Management Chapter 10 PDF

This chapter includes the following topics: Topic 10.1 – Performance Management Overview Topic 10.2 – Business Process Management (BPM) Topic 10.3 – Business Measurement, Assessment, and Evaluation Topic 10.4 – Business Improvement Methods & Tools How do organizations get better at what they do? Is...

This chapter includes the following topics: Topic 10.1 – Performance Management Overview Topic 10.2 – Business Process Management (BPM) Topic 10.3 – Business Measurement, Assessment, and Evaluation Topic 10.4 – Business Improvement Methods & Tools How do organizations get better at what they do? Is this a random experiment based on trying different things and hoping those initiatives will improve performance? In well-managed organizations the ability to improve results is a deliberate and structured approach based on an understanding of the basic principles and elements that lead to improved performance. This focus starts by making Performance Management a key part of the culture of the organization and by adopting a set of Management Principles for effectively running an organization. Three core elements of those principles include: 1. Better understanding the activities of the business by using a Business Process Management (BPM) perspective of the work that is done. 2. Using Business Measurement, Assessment, and Evaluation in order to understand how well the organization is performing those processes and how well they are achieving their overall goals. 3. Assigning individuals with expertise in utilizing proven Business Improvement Methods & Tools to lead improvement initiatives that address performance gaps or other opportunities identified in business evaluations. In the context of the “Right Work, Done Well”, Performance Management helps organizations to get the work “Done Well” by continually improving the effective-ness and efficiency of the organization leading to superior results. Performance Management is the delivery of superior results through ongoing measurement, assessment, evaluation, and improvement of the organization. LG 10-1 Performance Management is based on a set of Performance Manage-ment Principles. Principles that set the foundation for achieving high perfor-mance. These Management Principles include the following: Role of Leadership – Develop and communicate a clear direction for the organiza-tion and support that vision by investing in the capabilities necessary to fulfill it. Customer Focus – create superior value for customers based on an understanding and commitment to economically delivering customer requirements better than competitors. High-Performance Environment – Use a process-based view of the organization that effectively integrates multiple activities and functions working collaboratively to create outstanding results. Fact-Based Management – Use a collection of balanced measurements and objective, comprehensive business assessments that are routinely reviewed and evaluated to understand how well the organization performs against standards of excellence. Use this data to identify performance gaps and improvement opportunities. Relentless Improvement – Embrace a commitment to continually do better through use of proven methodologies and tools coordinated by experts trained in managing and delivering successful improvement initiatives Innovation and Renewal – continually seek creative ideas for transforming and renewing the organization by not only adopting today’s best practices, but also by authoring tomorrow’s best practices. Performance Management starts by embedding the importance of these “Princi-ples” into the culture of the organization through the following approaches Role of Leadership – The leadership of the organization needs to communicate and reinforce the commitment to excellence achieved through a continual focus on the Performance Management Principles 2. Use of Experts & Training – Superior results often require repeated and ongoing successful improvement initiatives. To that end, successful improvement initiatives are more likely to be accomplished when using individuals who have the training and experience in repeatedly delivering successful improvement initiatives. These individuals will be experts in project selection and management. They will also know how to apply proven improvement methodologies and tools. 3. Use of Proven Methodologies & Tools – The experts described above need to rely on a set of tools to be successful with their improvement efforts. These tools don’t need to be re-invented with each project; they already exist as a set of tools that have been demonstrated to repeatedly lead to high-impact, successful project results. Application of tools and methods such as Six Sigma and Lean Methodology have routinely delivered significant results when used by properly trained and experienced experts. Performance Management has three key elements that are derived from the Perfor-mance Management Principles: 1. Business Process Management (BPM) – Managers use Business Processes to help them better understand and manage the activities in their organizations. 2. Business Measurement, Assessment, and Evaluation – Managers use Measurements and Assessments to help them Evaluate the performance of their organizations. 3. Business Improvement Methods & Tools – Managers use proven Business Improvement Methods & Tools in order to improve the performance of their organizations. Each of these elements will be described in more detail in the following sections of this chapter. Why is Performance Management an important management concept? LG 10-1 In competitive businesses, becoming skilled in Performance Management helps leaders to manage their organizations more effectively and efficiently and to improve faster than their rivals. This is a distinctive competency that helps pro-vide a competitive advantage leading to superior results. BPM is sometimes defined broadly to include many of the aspects of Per-formance Management discussed in this chapter but in this textbook it is defined more narrowly to focus spe-cifically on the concept of process as an underlying framework for under-standing the inter-related activities performed in an organization. LG 10-2 A Process is a series of steps or actions taken to convert a set of inputs into a set of outputs. Ideally, in business, this conversion of inputs to outputs creates value for an end user of those outputs (customer), and also creates value for the organization perform-ing the conversion. When both the end user and the converter realize value in the process then the process is both effective and efficient. Why is this notion of “process” important to management? Essentially, all work performed in an organization is a process. The ability of a manager to effectively and efficiently design, develop, improve, and manage pro-cesses is a key aspect of the managerial role and an essential skill for getting work “Done Well”. The concept of process is most easily understood when thinking of making a product. In a donut shop, for example, dough, sugar, water, a recipe, a donut maker, tools and equipment, a shop in which to make the donuts, workers, and some other components are the inputs to the donut making process. The conversion involves taking those inputs and following a set of prescribed steps to convert the inputs into donuts to be sold to customers. The outputs of the process are donuts. The question is: How does a manager make sure the process is effective and effi-cient and thus creates value for the end user of the process (the customer) and for the converter (the donut shop)? Effective Processes: To understand if a process is effective, the manager of a process must start with an understanding of the requirements of the users of the outputs of that process – the “process customers” (in our example, the donut shop customers). Simply put, the requirements of a customer are the necessary characteristics of the product and service (at a given price) that will result in the customer perceiving that the output creates value for them and motivates them to behave in ways that are beneficial to the converter (the donut shop). Some of these desired customer behaviors include regularly buying the donuts, telling friends about the great donuts and service at the donut shop, providing feedback to the donut shop to help them improve, sug-gesting ideas for new products and services, and so on. Thus, an Effective Process is one that delivers outputs that results in obtaining the desired behaviors from the intended users (customers) of the outputs of that process (in this example, the donut shop customers). Unless the process results in obtaining the desired behav-iors from customers, the process is not effective. Efficient Processes: for a process to be efficient the manager must first operate the process effectively (obtain desired customer behaviors). Unless the process is delivering the required outputs, by definition it cannot be efficient because the output is not creating value for the customer of the process and therefore the costs of any outputs created, no matter how minimal, are wasted costs until the process can deliver effectively. Once the process is effective, in order for it to be efficient it must operate at a cost that allows the organization to realize an adequate return on the capital employed to run the process (allows the organization to be profitable). Thus, for a process to create value for the converter (the donut shop), and therefore to be an Efficient Process, it must be an Effective Process that also generates an adequate return on the capital employed to operate the process. Process Mapping: One of the tools that help managers to successfully manage processes is process maps. Process Maps are visual depictions of the multiple steps involved in the con-version of inputs into outputs. These process maps can take various forms from very simple depictions (SIPOc chart), to more detailed descriptions (swimlane chart), to very advanced descriptions (lean value map). Process maps help to illuminate the activities that are involved in a process making it easier for managers and process participants to understand the process. We will describe these three visual process depictions in more detail next. Efficient Processes: for a process to be efficient the manager must first operate the process effectively (obtain desired customer behaviors). Unless the process is delivering the required outputs, by definition it cannot be efficient because the output is not creating value for the customer of the process and therefore the costs of any outputs created, no matter how minimal, are wasted costs until the process can deliver effectively. Once the process is effective, in order for it to be efficient it must operate at a cost that allows the organization to realize an adequate return on the capital employed to run the process (allows the organization to be profitable). Thus, for a process to create value for the converter (the donut shop), and therefore to be an Efficient Process, it must be an Effective Process that also generates an adequate return on the capital employed to operate the process. Process Mapping: One of the tools that help managers to successfully manage processes is process maps. Process Maps are visual depictions of the multiple steps involved in the con-version of inputs into outputs. These process maps can take various forms from very simple depictions (SIPOc chart), to more detailed descriptions (swimlane chart), to very advanced descriptions (lean value map). Process maps help to illuminate the activities that are involved in a process making it easier for managers and process participants to understand the process. We will describe these three visual process depictions in more detail next. This Swimlane Process Map depicts the process for preparing and distributing payroll to employees. Unlike a SIPOc Process Map, the Swimlane Process Map identifies each of the departments involved in a process and depicts what activities they are responsible for completing and where in the overall process flow those activities take place. Swim-lane Process Maps can also show decision points in the process and depict alternative paths based on the outcome of those decisions (the orange diamonds in the chart NOTES: In viewing the Lean Map above note the identification of time required to complete each process step and the time lapse between steps (shown within the red circles). This latter indicator helps to identify areas of “waste” in the process. While in our simple example we focused on the process of a donut shop making donuts for its customers, it is important to understand that not all processes are delivering outputs to external customers. Many processes serve the needs of internal customers to the organization. We saw one example of an internal process with the Swimlane Process Map that illustrated the payroll process. Another example - human resources organizations provide various services for internal users within their organizations. One of those services, the hiring process, is designed to help managers attract, select, and hire qualified individuals to work in their departments. The hiring manager (the person who the new employee is going to report to) is the customer for this process and just as an organization would consider how to create value for an external cus-tomer, the human resources department also needs to consider how to create value for this internal customer by effectively designing and managing the hiring process. They also need to consider how to make that process efficient by eliminating unneces-sary steps or costly elements that don’t create value for the organization. Business Process Management (BPM) Summary: The BPM concept of effective and efficient process management is a fundamental aspect of understanding how work is “Done Well”. Effective processes result in obtaining desired behaviors from the intended users (customers) of the outputs of the process (in other words - design processes that fully meet customer requirements). Efficient processes are effective processes that generate adequate returns on the capital employed to operate the process (don’t waste resources while fulfilling customer requirements). Process maps provide a tool that managers can use to better understand the processes they manage. SIPOc, Swimlane charts, and Lean Value Maps are three types of process maps that can be used to illustrate processes. All work is a process and thus to get work “Done Well” a manager must under-stand how to successfully manage processes. They must make sure processes are designed and managed to operate effectively and efficiently. Once an organization has identi-fied and mapped key processes the question becomes how will they know if the processes are effective and efficient? In many businesses it takes mul-tiple processes working effec-tively together to fully obtain the behaviors desired from external customers. In smaller businesses, like the donut shop, it may only require a few effective processes to meet customer requirements. Business Measurement, Assessment, and Eval-uation helps organizations to understand how effectively and efficiently specific processes are performing as well as to understand how well the organization is performing overall to aid in the identification and prioritization of opportunities for improvement. In measuring business performance at the process level, the organization can collect data on the value of the outputs of processes to evaluate whether they are effec-tive or not. They can also collect data on the capital employed and the costs associ-ated with operating the process relative to the value of the outputs generated to evaluate the efficiency of the process. Measures of Effectiveness evaluate whether customer requirements are being met. Measures of Efficiency evaluate whether the value of outputs relative to the cost of inputs is creating value for the organization. The above described measures of Effectiveness and Efficiency are also known as lagging measures. Lagging measures provide data on the organization’s perfor-mance after the processes are completed. While these measures are important for evaluating the organization, it is helpful to have leading measures as well. Leading measures evaluate the process while in progress or even better, before the start of the process and can be predictive of likely results. Leading measures can allow the organization to take corrective actions to improve effectiveness and efficiency before the processes are finished and before defective and/or unnecessarily costly output is created. Measuring a process is not always easy. In sophisticated manufacturing oper-ations it is not uncommon for businesses to use technically advanced, in-process monitors to evaluate production processes. These systems use instruments and software designed to detect when a process is not operating as intended and to provide warnings, or have the system even automatically shut down or correct the process. In less sophisticated settings, basic measurement charts can be used to evalu-ate how effective a process is performing and identify outputs that do not meet customer requirements. They can also measure the efficiency of the process and identify areas in need of better cost control. In order for these measures to provide useful information the measurement charts should be “Well Dressed”. A “Well Dressed” measure is the concept of having measurement charts that include all the information necessary to allow for rapid, complete, and accu-rate interpretation of the data presented. “Well Dressed” measures include the following: Title: clearly labeled at top of chart indicating what is being measured Goal: clear indication of the target performance Min: clear indication of the minimum acceptable performance Results: clear indication of current and past performance Competitor: clear indication of competitor’s performance. Benchmark: clear indication of world-class standard of performance Axes: clearly labeled to indicate what is measured and in what time frame Performance Status: color-coded indicator of whether the performance is meeting standards (green), needs immediate improvement (yellow), or is seriously deficient (red) Owner: Name of person responsible for producing chart Updated: Date chart was most recently updated with data Projects/Impact/Project Mgr: Description of what actions are being taken to address yellow or red performing processes, the current status of those actions, what those actions are intended to deliver, when they are expected to be completed, and who is responsible for leading those actions. The purpose of creating a “Well Dressed Measure” is to provide all the information a manager needs to quickly determine and properly evaluate the status of a key aspect of performance in the organization as well as to understand what related initiatives are under way and their expected impact on improving that performance. creating measurement charts in this format provides a valuable tool for helping managers understand if they are getting work “Done Well” (or not!) Measurement at the Organization Level: There are several ways an organization can evaluate its overall performance. Two of these approaches are discussed here: Balanced Scorecard Business Assessment Balanced Scorecard: The concept of organizations using a “Balanced Scorecard” was broadly socialized by Kaplan and Norton in the 1990’s. The initial intent of their work was to suggest that leaders of an organization should routinely evaluate more than just financial results and/or marketing results. The Balanced Scorecard provides a focus on both financial and non-financial objectives described as Perspectives. The four Perspectives are: financial, customer, Internal Processes and Organizational capacity. It is estimated that over 50% of medium to large businesses use some form of Balanced Scorecard to assess overall performance of their organizations. Another approach to evaluating business performance at the organizational level is the use of a comprehensive Business Assessment. The National Institute of Stan-dards and Technology (NIST), an agency of the commerce Department of the United States government, is responsible for the development and management of the Malcolm Baldrige business assessment framework. This framework includes a set of comprehensive criteria for conducting assessments of organizations across multiple business sectors. Organizations that have made substantial progress in meeting the standards that are part of the criteria can apply for national recognition as part of the Malcolm Baldrige Awards Program. The Baldrige framework has 7 categories to be evaluated as part of an assess-ment of the organization. These categories are: 1. Leadership 2. Strategy 3. Customers 4. Measurement, Analysis, and Knowledge Management 5. Workforce 6. Operations 7. Results Organizations can use business assessments, like the Baldrige framework, to help identify strengths and weaknesses in performance. The assessment evaluates both business results and how well key business processes are managed. The results of an assessment help management identify improvement opportunities. Business Evaluation is the process of collecting and analyzing external and internal business data, assessing overall business performance, and identifying and prioritiz-ing opportunities for improvement. Measurement data from a Balanced Scorecard supported by more detailed data from effectiveness and efficiency measures at the process level provide key inputs to the Business Evaluation process. Periodic Business Assessments also provide fur-ther insight into overall business performance. collectively this data combined with sound analysis and managerial judgment are the key inputs for conducting periodic Business Evaluations that include developing a list of improvement opportunities and reaching consensus as a leadership team on the highest priorities. Having selected a set of improvement priorities, management needs to make sure those initiatives are properly supported and resourced. The role of leadership in man-aging business improvement is discussed further in the next section (Topic 10.4) in this chapter. Business Measurement, Assessment, and Evaluation helps organizations to under-stand how effectively and efficiently specific processes are performing as well as to understand how well the organization is performing overall to aid in the identifica-tion and prioritization of opportunities for improvement. LG 10-3 Measurement is done both at the process level and at the organization level. “Well-Dressed” measures are designed to provide meaningful data on the effective-ness and efficiency of processes and overall organizational performance. A Balanced Scorecard provides indicators of both financial and non-financial performance which provides a more comprehensive view of the business. Use of Business Assessments, like the Malcolm Baldrige business assessment framework, help to evaluate the overall performance of an organization in terms of business results and the performance of key processes. Management teams use these various measures, scorecards, and assessments to provide the necessary data to perform meaningful evaluations of the business in order to identify and prioritize opportunities for improvement. collectively, these Performance Management practices of Business Measure-ment, Assessment, and Evaluation are essential to understanding if work is getting “Done Well” and to identify opportunities for doing it even better! Once the organization has identified its improvement opportunities through use of measurements, assessments and busi-ness evaluations, the next step is to move forward to address the identified improve-ment options. How does an organiza-tion successfully prioritize and implement improvements? Historically, success rates for improvement projects are not very good in many organizations. However, some orga-nizations have consistently good results with improvement initiatives. What do the successful organizations do differently? There are typically three major things that successful organizations do differently: 1. Role of Leadership – Leadership plays a proactive role in overseeing the prioritization, selection, and routine monitoring of improvement projects. This involvement by leadership reinforces the importance of these projects and helps ensure that necessary time and resources are being allocated to them. In addition, leaders also make sure that appropriate recognition is given to members of the organization who successfully deliver improved results from their projects. Role of Business Improvement Experts – Highly trained and experienced improvement experts are used to manage key improvement projects. Managing an improvement project, like managing most activities, requires knowledge, skill and experience. These unique set of characteristics for managing improvement projects are not commonly found in line managers nor is it easy for them to dedicate the time necessary to lead an improvement project while also performing their other responsibilities. 3. Use of Proven Improvement Methods and Tools – These “experts” use proven improvement methodologies and tools as a key part of their approach. When used properly in improvement projects, these methods and tools save a lot of time in organizing a project and executing the steps necessary to complete it successfully. In addition, these methods and tools have proven to deliver high project success rates. What are some of the methods and tools used in improvement projects by success-ful organizations? An entire book would be necessary to describe all the improve-ment methods and tools available. for purposes of this introductory level textbook, two frequently used and very effective methods and tools are DMAIc/Six Sigma and Lean Methodology. A. DMAIC/Six Sigma: LG 10-4 Six Sigma is actually a statistical term that refers to the number of standard devia-tions (6) from a mean. for a set of data, six sigma means that 99.99966% of the data would be contained within the upper and lower limits set by the six standard deviations calculation. In other words, only 3.4 data points per million data points fall outside these limits. In using a Six Sigma concept for Performance Management purposes, the upper and lower limits that are set for measuring outputs of a process are determined by defining the range of output quality (effectiveness) that fully meets customer requirements. As long as the output of the process falls within this acceptable range it is considered to fully meet the standard, or fully meet customer requirements. Any output that does not fall within the acceptable range is considered a defect. In order for a process to be considered a Six Sigma process no more than 3.4 outputs per million can be defective (thus fail to fully meet customer requirements) A process that consistently achieves six sigma performance would be considered an excellent, well-controlled process with minimal levels of variation. The greater the variation found in the outputs of a process the more likely that process will produce defective outputs (outputs that do not fully meet customer requirements). few processes meet the rigorous test of six sigma quality (minimal variation within six sigma limits that produce outputs that fully meet customer requirements). for many organizations six sigma performance is a goal to be strived for rather than a goal that will likely ever be achieved. Below is an example of a statistical process control chart depicting a process that is generally operating within control limits (producing outputs that meet cus-tomer requirements). Only one data point (defect) is outside of the prescribed limits (shown in red circle): When used in Performance Management, Six Sigma goes beyond simply measur-ing the output data from processes - it also includes a methodology for improving processes to get closer to achieving six sigma performance. This methodology is called DMAIc. The acronym is Define, Measure, Analyze, Improve, Control. This fre-quently used methodology for managing improvement projects is well documented to deliver successful improvement results. Many organizations such as Motorola, Allied-Signal, general Electric, Johnson & Johnson, and American Express, along with numerous others have repeatedly used this methodology on thousands of projects with excellent results. B. Lean Methodology: LG 10-4 Lean methodology is an improvement tool with a primary focus on eliminating waste in processes. Waste is defined as any activity that is not creating value for the customer or the converter in a process. Seven primary causes of waste are identified as part of the Lean method. These are: Overproduction (producing more products or components than are currently required to meet demand), 2. correction (having to rework a defective output of a process), 3. Inventory (the need to store output until it is required), 4. Motion (the need for excessive movement of materials and/or people as part of performing a process), 5. conveyance (similar to motion in terms of requiring a component of the process to be transported some distance for further processing), 6. Overprocessing (performing steps in a process that do not create value for the customer or the converter), 7. Waiting (not having parts or people available when required to perform the next step in the process). The Lean Methodology minimizes these seven causes of waste. By using tools like the Lean Value Map described in Topic 10.2 in this chapter, organizations are able to identify areas of waste in the process and use Lean tools to reduce or remove those wastes. Implementing Lean improvement methodology and tools to remove waste helps to make processes more efficient by reducing costs and by reducing cycle time (the total time required to convert inputs to outputs in a process). Business Improvement Methods & Tools Summary: Leadership of an organization needs to proactively be involved in the selection and prioritization of improvement projects based on the results of measurement and assessment evaluations. Highly trained experts in improvement project management, utilizing proven improvement methodologies, need to be selected to lead improvement projects in order to greatly increase the probability of successful outcomes. Projects are likely to be completed more quickly and with better results when proven improvement methodologies and tools such as Six Sigma/DMAIc and Lean Methodologies are used. collectively, this approach to Business Improvement is a key component of Per-formance Management and essential to getting work “Done Well”! Author’s Note: While business improvement tools and methods like Six Sigma/DMAIc are not experiencing the same wide-spread levels of praise and adoption seen in the early 2000’s, and while there have been recent criticisms that these tools were overly focused on efficiency and less on driving innovations necessary to achieve higher levels of effectiveness, the proven benefits of using these methodologies and tools is still compelling. That is why many organizations still employ these Performance Management tools and methods as part of a comprehensive approach to business improvement. In concert with this traditional approach to business improvement, organizations are now also focusing significantly more attention on innovation initiatives (see chapter 5) and on creating “Agile” organizational structures designed to rapidly respond to changing business/competitive environments (see chapter 7). Like many approaches to the practice of management, Performance Manage-ment needs to be customized to meet the unique circumstances of each organiza-tion and to be adapted, as necessary, to respond effectively to a changing business and competitive environment. As more and more processes are designed to be effective and efficient from the start, the need for multiple cycles of improvement are reduced and so the management focus properly shifts more to innovation and agility with less relative emphasis on improvement. Johnson & Johnson (J&J), one of the top 50 companies in the fortune 500, has a rep-utation for sound management practices. In the early 1980’s the company formed the Quality Institute to provide training to management teams across the globe in various quality management methods such as benchmarking and reengineering. Later, the Quality Institute adopted a modified version of the Malcolm Baldrige busi-ness assessment model and began conducting voluntary business assessments of the over 150 J&J business units worldwide. An annual awards ceremony was con-ducted each year at corporate headquarters to recognize the business units who achieved high scores on these assessments. In the early 2000’s, Ralph Larsen, then cEO, challenged the leaders in the Qual-ity Institute to become more proactive in supporting the J&J business units’ efforts to improve. A taskforce was formed to benchmark Performance Management suc-cesses at other companies such as general Electric, American Express, and Motor-ola. After six months of evaluations the taskforce proposed that J&J formally adopt a J&J customized version of what these successful companies had been doing. The new initiative was branded “Process Excellence” and incorporated Business Process Management (BPM) and adoption of tools such as Six Sigma and Lean Methodology. It also made business unit participation in business assessments mandatory at least once every three years. As a result of J&J leadership committing to the Process Excellence initiative, improvement projects that were chartered using the tools and methods developed as part of “Process Excellence” delivered over $4 billion in independently verified profit impact in only 5 years!