Mastering Performance Measurement Systems

In this article, firstly, we present performance measurement systems commonly used by project-oriented companies, such as consulting firms. Secondly, we analyze the shortcomings of the system in place. Finally, we suggest to implement a balanced scorecard to provide an integrated view of overall organizational performance and strategic objectives.

Commonly used Performance Measurement Systems

In project-oriented companies, although every project involves a similar set of process stages, each project is regarded as unique. Every project is considered as a prototype.

The success of a project depends on a number of factors such as project complexity, contractual arrangements. However, it is the project manager who is responsible for orchestrating the whole process. Its main tasks include goals setting, management and planning of the overall project.

Success from the management’s point of view is when the project is completed with the lowest possible cost as quickly as can be achieved, with the highest quality, with no accidents and so on. It means bringing each of project performance indicators (PPI) – such as cost, schedule, quality, safety, labour, and material consumption, etc. – to an optimum. To do so, the project manager has to implement a performance measurement system to control the key performance indicators (KPIs) defined for the project.

The performance measurement systems can perform multiple roles:

• Communicate the company’s strategic objectives

• Motivate employees to help the company achieve its strategic objectives

• Evaluate the performance of managers, employees and operating units

• Help managers allocate resources to the most productive and profitable opportunities

• Provide feedback on whether the company is making progress in improving processes and meeting the customers and shareholders’ expectations

It is clear that different measures are needed in different levels of organization. There should be information available for strategic management purposes at corporate level and information for operational management at the project level.

Mostly, the measures can be focused on three levels:

• Corporate level: the company analyzes the general environment and its own performance.

• Projects level: the company measures the individual projects’ performances.

• Stakeholders’ level: the company analyzes the subcontractors and material suppliers’ performances (i.e. logistic, quality, cost, etc.).

Performance Measurement Systems – Corporate level

Companies use different key performance indicators (KPI) on corporate level to measure the overall state of the business. The KPIs are used as leading indicators, which give opportunity to change and take appropriate corrective action before the situation has gone out of control.

The companies’ KPIs can be classified into two categories: financial and non-financial indicators. The financial indicators are mainly: sales revenues, EBITDA, order book and return on investment (ROI). The non-financial indicators are: customers satisfaction, billable hours, training, supply chain relationship, safety, etc.

These KPIs help a company to benchmark itself against the local and global performances of their industry peers and to identify areas for improvement. Moreover, the KPIs are closely related to the objectives of the company. Accordingly to the performance achieved, these objectives must be regularly reviewed by the Board of Directors and the Executives and Strategic Committee.

These financial and non-financial KPIs are used by companies to analyze their general environment and their own performance which allow to set their objectives.

With the emergence few decades ago of the human resources, most companies have developed a “Competency Banding” that aims to be innovative integrated job grading system that guarantees a transparent working method, clear information and direct communication between the company and its employees.

The job grading model identifies all jobs covered inside the company. Each of these jobs is defined by key competencies indicators and job features, which allow to creating job families. For each function within the job families a role description is defined. Each employee then receive a personalized “Competency Banding” communication package containing its own role description. In this way all employees have a clear idea of their current jobs and the career paths open to them.

This “Competency Banding” system may be linked directly to the employees’ incentive compensation system. For example, employees’ yearly bonus could be based on:

• Individual Bonus based on the outputs of employee performance tied to the “Competency Banding” of the employee.

• Collective Bonus rewards all employees depending on the results of EBITDA and of new orders signed (amount of signed and ordered projects (new contracts) during the period) in comparison with the objectives fixed by the Board of Directors at the beginning of the period.

Performance Measurement Systems – Project level

In the project level, most of companies use five project performance categories related to cost, time, quality, customer satisfaction, and supply chain relationships.

• Cost: project cost performance is used to show how well the project adheres to the agreed budget. The cost control is mainly associated to: interim payments, variation orders, cost and prolongation claims and financial account forecasts.

• Time: time monitoring seeks to assess how well the project adheres to the planned schedule over a period of time. The main indicators for the planning department are: achievement of critical dates, achievement of milestones and the turnaround time for submission in the period.

• Quality: helps to ensure that the project will achieve the quality standard set out in the contract. The main indicators for QA/QC department are: number of non-conformance report (NCR), works rejection rates.

• Customer satisfaction: surveys will be conducted at the end of each project. The customer will answer several questions, relevant to the project and the consultant’s role within the project.

• Supply chain relationships: As with the customer satisfaction KPI, a survey will be conducted to see how the company strengthen its relationships.

 The project KPI system allows the project manager to compare the actual with the targeted results (project objectives). The system identified areas where the performance is failing, allowing trouble areas to be addressed promptly. The system allows tailor-making to suit the individual needs of the project. Nevertheless, data collected have to be accurate and reliable, otherwise the project manager will analyse incorrect information and could jeopardize the project by taking wrong decisions.

Performance Measurement Systems – Shortcomings

Performance measures are used to measure and improve the efficiency and the quality of the business processes, and identify opportunities for progressive improvements in process performance.

However, it has been recognised that many project-oriented companies have problems in their structure particularly with fragmentation that has inhibited performance. Moreover, those companies to-date rely on traditional performance measures such as profitability, return on investment and so on. Their performance measurement system focus mainly on financial measures and companies’ decision-makers set the objectives based on this information without taking into account other key indicators.

Few project performance measure categories were identified as critical for project-oriented companies: people, cost, time, quality, health and safety, environment, client satisfaction and communication. Two of them are often forgotten in companies’ KPIs:

• People: overview of how project members feel about the project performance with respect to time, cost, quality, health and safety, etc. over a period of time.

• Communication: to assess the effectiveness of communication among project participants.

Other measures of performance which relate to the process itself are sometimes neglected as well. The process management paradigm, according to which companies should focus on and be organized around a number of core business processes, has been recognized to provide significant advantages in terms of improved organizational performance. As we know, process view is one of the key elements in logistics and supply chain management. Every project can be seen as an order-delivery process where all the parties along the supply chain are involved.

Therefore, companies by implementing key performance indicators related to their processes will be able to become cost-effective and, as result, will maximise the profitability of the project.

Finally, the data collection and analyses are critical to get accurate measurement. If done manually, data collection gives low-quality data and is error prone. Since few years, many Web-based systems have been created to automate project performance control and to allow the project managers to measure the actual performance in real time. More importantly, the use of these systems enable the project managers to compare and present data in user-friendly (graphs and curves).

In the aim to reduce the shortcomings of the Performance Measurement Systems, we recommend to companies to implement a Balanced Scorecard (BSC) that has proven a powerful tool for strategic planning and communicating strategy.

Balanced Scorecard

Kaplan and Norton developed the BSC which aims at providing “a framework that translates strategy into action”. The balanced scorecard measures organizational performance across four different but linked perspectives that are derived from the organization’s vision, strategy and objectives.

• Financial: it contains objectives and measures that represent the success for profit maximizing for increasing the shareholder value.

• Customer: it describes how company intends to differentiate itself from competitors to attract, retain, and deepen relationships with targeted customers. It should contain the customer value proposition. Success in the customer perspective should lead to improvement in the financial perspective objectives for growth in revenues and profits.

• Process: it produces and delivers the value proposition for customers and it achieves the productivity improvements for the financial objectives.

• Learning and growth: it identifies the objectives for the people, systems, and organizational alignment that create long term growth and improvement.

The BSC underlines the cause-effect relationships throughout every part of the organization. According to Kaplan and Norton, BSC tells us the knowledge, skills and systems that employees will need (learning and growth) to innovate and build the right strategic capabilities and efficiencies (process) that deliver specific value to the market (customer) which will eventually lead to higher shareholder value (financial).

Companies should implement a BSC across all their organizational levels to improve their performance measurement system. However, the concept of introducing a BSC in an organization is a challenging endeavour that constitutes a significant change initiative.

To implement a BSC, companies should follow the seven steps below:

• Communicate and align the organization around a clear and concise strategy

• Determine the major strategic areas for getting the organization focused on those things the organization can actually do

• Build a strategic grid for each major strategic area

• Establish measurements

• Set targets for each measurement

• Launch programs

• Construct a coherent management system

A knowledge-based system (KBS) – an interactive software-based system designed to help decision makers – associated to the BSC will allow companies to collect, monitor, compare and analyze data in real-time with user-friendly interface.

Conclusion

Balanced Scorecard is a powerful tool that could be applied to the three levels (corporate, projects, stakeholders) of project-oriented companies. Moreover, if the BSC is combined with either a knowledge-based system or a Web-based system, companies will clearly identify the cause-effect relationships  in real-time and could therefore evaluate if the project is effective and resolve the problems identified.

Article written by Tristan Van Iersel

For more information on Balanced Scorecard, you may read: R.S. Kaplan & D.P. Norton (2008), Mastering the management system, Harvard Business Review, January 2008.