Simplify Your Approach to Measuring Performance

by Philip Ricciardi

Adhering to three fundamental business
principles will help you design and maintain an
equitable, productive performance-measurement program.

Remember when you went out to buy your first computer? While you had some ideas about what you needed, there was a lot of uncertainty and you relied on the vendor or salesperson for advice. More than likely, you wound up with something less than the ideal setup. But you learned from your first experience, and when it was time to replace that first system, you were much better equipped to make intelligent choices.

The second time, you were a more knowledgeable buyer and your priorities had changed. You no longer needed a vendor to tell you what to buy. You were now interested in compatibility, expandability, price and support services. Your purchase decision was based on entirely different parameters. Chances are, you wound up buying your second system from a different source, one that better addressed your changing requirements.

Your customers are a lot like that. The reasons they had for doing business with you may well have changed, and in today's competitive environment, they are always looking around-for better service, more knowledgeable support, faster response and lower prices. And if any of your business processes have suffered even a minor deterioration, they may no longer stack up favorably against your competitors' processes, and you may see an erosion of your customer base before you can react.

Let's assume you are aware of the importance of overseeing business processes and measuring performance. You may have already done some time studies and established standards for measuring employee productivity. Many of these types of programs are set up quickly in response to a need for some sort of criteria to help evaluate performance. But their implementation creates general resentment on the part of employees, who believe that either they don't need grading or that the grading doesn't accurately reflect their contributions. If the performance-measurement program doesn't encourage improvement in the volume and quality of output, it will not improve productivity nor provide information needed to manage operations. It may be detrimental to employee morale. It certainly won't reduce operating costs or enhance corporate profits.

Principles

In order to avoid this type of negative experience with performance measurement, make certain the program addresses three issues:
It must measure both productivity and quality.
It must be fair.
It must provide incentives.


Making certain the program measures quality, not just productivity, sounds rather elementary. But many companies fail to recognize the difference between employee/process productivity and quality of output. They tend to hone in on one or the other. Those that concentrate on productivity create a nimble employee machine that processes work at a frenetic pace. Unfortunately, the machine makes mistakes that are passed on to customers. Those that focus on quality tend to generate great products, but also unacceptable lead times and missed delivery dates. The ideal program helps improve both, balancing the need for speed with the need for doing the job right.

One of the toughest elements to get right in a performance-measurement program is equity. Too many programs fail to assess each individual, department or process in the same way. For example, an accounts payable clerk may be measured in terms of processed checks per day, while a shipping dock worker is measured in terms of pallets loaded.

Even in the same department, inequities often exist. For instance, take Claire, a customer service representative. Her department standard calls for each representative to handle a minimum of 20 calls per day. But Claire works with newer customers, who tend to have more questions when they call. She resents what she perceives as an unreasonable standard because her calls take longer than those with established customers. As a result, Claire consistently receives low marks. Alternatively, Claire may decide to defeat the standard by rushing through her calls, in the process delivering poor service and quite likely losing customers.

Here is an example of a program that not only fails to achieve its goals but actually subverts quality and/or productivity. Therefore it's important that the program measures everyone in the same manner and generates comparable results, regardless of the type of work being performed.

Finally, the program must include incentives that recognize and reward outstanding performance. Senior management in many companies remain convinced that the introduction of any type of incentive would throw their organization into chaos. While it would be naive to assume an incentive plan contains no risks, introducing any kind of performance-measurement program has the potential for employee revolt if mishandled. If you develop incentives that give every employee the opportunity to be rewarded for good performance, they will not engender problems. Quite the contrary, they may prove to be the most important element in ensuring the success of the entire measurement and improvement effort.

A unique relationship

A good way to define performance is productivity multiplied by quality. Performance consists of both the amount of work completed and the value of the work to the customer. An overall performance rating therefore measures the ability to deliver: the right output, the right way, the first time and on time.

A lot of organizations make the mistake of focusing on measuring and improving productivity or quality without understanding the intrinsic relationship between them. But the two affect each other as well as the organization's bottom line in several ways:
Increased productivity reduces cost. The higher the output for each hour of labor, the lower the labor cost of each unit.
Increased quality increases revenue. At a macro-level, high overall quality of output increases client satisfaction, retention and sales.
Increased quality improves productivity. At a micro-level, each task performed correctly the first time eliminates the need for inspection and rework, reducing the cost of each unit.
Increased productivity increases service quality. Delivering output faster improves the timeliness of service and therefore increases quality to the customer.


Here's how each of these critical components of performance can be measured equitably:

Measuring productivity

Think of productivity as the relationship between the output of a process and the input of resources. Productivity equals output divided by input. If output increases while input remains constant, productivity increases.

Many different outputs can occur when performing work, such as boxes packed, customer inquiries answered, machines assembled, etc. However, the work required to produce any type of output can be measured in terms of standard time, which is the time required for a fully experienced employee to perform a given task and obtain the task's output. This concept of standard time facilitates measuring all employees on a level playing field, regardless of the type of work they do.

The first step in designing a performance-measurement program is identifying the deliverables (output) of each process being measured and determining the standard time for each output. Measuring all output in terms of standard time allows different types of work to be compared with one another. We can then think of output as volume completed (by process/task) multiplied by standard time (for each unit of output).

For example, a processed check may take a standard time of 30 minutes to complete. If an accounts payable clerk processes 14 checks today, 14 x 30 = 420 minutes (7 hours) of output has been created. Similarly, a pallet loaded onto a truck may take a standard time of five minutes. If a shipping dock worker loads 84 pallets today, 84 x 5 = 420 minutes (7 hours) of output has been created. The accounts payable clerk and shipping dock worker performed very different jobs, but both created the same amount of output in terms of standard time.

Think of the resources required to produce output as the amount of time employees had available to perform their tasks. Think of input as: Paid time minus allowance time (breaks, etc.), time off (vacation, holiday, sick, etc.) and assignment-work time (work for which no standard time is established).

An employee's input equals the time paid minus the time the employee was not available to do any measured work. For example, suppose Claire, our customer service representative, was paid for eight hours today. She received a 15-minute break in the morning and afternoon, a 30-minute lunch and a one-hour unmeasured assignment. Her available time would therefore be:

8 hours x 60 minutes = 480 minutes,

­p; 60 minutes (breaks and lunch)

­p; 60 minutes (assigned work)

= 360 minutes (6 hours) available time (input)


Employees should spend their available time (input) solely on value-added productive work. As input decreases, productivity increases (output stays the same).

Note: When productive work is not available, supervisors must be prevented from creating "busy" work as assignment work time. This practice artificially inflates productivity by decreasing input. When no work is available, the only way to maintain the productivity level is to reduce paid time. In other words, employees must be encouraged to take vacation or stay home.

To finish the example, suppose Claire has completed 20 phone calls today with a standard time of 20 minutes each.

Her output = 20 x 20 = 400 minutes
Her input = 480 ­p; 120 = 360 minutes
Her productivity is (400/360) x 100 = 111


The 111 score represents her productivity, based on standard time. It can be compared with any other worker's productivity score on an even basis, regardless of the type of work they perform. Since a 100 score represents average, Claire is an above-average worker from a productivity standpoint.

Incidentally, employees often become more productive without any major change in procedures or support systems when they are made aware of their current and expected levels of performance, as well as their progress, on a daily basis. This has increased employee performance more than 10 percent. This is known as the observer effect, and it alone can justify implementing performance measurement.

Measuring quality

Whenever an employee or group of employees completes a task, the output should be appropriate (the type required by the task's customer), accurate (correct), complete (every required aspect of the output must be delivered) and on time (within required time frames).

All units of output must conform to all of the above criteria for them to be considered acceptable quality outputs. If, for example, a video retailer's customer orders a VHS Jane Fonda workout videotape for Christmas, the warehouse must ship a tape that:
Is a VHS tape, not a laser disc (appropriate).
Is a Jane Fonda tape, not a Cindy Crawford tape (accurate).
Contains accompanying brochures and coupons (complete).
Arrives by December 24th (on time).


What happens when output is not of acceptable quality? Indirectly, productivity suffers because the work must be redone until correct. So, in terms of performance, think of quality as total output minus output reworked, divided by total output, or the percent of work done with acceptable quality.

Let's go back to Claire again. She completed 20 phone calls today, but suppose she rushed through two of them and gave incorrect information. Realizing her mistakes, she calls the customers back with the correct information. She has actually made 22 calls, but we only want to give her credit for the ones she did right in the first place. We therefore calculate her quality score as:

Her total output = 22 calls
Her output reworked = 2 calls
Her quality score = (22 ­p; 2)/22 = 91%

Ninety-one percent represents her quality score, based on acceptable units of output. It can be compared with any other worker's quality score on an even basis, regardless of the type of work performed. Since everyone should be aiming for high quality, Claire is encouraged to take more care with her answers to customers. How do we rate her overall performance?

Her productivity: 111, multiplied by
Her quality: 91%, equals
A performance of: 101

Even though her quality needed work today, she still comes out as an above-average employee.

Incentives

In addition to recognition programs for outstanding performance (such as an "Employee of the Week" award), a monetary incentive or gainsharing program can be implemented that uses the existing performance-measurement program as its basis.

A simple shared-benefits concept can be used to drive the incentive calculation. A performance score of 100 represents an employee working at standard. If employees attain higher scores, the company requires fewer labor hours to complete the work. Therefore, high-performance employees save the company money in labor costs. To encourage employees to attain high performance, the company will share some of these savings with their best performers. Let's look at another of Claire's work weeks. We'll assume that the company has decided on a policy of a 50-percent share of savings with the employee for this example:

Claire's weekly pay rate = $560
Her performance score for this week = 120
Her full-time equivalent = 1.20

A full-time equivalent rating simply means that Claire does the work of 1.20 average employees. By having her around, the company avoids having to pay an extra 0.20 average employees. Since we are grateful for Claire's good performance, we will reimburse some of the cost savings she gives us back to her.

The company's savings due to
Claire's high performance = 0.20 FTE
This week's $ savings to co. = $560 x 0.20 = $112
Her incentive payment @ 50% = $56


Claire will receive an extra $56 in her paycheck this week in recognition of her high performance. Two policies should be strictly enforced to keep an incentive program under control:
Ensure that the basis for the incentive payments is clearly documented in writing. Sometimes employees get the mistaken impression that the incentive payment is part of their normal salary and that they deserve it every week. It must be made clear to employees that incentive payments are a bonus for high performance and that they only receive it when their performance warrants it.
Supervisors must not make "busy" work (assigned work) during slow periods to artificially reduce employees' input (available time). Incentive payments should be rare when work is slow for the company because employees have less opportunity to complete a high volume of work at high quality.

Performance trends and reporting

What type of information is necessary to ensure that processes are achieving expected results? Since productivity and quality are both expressed in terms of time, you can calculate performance at various levels, from an individual employee right up to companywide and overall types of work performed.

Maintain and analyze data to indicate trends over time. Figure 1 shows reports that the program should provide.

Each person should have appropriate information for their level to track over time. This information will quickly identify opportunities for improvement and superior performance to be rewarded. Maintain a performance report at a department level with employee detail. Figure 2 shows a sample report.

Obstacles

Remember, a performance-measurement system is not a static set of calculations and reports that remain constant once you set them up. The program is a dynamic entity that you must maintain by periodically performing the following checks:
Maintain standards-I once saw a performance-measurement report at a business services company that indicated their employees earned an average score of 435! In reality, technology changes-made 10 years previously-greatly improved the amount of work employees were able to process, but no one updated the standard times. Consequently, the reports from the performance-measurement system were widely viewed as a joke and not used for management analysis. Keep standards up-to-date and review them after every technology change.
Review data daily-Excessively high (more than 140) or low (less than 60) daily scores at an employee level may indicate a problem with input data. An employee may write down 4,000 units when he or she really meant 400, while a person given three hours of assignment work may forget to write it down. A program should produce an exception report for supervisors to review and reconcile daily.
Keep it equitable-Periodically review the type of tasks high and low performers work on. If everyone who works on a certain task tends to get a high or low score, the task's standard may need adjustment.
Once you have the data, act on it! Performance-measurement data is meant to drive management decisions and help rectify a negative trend before it affects your customers.

Success through structure

The ultimate success of a performance-measurement program can be predetermined by the way you structure it. If it is done in simple terms that everyone in the organization can understand, employees will not view the effort as an attempt by management to trap them. Providing high-performance incentives will help generate enthusiasm at all employee levels. Management will be able to make objective assessments of employee performance and business processes, and also have an accurate source of information that will enable them to manage and improve operations on a continual basis. Ideally, the program will evolve into a continuous performance-improvement program, and its simplicity and fairness will translate into long-term benefits for your organization and your customers.

About the author . . .

Philip Ricciardi is a supervisor in the operations management consulting practice at Richard A. Eisner & Co., LLP. He has designed and installed performance-management systems in a wide variety of industries.