Performance Measurement System

The purpose of this article is to describe a process whereby a company's, department's, or individual's critical success factors may be identified, measurements developed to monitor and evaluate performance relative to those factors, and performance improved through effective management using those measure­ments as a guide.

One of the key characteristics that differentiates successful orga­nizations from the "also rans," is their ability to recognize and focus on the most important aspects of the business, be it manufacturing, banking, health care, or whatever. Identifying the enterprise's Critical Success Factors, establishing Performance Measures to monitor those factors, and then using those measure­ments to run the business seems like a fairly straightforward process. Unfortunately it is a process that rarely receives the attention it deserves.

Critical Success Factors (CSFs) are those attributes that are most important to the short and long term health of the endeavor. CSFs document the few high priority tasks that the enterprise must do well in order to succeed. The organization's goal should be stated in terms of these CSFs and they should capture all the major parameters by which we gauge the ultimate success or failure of the business.

CSFs are typically action-oriented statements that provide a transition between high-level goals and objectives and the day-to­day activities of the organization (ie, increase product quality, or maintain a leadership position in customer service). CSFs at a corporate level typically include references to things like:

• Profitability

• Order turnaround time

• Sales volume

• Growth rate

• Market reputation

• Customer service

• Market share

• Inventory availability

• Warranty service

• Product quality

• Environmental safety

• Brand identification

• Price position

• Employee retention

• Order fill rate

• Market visibility

• Depth and breadth of product offering

• Product cost

• Inventory turnover

The CSFs for an organization should answer the question, "What are the most important factors that will determine whether or not

we are considered successful?" For example, CSFs for a manu­facturing concern would typically include some statement regard­ing profitability, product cost, customer service, and product attributes, although depending on the industry, products, and marketplace almost any attribute could potentially become a critical success factor.

It is important to note that CSFs may change over time, as the marketplace and customer expectations change and evolve. Think, for instance, how your local garage or gas station has been impacted by the advent of self-service gasoline, express oil change services, and convenience food markets. Had you told a gas station owner ten or even five years ago, that his competition would be serving hot dogs and popcorn in a clean, warm waiting room, he probably would have laughed out loud. CSFs must be reviewed and changed periodically to reflect the current operating environment.

Determining the CSFs for your company is not a matter of deciding what you think is, or should be, important. CSFs are more typically driven by external forces; by the marketplace, your customers, and suppliers. These groups determine the standards to which your company must adhere and the level of performance that is required to gain acceptance. Keeping these groups "happy" is key to long term success.

Government controllers, taxing authorities, and industry regula­tors may also play a part in determining your CSFs. Each may prescribe programs, adherence to which becomes a critical suc­cess factor to the ongoing health of the company.

Other groups having input are the company's stockholders, financiers, parent corporation, and perhaps even the employees. Each of these groups, whether well organized or not, may wield the power to affect the overall success of the organization. If this is the case, that fact should be recognized and the organization's activities and priorities tuned accordingly.

Determining your company's CSFs then becomes a process of (A) understanding the wants and needs of each of these external groups, (B) stating their needs in terms of your organization's success factors, (C) evaluating the potential impact each factor could have on your business, (D) evaluating your ability to affect or control your performance relative to the factor, and (E) prior­itizing the factors to determine those that are critical and hence deserve constant, ongoing attention.

Much of this investigation and analysis may have already been done for you, and be reflected in key documents that already exist within your organization. These documents are the Business Mission Statement, Five Year Business Plan, and any other "strategy" documents. For any company attempting to define their CSFs for the first time, these documents should provide a good starting point, providing they are reasonably up-to-date.

Another source that is often overlooked is the daily appointment book or calendar of the CEO or Executive VP. What better method to determine the most critical issues facing the company than to review how the chief executive spends his or her time!

It may be obvious at this point that CSFs exist not only for the company as a whole, but also for each functional organization within the company. It is possible to identify each organization's customers, competitors, suppliers (eg, manufacturing's customer is sales or distribution), and the same process may be used to determine the organization's CSFs. Thus a hierarchy of CSFs may be developed, with the CSFs of each functional organization supporting the goals and objectives of the organization above (see Figure 1).

We should also note that the CSFs at each level should tie to the the organization's strategic or tactical plans. If a mismatch exists, either the plans or the CSFs are off target or not appropriate.

Finally, it is important to note that the list of CSFs should be reduced to the critical few. Typically, any given functional organ­ization should have no more than four to six CSFs at any point in time, and executive management for the company as a whole should not attempt to focus on more than ten to twelve factors.

To be Continued

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