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Performance Measures in Times of Change

Carol Blanchar and Judy Onton

Businesses in global markets are trans-forming themselves to survive. Increas- ingly, business planners turn to strategies such as outsourcing and offshoring to drive down costs and take advantage of new opportunities. Each of these strategies depends on a deep understanding of cus- tomer needs, flexible business processes, and a flexible workforce to be successful. These strategies or tools may serve as cata- lysts for organizational changes that have significant effects on the business. However, the people in the business make successful change possible, and they can do that only if there is a corresponding change in individ- ual performance measures and an invest- ment in the tools that enable people to respond successfully.

A study of 500 finance and human resources leaders conducted by Hewitt Asso- ciates showed that for 95 percent of compa- nies, cost was the primary gauge of success of offshoring initiatives. Only 54 percent of com- panies found their offshoring initiatives “somewhat successful,” while only 8 percent found them to be completely successful.1 The trend toward offshoring is usually coupled with reducing headcount, jettisoning employ- ees to reduce labor costs. That may be why so few of these initiatives have been successful.

Outsourcing and other tools for staying competitive in times of change must provide

for investing in people and setting new per- formance measures. Aligning employee perfor- mance measures with change initiatives will drive successful strategy execution while pro- tecting and developing your critical in-house expertise.

In a recent article, Jane C. Linder, execu- tive research fellow and director of research at the Accenture Institute for High Perfor- mance Business, says, “Outsourcing, or for that matter any other management tool, does not create an impact by itself. . . . In other words, tools don’t make change happen; peo- ple make change happen.”2

Performance measures drive the actions people take. The old adage “You get what you measure” has never been more meaning- ful. The role of the HR professional is to ensure that employee performance measures tie directly to bottom-line profitability and to champion the necessary investments in peo- ple to execute change successfully.

In this article, we suggest new ways to connect employee performance directly to the bottom line of fast-changing organizations. We also describe the experiences of some organizations that have invested in change strategies and the elements of their success and failure in reaching their objectives. Finally, we provide examples of performance measures and corresponding tools that make business strategies most likely to succeed.

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IMPROVING THE CUSTOMER EXPERIENCE IS AN OVERARCHING SUCCESS STRATEGY

In fast-changing global markets, performance measures must reflect economic reality. Part of that reality is that an organization’s employees are its most important assets and the key to success in a world of change. Another aspect of that reality is that all employees, even those who do not have direct contact with customers, have an impact on the customer experience. There- fore, each employee and team must be able to describe the connection between individ- ual and/or team performance and the success of the business’s customers and users.

Never losing sight of the customer expe- rience remains a critical success factor. For example, do you have any idea what impact your outsourced service is having on your customers’ experience with your company? Do you know how your out-

sourced operation is contributing to your customers’ success?

How many times have you, as a customer, made a call to a customer-service department and been frustrated by disjointed service, being transferred to several people, all of whom ask you to restate your problem or seem to have no understanding of your prob- lem at all? Would you buy from that com- pany again? No company can afford uncoor- dinated activities that are disassociated in time or place, providing a negative impact on customer experience. Use performance mea- sures to motivate your people to implement

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the change in a way that enhances the end- customer experience.

In a recent article about changing expec- tations for IT professionals, Ravi Aron, an assistant professor at the Wharton School, provides an example of the type of coordi- nation that is necessary today to improve the customer experience. Aron states that the new breed of IT developers will be peo- ple who redesign work to achieve better proximity to customers. The article describes the need for cooperation between IT and businesspeople, with the IT person needing to be good at communication, col- laboration, and project management. “The icon in the industry is the genius program- mer-hacker, someone who works in isola- tion and creates great code,” says Network Services CIO Mike Hugos. “Those days are over.”3

Today, every employee and department is challenged to understand what end-customers and end-users are trying to accomplish and exactly how they see your products and ser- vices contributing to their success. Ask your employees, how well do we know our cus- tomers? How long is it before we know about a change in customer purchasing behavior, and how long does it take to get our external partners on board to help respond quickly?

In the global market, it isn’t just about being fast, but rather about being every- where, all the time, with whatever the cus- tomer needs—even if we outsource critical operations. Business precision is tightly cou- pled with where we think our customers and competitors are headed. Change-based per- formance metrics measure how well we know our customers, how long it takes before we know about a change in customer purchasing behavior, and how long it takes us to respond to them.

Business precision is tightly coupled with where we think our customers and competitors are headed.

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EXAMPLES OF HOW COMPANIES INVEST IN TOOLS TO ALIGN AND ENABLE PEOPLE

Business processes change successfully only when people are motivated and aligned with the business objectives behind the change. In the sections that follow, we provide specific examples of business changes common to global enterprises today, with results that vary remarkably depending on how people were aligned with the underlying business goal.

Introducing a New Product Line for Higher Returns

Dell Computers is a master of change. The company transformed from a hardware-deliv- ery machine to a highly effective direct-sales system that delivers PCs and peripherals. Dell customers can select product configura- tions that match their needs, and Dell very quickly delivers their orders directly to them.

People think of the famous Dell business model as a set of direct sales and delivery processes that are good only for high-volume, competitive PC markets. But when asked whether Dell can do in services what it did in PCs, CEO Kevin Rollins says, “Absolutely. Our direct model has basic principles: Don’t let anyone come between us and the cus- tomer. Keep clear communication, and no extra costs.” Those tenets apply even when Dell is selling services, Rollins says, and they enable the company to give service customers a better experience than the competition can offer. The CEO believes that those guiding process principles are supported by metrics and performance measures that keep Dell’s people connected and accountable for busi- ness objectives, even when the strategy changes to include services in their product offering.4 Dell focuses on volume and market

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share and believes that its customers value price, customization, and fast delivery. The company remains the gold standard for the rest of the industry in end-to-end supply- chain speed and time-to-market. This creates tremendous pressure on employees and sup- pliers to continually shorten lead times and decrease inventory levels.

Outsourcing Manufacturing to Lower Costs

Nearly every day, business executives are in the news trying to reassure their worried shareholders that they can fix a broken busi- ness process. By that time, the damage has been done and the business has suffered seri- ous losses. Business processes occur in real time and cannot be redone when they go wrong. Investment to motivate and align peo-

ple is small in comparison to the losses from a change if a business process can’t keep up.

During a recent press interview with Tellabs, hard questions were posed about supply-chain processes that had negatively affected business results. The CEO responded that the supply-chain issues that have dogged Tellabs in recent quarters, as one of its ven- dors moved manufacturing facilities from Finland to Estonia, will probably persist for another quarter or two: “Supply-chain prob- lems are complex and don’t go away immedi- ately. There’s a lot of screaming and yelling that goes on between you and your outsource guy. We’re working that strenuously.”5

In this case, a CEO was called to account for a supplier strategy (moving a manufactur-

Business processes change successfully only when people are motivated and aligned with the business objectives behind the change.

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ing plant) that negatively disrupted cus- tomers. This can happen to any company. The challenge for companies and suppliers is to be sure that when planning significant changes, like a plant relocation, to include an investment in the corresponding communica- tions and people strategies to keep deliveries on schedule.

Collaborating Across Divisions to Increase Corporate Learning and Profit

In fast-changing markets, business objectives are dynamic, constantly responding to new information about customers and competi- tors. Only when business objectives are directly linked to people objectives do people have the incentive to select and adopt tools to adjust and succeed.

For example, the senior vice president of supply-chain management for a highly suc- cessful high-tech corporation recognized the

need for collaboration across divisions and in 1998 expanded the company’s annual semi- nar for supply-chain and procurement man- agers with a Web portal. As a result, atten- dees from dozens of operations were able to contribute ideas for the seminar session top- ics, dialogue together about issues, view the seminar materials, and keep track of initia- tives from the meeting for collaboration to better meet corporate supply-chain objectives over the coming year. The reason for the strategy was to transform the interaction between separate groups to become ongoing and directly aligned with specific business

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goals, rather than disconnected and struc- tured around an annual meeting.

Although the Web-portal investment and implementation efforts were significant, the strategy did not meet the company’s business goal. Operations managers had not made the connection between ongoing collaboration and their own supply-chain objectives and, therefore, they did not give their employees performance measures that held them accountable for cooperating across organiza- tions in support of company supply-chain goals overall. If the employees had such per- formance measures, they would have embraced the Web portal, made it their own, and adapted it to fit their needs.

In the six years since the company tried the internal Web portal, the need for supply- chain collaboration has become even more urgent, and the value to the corporation even greater. Today, an application service would enable the vice president to set up that same secure portal across the Internet in a matter of hours, for a fraction of the cost. However, just as before, only a change in performance measures will make the portal an effective collaboration tool and improve corporate response to world markets.

Managing Explosive Growth from Internet Business

New business models emerge in response to infinite reach and instant access of a market based on the World Wide Web. We all know how few of these new business models have succeeded. Early evidence shows that a man- agement focus on motivating people to adapt to change and holding both internal and external contributors directly accountable for business success is what sets successful busi-

In fast-changing markets, business objectives are dynamic, constantly responding to new information about customers and competitors.

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nesses apart from others that operate in the Internet market.

Meg Whitman, CEO of eBay, was recently interviewed about how the company manages its incredible growth. The factors she describes include motivating personnel to work across business boundaries and meet business objectives, for example:

• Ensuring that employees are excited by the mission of the company and under- stand the results that they are going to be accountable for;

• Reorganizing early and often, to keep peo- ple fresh and “repotted” into new opportu- nities;

• Opening up the Internet platform to out- side developers (inviting outside parties to contribute enhancements to eBay so that it can be customized for specific market groups), now grown from 400 to 10,000 over the last 18 months; and

• Motivating people who aren’t on the eBay payroll by enabling, not directing.

Whitman concluded by stating, “I think we are one of the pioneers of a different kind of business model. And I think the Web has certainly made self-organizing and empower- ment of different groups far easier than it was prior to the Internet. But I think we are still at the earliest stages. So we’re watching it very carefully. We know it is central to our business. Enabling our customers and our partners to be successful is critical.”6

Business processes are people processes. They succeed only if they are matched with investment in resources, tools, and training that people may select and apply to meet their performance metrics. The next section describes the kind of investments needed to

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support dynamic business goals in fast- changing markets and points out some busi- ness goals that become the new employee performance measures.

TOOLS TO ENABLE SUCCESSFUL PERFORMANCE

Aligning performance metrics and measures is futile without specific investments that enable people inside and outside the com- pany to respond quickly and effectively. How do individuals and organizations implement a process change successfully? Researchers and enterprise employees agree that communica- tion is key. Important areas of strategic investment required to support performance for fast-moving, adaptive organizations include:

• Communications Tools. The worldwide Internet and communication technology make global, mobile voice, video, and data exchanges available to mobile individuals and teams at very low cost. Performance metrics should track the innovation and application of those tools to current busi- ness processes, including policies for access and security.

• Collaboration. People need both written and verbal skills required for collaborative decisions that cross cultural and national boundaries. Across businesses and func- tions, people work together, with individ- ual roles clearly assigned and individual accountability for business metrics.

Researchers and enterprise employees agree that communi- cation is key.

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• Formal Business-Process Change Man- agement. In the past, changes to business process like those described above were each managed as a project with a begin- ning, middle, and an end. In contrast, today such changes are part of normal operations, and change is managed as an ongoing process, not a single event.

The tools of change management include configuration control, formal test and validation procedures, and policies for change authorization. These are applied by employees to consistently deliver to customer expectations and maintain qual- ity as changes continue to happen.

• Supplier Alignment. Sourcing principles that protect delivery capacity and price, along with terms to keep multiple compa- nies aligned, are now part of most busi- ness processes, especially those with out- sourced and offshore components. As outside businesses get involved, multiple

service-level agreements must work together in a way that is truly collabora- tive to meet customer commitments. Skilled source management combined with continual feedback is necessary to stay united in action and priorities.

• Customer Interaction. In the past, creat- ing a personal connection to a customer has been prohibitively expensive, with only a slow trickle of information back to the company gained from either presale or ongoing interactions. Web technology changes all that by allowing customers to have direct access to the company and

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personal control of their purchasing and use of company products and services.

• Innovation. Perhaps most importantly, a competitive global organization, facing rapid change, must embrace experimenta- tion and reward innovation. Brutal compe- tition and emerging service-revenue sources now demand innovation from even highly conservative and regulated businesses. Innovation investments include:

❏ Open product architecture—that is, offering a solution that has a publicly shared rather than a proprietary archi- tecture; for example, Sun Computers may offer a Linux operating system as an alternative to its own Solaris sys- tem. Customers demand open architec- ture because they would rather not be committed to one vendor, and the competition drives down prices. The benefits for vendors are increased mar- kets and decreased barriers to entering the new markets.

❏ Standards adherence—i.e., ensuring that an offering is compliant with cer- tification and test requirements (e.g., “carrier-grade” telecom equipment). Customers like standards because it means two different products should behave exactly the same and they can choose the product with the lower price. (Note, however, that the pres- ence of standards means that profits will tend to shrink over time as demand growth begins to taper off and competitors must lower prices to keep or capture market share.)

❏ Secure Internet workspaces, which allow personal productivity tools (e.g., phone, e-mail, and data) to be com-

Skilled source management combined with continual feedback is necessary to stay united in action and priorities.

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bined over a single corporate network, customized by individual employees to enable them to be fully functional wherever they are and on whatever device they are using. An example is the “find-me follow-me” feature of net- work-based telephones called “pres- ence awareness,” where a team with shared responsibility can tell where every coworker is and whether he or she can take a call or a message, then communicate with an alert, a request, a response, or a link to data. Because this connects over the Internet, it has the potential to be very disruptive to current labor practices. Employees may find themselves competing for jobs with others located remotely who will do the same work for lower wages and expenses. On the other hand, peo- ple with scarce but valuable skills or expertise may become a global resource and far more expensive for a company to retain.

INDIVIDUAL PERFORMANCE METRICS

It’s a given that individual performance mea- sures should be linked directly to business objectives. However, the ways in which this is accomplished may be determined by man- agement’s view of what drives the business and will evolve as management sets business priorities. Common approaches to setting per- formance metrics focus on customers, finan- cial indicators, and product delivery.

Customer Perception of Value

This approach views business success coming from the target customers’ perception of your offering relative to your competitors’ offer-

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ings. It emphasizes customer response as the fundamental engine driving profit and growth and encourages employees to focus on improving the customer experience to meet

business goals. Teams responsible for a busi- ness process can quickly diagram the busi- ness “system” as causal loops, showing exactly how investing to improve one part of the process has a positive impact on other steps, thereby directly affecting the customer experience and increasing revenue and share.

Consider, for example, the leads-manage- ment process. Marketing and sales managers invest in systems to help produce more leads to new business that result in more revenue. The teams of people responsible for success- ful leads processing are usually organized around three activities:

1. Capturing leads from a wider variety of lead-generation activities,

2. Integrating customer databases with sales channels and assignments, and

3. Following up with new contacts.

Each activity has its own measures of excellent performance, but the entire invest- ment to improve leads processing is also mea- sured on the direct contribution to the cus- tomers’ perception of value, confirming that indeed new customers bought more from you as a result of the leads-handling excellence.

In a global business today, leads-processing teams will be challenged to meet new metrics as the global market drives down prices and increases competition. For example, the teams will have to find ways to decrease the

Common approaches to setting performance metrics focus on customers, financial indicators, and product delivery.

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time it takes to respond to a new lead (from days to minutes) or to process many thou- sands of leads from a free Internet “webinar” (online seminars), but they will have access to tools such as unified messaging and many new choices in call handling.

In the face of ongoing changes from glob- alization, new performance measures must motivate and reward the innovation and adaptability that will keep leads processing competitive and be supported by investments in the communications infrastructure to enable success.

Financial Metrics

This approach views business as an ongoing investment and connects individual and group performance to returns in the form of revenue and profit. Displayed on a spread- sheet, metrics are shown as line items from corporate income statement and balance

sheet reports. By comparing results for differ- ent scenarios, investors and planners can decide between investment alternatives.

For the team of people responsible for war- ranty expense, for example, performance met- rics include warranty expense as a percent of overall revenue, the rate of growth in revenue quarter to quarter compared with the rate of growth in warranty expenses, and how the warranty ratio for your company compares with that of others in your industry.

The complexity and scale of globalization increases uncertainty and expense for busi- ness-process teams, even while global mar- kets drive down prices and profit. In the

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above example, warranty-expense metrics would change dramatically—they must now be far less relative to revenue, must grow less than revenue year to year, and may even be held to the benchmark of industry competi- tors who have outsourced to an undeveloped nation with very low labor costs. Employees can adapt to these aggressive and dynamic changes, but they will shift their activities more to process engineering, collaboration, and cross-business coordination.

There is a common belief among financial planners that investment in skill building to better manage complexity and change, along with a supportive converged voice and data infrastructure, is “soft,” meaning that the returns on that investment are difficult or even impossible to isolate or quantify.

On the contrary, experience proves that faced with highly volatile markets and global supply chains, even laying a shared view of changes in demand, availability, and engineer- ing has quantifiable results. Open communica- tion between people across the end-to-end sup- ply chain results in measurable decreases in inventory levels, waste, obsolescence, and car- rying costs. Even better, the time to respond to a change in demand is demonstrably shorter, and the amount of cash tied up in serving a target market goes down. These returns had long been simulated in dynamic models of complex global businesses but have been con- firmed recently by pilots of even simple Inter- net-based services that lay communication backbones across delivery teams worldwide.

Delivery and Time-to-Market

This approach views business as a delivery capacity that gains revenue and market share while protecting profit. The business is usually shown as a set of handoffs across the entire

By comparing results for different scenarios, investors and planners can decide between investment alternatives.

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supply chain. At each handoff, orders are placed by the buying organization, and the seller makes commitments and delivers to those promises. At each point, several teams are involved on both sides for contracts, pro- curement, order processing, capacity planning, shipping, logistics, and receiving. Each of those functions has performance metrics of its own, and together, they determine how quickly the business can respond to opportunities in target markets, at what cost, and with what results for revenue, profit, and share growth.

One example of a delivery metric is lead time, with teams held responsible for lead times on both sides of the handoff, at every point in the supply chain. In combination, they represent the company’s ability to deliver on commitments to customers and distributors and to adapt and remain compet- itive when opportunities arise.

For emerging global markets, aggressive competition and emerging competitors drive a need to constantly shorten lead times. And yet, even a simple global supply chain involves coordination and alignment between numerous separate groups of people, includ- ing third parties and many located in other countries and regions.

Current performance measures now must expand to include contract negotiations, logis- tics management, and warehousing options to decrease lead times and remain competitive. New performance measures will reward suc- cessful alignment, collaboration, and joint results across teams. Investment planning to improve delivery performance necessarily includes money for the training to build these new skills, along with a global Internet com-

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munication network, so that the business remains competitive in the years to come.

ALIGNING PERFORMANCE AND PRODUCTIVITY

People execute change strategies successfully when their performance measures are aligned with business outcomes and accom- panied by the resources and tools that enable their productivity. A corresponding invest- ment in a well-defined strategy that links people, communications processes, and per- formance measures will pay off in bottom- line revenue and profit.

NOTES

1. Robinson, K.-S. (2004, March 5). Study: HR should play a larger role in “offshoring” decisions. HR News. Retrieved February 2, 2005, from http://www.shrm.org/hrnews_ published/archives/CMS_007751.asp

2. Linder, J. (2004, May/June). Transformational outsourcing. Supply Chain Management Review, pp. 55–61.

3. Koch, C. (2004, October 15). A new game plan. CIO Magazine. Retrieved February 2, 2005, from http://www.cio.com/archive/101504/outsource.html

4. Jones, K. (2003, February 1). The Dell way. Business 2.0. Retrieved February 2, 2005, from http://www.business2. com/b2/web/articles/0,17863,515300,00.html

5. Gubbins, E. (2004, December 1). Tellabs digests AFC. TelephonyOnline. Retrieved February 2, 2005, from http://telephonyonline.com/access/web/telecom_tellabs_ digests_afc/index.html

6. Schonfeld, E. (2004, November 10). How to manage growth. Business 2.0. Retrieved February 2, 2005, from http://www.business2.com/b2/web/articles/0,17863, 767260,00.html

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Carol Blanchar and Judy Onton34

Carol Blanchar is CEO and principal of Conexo, Inc., Santa Clara, California, specializ- ing in the analysis of global enterprises’ investment returns from emerging communica- tion and collaboration technology. She spent 15 years as a finance supervisor, project manager, and professional services manager at Hewlett-Packard prior to founding Conexo in 1991. She may be contacted via e-mail at [email protected] or by visiting www.conexo.com. Judy Onton has over 15 years of HR experience, and her consulting work focuses on help- ing executives of high-tech companies build organizations that achieve results. She has worked with a variety of technology companies in the software, networking, and semicon- ductor industries. She may be contacted via e-mail at [email protected]. The authors would like to acknowledge the contribution of Andre Kuper.