“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.
One question we often get is what is a good performance measure? While you could simply Google “performance measure” (or more typically “KPI” noting our thoughts on using this label) and this will give you a surprising number of response, instead we would ask you to think about the intended purpose. What do you want the Performance Measure to do?
Having run many Performance Based Contracting (PBC) courses and workshops we ask this question regularly with answers being focused on:
- Reducing contract price
- Improving contract performance
- Adjusting contract payment based on seller performance
- Understanding commercial issues
For those familiar with our approach to PBC (see earlier blog) we consider that there are 2 distinct parts to a PBC; the requirements and the consequences. As you can see from the above list most people believe that a performance measure delivers both. But does a performance measure do both?
In our minds a performance measure has one simple role; to communicate. As you can see from the diagram below, a performance measure either:
- communicates the buyers need (requirement) (e.g. what performance to I need out of this contract); or
- communicates the sellers performance (e.g. did the required performance get delivered).
A performance measure on it’s own does not affect payment, does not increase contract length, does not terminate contracts, etc. This is the role of the overall PBC including the various contract terms. Hence our view that performance measures only communicate.
But how you use that performance measure to communicate the buyers need or feedback the sellers performance, and then what consequence (positive or negative) you then apply based on this communication is at centre of any successful PBC.