It's a classic business dilemma: Rapidly growing revenue with steeply declining margins. Not too long ago, supply chain and logistics management firm D.W. Morgan Company faced just this quandary. Company leaders sought to accelerate growth "even in the economic downturn" explains Grant Opperman, president and chief strategy officer. Interestingly, the organization achieved that goal through the development and application of better metrics.
D.W. Morgan worked with Lisa W. Hershman, chief executive officer of Hammer and Company and co-author with Michael Hammer of Faster, Cheaper, Better. Hershman is an expert on the science of how work actually gets done and how to transform a business by improving its operations. The lessons she taught D.W. Morgan about how the right metrics shape behavior are far-reaching and can be applied at any business.
Hershman and Hammer cite seven deadly sins of performance measurement. They are described here.
- Vanity is the sin of using measures whose sole purpose is to make the organization, its people, and especially its managers look good. It's human nature to gravitate toward metrics you can score well on and away from those that will be more challenging. This is especially true in a marketplace where bonuses and other rewards typically are tied to performance measures. Take, for example, a metals refiner that used yield--the percentage of raw material successfully turned into saleable product--as a key performance metric. Everyone at this business was pleased that yield consistently was over 95 percent. However, an executive new to the company observed that this figure glossed over the differences between high-grade and low-grade product. When the company started to measure the yield of high-grade product, employees discovered it to be closer to 70 percent. That insight did not generate a lot of enthusiasm; however, it is a much more meaningful representation of performance.
- Provincialism is the sin of allowing organizational boundaries and concerns to dictate performance metrics. On the surface, it may seem natural for a functional department to be measured on its own performance. After all, that's what its managers can control. In reality, however, measuring too narrowly inevitably leads to suboptimization and conflict.
- Narcissism is the sin of measuring from the company's point of view, rather than from the customer's. One retailer measured its distribution organization on how well the goods in the stores matched the stock-on-hand levels specified in the merchandising plan. There was 98 percent availability when measured in this manner. But when executives finally thought to measure to what extent the goods in the stores matched what customers actually wanted to buy, the figure was only 86 percent. Another retailer measured goods in stock as whether the goods had arrived in the store; eventually the company realized that simply being in the store did the customer no good if the product wasn't on the shelf.
- Laziness is the sin of assuming you know what is important to measure without adequate research and consideration. Decision makers must go through the effort of ascertaining what is truly important and not rely on blind assumptions.
- Pettiness is the sin of measuring only a small part of what matters. For instance, a telecommunications systems vendor rejected a proposal to have customers perform their own repairs because that would require putting spare parts at customer premises. This would, in turn, drive up spare parts inventory levels--a key metric for the company. However, the broader and more meaningful metric was total cost of maintenance. The increase in spare parts inventory would have been more than offset by a reduction in labor costs achieved by the new approach.
- Inanity is the sin of implementing metrics without giving thought to their consequences on human behavior. People will seek to improve a metric they are told is important, especially if they are compensated for the improvement. In one example, a regional fast-food chain defined chicken that had been cooked but unsold at the end of the day as waste. Restaurant managers were told to drive out this waste, so they began only cooking chicken once it had been ordered. Thus a fast-food restaurant became a slow-food restaurant.
- Frivolity is the sin of not taking measurement seriously. The symptoms are easy to see: arguing about metrics, finding excuses for poor performance instead of tracking root causes, and looking for ways to blame others rather than shouldering the responsibility for improving performance. A company committing this sin will find itself unable to use its metrics to drive improvements in operations, which is the key to improved enterprise performance.
Fortunately for D.W. Morgan, company leaders have developed a precise definition of perfect shipments and defined goals for achieving them. They also have established a quarterly bonus incentive program shared equally among all employees based on the perfect shipment metric. "The lessons we learned from Hammer and Hershman are truly working for us," Opperman says. The results of the transformation were clear and definitive. One year after installing the new metrics, 85 percent of the shipments met the perfect standard, revenue grew by more than 40 percent, margins increased by 10 percent, and both customer and employee satisfaction increased. Elizabeth Rennie is managing editor for
APICS magazine. She may be contacted at email@example.com.