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Weekly UpdatesWhen the company merged two different operational activities in early 2006, the performance of the Ontario and Atlantic division was not as good as expected. However, in 2007, only one year after the amalgamation, the divisional profit almost doubled to unprecedented levels and the employee commitment to keep driving the performance has never been so strong.
The financial result numbers indicate that the division performance in 2007 mainly came from lower cost of sales and reduced overhead costs. However, the real driver behind that successful cost structure turnover was the selection of proper key performance indicators (KPIs), the implementation of simple scorecards, and the consistent measurement and monitoring throughout 2007 that encouraged the operating team to act in accordance with the division's objective.
I have been heavily involved in measuring and tracking business performance for the past eight years. It was not until last year that I experienced how important it is to have four key success factors to achieve a successful implementation.
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Four key success factors
During my professional career, I have been developing and establishing performance measurement processes for three multinational companies (fast moving consumer packaged goods, air courier services, and retailer). Based on that experience, I can draw a solid and simple conclusion that has been proven true so far: "There are four important factors that will determine a successful implementation of performance measurement process into the day-to-day business activities; management support, clarity, team buy in, and consistency."
Those four key success factors (KSF) are inseparable; even if only one factor is missing from the equation, the implementation of performance measurement will be easily sabotaged and failed. The cost associated with failure is innumerable because all hard work and resources that have been put toward the process are wasted. Moreover, the employee will no longer trust the measurement initiative and it will become harder to implement another measurement process in the future.
In the past four years, I have discovered that the end result of implementing KPI and scorecards at two similar companies with the exact same measurement methodology, constraints, and objectives could differ like heaven and earth.
Scorecards
Let's go back to the success story. Realizing that something needed to be done to achieve better financial results, the Division decided to adopt the scorecarding concept and started measuring store performance at the beginning of 2007. The four KSFs were really playing a pivotal and significant role: the divisional vice-president was staunchly supporting the KPI and the measurement processes, the KPI was simple and clear, the operating team bought the concept, and the results were being monitored consistently.
It took about three months of consistent communication and reinforcement of the scorecards' measurement at all branches before the processes were fully embraced and embedded into the monthly performance review of the operating team.
First year result with Scorecards
The division deliberately chose a very simple and clear KPI. To make the message very clear that the main company objective is to increase profitability at the service centre level, the division selected unit operating profit as its first indicator, followed by sales and average price.
These three main KPIs were significantly helpful for the store manager to perform and compete on the most important objective, which is increasing the bottom line by managing the average price while keeping the direct labour cost at the same level and reducing indirect cost vigorously.
In addition to the scorecards, we added the colour coding to visualize the performance for each store: red for low performing stores, yellow for average performers and green for stores with high performance. With consistent communication and implementation, the message was loud and clear--the division wanted to improve their operating profit.
The sales and average price are very simple indicators for the store managers to gauge whether they are moving in the right direction. When you are able to improve your service value, you could realize significant reduction on cost of sales and overhead.
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The scorecards were the main tools behind the significant improvement on the bottom line. The year-end result for 2007 showed that the KPI, the scorecards, and the measurement processes were helping the division increase its trading profit from a mere single digit percentage to a respectable double digit percentage within one year. It proved that "what gets measured gets done."
Second-year result with balanced scorecards
Second year attempts to further increase the bottom line result gave the division more challenges because the store needed additional help to stay on course. The Division started reviewing all available reports and developed comprehensive balanced scorecards (BSC). The Division identified four major components for the measurement; all components were being supported by existing separate reports that were available in three separate departments.
At the higher level, the company also came up with the same understanding that comprehensive KPI needed to be developed and a strong BSC needed to be presented to the store manager to help the team drive performance to the next level.
By adopting the BSC concept, as illustrated in Picture 1, the Division improved its 2008 scorecard with more KPIs, while maintaining the same message that the additional indicators would help the store improve its bottom line.
With this new scorecard, the Division also communicated the new colour coding bracket to the store level, a new performance bracket with five percentage points higher than the previous year. This five percentage point increase was really a stretched target--taking into consideration that the Division doubled its operating profit from the previous year.
In addition, performance targets for three non-financial KPIs (productivity, customer satisfaction, sales activity) were added to help store managers manage their store and achieve better financial performance.
Although 2008 annual results still need to be seen, early results show that the bottom line performance for Quarter 1 - 2008 reached a new level with some stores yielding a very healthy percentage for their operating profit--a number that the division could only have dreamed of achieving two years ago. The results also show that the operating profit had improved by almost three times for the first quarter of 2008, the lowest season of the year.
Company-wide initiative
In addition, to the BSC, the Division receives very strong support from the company's CEO. The CEO took the BSC and simplified it by combining the four KPIs and linking the store performance rating to a world-class corporate level by comparing Canada to performance in other countries.
Each KPI will be assigned a star rating between one and five. The rating will be measured and published on a half yearly basis and a weighted calculation will assign one star rating to each store. At the annual meeting, an award will be presented to each store that meets company objectives.
The award concept was presented during the annual meeting across the company divisions where the buy in exercise was really taking place. The CEO also spent considerable time assuring that the measurement will be done consistently throughout the year and will be incorporated into their performance bonus.
With top management support, simple indicators, team buy in, and consistent measurement, the company and the Division are on the right track to achieve their objective. What gets measured will definitely gets done.
By Santoso Sugianto, CMA
Santoso Sugianto, MBA, CMA, (ssugianto@hotmail.com) is a senior executive with 12 years of international experience managing operations finance for fast moving consumer packaged goods, distribution and logistics, retailers, and multi location service companies.
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