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Balancing Performance Metrics: Establishing
Process and Results Measures
By Mark Henderson
Overview
Typically, organizations involved in creating new performance measurement
systems rely heavily on results-oriented measures. Often, however, measures
focused exclusively on results represent lagging indicators of performance
which afford limited predictive capability to management. Effective measurement
systems should encompass a blend of both results and process measures
so organizations can not only keep score and measure progress each day,
week, or month; but also so they can more reasonably predict what the
score will look like.
If we look at an automobile dashboard, we can easily draw a useful analogy
to make this distinction operational. For example, the odometer in the
car basically tracks results-how many miles the car has traveled during
any given trip. While this is clearly a useful measure to track, monitor,
and review regularly, it does not provide a complete measure of your car's
performance. If you chose to drive from Toronto to Vancouver, monitoring
only the odometer could certainly put the result of arriving at your destination
in question. Many other key processes which allow a car to make such a
trip must be tracked and monitored all along the way to ensure you reach
Vancouver.
For example, if your gas gauge is teetering on the brink of EMPTY,
you could reasonably predict you would be left stranded somewhere between
the two cities. Alternatively, if your oil pressure were low, you could
reasonably predict the result of arriving in Vancouver would be in jeopardy.
While your car's dashboard only has several key indicators, they are a
proper blend of process and results measures which allow you the comfort
of knowing that should something go wrong, you will be alerted. The dashboard
may not prompt you as to what specifically is wrong, but it will help
you and your mechanic work to find the root cause of the problem.
Balancing Results and Process Measures
Results measures generally reflect indicators which are strategic in nature.
In other words, results or outcome measures are reflective of the key
predictors of the company's performance and long-term health. Process
measures are slightly more tactical in nature and typically reflect a
predictive element of the results measures. Often a process measure has
a significant influence on, or is a major contributor toward, the ultimate
performance of a results measure. As in sports, knowing the score at the
end of game is useful but limited information. By tracking the key processes
which make up the game as it is played, you gain much better insight into
what timely actions are required to provide you the outcome you want when
the results are tallied.
Several concrete examples from organizations experienced in the development
of such measures are instructive. The organizations from which the following
examples are drawn have successfully implemented corporate-wide measurement
systems which track, monitor, and report on a series of indicators of
financial, operational, and quality performance. Each of these systems
contains a proper balance of results- and process-oriented measures.
The first set of examples comes from an organization which provides home
health care services in multiple locations across several states in the
southeastern region of the United States. For this organization, one of
the critical results measures in the financial area is Gross Revenue.
Gross Revenue is a fairly universal results measure most companies look
at each month. Yet, without a corresponding measure of the billing process
(among many other processes which impact revenue generation), it is difficult
to predict what the revenue number will look like each month. In this
example, the crucial process measure is something called Final Bills On
Hold. The operational definition of this measure is number of claims and
total dollar value of accounts placed on hold from remittance to the payer
(Medicare). This process measure not only highlights the performance of
the billing process (i.e., cycle time), but also several of the other
major processes involved in delivering patient care (i.e., Start of Care,
Clinical Documentation, and Discharge Processes) which allow appropriate
and accurate billing to take place. By tracking and reporting this measure,
reasonable prediction of the Gross Revenue results measure is made far
easier, the cause and effect correlation being very clear.
One other example from the Operational area will prove useful in highlighting
the interplay between results and process measures. In the home health
care business, Patient Census is clearly a results-oriented indicator.
It is operationally defined as the number of active patients at the end
of the month derived by taking the current month's beginning census, adding
all new admissions for the month, and then subtracting all discharges
which took place in the month. However, due to the reimbursement structure
of this particular industry, a measure called Utilization Rate is also
very important. This reflects the number of chargeable visits made in
a given month divided by the month-ending patient census. In essence,
this gives the number of visits made per patient per month. As mentioned,
the reimbursement structure of the industry incents companies to maximize
the number of clinically appropriate and legal visits (i.e., as ordered
and signed for by a physician) performed. Ineffective and inefficient
patient care processes lead to low Utilization Rates, thereby directly
impacting financial performance. In this instance, Utilization Rate serves
as an excellent indicator of performance for the patient care delivery
process. It is equally important to track this process measure along with
the results measure of Patient Census. Low Patient Census clearly limits
utilization potential so, by measuring both, the cause and effect linkages
are made evident.
If we shift gears to examine an international provider of transportation
and logistics services, we can see a similar pattern of balancing process
and results measures. Clearly, a key results-focused quality metric for
organizations is Customer Satisfaction. This company is no different from
most and thus has put in place a sophisticated set of methods for measuring
Customer Satisfaction using an index approach which provides detailed
data from a variety of perspectives (for example: by product, region,
specific service location). Yet they go one step further by knowing the
key processes and their attendant outputs which impact most significantly
the scores on the Customer Satisfaction index. One such process is the
pickup and delivery of international packages. This is a premium service
line which is very lucrative for the provider, while involving considerable
expense for shippers. It also involves substantial documentation requirements
to allow packages to move freely across borders in a timely and efficient
manner.
This organization knows a key driver and predictor of customer satisfaction
for those customers shipping internationally (potentially the most profitable
customers of all those they serve) is on-time delivery of their shipments.
Interestingly, the process measure they use to track this activity is
something called International Shipment Delays. It has been operationally
defined as the raw number of international shipments by service location
which could not be sent due to incomplete shipping documentation. They
track this indicator in this manner because they know from root cause
analysis that most, if not all, of these "held" packages could
be averted through a joint effort between themselves and their customers.
However, from the customer's point of view, the only people to blame when
their important (and expensive) shipment does not arrive at the right
destination at the right time are the people who picked the package up.
This critical pickup process, which includes securing all the necessary
documents needed for international transport, directly influences the
ultimate results measure of customer satisfaction. And, since they can
see this data by product/service line and service location, it is not
difficult for the spotlight to shine intensely when there are process
problems which impact satisfaction scores.
The final example originates from a major financial institution based
in Canada with operations around the world. One of the key operational
results measures they pay close attention to is Productivity and Cost
Management, defined for strategic purposes as Return Per Employee. In
other words, for every dollar (fully loaded to encompass all costs including
but not limited to salary and benefits) invested in an employee, is the
return greater than the one dollar invested? Basically, this organization
thinks about the equivalent of a Human Resources Balance Sheet, where
they want a better than average return on perhaps their most strategic
investment.
In terms of process metrics which directly impact this Productivity results
measure, they track variables such as cost, efficiency, speed, or cycle
time for transaction processing. Specifically, one key operational process
measure for this financial services company, which heavily influences
their overall Productivity outcome measure, is Transaction Cycle Time.
This is operationally defined as the amount of elapsed time it takes to
complete a series of routine or standardized financial transactions. Experienced,
well-trained employees obviously compress the throughput time on transaction
processing, thereby enhancing their return to the corporation. Similarly,
the organization clearly sees a direct cause and effect link between a
highly-trained, long-term employee and the ultimate performance of a key
result measure like Return Per Employee. Once again, the balance between
Process and Results measures provides a broader picture on the scoreboard,
allowing this organization to prudently select the right improvement initiatives
to achieve the measurable outcomes they require.
Measurement and Compensation Alignment
The purpose of aligning performance measurement and compensation systems
is to ensure the proper incentives are firmly in place to drive appropriate
quality and customer-oriented behavior. Other management systems (reward
and recognition, performance management, and internal communications all
come to mind) will also need tight linkages to the measurement system
so all available reinforcement levers work to shift the culture as required
toward a new standard of performance and competency. Typically, incentive
compensation serves as the best means for tying pay and measurable performance
together.
Usually an organization chooses three to five critical performance measures
and uses the improvement of these indicators over a set period of time
to align incentive compensation with. For example, if the strategic objective
was to grow revenue, one component of the incentive compensation scheme
could be tied to the percentage growth from some agreed-upon baseline
number. If the total compensation program consists of 80% base salary
and 20% incentive or variable compensation, the 20% can be divided either
equally or in a weighted fashion to accommodate measurement across the
three to five critical performance indicators. When the correct metrics
are chosen as the basis for incentive compensation, they exert significant
influence over behavior.
By altering the performance measures by which people are held accountable,
and tying incentive pay to improvement in these metrics, you will fundamentally
shift focus and attention. The incentives will drive change and improvement
into the organization. Managers will be forced to reexamine their approach
to day-to-day management. Their roles will, by definition, shift to become
more strategic in nature, pulling away from the fire-fighting around daily
routine operations. Instilling a sense of ownership will be a natural
outgrowth as managers and employees alike are incented to lead the business
forward, actively seeking ways to profitably change, grow and improve.
Their outlook becomes more strategic, no matter their function, as they
search for new sources of revenues or new products, or ways to contain
costs, improve quality, and enhance value to customers through superior
service.
Conclusion
There is a clear and obvious dynamic relationship between results measures
and process measures. Neither is sufficient on its own and any good measurement
system will seek to find an appropriate balance of both kinds of indicators.
Knowing what the score is at the end of the game is critical; knowing
how the score got that way is just as important. Process measures provide
a predictive capacity to let you know how the game is going and the opportunity
to intervene as necessary to adjust events in the direction you desire
them to go. Aligning incentive compensation to a carefully selected set
of balanced metrics simply adds compelling and persuasive influence for
everyone to do his or her part in ensuring victory.
Mark Henderson was previously Senior Vice President
with The CLEMMER Group, a North American network of organization,
team, and personal improvement consultants based in Ontario, Canada
www.clemmer.net.
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