What Gets Measured Gets Produced

by Rick Lamprecht

What Gets Measured Gets Produced

Have you ever driven with a broken speedometer?  Scary. Have you ever driven into the sun with a dirty windshield? Dangerous!  Likewise, making improvements to your company without knowing where your company is headed has the same risks.  Managing without metrics is pointless.  A business operator has to know where he stands versus plan, and against historical performance.  If you cannot measure it, you cannot manage it.

True performers want to be measured.  Measurement plays a primary role in their control systems.  They don't want to be blindsided by negative situations occurring that they had no way to keep track of.  They have grown beyond simply measuring by intuition, even though such judgments can be important. They've grown beyond tribal knowledge.  They know the business cannot be leveraged if it relies on personal feel rather than objective processes.

Control systems are influential. If you don't think so, why do you stop at a red light when no one else is around?  The very act of measuring something changes behaviors of people. People pay attention to goals that are measured, as opposed to those that are unmeasured. The very act of measurement is a stimulus that focuses attention on an item. For example, if a store uses an incentive pay plan that compensates employees on the basis of sales volume as a performance measure, those employees will compete for sales and ignore unmeasured functions such as housekeeping and stock work.

This means that an organization must determine if its measurements drive performance to the strategic goals of the company. For example, a person can do a great job by performing to a particular measurement, even to the detriment of what is important to the customer.  For example, airlines tout their on-time departure metrics.  But what is not revealed is that passengers can pull away from the gate on time, and then have the aircraft remain on the tarmac for three more hours while the storm passes.  Meanwhile, passengers are all held hostage without cabin services instead of being able to walk around the terminal in comfort.

Remember Blanchard's customer-centric upside-down organization chart mentioned before?  Would an airline permit such sub-optimization if their metrics reinforced a values system based on what is best for its customer's comfort?  

Whatever metrics your company chooses to keep track of, several criteria should describe the metrics.  They should be the success factors that make a difference to the company.  They should mirror the tasks and objectives which serve the strategic plan.  The success metrics would typically be information you would not want in the hands of your competitors. 

The activities measured should be key operating data, in contrast to accounting reports.  They should meet the criteria of:

• Real Time - The reporting of the measurable event should be as close to the data collection as possible, not more than a day between event and its reported result.  This is in contrast to accounting reporting that is typically weeks from the event that is measured.
• Objective - They should be binary and/or quantifiable, dispassionate, provable, and absolute.  This is in contrast with typical accounting reports that have accruals, allocations, are too macro, and aggregate data over longer time periods.
• Appropriate - The metrics should record those meaningful events and job functions that have a direct impact on the strategic objectives of the firm. In contrast, accounting reports are assembled in aggregate form for reporting purposes, not typically for internal control purposes.
• Fair - The operating measurements should accurately reflect physical events and operational transactions in an unbiased manner, free from extraneous influences.  They should be totally in the control of the person reporting them. This is in contrast with accounting reporting which is collected primarily for tax preparation and cash-balance purposes.
• Matches the Job Function - Measurements should be totally within the role in both responsibility and accountability.  In contrast, accounting metrics report shared responsibilities.  They do not measure human functions.  For example, what single activity or single person is responsible for profit?
• Your Goals - The metrics should ultimately lead to reports of what you want done, and the progress toward those ends.

Materials and Overheads are the primary costs of most enterprises.  Let's focus on overheads.  Your metrics should also focus on what comprises overhead cost in your organization.  The goal is to learn why the staff exists and what keeps them busy at its current level.

There are four determinants to overhead in most companies, classified by four types of transactions:

Every one of the above transaction activities can be measured and ratios can be established to determine the headcount or hours that are required to perform each typical activity. 

One of my early employers used a process called Work Flow Control to keep its large G&A costs in line with the variations of workload.  The company developed time standards for every G&A and overhead activity.  There were time standards put on creating purchase orders, data entry activities, on typing of letters (obviously this was back in the days of the typewriter), the time it takes to create an E-size mechanical drawing, etc. 

The hours spent per month were compared against the activity per month in each of the measured areas, and ratios were reported.  The Work Flow Control program increased G&A productivity by weeding out the worst performers.  The metric was helpful in budgeting headcount levels in the strategic planning process.  

The company president attributed the Work Flow Control program as one of the principal contributors to the firm's remarkable 51% return on investment.

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