Quality Progress

February 2002 • Table of Contents

Eight Steps to a New Performance Measurement System

Performance is an important part of any measurement based management system

by Bjørn Andersen and Tom Fagerhaug

This eight-step process for creating a new performance measurement system is based on our experiences with a number of organizations.

Before you start, your organization should establish a core team to carry the performance measurement system design process forward. Though the system is never finished, it should take only a year or so to get something in place.

The eight steps of the design process are:

1. Understand and map business structures and processes. This forces those setting out to design a performance measurement system to think through and reacquaint themselves with the organization, its competitive position, the environment it exists in and its business processes. After participating in this exercise, most managers agree the effort is a welcome break from day to day operations and an opportunity to revisit some of the organization's strategic issues.

2. Develop business performance priorities. The performance measurement system should support the stakeholders' requirements from the organization's strategy through to its business processes. This order of priorities must be in place well before the process enters the actual design phases.

3. Understand the current performance measurement system. Every organization has some kind of measurement system in place. For this reason, there are basically two ways to approach the design and implementation of a new performance measurement system. You can either scrap the old system and introduce the new one as a replacement, or you can redevelop the existing system. Both approaches can work, but the former approach is more likely to lead to trouble. People will cling to the old measurement system and either use both systems simultaneously or use the old one and simply go through the motions of the new one. You can eliminate this outcome by taking the latter approach.

4. Develop performance indicators. The most important element of a performance measurement system is the set of performance indicators you will use to measure your organization's performance and business processes. This is the point in the design process where the top-down cascading approach meets the bottom-up design approach and where the broad masses of the organization become involved. The purpose of this step is to develop the performance measurement system with an appropriate number of relevant and precise performance indicators.

5. Decide how to collect the required data. Developing perfect performance indicators that will tell you everything you ever wanted to know about what goes on in your organization is one thing, but being able to collect the data required to calculate these performance indicators is a completely different matter. This issue must initially be ad-dressed during the development of the performance indicators so you avoid selecting those that can never actually be measured. Remember, the proliferation of modern enterprise resource planning systems has turned this into an exercise in figuring out which data can be extracted from the systems' data warehouses.

6. Design reporting and performance data presentation formats. In this step, you decide how the performance data will be presented to the users; how the users should apply the performance data for management, monitoring and improvement; and who will have access to performance data. After you finish, you should have a performance measurement system that has a solid place in your organization's overall measurement based management system.

7. Test and adjust the performance measurement system. Your first pass at the performance measurement system will probably not be completely right--there are bound to be performance indicators that do not work as intended, conflicting indicators, undesirable behavior and problems with data availability. This is to be expected. In this step you should extensively test the system and adjust the elements that do not work as planned. As a result, you will have a system where the main quirks have been eliminated; however, your system will still not be perfect. A performance measurement system should be construed as a never ending journey toward perfection.

8. Implement the performance measurement system. Now it's time to put your system to use. This is when the system is officially in place and all can start using it. This step involves issues such as managing user access, training, and demonstrating the system is important and will be used.

Remember, this is not an absolute process that needs to be followed to the letter to work. In some cases, one or more steps may be superfluous; in others, additional steps may be needed. You know your organization better than we do, so it's up to you to make the necessary adjustments to the process to maximize the probability of the system's success.

BJØRN ANDERSEN is a research director at SINTEF Industrial Management in Trondheim, Norway, a professor at the Norwegian University of Science and Technology and a member of ASQ.

TOM FAGERHAUG is a research scientist at SINTEF Industrial Management in Trondheim, Norway, and a member of ASQ.

Note: This column is adapted from the authors' book Performance Measurement Explained, published by ASQ Quality Press in 2002.

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