Performance reporting brings out the best in people by creating information that can’t be ignored.
All too often, companies fail to notice or choose to ignore information that can reveal current or near-term realities for the organization. Performance reporting (benchmarking) is the process of defining the best systems, processes, procedures and practices in support of achieving sustained performance improvement.
Establishing key performance measures helps an organization highlight the cause-and-effect relationship between performance drivers and financial results (and/or strategic outcomes).
For example, in a service organization, having the correct key performance measures will help the organization’s people understand the connection between achieving greater levels of utilization (billable performance) and producing greater levels of gross profit.
For a manufacturer, identifying scrap as a key performance measure can help team members understand the relationship between lower levels of scrap and an improved gross profit and, ultimately, net earnings.
In a sales organization, selling success has a lot to do with establishing a selling success model. Such a model includes repeating certain sales related activities (success habits) that ultimately lead to increased productivity. Examples of key performance measures within a sales organization are the number of prospecting calls (or the amount of time spent prospecting), the number of appointments and demos, the size of the 30-, 60- and 90-day forecast, and closing ratios.
In every department within every organization there is a critical number. It’s the job of leadership to help the team identify those numbers — the key performance measures — throughout the organization.
Many organizations lack the understanding of how actions (or lack of actions) directly affect financial performance. People might know what has to be done to improve performance, but they often get complacent about that knowledge because they don’t understand the financial impact of their activities.
Once every department knows its critical numbers, the organization will be better able to act with an appropriate sense of urgency to identify and attack problems and obstacles and to seize opportunities.
Performance reporting serves as an education tool, teaching people the cause-and-effect relationship between their actions and the financial results of those actions. Creating increased performance visibility leads to improved operating performance.
Continual learning within an organization can be a key success factor for the company. The main purpose for having appropriate performance reporting is so that all members of an organization are better able to learn from each other about how best to run their respective piece of the business. Teams need to learn how their organizations make money and lose money on a department-by-department basis. It is management’s responsibility to ensure that every member of the organization knows the critical numbers.
Establishing key performance measures is nothing more than setting performance standards. It’s as simple as choosing a category to measure, picking a performance target and going after that performance target. Almost any target will do, as long as you can explain why it’s worth aiming for. Setting standards is a team effort and an ongoing process of refinement.
Key performance measures can be financial and/or operational and, ideally, should be forward-looking to help managers predict the company’s financial performance and spot the need for changes in operations.
When properly structured performance reports are used by the management team on a consistent basis, the information will begin to have a pivotal impact on how responsive the entire company will become in terms of identifying problems and opportunities, prioritizing them and attacking them with the appropriate sense of urgency.
Every business has bright people who are capable of improving the operating performance of their organizations. But without the consistent use of performance data, that intellectual capital will go underutilized.
Performance measures will give individuals and departments a highly refined view of their role in the company’s success. Consequently, owners and managers will see improved individual responsibility and accountability, which will support companywide performance excellence.
Creating a scorecard by department and by individual is important to help identify the metrics for evaluating the quality and effectiveness of an organization’s operating performance. To improve your ability to monitor operating performance more effectively, review the following steps.
Step 1: Ask each department head to identify his or her critical numbers — key performance measures.
Step 2: Establish performance benchmarks or standards for each key performance measure.
Step 3: Determine measurement frequency (daily, weekly, monthly and quarterly).
Step 4: Have each department head present his or her key performance measures to the management team and ensure you have team buy-in.
Step 5: Develop appropriate reporting systems.
Step 6: Begin the ongoing performance review/reconciliation process with all departments.
Step 7: Develop action plans for improving operating performance as performance variances occur.
Philip Mydlach is the owner of Mydlach Management Advisors in New Berlin. He can be reached at 262-785-5552 or pmydlach@aol.com.
