CUSTOMER VALUE AND BUSINESS IMPACT

Why are you losing market share? Which competitors represent the biggest threats? Why are customers only purchasing once? Do you really understand the Value Proposition you are presenting to the market? Where should you focus effort to develop competitive advantage, and what sort of effort will it take?

This chapter shows you a way to respond to all of these questions. The bottom line is: if your customers perceive that they get more Value from your enterprise than from elsewhere, they’ll stay with you, and they’ll recommend you to others. That represents success in the marketplace.

WHAT’S A PARTNER?

1. A. You run a company manufacturing automobile components for retail, and your delivery company is becoming increasingly unreliable in terms of meeting delivery schedules, despite complaints from you and your customers (retail outlets) alike.

2. B. Your company is part of an alliance developing the infrastructure to mine a metal deposit. The alliance partner operating the rail link to the nearest port is struggling with cash flow.

3. C. You run a company that manufactures and sells proprietary solar cell-based products. You hold some of the key patents, the others being held by a software company, with whom you’ve been developing this market-leading technology. Their most important patent is now being breached by a competitor, but they cannot afford to defend it on their own.

PREAMBLE: WHERE ARE WE NOW?

How are data and information currently being used throughout your enterprise to:

• manage risk?

• inform decision-making – getting the right information, at the right time, in actionable format?

• improve all aspects of the business – using business analytics, Six Sigma etc.?

The best entrée to adopting the performance measurement system described in earlier chapters is to find out the answers to these questions. And this is not a major undertaking: It can be accomplished in days not weeks, and by just a small team of two people, with only modest demands on management time.

The outcome of the assessment process will be a list of prioritized improvement strategies and action plans, developed with the leadership, that form the basis for getting started.

THE PERFORMANCE MEASUREMENT FRAMEWORK ASSESSMENT PROCESS

The goal is to assess the status of the enterprise against eight basic criteria1 (see Exhibit 11.1) relating to the Performance Measurement Framework, as a basis for improvement.

Here we give an overview of the assessment process, with the details deferred to Chapter 12. It is modeled on a proven process developed by Norbert Vogel, a leading practitioner in devising and exhibit 11.1. Criteria used in an initial assessment of an enterprise against the Performance Measurement Framework, and the areas explored for each criterion.

PREAMBLE: WHO’S THE OWNER?

Who owns your business?

What Value are you creating for the Owners that prevents them from investing their money elsewhere? In fact, what does Value mean to them?

Answers to the first question tend to fall into one of four categories:

1. Shareholders of publicly listed companies

2. Individuals or families or groups, for privately owned enterprises

3. Governments, for a wide range of official departments, statutory authorities and other agencies

4. Communities, for a range of community-based cooperatives.

The diversity of types of ownership implies a diversity of concepts of Value for the Business. Here, we’ll concentrate on publicly listed companies, as they present the greatest complexity.

The complexity arises partly because, by and large, the shareholders are not entitled to receive all the information they need to assess the Value being created for them. That’s not a surprise: companies need to keep a lot of information confidential to develop and maintain competitive advantage. So, as proxy for the shareholders, public companies have Boards, members of which are entitled to have access to all the information. That’s why we develop the Value tree for the Board, rather than for the shareholders.

THE NEED FOR ANALYTICS

Is that how your enterprise is going – or rather, not going? Which lever should you pull to give it the best impetus? Why this lever and not another lever? How will you decide? And how will you know whether you’ve changed things in the way you intended?

The purpose of this book is to describe how to obtain performance measures that will provide you with a sound basis for answering these questions: measures that can help you focus your efforts on improvements likely to have the biggest impact on your most pressing business issues – how to increase market share, how to reduce staff turnover, how to work better with suppliers, how to build community support for a development.

Most leaders now recognize that it isn’t good enough to rely simply on some financial measures supported by a few indicators such as market share. More information is needed if companies - let alone, countries - are to guard against the sorts of risks that resulted in the 2007-2008 Global Financial Crisis. And there are numerous other risks that can also cause the downfall of the most well-intentioned leader who hasn’t got timely and actionable data.

INTRODUCTION

In the mid-1980s, AT&T was confronted by a paradox: on the one hand, customer satisfaction levels were running at about 95 percent; on the other hand, they lost 6 percent market share, where 1 percent was worth $600,000,000. For the first time in corporate history, AT&T laid people off – 25,000 worldwide from an overall staff of 300,000 – including managers recently rewarded for the apparently outstanding customer satisfaction performance.

An AT&T trouble-shooting team discovered that one of the critical factors explaining the paradox was the way in which customer satisfaction was being measured: AT&T’s overall focus was not concentrated on their customers’ perceptions of Value. And it turned out to be Value that had a connection to business results.

The concept of creating and adding Value for stakeholders is at the core of our approach to performance measurement.

What does Value mean to them?

And as we’ve seen in Chapter 3, just asking this simple question leads immediately to issues of market segmentation, regardless of the type of stakeholder.

The word “Value” obviously connotes some sort of exchange or trade: you get something you want, you give something in return.

PREAMBLE: AN ONGOING DIALOG WITH THE STAKEHOLDER

Relationships are sustained if the partners to the relationship remain in contact, whether by telephone, letter or email, or personal meetings. And your relationships with your stakeholders are no different. You need some form of ongoing dialog with each of the stakeholder groups. The frequency and nature of the dialog may vary, but it has to take place.

The generic process for managing Stakeholder Value provides an ideal vehicle for a constructive dialog. Indeed, a communications plan is an essential concomitant of a properly implemented Value management process, and we’ll discuss this explicitly in Section 13.6 below. The most compelling example of such a dialog is a People Value process (although the same applies to all the other stakeholder groups), so it’s helpful to look at the steps in the process (Exhibits 13.1 and 13.2) to see the dialog developing (Exhibit 13.3).

Experience with this process confirms strongly that, even in the most hostile of environments (e.g. a university)

• there is a large initial and beneficial impact of involving people in the design of the instrument, they enjoy the Focus Groups2 and also tell other people what they’ve been doing and why; and

• people will continue to participate in follow-up surveys provided that management responds to the results promptly and sensibly.

PREAMBLE: WHY BOTHER?

How much of your budget is spent on remunerating your people: salary, bonuses, provision for retirement etc.? 10 million dollars? 100 million dollars? More?

Would you like to save yourself at least 0.5 percent to 1 percent of this annually? There is a simple solution: cut your unplanned staff turnover by 1 percent.

It is very costly to lose someone you hadn’t wanted to lose. You lose money through:

• recruitment processes

• downtime pending appointment

• cost of load sharing

• cost of new hire

• time to become proficient.

For lower-level staff, staff loss is generally reckoned to cost of the order of 50 percent of their total annual package, rising to 100 percent or more for senior people. And we haven’t even started to add in the cost of the knowledge and know-how that walked out the door.

PREAMBLE: AN ASSESSMENT, NOT AN AUDIT

Remember our overall goal as stated in Exhibit 2.1 in Chapter 2: we aimed to describe a system for performance measurement that provides:

1. a concise overview of health of your enterprise;

2. a quantitative basis for selecting improvement priorities; and

3. alignment of the efforts of the people with the mission of the enterprise.

The purpose of an assessment (cf. Section 11.2) is to evaluate how well your current approach to performance measurement is helping you achieve this. The assessment is based on the eight criteria described in Exhibit 11.1 and also depicted in Exhibit 12.1, which derive from the Performance Measurement Framework.

The approach to performing the assessment is essentially based on the approach used for Business Excellence frameworks such as that of the Baldrige or the European Foundation for Quality Management (EFQM). Each criterion is evaluated in terms of

and

Lucky Fred (Vine)! Unfortunately, the rest of us have to deal with the real world, which is pervaded by uncertainty. It behoves anyone being presented with quantitative information in the form of individual numbers, tables and graphs to gain an understanding of what all this stuff means. After all, if it’s being presented to you, you may well be accountable for what it all implies. So, to help you elicit this information, here are some basic questions to ask.

1. How reliable is this number?/What sort of error do you associate with this number?

2. How do you know it has changed significantly from last month’s (last quarter’s) number?

3. Where is the trend chart for these numbers?

4. Is that apparent increase/decrease/cyclic effect in this trend chart really meaningful?

5. What is the justification for using so many significant digits/decimal points?

6. How representative was the sample used to calculate these numbers? How was the sample collected? What biases might be present? How do you know you collected sufficient data to produce a reliable estimate? What demographic factors do you think might affect this number?

7. Why are you presenting a pie chart instead of a dot chart?

8. Why are you presenting a divided bar chart instead of some dot charts?

9. If we’re supposed to be seeing a pattern in the data, why aren’t we looking at graphs instead of tables?

10. How do you predict these numbers will change in the future, and what is the uncertainty in your forecasts?

11. Why is this a realistic target? How do you know the system is capable of achieving it?

PREAMBLE: WHERE ARE WE GOING?

Recall (from Chapter 1) that our purpose is to describe a system for performance measurement that gives you the quantitative information that you need to help you run your enterprise. “Quantitative information that you need” means information that is:

• timely

• actionable – in a format (graphical or tabular) that facilitates decision-making

• measures the right thing, the right way

• clearly interpretable in terms of its limitations – degree of uncertainty in the measurement, possible biases.

And additionally, the information has to provide a concise overview of the health of your enterprise. So, what should be reported, and how should the reporting take place to make the most of this information?

CONCISE AND COMPREHENSIVE REPORTS

We are now in a position to identify the groups of measures that need to appear in monthly or quarterly leadership reports. The Board Value tree in Exhibit 9.2 identifies six groups of Attributes that need to be monitored, as shown in Exhibit 10.1, where “to be monitored” means that lead indicators are needed.