I recently read an article by Robert Wolcott in the Harvard Business Review (HBR) titled “Don’t be Tyrannized by Old Metrics”. The article discussed the virtue of companies continuously reviewing, and where necessary, changing performance measures especially where there was a corresponding change in strategy (or in the case of Performance Based Contracting (PBC) a change in the contract scope of work).
While Robert’s article is mainly focused on those metrics that you may find in a company Balanced Scorecard, the 4 points he raised make good sense for any PBC practitioner to consider:
- Know your metrics and behaviours they drive. Those familiar with this blog may remember that our definition of a highly successful PBC is one that firstly drives the right behaviour. Since if this is not being achieved, or worse still, the PBC drives perverse incentives, the PBC will fail.
- Track your metrics at your peripheries. Research shows that a good source of innovation is located in industries that are outside your industry (i.e. at your periphery). Therefore, we should be looking and learning from these peripheral industries to see what performance measure they are using and whether they would be applicable to your area.
- Prioritise metrics that reflects value to customers, rather than simply volume or efficiency. This is great advice. Linked to knowing the performance measures and the behaviour they drive is what the focus of these performance measures are. While Peter Druker famously said “You can’t manage what you can’t measure”, given modern data systems ability to record and report I am not sure reporting 200+ performance measures every day helps focus our attention. Instead, we should focus our attention on those critical performance measures that measures success (insight) as opposed to the approach of “if we can measure it we should measure it” (oversight).
- Experiment with emerging, alternative – and iterate. This is the most controversial point, especially when considering from a commercial perspective. While we should explore new and innovative performance measures, a PBC starts within a known commercial relationship of risk and reward. For example, if the seller does A the buyer will pay $X. However, if the seller does (A – 10%) then the buyer will pay $Y. However, by the changing performance measure, including the commensurate change in performance level, we also change the basis of payment and the associated commercial risk. While changing is OK, we simply need to acknowledge the impact. One option to help deliver this is to run these new performance measures in parallel with the old ones to make sure that they work as expected and not jump directly to them. We sometimes refer to them as “ghost metrics”. If they work well, we can then look to change as part of a formal contract change proposal.
Robert’s parting advice is to review your metrics at least annual to check if relevant but also to check whether you could do better. My colleagues and I agree that we should all be reviewing any Performance Management Framework (PMF) at least annually as part of a contract annual strategic review. Indeed, those familiar with the Australian Standard for Defence Contracts (ASDEFCON) templates, especially the Support version, would be aware that this annual PMF review is a core part of the contract.
So in summary, and as with most things in life it is about balance; balancing the need to review and change contract performance measures with the need to explore innovative new and alternate performance measures, especially where this changes the underlying commercial basis.