9.4.1 Recommended performance target settings
The probability of failure of process improvement projects is high with the literature indicating probability of failure results exceeding fifty percent. This would indicate the performance targets are being set too high when compared to the capability of the organisation’s process improvement project to achieve them. If the performance improvement risk assessment process is to add value to an organisation it must facilitate the probability of success for an improvement project exceeding fifty percent by a reasonable margin.
Subsequently the risk assessment should provide information to and guide decision makers to set performance targets that an organisation achieves more than fifty percent of the time. The predicted probability of success in meeting or exceeding the chosen performance target should exceed fifty percent. The recommended probability and performance target ranges for a particular process improvement project are illustrated in Figure 9-7 with recommended probability of success in the range 0.5 to 1.0.
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Figure 9-7: Recommended performance target setting range
9.4.2 Setting performance targets meeting decision maker’s risk profile
A manager may receive a request from senior management for a single number for the level of performance gain to be obtained from an improvement project. Without probabilistic performance prediction data similar to Figure 8-3 the response may be based on experience and ‘gut-feeling’ alone. The performance cdf data exemplified in Figure 8-3 provides an additional decision support dimension.
Assume the manager has a conservative risk profile and decides it is acceptable to be below the stated performance value one time in three or odds for success of 2:1. This corresponds to a probability of success equal to 67 percent or a cumulative frequency of 33 percent. From the performance probability of success function for the improvement project in Figure 8-3 or Figure 9-7 the corresponding relative performance P* is equal to 0.48. This value is very close to the predicted mean
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relative performance 0.49 as the target performance level of the project with the full knowledge that there is a one third chance the result will be worse and two thirds chance the result will be better. This is a risk the manager is willing to accept. The decision is made based on knowledge of the odds.
9.4.3 Negotiating a performance target for an improvement project
An improvement project is proposed in an organisation to improve performance. The improvement project will obtain a go if a commitment can be made by the responsible manager that it will meet a specific performance target. Before accepting responsibility for the project the manager wants to know what is the likelihood that the project can succeed based on the organisation’s capability.
The manager wants to be associated with ‘winning’ projects more than ‘losing’ projects and has a personal goal of only accepting improvement projects where the probability of success in meeting target performance goals immediately after project completion is better than 67 percent or has odds of 2-to-1 in favour of success. The company has a requirement for the project to meet a performance target P*targ = 0.7.
A risk assessment is conducted of the improvement project. The capability score is estimated at SC = 60 and cdf of predicted performance is estimated as in Figure 8-3.
The estimated probability of meeting or exceeding the specified target P*targ = 0.70 is
estimated at 13 percent. This is less than the manager’s requirement for a minimum 67 percent success rate. The manager argues a target equal to P*targ = 0.48 is more realistic
with 67 percent probability of success. A comprise is negotiated for P*targ = 0.55 with
an estimated 58 percent probability of success or odds of 1.4-to-1. The project proceeds on this basis.
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9.4.4 Setting performance targets meeting an organisation’s risk profile
The argument for setting performance targets for an individual manager can also apply for an organisation engaged in process improvement. An organisation is interested in using the probability of success estimates as a decision making support tool. Their belief is that continued engagement in improvement is dependent on obtaining consistent success in improvement efforts; however they acknowledge aiming for performance gain has a risk of failure. They neither want to aim too pessimistically (low) in their target setting but understand that aiming unrealistically optimistically (high) is counterproductive.
The organisation therefore decides in balance to implement the operating policy performance targets will be set such that each improvement project will specify a performance target with a probability of success of 70 percent equivalent to odds of success approximately 2.3:1.
9.4.5 Setting the performance target to meet a value target
An organisation specify a process improvement project and expect it will achieve a target value Vtarg = 5.0. What is the target performance level P*targrequired and what is
the probability of successfully achieving this target or better?
Value V associated with relative performance P* is estimated to be as in Figure 9-5. An
analysis of the improvement project determines the probability density function of the relative performance variable as shown in Figure 8-2. An improvement capability analysis determines the capability score SC for the improvement project is 60.
Combining this data produces the probability of success function for value V in Figure
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From Figure 9-5 the desired Vtarg = 5.0 is equivalent to Ptarg = 0.74. The probability of
success from Figure 9-6 is estimated at seven percent.
9.4.6 Prediction interval estimate
A manager is interested to know a confidence interval of performance anticipated to be obtained from an improvement project given the organisations current capability. This manager understands there are uncertainties in performance due to random factors and other factors that can be managed to improve the odds of success. A two-sided 90 percent prediction interval of predicted performance is requested.
Figure 9-8: Relative performance pdf: 90 percent prediction interval (SC = 60)
From the example in Figure 8-3 with SC = 60 the 5 percent performance value is P* =
0.04 and the 95 percent performance value is P* = 0.77. The reported 90 percent
performance prediction interval for the project is therefore [0.04, 0.77]90% as illustrated in Figure 9-8.
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