UNDERSTANDING THE VALUE OF YOUR IT ACTIVITIES Things were so simple in the industrial days: Companies could hum along profitably for years if executives merely kept a close eye on the bottom line.
Those operating in the black were considered successful; those in the red were not. Of course, those days are long over. In the Internet age, disintermediation forces, consolidation and global competition are forcing executives to pay closer attention to softer stats like quality of service, customer retention and satisfaction, and employee loyalty.
In today's service and knowledge economy, performance metrics must take into account the changing definition of success (customer experience, not just price and product differentiation, for one), and they must make sense to the individual worker, according to Swedish researcher, professor and business consultant Eric Giertz. Broad financial measures such as profit and loss do not give employees much information on how to improve in their daily jobs. "If you choose the right performance measures, each employee should know when they leave the job every day if they have done well," he says. And that's good for business, since employees are the ones dealing with your customers, day in and day out.
In his forthcoming book, Measuring Success: Identifying Performance Indicators (Celemi Publishing Inc., spring 2000), Giertz defines various business functions (or "logics," as he calls them) within the enterprise that can be used to identify performance measures to apply to each individual business unit or department. Some companies have only one business function with corresponding measures (a consultancy, for instance), while a consumer goods company that develops, produces and markets its products encompasses several areas.
In this light, the factory at SqueakyKleen, a fictitious soap company, probably shares more similarities with a flour mill than with any other division of SqueakyKleen. Using the Giertz model, both operations fall under the "labor-intensive processing plant" logic, where the most important measures include inventory turnover rates, volume produced per employee and percentage of late deliveries-all of which contribute to the overall profitability of the company. If a warehouse worker knows how much mineral oil is the optimal amount to stock for a given quarter of soap production, has the software tools to track that, and understands what it means for the company and her next raise if the goals are met, chances are she'll work hard to meet and exceed those expectations.
Beyond making measures more meaningful for employees is the challenge of selecting those critical indicators that will propel an organization to industry leadership. Quips Giertz: "If it's good all the time, we don't have to measure it."
CIO recently spoke by phone with Giertz at his office in Stockholm, Sweden.
CIO: Why are financial measures becoming less important than intangibles like customer satisfaction?
Giertz: The financials are still important to some people, like managing directors, but individual workers cannot understand how to improve their operations just by looking at financial ratios. They can't connect their work to these numbers. In retailing it would be more helpful to look at things like average purchase per customer.
If you really want to improve the processes, you have to involve management and employees in the discussion. Then you shouldn't try to compare different units but look at how you can manage each unit to improve its business. Too many people want to take the easy way and say there is only one set of indicators for measuring every kind of operation all over the world. If that's the approach you take, then you will fail.
How would these new indicators work at, say, an auto manufacturer?
Giertz: That kind of company consists of several different business logics. For instance, you have capital-intensive processing-machines that work 24 hours a day, seven days a week, making single parts within the motor. In that kind of operation you'd need to measure equipment availability and production quality.
Then you have people assembling cars, which is where labor productivity is a priority-so you'd look at the number of cars assembled per month.
In the repair shop at the dealer, you must look not only at the time it takes to perform a service but also how to classify the time, such as billable time versus total time. You should also try to understand customer satisfaction through questionnaires. Then you should conduct spot checks to see if the jobs that you charged the customer really got done. You may get some kind of objective quality index indicating that you have a lot of recalls for jobs that are not well done. Or, let's say there's a lot of wasted supplies-4.8 percent, for instance. To get it down to less than 1.8 percent, you can measure it each day for six months. When you have reached the goal, let it go for a while. If it gets terrible again, bring it back as a performance measure. So you can use recall job ratio, quality index, customer attitudes, capacity utilization and labor productivity as performance measures. If you perform well on all five, probably you will have great revenues, customer return, high productivity and efficiency.
When looking at the numbers, you should know what is the average that you have met before, what is the lowest, the worst case and the best case. Then you should know how much this fluctuates and what should be the bottom-line situation for each day or each week. Finally, each year you should reconsider whether you're looking at the most important measures and, if not, change them.
What role does IT play?
Giertz: It varies. A manager in a retail store could ask her employees to promote certain products or offers that will entice customers to buy a little more, with a goal of increasing the average sale of $40 to $46. Of course, to measure how much the average customer is buying each day, you need information technology. Sometimes IT actually plays a bad part because financial controllers bring out lots of different statistics that you don't know how to use and may not be of great importance to your employees. So you should first ask how do you want them to perform, how can you measure it, and is IT available? Today it's sometimes the other way around. IT makes a lot of information available, and you almost drown in it-you can't see what's important anymore.
What kind of results have you seen in Sweden from using this kind of performance measurement system?
Giertz: I have been working with manufacturing companies to see how people on the factory floor involve themselves in productivity improvements. They do things that people in engineering or product development have never thought of because they don't know the operation well enough. In one print shop, the value added per employee increased by more than 20 percent when they began tracking indicators like delivery precision, paper waste and capacity utilization.
So we're talking major improvements in process and revenues?
Giertz: Major improvements due to lots of small, continuous improvements. If you manage each kind of operation uniquely within the organization, you will get quite good at delivering a particular service. Ultimately, diversified conglomerates will be reduced in number and will instead leave way for big, global, very specialized companies. And that means knowing how to replicate and to run a specialized business in many local places will be important management skills.
Is this trend good for the consumer?
Giertz: There are major efficiency and quality advantages in providing services in large volumes. Companies will never be able to rest on their laurels because there will always be competition. If you don't change your standards, you will lose market share. It's the same mistake Henry Ford made when he said the Model T was the final car. It turned out that there was further development of cars.
In the end, the consumers have the power.
Senior Writer Polly Schneider can be reached at firstname.lastname@example.org.
"Each year you should reconsider whether you're looking at the most important measures and, if not, change them."