Key Performance Indicators for Government and Non Profit Agencies: Implementing Winning KPIs

PART I

Setting the Scene

CHAPTER 1

Background

Iam often asked Are KPIs as relevant for government and non profit agencies as they obviously are for the private sector? My answer is always an unequivocal yes. I would even go on to say that KPIs could have a more profound impact in government and non profit agencies as resources are scarcer and staff can easily be diverted away from what is important by the politics inherent in such institutions.

Are Agencies Really Non Profit Agencies?

I was asked by a member of my golf club not to refer to government and non profit agencies as not-for-profit or non profit agencies because it sent the wrong message. It certainly does. These agencies delivering services around the world are running their organization utilizing all the best management practices they can muster.

A surplus or profit should never be considered wrong in these entities as surpluses are an essential part of an agency's longevity. These surpluses or profits are required for:

Funding years when uncertain revenue will be less than necessary.

Reinvesting in fixed assets because depreciation will never be enough to fund replacement assets.

Funding of new initiatives that will make a breakthrough in performance management, which will lead to further efficiencies.

Thus, for all those working in government and non profit agencies, no offense is meant by the title of this book. Bear in mind that we had to pick a title that was brief and commonly understood.

Measurement in Government and Non Profit Agencies

For measurement to work in government and non profit agencies, there has to be a radical change in the way performance management and measurement is approached and addressed.

Without tackling the common flaws in performance measurement, without a sound understanding of the great management thinkers of the last 60 years, and without a sound grip of the performance management foundation stones, key performance indicators (KPIs) will simply flounder. Hence, I have decided to discuss these three issues before I venture into the detail of KPIs and how they can make a difference to the operations of government and non profit agencies.

Government and non profit agencies were among the first to embrace the balanced scorecard. Part of the reason for this, I believe, is that management in these two sectors keep abreast with current trends more than their counterparts in the private sector. They are, thus, more aware of the changes in business thinking.

Measurement is just as important in government and non profit agencies, as the scarcity of both people and financing means any wastage is more acute. In addition, the impact of better alignment to the organization's strategy and critical success factors will benefit many.

Unintended Behavior: The Dark Side of Measures

Measurement initiatives are often cobbled together without the knowledge of the organization's critical success factors and without an understanding of the behavioral consequences of a measure. As is mentioned in Chapter 2, it is a myth of performance measurement that most measures lead to better performance.

Every performance measure has a dark side, a negative consequence. The key is to understand it. Well over half the measures in an organization may be encouraging unintended behavior. This book will repeatedly drive home the importance of understanding this dark side and selecting fewer measures, as well as selecting those with a minimal negative consequence.

How performance measures can go wrong can be illustrated by two examples.

Example: City Train Service

A classic example is provided by a city train service that had an on-time measure with some draconian penalties targeted at the train drivers. The train drivers who were behind schedule learned simply to stop at the top end of each station, triggering the green light at the other end of the platform, and then to continue the journey without the delay of letting passengers on or off. After a few stations, a driver was back on time, but the customers, both on the train and on the platform, were not so happy.

Management needed to realize that late trains are not caused by train drivers, just as late planes are not caused by pilots. The only way these skilled people would cause a problem would be either arriving late for work or taking an extended lunch when they are meant to be on duty. Management should have been focusing on controllable events that led to late trains, such as the timeliness of investigating signal faults reported by drivers, preventative maintenance on critical equipment that is running behind schedule, and so on.

Example: Accident and Emergency Department

Managers at a hospital in the United Kingdom were concerned about the time it was taking to treat patients in the accident and emergency department. They decided to measure the time from patient registration to being seen by a house doctor. Staff realized that they could not stop patients registering with minor sports injuries but they could delay the registration of patients in ambulances as they were receiving good care from the paramedics.

The nursing staff thus began asking the paramedics to leave their patients in the ambulance until a house doctor was ready to see them, thus improving the average time it took to treat patients. Each day there would be a parking lot full of ambulances and some circling the hospital. This created a major problem for the ambulance service, which was unable to deliver an efficient emergency service.

Management should have been focusing on the timeliness of treatment of critical patients, and, thus, they only needed to measure the time from registration to consultation of these critical patients. Nurses would have thus treated patients in ambulances as a priority, the very thing they were doing before the measure came into being.

To avoid putting in a measure that will not work you need to:

Set up a trained team who approve all measures. This team should be trained in all aspects of performance management and measurement that is discussed in this book and in others such as Dean Spitzer's Transforming Performance Measurement.¹ If you want chaos, allow teams and managers to invent their own measures. In that case, you may as well close this book now as it will make little impact.

Ensure that you are measuring something that matters. The key here is to understand the critical success factors. In the hospital situation, it was the treatment of critical patients, hence we measure the timely treatment of these patients. In the train example, the critical success factor was the timely maintenance and timely rectification of signal failures. The measures that would assist with timely trains would include:

Signal failures not rectified within xx minutes of being reported. These failures should be reported promptly to the CEO, who will make the phone call to the appropriate manager (receiving these calls on a regular basis would be career-limiting).

Planned maintenance that has not been implemented should be reported to the senior management team on a weekly basis, keeping the focus on completion.

Consult with staff so that you have some idea of the possible unintended consequences of the measure. You have to ask staff If we measure xxxx, what action will you take?

Pilot the performance measure to enhance its chance of success. Putting measures in without this piloting is simply being naive.

There needs to be a new approach to measurement—one that is done by staff who have been suitably trained, an approach that is consultative, promotes partnership between staff and management, and finally achieves behavioral alignment to the organization's critical success factors and strategic direction.

Balanced Scorecards within Government and Non Profit Agencies

The groundbreaking work of Kaplan and Norton² brought to management's attention the fact that performance needed to be measured in a more holistic way. Kaplan and Norton suggested four perspectives in which to review performance: financial, customer, internal process, and learning and growth.

Right from the start, the government and non profit agencies were quick to see the benefits of a balanced-scorecard approach, and many initiated projects. Unfortunately many of these initiatives have failed for reasons set out in Chapter 2, Myths of Performance Measurement. It is my fervent hope that this book will kick-start the enthusiasm to restart, reinvigorate, or start for the first time reporting performance in a balanced way.

Checklist: Where Are You in Your Journey with Performance Measures?

The checklist in Exhibit 1.1 is designed to assess your progress with performance measures.

EXHIBIT 1.1 Assessing Your Progress with Performance Measures Checklist

Major Benefits of Performance Measures

The major benefits of performance measures can be grouped and discussed under these three headings:

The alignment and linking daily actions to the critical success factors of the organization.

Improving performance.

Creating wider ownership, empowerment, and fulfillment.

Alignment and Linking Daily Actions to the Critical Success Factors of the Organization

As Exhibit 1.2 shows, even though an organization has a strategy, teams are often working in directions very different from the intended course.

EXHIBIT 1.2 Discord with Strategy

Source: David Parmenter, Winning CFOs: Implementing and Applying Better Practices, Copyright © 2011 by David Parmenter. Reprinted with permission of John Wiley & Sons, Inc.

Performance measures should have been carefully developed from the organization's critical success factors. The critical success factors will help staff align their daily activities with the organization's critical success factors as shown in Exhibit 1.3. This behavioral alignment is often the missing link between good and great organizations.

EXHIBIT 1.3 Alignment with Strategy

Source: David Parmenter, Winning CFOs: Implementing and Applying Better Practices, Copyright © 2011 by David Parmenter. Reprinted with permission of John Wiley & Sons, Inc.

EXHIBIT 1.4 Linkage of KPIs to Strategic Objectives

Source: David Parmenter, Key Performance Indicators: Developing, Implementing, and Using Winning KPIs, 2nd ed. Copyright © 2010 by David Parmenter. Reprinted with permission of John Wiley & Sons, Inc.

In his book, Transforming Performance Measurement,³ Spitzer points out that one of the most important roles of management is to communicate expectations to the workforce. He goes on to say people will do what management inspects (measures), not necessarily what management expects. Thus, we need to put in place the right measures.

KPIs are the only things that truly link day-to-day performance in the workplace to the organization's strategic objectives. Some people think that because the annual planning process comes from a medium-term view (called the development plan in Exhibit 1.4), which in turn is linked to the strategic plan, strategy is linked to day-to-day activities. It looks good on paper but never works in practice. Strategy is broad and wide ranging, whereas the annual-planning process is a dysfunctional silo-based process.

Improving Performance

Performance measures can and should have a profound impact on performance. Measurement:

Tends to make things happen, it helps people see progress and motivates action.

Increases visibility of a more balanced performance and focuses attention on what matters.

Increases objectivity—Spitzer points out that staff actually like measuring and even like being measured, but they do not like being judged subjectively.

Improves your understanding, your decision making, and execution— Spitzer points out that you will not be able to consistently execute well without measurement. Measurement can improve your business intuition and significantly increase your decision-making batting average.

Improves consistency of performance—Spitzer points out that outstanding success is about consistent success over the long term.

Facilitates feedback on how things are going, thereby providing early warning signals to management. Spitzer points out that without good measurement your organization is flying blind.

Enables you to manage the future. By measuring future events, you can ensure they happen (e.g., a CEO should look weekly at the list of celebrations, or recognitions, scheduled for the next two weeks. This would ensure success is celebrated in the organization.).

Creating Wider Ownership, Empowerment, and Fulfillment

Peter Drucker⁴ talked about leadership being very much like an orchestra conductor. Giving the general direction and the timing and leaving the execution to the experts (the players). Performance measures communicate what needs to be done and help staff understand what is required. They enable leaders to give the general direction and let the staff make the daily decisions to ensure progress is made appropriately.

This shift to training, and trusting staff to make the right calls is very much the Toyota way. Any incorrect decision is seen as a fault in training rather than with the individual.

The delegation of authority to the front line is one of the main foundation stones of KPIs (see Chapter 8). This issue was discussed at great length in In Search of Excellence.⁵

I have yet to meet a human being who desires failure or finds failure rewarding. Where measures are appropriately set, staff will be motivated to succeed. Peters and Waterman refer to studies which have shown that performance will improve when more attention is paid to what staff are doing. In one behaviorist study, staff productivity rose when the lighting was improved; it then rose again when they dimmed the lighting!

Notes

1. Dean R. Spitzer, Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success (New York: AMACOM, 2007).

2. Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Cambridge, MA: Harvard Business Press, 1996).

3. Spitzer, Transforming Performance Measurement.

4. Elizabeth Haas Edersheim, The Definitive Drucker: Challengers for Tomorrow's Executives—Final Advice from the Father of Modern Management (New York: McGraw-Hill, 2006).

5. Thomas J. Peters and Robert H. Waterman, In Search of Excellence: Lessons from America's Best Run Companies (New York: Harper & Row, 1982).

CHAPTER 2

Myths of Performance Measurement

Before we can enter into the discussion of implementing KPIs, we need to examine why you want performance measures in your organization. There can be many reasons and some will most certainly lead to failure. Thus, at this point, let us look at some of the myths about performance measurement.

Myth 1: Measuring Performance Is Relatively Simple and the Appropriate Measures Are Very Obvious

Performance measurement is failing around the world because management is not aware of the unintended consequence of the performance measures they have picked. As mentioned already, all measures have a dark side. There is a possibility that the actions the measures cause may send performance in the wrong direction.

One of the characteristics of a key performance indicator (KPI) is that this dark side, this unintended consequence, is very minor, and thus, KPIs have the holistic property of sending performance in the right direction.

Every measure that is to be used needs to be:

Discussed with the relevant staff: If we measure this, what will you do?

Piloted before it is rolled out.

Abandoned if its dark side creates too much adverse action.

Myth 2: You Can Delegate a Performance Management Project to a Consulting Firm

For the past 15 years or so, many organizations have entered performance measure initiatives, and these have frequently been led by consultants. Commonly, a balanced-scorecard approach has been adopted based on the work of Kaplan and Norton. The approach, as I will argue, is too complex and leads to a consultant focused approach full of very clever consultants, undertaking this exercise with inadequate involvement of the client's staff. Although this approach has worked well in some cases, there have been many failures. I firmly believe in an in-house approach to this initiative, supported, when necessary, with an external facilitator.

The balanced scorecard has generated a billion-dollar industry of consultants taking organizations on a journey going nowhere quickly. Before you make this mistake ascertain:

How many of the consultants have worked on a balanced-scorecard project that has worked well?

Why are the consultants not questioning a methodology that is profoundly flawed in a few key areas?

How many of the consultants have worked as a manager in your industry? In other words, have they had experience in firing live rounds?

Are you wiser or quietly confused after the consultant's presentations?

Myth 3: Your In-House Project Team Can Achieve Success while Continuing with Their Other Duties

The winning KPIs methodology clearly states, you can do this in-house. If you cannot, no one else can. KPI projects are in-house projects run by skilled individuals who know the organization, its success factors, and who have been unburdened from the daily grind to concentrate on this important project. In other words, these staff members have moved their family photographs, the picture of the 17-hand stallion, or their petite Bichon Frise dog and put them on their desks in the project office. Leaving the daily grind of firefighting, in their sphere of operations, to their second-in-commands who have now moved into their offices, on a temporary basis of course!

Myth 4: By Tying KPIs to Pay You Will Increase Performance

In all types of organizations, there is a tendency to believe that the way to make KPIs work is to tie KPIs to an individual's pay. KPIs are so important to an organization that performance in this area is a given, or as Jack Welch says, a ticket to the game.¹ When KPIs are linked to pay, they become key political indicators (not key performance indicators), which will be manipulated to enhance the probability of a larger bonus.

Because KPIs are special performance tools, it is imperative that these are not included in any performance-related pay discussions. KPIs are too important to be manipulated by individuals and teams to maximize bonuses. Although KPIs will show 24/7, daily, or weekly how teams are performing, it is essential to leave the KPIs uncorrupted by performance-related pay. I have attached an article on the 10 rules of performance-related pay in Appendix A.

Performance bonus schemes using a balanced scorecard are often flawed on a number of counts:

The balanced scorecard is often based