“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.
Andrew. Much of what you say is correct. However I still feel that the effectiveness of communication is the key. Supplier relationship management can’t be understated. We have seen contracts fail due to either the supplier, the Commonwealth or the Services each believing they are independently right. Contract success is an interdependent relationship which should be co-managed and measured between the three parties. It’s only when we achieve a win-win-win, and measure accordingly, that true sustainable success casn be achieved. Mike
I completely agree with you sentiment in that by constraining our perspective to rigid organisational / commercial boundaries can lead to our soldiers, sailors and airmen not getting what they need.
Indeed, over the past 24 months we have moved to what we refer to as Generation 3 Performance Based Contracts (see Performance Based Contract vs. Outcomes Based Contract vs. Relational Contract) where we have introduced a new tier of performance measure for exactly this purpose; the Strategic Performance Measure (see When is a KPI not a KPI
). We have observed that by having all parties (e.g. contractor, commonwealth and the services) measuring the capability outcome leads to an open discussion of what we all need to do to deliver success for our soldiers, sailors and airmen. This should be our ultimate (enterprise) goal.
hi gents some interesting reading but for my mind the behaviour element is missing. i think it plays such an important part on many levels including quite possibly the reason for the kpi itself. However it might not be as explicit as it could be.
Thanks for your comment. And we agree wholeheartedly! For long-term support contracts, performance in our minds is more than simply just “stuff on time”. It is also about being the right long-term partner through positive, collaborative behaviours.
If you hadn’t noticed in the blog, after completing years of research in this area to define what are the behaviours we want and to what standard, we have been including behavioural performance measures in our PBCs for at least the past 2 years (see the following previous posts PBC vs. Outcome Based Contracting vs. Relational Contracting, When is a KPI not a KPI?, Measuring and Incentivising Sustainment in the Age of Asset Management).
Indeed, we think the behavioural measures are the one of the critical elements of future PBCs, as we call them, Generation 4 PBCs.
Anyway, thanks for your comment and participation. We hope you enjoy this site and content, and always happy to discuss as it is a fascinating topic!
Agree. Behaviour is the way we control it, and thus how effectively we control it. The right behaviours leads to better performance and hence better outcomes. It is greater trust, better risk reward trade offs, and rewarding for performance.
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