In simplifying business, it can be argued there are two fundamentals all organizations follow:
- Doing the ‘right things’ (strategic intent).
- Doing ‘things right’ (operational effectiveness).
Each of these fundamentals is codependent. Being good at one and weak at the other, regardless of which, renders an organization marginal and challenged to sustain itself. For example, having a well-thought-out and developed strategy (doing the ‘right things’) is essentially meaningless if management is incapable of executing operationally. Alternatively, an organization with great operational execution may survive for extended periods but will languish in its growth potential without a great strategy.
My bias is operational effectiveness (doing ‘things right’), of the two primary fundamentals, is a critical skill companies must have before substantial growth overtakes them. Basically, be ‘great’ at what you do before trying to be ‘big’ at it! If a culture of ‘operational excellence’ does not pervade a company when it is small-to-medium-sized, it gets ever-more difficult to infuse into the fabric of a company as it grows and conflicting agendas take over.
So how does one define ‘operational effectiveness’? When is a company operationally effective and when is it not? Let‘s think even more profoundly and say, ‘what is performance’?
Is it achieving budgets? Perhaps. . . . But when we contemplate that budgets are just concepts and ideas, frequently developed more than twelve months in advance, and oftentimes highly influenced by external macro-economic factors, it’s difficult to accept that achieving or not achieving budgets by itself defines performance.
The same can be said for goals and objectives. Sometimes ‘stretch goals’ are missed, yet year-over-year corporate performance has improved. Without a means to recognize the improved performance, missed goals—and perhaps missed bonuses—will negatively affect personnel and corporate morale. If goals do not stretch personnel, they are easily hit and while morale may be good, corporate performance may not be. Both of these conditions are problematic.
Fundamentally, achieving or not achieving budgets, goals or objectives does not, by itself, indicate good or bad performance.
For me, ‘performance’ in its purest sense must be based on known factors—i.e. current performance vis-à-vis historical performance—and how they relate to each other going forward. How a company is performing on its Key Success Factors (KSFs), as they relate to past performance, is a true indicator of whether it has ‘operational effectiveness’ or not.
KSFs for each company will be different and, in fact, will change as a company evolves over time. At a given point in time, a company’s collection of KSFs could include elements such as:
- Liquidity items: cash reserves, managing working capital items such as inventories and receivables/payables.
- Debt coverage: ensuring EBITDA satisfies debt obligations.
- Product/service margins.
- Sales growth.
- Customer satisfaction factors.
In this example, each KSF defines an element of a company’s prevailing success. But operationally, one cannot ‘manage performance’ through KSFs. These measures, while critical indicators of a company’s achievement (or lack thereof), are aggregations of a multitude of performance factors. In other words, tracking a KSF does not provide the means to manage performance.
The same can be said for financial statements. While they are the ultimate report card all companies are measured upon, they also do not provide the means for managing performance. There are several reasons for this, but perhaps the greatest reason is they are many weeks post-performance—lag indicators—to be of significant value in driving performance. As a ‘report card,’ financial statements can only tell you how you did, not help you to do better.
At its very core, ‘Performance Management’ requires defining, tracking and acting upon the Key Performance Indicators (KPIs) that define ‘manageable performance;’ performance factors within the control of key personnel managing company results.
It is possible (probable in fact) that every KSF defined for a company requires tracking multiple KPIs to demonstrate if performance is trending as desired.
The essence of Performance Management is breaking ‘KSF performance’ down into its manageable parts (performance controllability), tracking those factors at least weekly and creating/executing action plans to ensure KPIs are trending favourably.
When tracked, reviewed and acted upon weekly (at management review meetings), KPIs provide ‘lead indicators’ that managers can respond to in a timely manner to correct performance. Where a performance factor is highly critical, for some period of time, daily tracking and review may be required.
Not all factors influencing a company’s performance are within the control of management, but may still be important factors in considering company performance. For example, in international sales, exchange rates (Fx) will be a significant influence. While management cannot affect the rate (other than with offsetting Futures’ contracts), tracking the Fx rate will offer deeper insight into a Sales Growth KSF. Such a factor is a ‘result indicator’ and, while not management-controllable, may be important to track and understand as it relates to KSF performance.
Does your company have a functioning ‘Performance Management’ system? Of course, this is vague question. Better yet, ask yourself these questions:
- Are you consistently able to predict what your financial statements will report when they’re produced?
- If you are tracking the correct KPIs (lead indicators) you are!
- Are you consistently improving on all the company’s most critical Key Success Factors?
- If you are tracking and acting upon the correct KPIs, you are!
So, do you have a functioning ‘Performance Management’ system?
David Fisher, MBA