Performance Gaps

An operations manager stops by your office (he’s managing by walking around) and says that he has good news and bad news.  The good news is that the company shipped more widgets to customers last quarter than it did the previous quarter but the bad news is that executive management thinks that we performed worse.  How is this possible?

When I posed this hypothetical scenario during a recent workshop, the attendees had a wide range of suggestions.  The products had a higher defect rate that led to lower customer satisfaction.  The company shipped the wrong product to customers or shipped the products to the wrong location.  And they even suggested that the company might have manufactured and shipped more product than customers actually ordered.

All are very creative ideas but not the source of the performance problem.  Instead the answer lies in the difference between outputs and outcomes.  For example, suppose the organization shipped 1500 widgets in Q1 and 2000 in Q2. Clearly, its output increased.  Many organizations would create a dashboard with a graph like the following to show that its performance increased:

Widget ActualsWidget Actuals
However, this is flawed thinking.  Just increasing output does not necessarily increase performance.  Imagine for a moment that the organization wanted to ship 3000 units in Q1 and 5000 units in Q2.  In that case, the organization might add a line depicting the target values so that the graph looks like this:

Widget Target
The difference between the actual value and the target value in Q1 is 1500 units and in Q2 is 3000 units.  In other words, the gap between what we did and the outcome we were trying to achieve actually doubled.
  Does that seem like better performance?

Of course not. True performance improvement comes when we close the gap between actuals and targets. 

3 Responses to Performance Gaps

  1. Timo Elliott June 27, 2007 at 3:05 am #

    Nice example, but to extend it even further: TRUE performance improvement is the gap between you and your competitors. :-)

    i.e. imagine you beat my target by 20% but the #1 competitor increased their market share by 50% over the same period…

    Consequences and trends: (1) more organizations are incorporating benchmark and other external data into their BI systems and (2) people are struggling to implement better systems than “fixed contract” targets that don’t reflect today’s dynamic markets. E.g. the excellent book “Beyond Budgeting”

  2. Philo July 8, 2007 at 5:09 pm #

    Interesting analysis, but you make no allowance for the possibility that the targets may be flawed. The real result is that output increased 33%, which is commendable, period. It’s nice that “the organization wanted an output of 5,000 units.” Yes, and I want our parts to show up for free.
    Without a solid analysis that the targets are reasonable and attainable, just waving them around like stone tablets will do nothing but harm morale. Moreover, that the Q2 target value is more than double the actual output is incredibly fishy – either there are massive performance problems or else management has unreasonable expectations.

    Interesting analysis, but IMHO a flawed example that calls the entire premise into question. If the misses were 1% and 1.5% it might be more compelling, but I’d still expect more discussion about where the targets came from.

Trackbacks/Pingbacks

  1. Quick Guide to Performance Management « Manage By Walking Around - September 27, 2010

    [...] A grading system compares actual and target values to determine a performance score.  The closer the actual value is to the target value, the better the score.  One of the most common systems is based on letter grades (A/B/C/D/F) in which 90% and above is an “A”, 80-90% is an “B”, etc.  Unfortunately, this common scheme doesn’t work in many situations such as rewarding over-performance , grading on a curve, and dealing with defect rates. [...]

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