Elements for a ‘good’ performance measure

In addition to the list of recommendations for performance measures, Neely et al. (1997) introduced a framework called ‘the performance measure record sheet’, which specifies what makes a good performance

31 measure. The article showed that the performance measure record sheet does lead to the design of ‘good’ performance measures, but that explicit guidelines on how to use the measures are still missing. In Table 4, the elements of which the framework consists can be seen. All the recommendations of the previous section can be linked to the elements of the record sheet, however some of them turned out to be not a characteristic of a well-designed performance measure. The design of the record sheet ensures that recommendations 1, 2, 3, 4, 6, 7, 8, 9, 13, 14, 15, 20 and 21 are satisfied (Neely et al., 1997). The remaining recommendations should only be considered as important process guidelines and supplements for the framework. The relation between the elements and the satisfied recommendations is shown in Table 4 as well15. Since all the elements of the record sheet are covered by the 18 selected recommendations in the previous section, the record sheet is used to describe the KPIs of the PMS of PL IMS Procurement. However, some necessary adjustments are done to the record sheet, to be able to use it in this research. This is described in the next section.

3.3.1 Applying the performance record sheet at PL IMS Procurement

Several adjustments need to be made to the performance record sheet to be able to apply it for IMS Procurement. First of all, to avoid confusion over the definition of a KPI, a definition of the indicator is added after the title of the KPI. Additionally, element 4 and 5 are reversed in order, since it makes more sense to discuss the way of calculating a KPI before discussing the target. Continuing on the target of the KPIs, there are three main approaches to establish standards for a target according to Cousins et al. (2008). The first approach is based on historical data, where the past data of an activity serves as a basis for the setting of a performance standard. Another option is to use planned performance, where the company can look to other internal divisions to identify company-wide best practice. The last approach is competitive benchmarking, where the targets are set based on an analysis of competitors or other firms with similar activities. In this research, two approaches are used, historical data and competitive benchmarking, to be able to make a suggestion for a target. The official targets should of course be established by the management team of PL IMS Procurement. For the historical data, from now on called internal benchmark, the performance of the eight selected ORUs is showed, including their average performance, and the highest and lowest scoring ORUs are highlighted. For the competitive or external benchmark, available information on the Internet is used from companies like Zycus and the Hackett Group, who provide benchmarking reports on the P2P process every year. If available, only the benchmarks of the best performing companies are taken into account, as Philips wants to be a world class provider of lighting solutions (Philips, 2015). An example of a benchmark study is the one of Zycus Inc. (Zycus, 2014), where they looked into KPIs relating to corporate processes and technologies for managing indirect spending. More than 450 procurement organizations worldwide took part in this study. With the internal and external benchmarks, a suggestion is made for the target of every KPI. A time scale for achieving the target will be different for every ORU, since there is a huge difference in performance between the ORUs, and is therefore left out of this research. However, an ambition for the first year in order to reach the target is suggested for all ORUs.

32 Table 4 - The performance measure record sheet of Neely et al. (1997)

3.3 Conclusion

This chapter answered Sub-question 2 ‘How can a PMS be created for the P2P process according to the available academic literature?’ The eight-step method of Andersen and Fagerhaug (2002) is chosen to structure the design of the PMS for PL IMS Procurement. In addition, the KPIs in the PMS have to fulfill the S.M.A.R.T. criteria of Doran (1981), as well as the 18 selected recommendations of Neely et al. (1997). All the KPIs are described according to the adjusted performance measure record sheet of Neely et al. (1997), which ensures that the KPIs are described as good performance measures, and that they satisfy most of the recommendations. In the next chapter, the PMS is designed using the input of the stakeholders, which is retrieved from semi-structured interviews, taking into account the literature framework of this chapter.

Element Description Relates to

recommendation(s) 1. Title A self-explanatory title of the measure 2, 9, 21 2. Purpose Purpose/underlying rationale of the measure 7, 14 3. Relates to Corporate objective that the measure relates to 1, 6, 7 4. Target An explicit performance target should be set _{(including a time scale for achieving it)} 4, 6, 7, 8, 14, 20 5. Formula Calculation of the performance measure 2, 4, 9, 15, 21 6. Frequency Frequency of measurement and review 3, 13, 20 7. Who measures? Identification of who is responsible for

measuring performance 4, 17

8. Source of data Source of the raw data 15, 21

9. Who acts on the data? Allocation of responsibility for taking action on

the measure 4, 6, 20

10. What do they do? Specification of the types of action that can be

taken to improve the performance 4, 6, 20 Notes and comments

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