Authors:
Juergen
H. Daum (lead author)
Peter
Bretscher (corresponding author)
Ing. Büro für
Wirtschaftsentwicklung, Eggersriet, Switzerland,
Abstract
Today,
customers or other important stakeholders demand that businesses or non-profit
organizations act according to their stakeholder’s subjective, qualitative
values and criteria. Organizations therefore must take increasingly
qualitative, subjective ratings and values into account in managerial
decision-making. They need performance measurement systems that are able to
handle subjective, qualitative measures and to combine them with quantitative,
i.e. financial information. The vector-based concept of performance measurement
& visualization introduced in this paper offers a practical solution that
can be applied for example in public service organizations or to support R&D
management of a software company.
Introduction
and Problem Description
As long as demand
exceeded supply, management’s attention was focused on efficient production
processes and efficient resource utilization: the focus was on internal
efficiency. This is reflected in traditional financial control-based[2] performance measurement concepts where the emphasis is
on costs and return on capital – that is, on efficiency measured in “objective”
financial terms.
However, this proven and
practical model for evaluating and managing the performance of organizations is
falling short today. When supply began to exceed demand in the industrialized
economies (beginning in the 1970s), organizations started to compete more and
more on quality, differentiation, and customer satisfaction rather than only on
cost/financial efficiency. The ability to create a positive “effect” for
customers from their “subjective” perspective – and increasingly for other
stakeholder groups that today have power over the “license to operate” of an
organization – became the critical success and survival factor for any
organization, whether business or non-profit (Daum, 2002).
Efficiency is still important
today, but it no longer creates competitive advantage. The main driver for
competitive advantage today is what we call external effectiveness,
which is effectiveness from a subjective stakeholder perspective. This becomes
obvious especially in the service sector, particularly in public services,
where for centuries organizations have been managed only on the basis of
budgets and funds. But today, when citizens are expecting more value for the
taxes they pay, these organizations need something more than just the budget to
optimize their operations and create value for their “customers”.
Subjective measurement
systems based on qualitative “measures” are nothing new. In fact they are at
the root of many of our objective quantitative measurement systems to which we
have become so accustomed that we sometimes forget that they didn’t exist 200
or 300 years ago.
One example is how we measure
temperature. Before the advent of today's objective, quantitative temperature
measurement systems, people for millennia “measured” and defined temperature by
categories like cold and warm – measures that need subjective
interpretation and that are highly context sensitive (“cold” in Norway probably
means something different than “cold” in Italy). It was not until the 17th
and
18th centuries when Réaumur (1683-1757), Fahrenheit (1686-1786) and Celsius
(1704-1744) introduced the first standard temperature scales based on natural
and common temperature reference points (such as the temperature of the human
body or the dew point and freezing point of water) that people have been able
to measure and compare temperature with an objective measurement system that is
based on context and interpretation independent measurement scales. And it was
not until the 19th century that Kelvin (1824-1907) developed the
Kelvin scale – a measurement concept which no scientist today (e.g. in physics)
can live without.
Subjective, qualitative
measurement systems are still used today when qualitative criteria are the
focus in the measurement or valuation process that require interpretation
through third-party experts or external company stakeholders. An example of a
qualitative measurement system is the rating of a company’s credit worthiness
by Standard & Poor's (S&P) with ratings ranging from “AAA” to “D”.
While S&P probably has internal rules and standard procedures governing how
they rate companies, the rating results are nevertheless subjective: they are
based on S&P's valuation/measurement methods and on personal qualitative
expert judgments by analysts. Because no objective measurement scale for the
credit worthiness of a company exists (at least not yet), the S&P rating
cannot be compared directly with the ranking of other rating agencies or with
the rating of a company's bank. Nevertheless, the S&P rating is widely
accepted and provides useful information about a company for capital market
participants or suppliers.
The Concept
of Vector-Based Performance Measurement & Visualization
Since supply exceeded demand
in the industrialized economies, subjective, qualitative factors, the
intangibles, become at least as critical as the quantitative, objective
(financial) factors in managerial decision making, because in a supply rich
economy customers and other stakeholder have a choice: they can choose between
various offers, and that means they are able to invest in a company or buy
something that is more in line with their personal, subjective qualitative
value scale than other offerings. This doesn’t mean that the quantitative,
objective measurement that the financials provide (e.g. costs, price – all measured
in monetary units that allow objective comparison independent from context and
subjective interpretation) become irrelevant. It is still an important
measurement of performance. But it covers only one dimension: the dimension of
economic/financial efficiency. Missing is the dimension of external
non-financial effectiveness from a subjective stakeholder perspective.
Only if we take both
dimensions into consideration are we able to assess the true performance of a
company, a business unit, a product line, or even of a public service
organization. We consider the vector-based approach to performance measurement
& visualization as a good method to do that in a systematic way and allow
aggregations and de-aggregations (mathematical operations) on the compound
result, which we define as the total or compound performance.
The intention of the
vector-based concept for performance measurement is to combine subjective,
qualitative measurement of performance with objective, qualitative measurement
of performance in such a way that total or compound performance (the compound
of qualitative and quantitative performance) can be easily calculated and
visualized. The solution is the concept of vector-based measurement and
visualization of performance (Bretscher, 1996, 1998).
The basic principle of the
concept is simple (see diagram 1):
The third dimension (the
length of the vector = v) represents the absolute total performance, the
compound result of qualitative and quantitative performance. It can be
calculated as:
The gradient of the vector
can provide users with additional relative performance information. It can be
calculated as α = arctan (y/x).
Diagram 1
Here is an example of a
simple managerial application for measuring and visualizing performance of a
company, business unit or product group (see diagram 2):
Diagram 2
Whereas the approach depicted
in diagrams 1 and 2 requires a direct rating of both dimensions (of the
subjective dimension e.g. by a customer survey or by systematic product use
value analysis), the approach depicted in diagram 3 allows values to be
determined for the second axis indirectly: they are derived via the vector from
the values of the other dimension.
Diagram 3
In this case the vector (i.e. its length and direction/gradient scale)
is not defined by a value on the x axis and one on the y axis but
by two values on either the x or y axis. The value for the other
axis is then derived from the vector. A possible application for this variant
is the valuation of enterprises by different investors with different
investment strategies: values on the x axis represent book value and the
price/market value a specific investor is willing to pay. The entries on the y
axis that are derived from the two values on the x axis show then
the different subjective use values the investment represents for different
investors.
This application example
draws attention to the difference between price and value. If this difference
is not recognized, there is a tendency to confuse cause and effect. But in
reality price is always – sometimes with a time lag – dependent on the
subjective value a potential buyer attributes to a product or good (see also
the application example for enterprise valuation on page 17).
The vector-based concept for
performance measurement & visualization of total performance also allows
users to easily aggregate performance of various sub-entities (such as groups
of customers, market segments, business units, or corporate functions) into a
“sum” of performance for the whole entity (such as a company). Analysis and
assessment of quantitative and qualitative values starts on the sub-category
level per sub-category. The concept of vector-based performance measurement
& visualization allows users to aggregate objective and subjective values
of these sub-entities into the total performance of the whole entity. We call
this the bottom-up approach. One example is separate valuation of the different
business units of a company according to the profit (x axis) and
customer use value (y axis) they have generated. The results of the
single business units would then add up to the total performance of the company
(see diagram 4)4.
The top-down approach starts
with a vector representation of the performance of an entire entity such as a
company, bank, business unit, or region. This total performance is then
de-aggregated into the contributions of the various sub-entities (business
units, branch offices, product groups, countries, and so on) creating a
specific vector profile for each sub-entity (see diagram 4). Through a
drilldown analysis of the performance of an entity, the components of its total
performance become visible on a sub-entity level and can be targeted with
managerial interventions.
Diagram 4
4 For simplification, the
cost/use value of the center is neglected here.
8© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
Helps managers to keep tabs
on all relevant aspects (subjective and objective) of the decisions making
process:
In the decision making
process, managers have to take into account objective, quantitative information
– usually financial information such as price, cost, revenue or profit, but
also subjective, qualitative criteria – that is, information about the likely
qualitative effect of their decisions for customers, investors, or other
stakeholders. They need to structure these different types of information and
make valuations and weightings in order to take a rational decision that takes
all relevant aspects into account. Because people cannot keep all these
different parameters in their head, they need instruments that support them in
structuring decision relevant information and to maintain an overview. In
traditional managerial decision making, often the only instrument available are
financial/accounting instruments that structure and visualize financial
information – representing just the cost, price, profit or revenue dimension of
a decision. The concept for vector-based performance measurement &
visualization represents an instrument that allows companies or non-profit
organizations to do that with subjective, qualitative information as well (such
as focusing on effectiveness from a stakeholder perspective) and to combine it
with objective, quantitative measurement (focusing for example on
economic/financial efficiency) for performance reporting and decision support.
Makes subjective and
objective views comparable and communicable – independent of time and location
(= increased transparency across the entire organization)
The vector-based concept for
performance measurement and visualization provides a value logic that allows managers
to include subjective views, experiences, and values and to link them to
objective measures in decision making processes - even when the holders of
these subjective views, experiences, and values are not personally present or
involved in the decision making process (which is a normal situation in larger
organizations, where decisions and decision-relevant information have to be
passed on to the next hierarchical level in written or electronic form).
Due to its mathematical
foundation, aggregations and de-aggregations are easily possible (linking the
strategic overview with the operational view):
Compared with other
techniques that are used to present qualitative, subjective values for decision
making for instance, the vector-based concept provides the benefit that
calculations (aggregations and de-aggregations) are easily possible so that the
whole picture across different sub-entities and sub-domains remains visible at
any point in time. It can show the objective and subjective aspects of results for
single sub-entities (such as projects or business units) and for the whole
entity (such as a company). Prioritization in managerial decision making, such
as for optimizing resource allocation across R&D projects or business
units, can be done with the whole picture in mind so that not only total
efficiency (resource perspective) but also total effectiveness (customer or
market value generated by investment) will be increased.
Represents an efficient and
effective management information management concept / it is easy to understand
from a managerial perspective:
Today's knowledge economy is
confronting managers with difficult trade-off decisions under increasing time
pressure. The vector-based concept for performance measurement and
9© Juergen H. Daum / Peter
Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version), presented
and published at the PMA Conference 2004 (The 4th
International Conference on Theory and
Practice in Performance Measurement and Management), 28-30 July 2004, Edinburgh
/ UK
visualization provides them
with a decision support and management information management concept that
presents management/decision-relevant information in very concentrated form and
in an easy-to-understand and easy-to-digest way – far beyond the possibilities
of the classical concepts: requiring fewer paper, fewer pages, and works with
more graphics/charts that help to establish a common understanding in a
management team of a situation and its various subjective and objective
aspects. The result: less interpretation uncertainty, better and more
consistent decisions.
Assumptions behind decisions
and the history of the decision making process become transparent:
Managerial decision making
always involves subjective ratings, valuations, and experiences. Because the
vector-based approach offers a systematic way to rate and measure qualitative,
subjective criteria, it makes the subjective criteria behind a decision
transparent and allows the development of the values of these assumptions to be
tracked over time to modify decisions and optimize the intended effect at a
later point without the need to communicate again all the details to people
involved in the decision process.
Governmental authorities are
facing a major challenge in administrating or managing their public service
operations. In contrast to the commercial sector, public service organizations
usually do not generate revenues through their operations. Their customers, the
citizens, do not pay directly for public services such as education,
infrastructure maintenance, police and justice, defense, and so on. Revenues of
public service organizations arise instead from fund allocation: the government
or governmental agencies allocate funds (i.e. a part of their tax income)
according to their current policies to the various public service departments.
Because there are no revenues from customers that can serve as a proxy for
success, the traditional public service management regime makes it difficult or
impossible to determine the efficiency and effectiveness of a public service
operation and how well it is performing.
Overcoming this problem and
establishing public services as modern, customer-focused and efficient service
organizations is the objective of the New Public Management (NPM) initiative in
Switzerland. The Swiss NPM concept is attempting to shift the focus on the
effects of governmental activities on society, such as in healthcare or
education, by centering public service management on these key questions:
How should our politics
affect the citizens? (effects) • • •
What contribution/performance
of the public service administration is required to achieve these effects?
(activities and their performance)
How much does it cost?
(costs)
10© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
Thus the main intention of
the Swiss NPM concept is to show the relationship between effects, performance,
and costs and to use the resulting insights for optimizing public service
management. NPM will adapt public service management in Switzerland to today’s
citizen demands while balancing this with today’s financial possibilities. It
is expected that NPM will lead to more efficient use of available funds and
resources and that they will be invested or deployed where they are needed to
create specifically desired effects for society. With that approach, effects
and performance will move to the center of attention – not just the costs
(funds) that a public service organization is spending.
The basic assumption is that
optimal results will become possible when effects, activities, and their
performance and costs are all taken into account. If one of these three
parameters is changed, the change will affect the entire system of the NPM’s
“magic triangle” (see diagram 5). If the budget, a specific fund, is reduced,
certain activities can no longer be performed: performance will decline. If the
government or the Kanton-Verwaltung changes the effect-goals, activities and
performance levels of public services need to be changed as well.
Because NPM takes into
consideration not just costs and funds but also effects and performance, it
enables qualitative targets (effects to be achieved, performance targets) to be
defined along with traditional financial targets (budgets or funds available to
be spent). This creates the foundation for a more “customer-centric”, i.e.
citizen-centric public service management and makes it possible to delegate
tasks and responsibility to the level at which the corresponding competence is
available. This principle of devolution is an important building block of the
Swiss NPM concept. The expectation is that the integration of tasks,
competencies, and responsibilities on each level will lead to more clarity,
productivity (efficiency and effectiveness), and flexibility. The Swiss
Regierungsrat has therefore defined as a major objective of the NPM initiative:
“Flexibility in resource allocation and responsibility will be delegated as far
as possible down to the expert basis” (Kanton Basel-Stadt, 2003).
To control and manage a large
public service organization under these conditions (three dimensions instead of
one financial dimension, and that across many organizational levels) requires
something other than the traditional budget-based or fund-based management
instruments public service organizations have used for centuries. We believe
that the vector-based concept for performance measurement and representation
provides appropriate instruments for executing the new policies in Switzerland
as they have been outlined in the NPM concept.
For instance, the NPM concept
structures the activities of a Kantons-Verwaltung into 140 “product groups” for
which effect goals, performance targets, and financial budget have to be
defined and controlled. The vector-based approach combines information from
cost accounting with non-financial performance and effects into a
multidimensional coherent performance measurement system that links all
organizational levels into one system of measurement. This makes the complexity
manageable and puts every product group and every public service department
into the context of the whole system/organization.
The basic principle for
applying the concept for vector-based performance measurement and visualization
to e.g. a Swiss Kantonalverwaltung is very simple: achieved effects and
effect-goals (“Wirkung”) are presented on the y axis, cost-budgets and
actual costs (“Kosten”) are
11© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
presented on the x axis,
and performance targets and actual performance (“Leistung”) is presented
through the vector (see diagram 5). With that approach it is possible to
measure and present the performance of one product group in all three
performance dimensions.
Diagram 5
It is also possible to break
down the total performance of the product group into performance contributions
of sub-entities (such as organizational units) or to add performance of all product
groups up to the overall performance of a department or an entire Kanton. This
enables the Kantonalverwaltung to keep tabs on the effects, performance, and
costs of the various product groups and departments and to make better
trade-off decisions between effects and costs and thus optimize the portfolio
of its services from a holistic perspective (see diagram 6).
12© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
Diagram 6
Benefits for the
Kanton-Verwaltung include:
Public service managers do
not need to wade through 300-page budget documents (that is the actual number
of pages for the Kanton Basel-Stadt budget, including 140 product groups, 1000
measures and 140 budgets). A few graphs/charts are enough to get an overview. •
•
The focus is set in the first
place on value and performance (effects for citizens and performance of the
public service) and then on financial budgets (on how to get and spend funds).
This aligns the whole organization with the intended effect of its activities
for society and enables management to make better trade-off decisions between
tight budgets (efficient use of resources) and benefits (effects) from a
citizen perspective.
The application of the
concept of vector-based performance management & visualization to support
public service management is currently under investigation at several
Kantonalverwaltungen in Switzerland.
13© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK Application in the software
industry: How the vector-based concept for
performance measurement & visualization can support the management
of an R&D operation:
While R&D investments and
activities are major value generators in companies today5, they are also
among the most risky. The time span from investment decision to return is quite
long (in the pharmaceuticals industry for instance up to 15 years, in the
software industry 5-8 years). During this long period, the investment is
subject to many risks: the market may change in the meantime, so that new
products, once they come finally to market, are not in demand anymore (market
risk); the engineers may not meet customer requirements or may produce a
defective product (engineering risks); the technology on which the product is
based may become outdated at a certain point in time (technology risk) etc.
Therefore it is considered as best practice in the software industry, as in
other R&D intensive industries, to manage R&D projects as investment
projects on a rolling basis through a continuous investment management approach
that allows corrections during the development process.
Rather than making only one
(investment) decision at the start of the development project, decisions are
made at predefined checkpoints whether to continue the project, modify it
(change the specifications of the final product, underlying technology or the
general scope, for example), or abandon it. Typically this rolling investment
management procedure is applied to several project in common – that is, to a
portfolio of products that are targeted for instance to one market segment or
for all R&D projects of a company.
The major challenge in the
decision making process of the product technology board of a software company
(sometimes also called R&D portfolio board) is to maintain an overview over
all portfolios and development projects and to make good trade-off decisions between
costs and effects for customers (customer value, i.e. created revenue
potential). But they must also judge the performance of a development manager
or development teams (for instance to make a decision, based on clear criteria,
about which team or which manager is best suited to lead a new important
development project). And that is not an easy task.
Should the performance be
measured based on the number of lines of code produced in a certain period of
time? While this indicator does show how efficient a development team is in
utilizing its resources to produce output, it tells us nothing about the
effectiveness of its output – that is, whether the final software product will
meet customer demand and be attractive enough for potential new customers. It
is obvious that additional, qualitative information is required, such as
subjective ratings by a set of pilot customers. Only when both dimensions are
taken into account can a sound judgment be made about the performance of a
software development team. The problem so far in many software companies is
that no concept exists that allows these qualitative aspects to be measured and
visualized in detail, connected with the quantitative, financial information,
and linked to the performance measurement system of the entire organization.
Here too we consider the concept of vector-based performance measurement &
visualization as a solution:
5 Lev and Aboody (Lev and
Aboody, 2000) report for example that a study in the chemical industry has
revealed, that while traditional capital investments (in tangible assets)
return after tax just the cost of capital of 7 percent, in contrast to that
investment in R&D return 17 percent – thus representing one if not the
major source of the added value created by chemical companies. For value
creation through R&D and other intangibles see also (Lev, 2001).
14© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
The vector-based concept
allows a software development department to measure efficiency (x axis:
e.g. number of coding lines per headcount) and effectiveness (y axis:
e.g. relative rating of customer satisfaction or, if the intended result of the
project is a “semi-finished” product that will be used by other development
projects, rating of the usefulness of the tool buy other software development
teams) in a way that allows an easy to understand visualization of the compound
result (the vector).
Because the vector-based
concept of performance measurement introduces (often for the first time) a
standardized way of rating of qualitative effectiveness based on a standard
rating scale, performance of development projects, portfolios, individual
teams, departments, or entire business units can be easily aggregated and
disaggregated. This enables a software company to manage and optimize its
entire development organization based on clear criteria oriented to customers,
markets, costs, and the performance of individual development teams or even
individual developers.
The software industry is
under considerable pressure to become commoditized. A counter-strategy that for
example suppliers of business software are applying is to transform their
business model from one of a software supplier (shipment of code) to one of a
service provider. The objective is to support customers end-to-end in the
process of optimizing their business processes through information systems.
Critical in the customer engagement process for management is to maintain an
overview over all activities in the customer-oriented value chain – not only
from a cost and (short term) revenue perspective, but also from a qualitative
perspective that sheds lights on the most critical potential the company needs
to create customer value and competitive advantage. The vector-based approach,
especially the vector aggregation technique described above, provides these
software companies with a powerful strategic tool to maintain an overview over
their entire customer oriented value chain across all functions and process
steps, both form a financial and intangible/qualitative perspective. This helps
management to determine where investments to enhance capabilities (i.e. value
potential for the future) are required or where investments will create maximum
value (see diagram 7).
15© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
Diagram 7
Organizations in other
sectors, especially companies in service industries, are facing similar
challenges in performance measurement and management to those faced by public
services organizations or software companies. We are convinced that the
vector-based concept of performance measurement and visualization provides all
these companies and organizations with an instrument that can bring more
clarity, transparency, and speed into the decision making and reporting process
by combining subjective, qualitative information with objective, quantitative
information. One of the industries that is actually going through a major
transformation that is confronting its players with the challenge to focus much
more on effectiveness from a customer perspective is the banking industry.
Application in a bank:
In a bank, the concept can be
used to optimize trade-offs between financial efficiency and customer
satisfaction throughout the entire organization – something that is regarded in
the banking sector as one of the major challenges and success factors at the
same time. The vector-based concept would introduce for example in a retail
bank an additional performance management dimension, additional to the usual
financial performance metrics. Branch performance, for instance, can be
visualized easily with the vector-based concept as the compound result
(represented through the vector) of effectiveness, which is measured through
customer satisfaction (value on the y axis, e.g. based on a yearly
general survey or by quarterly surveys of randomly selected customers) and
efficiency, which is measured for instance through the cost/income ratio (value
on the x axis, based on accounting data). Through vector aggregation
and/or de-aggregation of the contribution of branches, areas, and
16© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
regions to the total compound
(qualitative and quantitative), the performance of the entire bank organization
can be visualized. It could also be used to break down total performance into
the contributions of product groups or functional departments.
Many other possible
applications of the vector-based concept for performance measurement and
visualization exist, where the concept provides powerful tools for optimizing
trade-offs between qualitative subjective parameters and quantitative,
objective (financial) parameters and for improving the productivity of an
organization, whether commercial or non-profit.
One of these other
applications that we have already briefly mentioned is the following.
Application of the concept
for valuing an enterprise:
Continuing with the example
for applying the vector-based concept to the area of enterprise valuation from
page 7, an additional perspective the vector-based approach could provide is
the perspective on intangible asset levels a possible acquirer of an enterprise
would require in order to create a “leverage effect” and generate a positive
return. To explain this, let us take the example of an acquisition of Cisco and
the leverage effect Cisco had been able to realize by leveraging two important
intangible assets: its customer base and the capability of the company to
integrate the products and employees of an acquired company quickly and
successfully into its own value creation system:
Cisco, the network equipment
vendor, acquired Crescendo, a small company specialized in so-called network
switches, in 1995 (Bunnell, 2000). Cisco paid $97 million for Crescendo, an
enterprise that had an annual turnover of only $10 million. Wall Street
analysts found this to be hopelessly overpriced. However, Cisco went on to gain
a $500 million turnover a year later with the Crescendo products. In the light
of this new figure ($500 million instead of $10 million) Cisco's acquisition of
Crescendo was cheap. The analysts had overlooked the fact that the combination
of Crescendo technology and Cisco sales potential (the Cisco customer base)
meant that Cisco was able to immediately gain a much higher sales volume than
Crescendo would ever have had in the foreseeable future. The subjective
perception of Wall Street analysts differed greatly from the subjective
perception of the Cisco management. Each saw Cisco very differently: in sharp
contrast to the financial analysts, who saw Cisco only from the perspective of
a financial investor who can only apply portfolio techniques and financial
market information to “leverage” an investment, the Cisco management saw the
investment opportunity Crescendo represented from the perspective of an
entrepreneur who is able to leverage the investment with a strategic enterprise
asset a financial investor cannot dispose of: Cisco’s customer base and the
ability of the organization to integrate a new companies products and employees
quickly and successfully.
From such a perspective, the
ratings on the y axis in diagram 3 wouldn’t just represent the
subjective value different investors with different strategies would attribute
to an investment opportunity like the acquisition of a company like Crescendo.
It would also define the level of intangible assets an investor has to dispose
of if the investor wants to be able to “leverage” an investment for a given
price. The concept of vector-based performance measurement & visualization
helps to visualize this different value concepts and set the focus on the
difference between price and value that was described on page 7.
17© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK
For organizations that want
to apply the concept, we recommend the following implementation steps:
1. Awareness & Scope
Workshop: workshop with the key personnel (sponsor, owner, experts) of the
area that has been selected to serve as a “prototype” to test the concept
(these persons usually will become members of the project team or steering
committee later). The objective of this workshop is to broaden the
understanding of the concept, create awareness for its opportunities and
limitations, determine the scope of the prototype, and make a final decision
about the members of the project team and the governing structure of the
project (project plan and milestones, formation of steering committee, etc.).
The members of the project team, who might collaborate for certain tasks with
other people in the organization, perform the following steps:
2. Object definition:
define the objects of performance measurement (projects, departments, process
steps … what do we want to measure?)
and their relationship between each other and the “whole picture” (company,
business unit etc.).
3. Definition of measures,
metrics, and visualization: define measures and metrics for qualitative,
quantitative and compound measurement (
how do we want to measure in a multidimensional way? What are the
relevant/critical dimensions?), define the framework for 2D or 3D
visualization.
4. Parameterization:
Define rules for quantifying qualitative metrics ( how do we quantify subjective ratings in such a way that we can
later perform mathematical operations with these measures?) for example by
introducing a qualitative scale such as 1-5 for qualitative ratings in a
survey.
5. Clustering: define
clusters for objects that have been selected in step 2 ( how can we group the most detailed objects
into clusters so that we can maintain an overview?) An example would be to
group the 140 product groups of a Kantonalverwaltung into a number of clusters
that can be handled from a managerial perspective and can be used for
aggregation and de-aggregation.
6. Weighting: define
weights for each object and cluster to be analyzed from the perspective of the
whole picture of the organizational entity involved ( how important is each object within the framework of the whole
entity from the perspective of the customer or another major stakeholder?) For
instance, in a public service organization like a Kantonalverwaltung in
Switzerland one would weight the importance of the services of the different
departments from the perspective of the citizens or from the perspective of the
governing party – see diagram 6.
7. Defining the
charts/visuals: define the charts/visuals for each application area on the
various levels of the organization/in the areas involved ( which charts do we need to support planning
processes, performance reviews, or specific decisions? How are they connected
with each other – what is their logical link?).
18© Juergen H. Daum /
Peter Bretscher 2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version),
presented and published at the PMA Conference 2004 (The 4th International Conference on Theory
and Practice in Performance Measurement and Management), 28-30 July 2004,
Edinburgh / UK 198. Test and revision: Test the new measurement
and the visualizations system ( are
the assumptions we made in line with reality? Does the
system work in practice?) and revise it where necessary (iterative process).
Conclusion
and Outlook
© Juergen H. Daum / Peter Bretscher
2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version), presented and
published at the PMA Conference 2004 (The 4th
International Conference on Theory and
Practice in Performance Measurement and Management), 28-30 July 2004, Edinburgh
/ UK 20The concept of vector-based of performance
measurement & visualization brings
an unprecedented degree of rigor and discipline into the rating,
measurement, and handling of qualitative performance measurement in
organizations. We therefore regard the concept of vector-based performance
measurement & visualization as an important first step in developing
systems for the systematic recording, reporting, and visualization of
intangible, qualitative, subjective values that set the qualitative and subjective
(intangible) dimension into the context of the quantitative and objective
(tangible) dimension. This is important because intangible, qualitative aspects
can only create value when they are connected to the physical, tangible, and
financial world of our economies.
References
Aboody,
D. / Lev. B. (2001). “R&D Productivity in the Chemical Industry”, (this
paper is available on Baruch Lev’s website: http://www.baruch-lev.com/)
Bretscher,
P. (1996,1998). “Re-Inventing Business Administration, der Grundlagenartikel“
(this paper is available at http://www.bengin.com/)
Bunnell,
D. (2000). “Making the Cisco Connection”, John Wiley & Sons, New
York, p. 35 ff.
Daum, J.H.
(2002). “Intangible Assets and Value Creation”, John Wiley, Chichester
Kanton Basel-Stadt
(2003). “New Public Management im Kanton Basel-Stadt“, Basel (Brochure of the
Kantonalverwaltung Basel-Stadt), p. 6
Lev. B. (2001). Intangibles: “Management, Measurement, and Reporting”,
Brookings Institution Press, Washington D.C.
Sloan,
A.P. (1963). “My Years With General Motors”, Currency Doubleday, New
York, p.116-148
© Juergen H. Daum / Peter Bretscher
2004: PMA 477 - PRACTICAL APPLICATION PAPER (Long Version), presented and
published at the PMA Conference 2004 (The 4th
International Conference on Theory and
Practice in Performance Measurement and Management), 28-30 July 2004, Edinburgh
/ UK 21SUMMARY SHEET MEASURING
PERFORMANCE IN A KNOWLEDGE ECONOMY: LINKING SUBJECTIVE AND OBJECTIVE
MEASUREMENT INTO A “VECTOR-BASED” CONCEPT FOR PERFORMANCE MEASUREMENT Authors: Juergen
H. Daum (lead author), SAP AG, ERP/BSAG, Neurottstrasse 16, D-69190 Walldorf
E-Mail: juergen.daum@sap.com, Website: http://www.juergendaum.
com/
Peter
Bretscher (corresponding author)
Abstract:
Today, customers or other important stakeholders demand that businesses
or non-profit organizations act according to their stakeholder’s subjective,
qualitative values and criteria. Organizations therefore must take increasingly
qualitative, subjective ratings and values into account in managerial
decision-making. They need performance measurement systems that are able to
handle subjective, qualitative measures and to combine them with quantitative,
i.e. financial information. The vector-based concept of performance measurement
& visualization introduced in this paper offers a practical solution that
can be applied for example in public service organizations or to support
R&D management of a software company. Keywords: Subjective,
Qualitative Performance Measurement; Intangibles; Vector-Based Performance
Measurement & Visualization; Public Services.
[1] Peter Bretscher has developed the foundations of the vector-based
concept that is presented in this article (see Bretscher, P., 1996, 1998) in
collaboration with organizations from different sectors. It also has been
licensed to consulting organizations and the concept is continuously enhanced
and further developed.
[2] A good description of the basics of the financial control concept and
the development of the financial control based management system at General
Motors in the 1920s can be found in (Sloan, 1963), chapter 8.
[3] According to the
experiences of the authors still 70-90 percent of the information found in
performance management systems and management reports are financial
information.