How To Develop Performance Metrics for Service Organizations

How To Develop Performance Metrics for Service Organizations

Managers in service companies often find one of the biggest challenges they face is to drive the performance of their business. The substantive issue behind this challenge is how to effectively measure performance in an environment that does not lend itself to hard and fast metrics.

While those same managers, when placed in a manufacturing environment, may offer a similarly difficult “performance measurement scenario,” it is hard to ignore the variability associated with service industries. The key asset in a service industry is people and the key product is a service or a suite of services. It is likely that those two key ingredients could not possibly offer any more variability.

How to Develop the Metrics that Can Drive Performance Improvements for Service OrganizationsAsk any teacher or parent about how each student or child is completely unique. And as for a service, the whole premise upon which services are sold is that they are completely unique and tailored to the needs of the purchaser. Contrast this scenario with that of the manufacturing environment. The key to a manufacturing environment is to reduce variability such that processes are standardized and performed repeatedly until all inefficiencies are wrung out of the system. Given the high degree of variability inherent in the combination of eminently unique people providing completely customizable services to highly demanding clients, is it any wonder some service managers just throw their hands in the air when asked to measure and then drive performance improvements?

It is very tempting to just accept increased staff sizes and price contracts with a “cushion” to absorb these inefficiencies. Is it possible over the long haul, however, to continue those types of business practices and remain competitive? Not likely. Managers of service companies must come to grips with the realization that they, following the lead of their manufacturing colleagues, must develop effective performance metrics for their businesses. This paper examines how to develop the metrics that can drive performance improvements for service organizations.

Step 1: Understand Your Client Base And The Interface With It
Perhaps a place for service industry managers to start is to carefully examine their client base. What variances exist in the size of their clients or the industries in which their clients operate? Are there significant differences in the manner or structure around which the company interfaces with their clients? This might manifest itself in the differences found in service contracts entered into with clients. Once a thorough analysis of these factors is concluded, the service manager must develop a consistent methodology that will allow for the collection and analysis of data that will drive the development of performance metrics.

Step 2: Prepare The Organization For Change
The service manager attempting to introduce consistent performance metrics across a number of units or departments should expect a fair bit of resistance. The data will likely be questioned with the questioner indicating that those numbers don’t perfectly measure the way my area is performing. Additionally, the second round of resistance will come from employees who insist that their department is unique and can’t possibly be measured against the same performance targets as everyone else.

Overcoming this resistance is critical to the successful implementation of the performance metrics. The service manager can reduce this resistance by doing the following:

  • Obtaining the support of senior management before attempting to implement the metrics. This support must be visible to those whose performance will be measured.
  • Carefully selecting the team who will develop the metrics. While a smaller team can be more effective at times than a larger one, be sensitive to the fact that a broader representation of those being measured is likely to increase the “buy-in” to the metrics.
  • Communicating often. Make sure the reason(s) for introducing the metrics are clear and consider simple charts or other tools to track progress over time.

The fact is that no performance measurement will be perfect across every section of an organization. It is the responsibility of the individual or team developing the measures to do their homework carefully. The standard to which the measures are to be held is not perfection, however. Rather, the measurements should be highly accurate, applied consistently and provide important information to the management team who will make critical decisions based upon it.

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Step 3: Developing Metrics and The Metric Perspective
In their book “The Balanced Scorecard” written by David P. Norton and Robert S. Kaplan, Norton and Kaplan questioned the efficacy of utilizing what have become the most popular performance measures, namely financial accounting measures. Norton and Kaplan state, “the success of organizations cannot be motivated or measured by financial metrics alone.” This is a reference to the fact that financial metrics are largely historical and are based on accounting information. The issue is trying to run a business solely on historical financial data rather than on forward-looking estimates that reflect the strategic direction the company is taking—or trying to take.

So as to drive home the importance of looking beyond the traditional financial measures, Norton and Kaplan developed their balanced scorecard. Metrics suggested by that approach and developed by Norton and Kaplan include the following:

  1. Financial: ROI, revenue growth, revenue, mix
  2. Customer: Customer satisfaction, account share
  3. Internal: Quality control, time-to-market, operational efficiency
  4. Learning and Growth: Employee satisfaction, training, skills development

In his whitepaper, “Metrics that Matter: Measuring Professional Services Business,” Thomas E. Lah, developed some perspectives to consider when introducing performance measurements into a services organization. Lah states the following:

“Every metric provides a certain perspective on your business. In other words, different metrics tell you different things about your business. Some metrics tell you there is a problem today. Some metrics give you a heads up that there will be a problem down the road. Also, metrics naturally have different scopes. Total services revenue indicates how the overall business is doing, but provides little insight on how individual consultants are doing. Individual utilization metrics provides insight on individual performance and the overall health of the business. Continuing this logic, there are at least five unique metric perspectives you can consider:

    1. Functional Perspective: What business function does this metric help evaluate? Your sales organization? Your delivery teams? Service Marketing?
    2. Economic Perspective: Almost every internal company initiative has one of two objectives: improve operational efficiency or create future revenue (economic value). Does the metric track improvements in operational efficiency or assess the economic value of the business?
    3. Timeframe Perspective: Just like economic data, is the metric a leading or lagging indicator of how the business is performing? Does the metric indicate you currently have a real problem, or does the metric warn that soon you will have a problem if the current trend continues?
    4. Scope Perspective: Does the metric measure the performance of specific individuals, specific projects, or the entire business unit?
    5. Stakeholder Perspective: Does this metric provide insight on how your external stakeholders view you? External stakeholders would include customers and partners.”

Step 4: Maintaining The Effectiveness Of Performance Metrics
The task of the service manager is not over once the performance metrics are in place. To ensure the metrics continue to drive performance, it is important to continually evaluate them. The service manager should:

      • Consider revisions to the metrics in light of changes in the organization, client base or services offered
      • Continue to track improvements in performance and communicate that to the company as a whole so that the momentum of success drives further improvements
      • Ensure that compensation packages continue to incentivize those responsible for the improved performance

These steps are aimed to drive performance improvements for service organizations like yours. Utilizing these tips will help solve one of the biggest challenges many service companies face.

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Tom Gentile
Tom Gentile
Tom Gentile is a founding partner with BeaconCFO Plus who has created successful business solutions for companies across multiple manufacturing industries.  He has extensive experience in strategic planning, turnaround management, working capital/cash flow improvement, acquisitions and procurement.  Tom regularly speaks to groups of business owners providing advice to improve their ability to generate cash flow.
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