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Measuring Operational Performance

What gets measured, gets done. You know the saying. Business measurements should be quantifiable, precise and reliable, easy to calculate collect and understand. They are the expression of health or vitality of an activity or process, ant there are countless ways to measure performance using technology, keep enthusiasm in check and focus on the most meaningful.  

Performance measures express the priorities of an organization and provide practical guidance for the work that the organization does and  sales goals are a classic example (beat last year’s sales goals) that convey the expected behavior to the organization and that determines also rewards and corrective measures if needed.

There are more complicated tools, and we are going to discuss one, but all operational performance measurements need to answer the following questions:

  • What is the organization trying to accomplish?
  • What outcomes is the organization seeking?
  • What behaviors does the organization need from employees to achieve them?

A warning. Too often companies fall into the trap of measuring things that their competitors measure, or whatever external advisors think they should measure, and too often companies try to measure more than they actually need gathering lots of useless data. So, measure, but don’t make this a purpose.

One great tool, that offers a more complex view on the operational performance is the balanced scorecard proposed Robert Kaplan and David Norton and that incorporates  4 dimensions of financial and non-financial metrics:

  • financial performance,
  • customer assessment,
  • internal business process, and
  • learning and growth.

There are many ways to measure financial performance, and in the myriad of indicators many can be chosen if they fit the needs of a company: profit margin and operating margin, return on assets (ROA) and return on equity (ROE), revenues, revenue growth, gross profit and earnings, cash position, debt and leverage, or operating cashflow and leveraged free cash flow. Just some examples.

Revenue/inventory, sales/employee or share price can also tell a lot about the operational performance, but the customer is key and measuring customer satisfaction remains the most common measurement tool and in the expectancy – disconfirmation paradigm customer satisfaction is a result of the degree to which customer expectations are confirmed or disconfirmed by experiences. So, perceived performance is the key here.

Loyal customers know and like your company, products and services, tend to be resistant to their counterclaims of competitors, are willing to be early adopters of new product and services and offer positive word-of-mouth endorsements. You should therefore know where and who they are. For this you can use a basic customer survey or a more complicated Net promoter score (NPS).

By simply asking the question “How likely is it that you would recommend our company to a friend or colleague?” and using a scale from 0 to 10 you have these respondent categories:

  • 0 – 6: detractors – disgruntled customers or former customers,
  • 7 – 8: passives – satisfied customers yet susceptible to being swayed,
  • 9 – 10: promoters – highly loyal customers.

You can also measure customer loyalty and this is best measured through actions rather than sentiments. You should therefore count the percentage  of repeat customers this being the most relevant but also cost of poor quality (CQPQ), the lost revenue from returned or canceled orders which might be relevant alongside the lifetime customer value.

The effectiveness of the internal business processes can be measured by using two main indicators:

  • productivity – which is simply the yield of a process, if a process generates a lot of output is productive and therefore useful;
  • efficiency – you can measure the output given some level input, eg. it would be great to generate the same output with less input.

But measuring is not enough, and lean and six sigma which focus on waste elimination and variation reduction can help in improving operational performance. There are seven forms of waste: transportation, inventory, motion, over-production, over-processing and defects.

Measure and eliminate waste and you improve performance. Toyota does it well. For this you can use also the five phases of a six sigma project: define, measure, analyze, improve and control.

The learning and growth perspective focuses on the knowledge and the capabilities of the people that compose the business, the least developed aspect of the balance scorecard framework.

These measurements can be recruitment metrics: recruitment yield ratio, average time to fill job vacancies, cost per hire, employee turnover rate, retention metrics: voluntary and involuntary termination rates, average tenure and development metrics: training costs per employee, hours of training, employee assessments of satisfaction, advancement opportunities.

But, safety is the foundation for learning and growth, freedom for physical harm is the first step, and other forms of safety relevant. Safety metrics can therefore be the days without a lost time accident, the reportable incidents, or near misses.

And, lastly let’s not forget morale, the general attitude of team members. Are they motivated and ready to serve? All the distinct perspectives of the balanced scorecard dimensions interact a great deal, financial and non-financial in an equilibrium.

So, the tools to measure operational performance and there and using them as needed will help us achieve our goals. Just know them, and remember they are tools not goals.