, undertake greater self-monitoring of performance by employees, and have a greater willingness by employees to take risks. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Benefits of Information Management Understand customers and customer satisfaction Provide feedback to workers Establish a basis for reward/recognition Assess progress and the need for corrective action Reduce costs through better planning MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Leading Practices (1 of 2) Develop a set of performance indicators that reflect customer requirements and key business drivers Use comparative information and data to improve overall performance and competitive position Continually refine information sources and their uses within the organization Use sound analytical methods to conduct analyses and use the results to support strategic planning and daily decision making MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Leading Practices (2 of 2) Involve everyone in measurement activities and ensure that information is widely visible Ensure that data are accurate, reliable, timely, secure, and confidential Ensure that hardware and software systems are reliable and user-friendly Systematically manage organizational knowledge and identify and share best practices MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea To make decisions that further the overall organizational goals of meeting, or exceeding, customer expectations and making productive use of limited resources, companies need good data and information about customers and markets, human resource effectiveness, supplier performance, product and service quality, and other key factors, in addition to traditional financial performance and accounting measures. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Balanced Scorecard Financial perspective Internal perspective Measures the ultimate results that the business provides to its shareholders. They include profitability, revenue growth, return on investment, economic value added (EVA), and shareholder value. Internal perspective Focuses attention on the performance of the key internal processes that drive the business. They include such measures as quality levels, productivity, cycle time, and cost. Customer perspective Focuses on customer needs and satisfaction as well as market share. This includes service levels, satisfaction ratings, and repeat business. Innovation and learning perspective Directs attention to the basis of a future success—the organization’s people and infrastructure. Key measures might include intellectual assets, employee satisfaction, market innovation, and skills development. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea A good balanced scorecard contains both leading and lagging measures and indicators. Lagging measures (outcomes) tell what has happened; leading measures (performance drivers) predict what will happen. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Baldrige Classification of Performance Measures Customer-focused outcomes Product and service outcomes Financial and market outcomes Human resource outcomes Organizational effectiveness outcomes Governance and social responsibility outcomes MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Customer Measures Customer satisfaction and dissatisfaction Customer retention Gains and losses of customers and customer accounts Customer complaints and warranty claims. Perceived value, loyalty, positive referral, and customer relationship building MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Product and Service Measures Internal quality measurements Field performance of products Defect levels Response times Data collected from customers or third parties on ease of use or other attributes Customer surveys on product and service performance MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Financial and Market Measures Revenue Return on equity Return on investment Operating profit Pretax profit margin Asset utilization Earnings per share MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Human Resource Measures Employee satisfaction Training and development Work system performance and effectiveness Safety Absenteeism Turnover MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Organizational Effectiveness Measures Cycle times Production flexibility Lead times and setup times Time to market Product/process yields Delivery performance Cost efficiency Productivity MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Governance and Social Responsibility Measures Organizational accountability Stakeholder trust Ethical behavior Regulatory/legal compliance Financial and ethics review results Community service Management stock purchase activity MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Organizations need comparative data, such as industry averages, best competitor performance, and world-class benchmarks to gain an accurate assessment of performance and know where they stand relative to competitors and best practices. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Purposes of Performance Measurement Systems Providing direction and support for continuous improvement Identifying trends and progress Facilitating understanding of cause-and-effect relationships Allowing performance comparison to benchmarks Providing a perspective of the past, present, and future MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea In designing a performance measurement system, organizations must consider how the measures will support senior executive performance review and organizational planning to address the overall health of the organization, and how the measures will support daily operations and decision making. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Practical Guidelines Fewer is better. Link to the key business drivers. Include a mix of past, present, and future Address the needs of all stakeholders. Start at the top and flow down to all levels of employees Combine multiple indexes into a single index Change as the environment and strategy changes Have research-based targets or goals MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Linkages to Strategy Measures and indicators Key business drivers (key success factors) Strategies and action plans Measures and indicators MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea The things an organization needs to do well to accomplish its vision are often called key business drivers or key success factors. They represent things that separate an organization from its competition and define strengths to exploit or weaknesses to correct. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Process-Level Measurements Does the measurement support our mission? Will the measurement be used to manage change? Is it important to our customers? Is it effective in measuring performance? Is it effective in forecasting results? Is it easy to understand and simple? Are the data easy/cost-efficient to collect? Does the measurement have validity, integrity, and timeliness? Does the measure have an owner? MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Good measures and indicators are actionable; that is, they provide the basis for decisions at the level at which they are applied. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Common Process Quality Measures Nonconformities (defects) per unit Errors per opportunity Dpmo – defects per million opportunities MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Creating Effective Performance Measures Identify all customers and their requirements and expectations Define work processes Define value-adding activities and process outputs Develop measures for each key process Evaluate measures for their usefulness MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Analyzing and Using Data Analysis – an examination of facts and data to provide a basis for effective decisions. Examples Examining trends and changes in key performance indicators Making comparisons relative to other business units, competitor performance, or best-in-class benchmarks Calculating means, standard deviations, and other statistical measures Seeking to understand relationships among different performance indicators using sophisticated statistical tools such as correlation and regression analysis MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Organizations need a process for transforming data, usually in some integrated fashion, into information that top management can understand and work with. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Interlinking Quantitative modeling of cause-and-effect relationships between external and internal performance measures Facilitated by data mining – the process of of searching large databases to find hidden patterns in data, using analytical approaches and technologies such as cluster analysis, neural networks, and fuzzy logic MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

The Cost of Quality (COQ) COQ – the cost of avoiding poor quality, or incurred as a result of poor quality Translates defects, errors, etc. into the “language of management” – $$$ Provides a basis for identifying improvement opportunities and success of improvement programs MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Quality Cost Classification Prevention Appraisal Internal failure External failure MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea In manufacturing, quality costs are primarily product-oriented; for services, however, they are generally labor-dependent, with labor often accounting for up to 75 percent of total costs. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Quality Cost Management Tools Cost indexes Pareto analysis Sampling and work measurement Activity-based costing MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Return on Quality (ROQ) ROQ – measure of revenue gains against costs associated with quality efforts Principles Quality is an investment Quality efforts must be made financially accountable It is possible to spend too much on quality Not all quality expenditures are equally valid MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Data used for planning and decision making need to be reliable, accurate, secure, and accessible to those who need them. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Managing Data and Information Data Reliability – How well does an indicator consistently measure the “true value” of the characteristic? Data Accessibility – Do the right people have access to the data? MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea In many companies, business information is only accessible to top managers and others on a need-to-know basis. In high-performing companies, business information is accessible to everyone. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Knowledge Management The process of identifying, capturing, organizing, and using knowledge assets to create and sustain competitive advantage Explicit knowledge includes information stored in documents or other forms of media. Tacit knowledge is information that is formed around intangible factors resulting from an individual’s experience, and is personal and content-specific. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Key Idea Knowledge assets refer to the accumulated intellectual resources that an organization possesses, including information, ideas, learning, understanding, memory, insights, cognitive and technical skills, and capabilities. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Internal Benchmarking The ability to identify and transfer best practices within the organization Process: Identify and collect internal knowledge and best practices Share and understand those practices Adapt and apply them to new situations and bringing them up to best-practice performance levels. MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing

Measurement and Information Management in the Baldrige Award Criteria The Measurement, Analysis, and Knowledge Management Category examines an organization’s information management and performance measurement systems and how the organization analyzes performance data and information. 4.1 Measurement, Analysis, and Review of Organizational Performance a. Performance Measurement b. Performance Analysis and Review 4.2 Information and Knowledge Management a. Data and Information Availability b. Organizational Knowledge Management c. Data, Information, and Knowledge Quality MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing