1
Prologue

This book is about managing the performance of organisations. It is primarily focused on managing the performance of commercial organisations (i.e., businesses), but it also includes lessons from public-sector organisations. It blends the theory and practice of managing business performance, drawing on academic works as well as lessons and observations from many large and small organisations. Its contents are based on:

• the results of a series of funded research programmes involving numerous companies from different countries with a total research value exceeding c. £20m;
• the practical experiences of designing and implementing performance improvement programmes in a wide range of companies operating in diverse sectors.

Its contents balance the theory and practice of performance management. It also focuses on providing real practical advice, methods, tools and techniques to the practitioner responsible for the performance of their organisation. Indeed, a key message is that everyone is responsible for the performance of their organisation.

Furthermore, the book recognises that 'one-size-fits-all' answers rarely apply. The world changes over time and a successful company needs to adapt its performance management approach, style and process to match the needs of that time. Selection, positioning and management of the right people for the right positions at the right time become critical to sustainable success.

1.1 Background to this book

In the modern world we live in today, be it at work or at home, we cannot seem to get away from performance measures. What is intriguing, however, is the effect these measures have on organisations' performance. During my early consulting career I could not help noticing how some people worked to measures even though they knew it was the wrong thing to do and that doing so made them miserable. The quote ". they tell us that the customer is the king, but this is rubbish. in this place the measure is the king" reflects many such feelings of individuals from different levels of an organisation, ranging from shop-floor operator to senior management.

The purpose of my first research grant (1989-1992) was to understand the barriers to manufacturing systems' integration. Here we were concerned with manufacturing businesses as a whole and wanted to understand the barriers that prevented different parts of the organisation from working together effectively and efficiently towards a common purpose. We were three academic groups from three different UK universities working in collaboration with 11 large manufacturing organisations over a three-year period. The manufacturing organisations represented a cross-section of the industry including electronics, heavy engineering, defence equipment, construction materials and chemicals. Without exception, across all our cases, the root cause of failure to integrate was performance measures. We can probably cite several examples here, but the following adequately reflect many other cases.

An electronics manufacturing company purchased metal chassis for its products from the Far East at a cost of $14 per unit as opposed to from a local supplier for $18 per unit. But the $14 per unit was ex-works and did not include the shipping costs, which added another $6 to the cost of each unit. Because the shipping costs were charged to a different budget, buying from the Far East with longer lead times and larger batch sizes made the purchasing key performance indicator (KPI) look better. It was ironic that this practice continued for several years, even though everyone knew that it was not the right thing to do, as reflected in the purchasing manager's comment: ". I know if we bought locally it would be cheaper in total cost terms, but that is not my KPI and the KPIs are set by the US head office - we can't just go and change them."

A whisky producer ranked a very close number 2 in their target market. The strategy was to become number 1 by halving the supply lead times whilst maintaining 100% reliability. This would allow the distributor in the market to reduce its stock levels, thus making the brand a more attractive proposition. The strategy was rolled out, communicating clearly and concisely with everyone. Over the next few months we started to see a pattern developing where the service levels (delivery lead times) would be within three weeks of order for a couple of months but would deteriorate significantly in month 3. This pattern repeated over the next three months. When investigated, it appeared that the production manager was paid a quarterly productivity bonus based on the number of litres of product bottled on his bottling lines. This meant that for the first two months he would produce and ship what was ordered but in the third month he would run the fastest-running products, usually a mixture of 2lt and 5lt bottles, to make up his shortfall. As a result, he would get a big fat bonus, the company would have the wrong stock and the distributor would be out of stock. When we discovered this and questioned him, his response was ". this is my family's holiday money, I cannot afford to lose this income". Fortunately, in this case, the KPIs and bonus structure were quickly adjusted to bring the operations into alignment with the company's objectives.

From the results of this research it became clear that lack of an integrated and systematic approach to performance measurement was a key constraint to organisational integration, effectiveness and performance. This line of thinking led to my second research grant (1995-1998). Here, working with the same consortium of academics and industry partners, our objective was to develop a reference model for integrated performance measurement systems. This was about the time that performance measurement was popularised by books and articles such as Relevance Lost: The Rise and Fall of Management Accounting (Johnson and Kaplan, 1991) and 'Total quality: Time to take off the rose-tinted spectacles' (Kearney, 1991), and many organisations were introducing performance measures to enable them to better manage the performance of their business. Throughout this research it became evident that although measures were important, what organisations did with these measures was even more important.

In one manufacturing company they had a six-page weekly plant report containing 312 performance measures. When we enquired what they did with all of these measures, we were often faced with blank looks. We managed to convince the team responsible for issuing this report to stop issuing it as an experiment to see what would happen. It was five weeks before the IT Manager called to ask what had happened to the plant report. When asked what he wanted it for, his response was ". I just wondered, because the corner of my desk where it usually sits has been empty for a few weeks".

Simultaneously, we also noticed that when performance measures were focused on managing functions/departments and individuals, we observed them to be less effective. In contrast, when they were focused on flow of work through the organisation (i.e., the process), measures appeared to be more effective. With this it started to become clear that performance measures should be concerned with workflows within the business - that is, the key processes that make the organisation viable (more on this later).

Subsequently (1997-2002) I was involved in a multidisciplinary European consortium entitled Advanced Performance Systems, with a view to sharing knowledge and practice on the subject of performance measurement. As we all know, the practice of performance measurement has emerged from a number of disciplines that include management accounting, operations management, strategic management and human resource management, where the term performance management appeared to be exclusively reserved for managing the performance of individuals, also known as the annual performance review, personal development review, etc. In fact, in a performance measurement workshop where I defined performance management as the process in which we use performance measures to manage the performance of the organisation, I was criticised for misrepresenting the term.

Maybe because I am an engineer or perhaps because of my upbringing, I am a systems thinker. That is, I see everything as an interconnected part of the whole. As a result, I was wholly unsatisfied with the view that represented performance measurement and performance management as two exclusive concepts and indeed practices. I am a great believer that organisations at the most basic level are about people and that in organisations (public, private, commercial, industrial, charitable and so on) people do things (with computers, machines, materials, information, paper, suppliers, customers, other people and so on) that leads to good or bad performance results. I summarise this simply as people operate processes that deliver performance, as illustrated in Figure 1.1.

Of course there is more to managing business performance than just a simple conceptual framework, we will come back to this later in the book. What is significant here is that in an organisation there can only be one performance measurement and management system, and this system needs to integrate strategic, financial, operational and human resource views into a single efficient and effective...