Background and History of Measurement-Based Management
Measurement-based or fact-based management is not new. A form of it was developed during and after World War II when the so-called "Whiz Kids" became powerful managers at Ford Motor Company through innovative use of company data. Robert MacNamara, one of the Whiz Kids, went on to become Secretary of Defense, and introduced the same management methods in the Pentagon during the Viet Nam war. This approach to management was oriented to an industrial age that is now largely in the past. It strikes us as cold and impersonal, the mind-set of Dilbert's boss.
The modern history of post-industrial management could be said to begin with the work of W. Edwards Deming in the 1950's. Deming was an extraordinary teacher who, although he was first well-received in Japan, eventually influenced management philosophy everywhere. Deming, along with Japanese managers such as Genichi Taguchi, introduced the modern emphasis on quality, innovation, and employee empowerment, as well as feedback and measurement-based management. Others such as Peter Drucker, J.M. Juran, Peter Crosby, and Tom Peters were instrumental in spreading the Deming philosophy (with their own modifications) across America. But unlike the Whiz Kids and the others, Deming urged managers to recognize the value of their employees as untapped sources of company knowledge and ideas for improving quality. Perhaps this is one of the reasons that Deming's ideas continue to influence management in the post-industrial era.
Measurement and Feedback
In traditional industrial activity, "quality control" and "zero defects" were the watchwords. In order to shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. The problem with this approach is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects. What Deming saw was that variation is created at every step in a production process, and the causes of variation need to be identified and reduced. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a measurement system with feedback loops. The feedback data should be examined by managers to determine the causes of variation at each step in a process, identify the processes with significant problems, and then focus attention on improving that subset of processes. Deming proposed a continuous cycle, usually referred to as the Plan-Do-Check-Act cycle, to implement a philosophy of continuous product and process improvement.
The Deming philosophy emerged in the US government in 1987 via two initiatives, one military and one civilian. Under Defense Secretary Frank Carlucci, the Total Quality Management (TQM) program was introduced to create a new focus on total ownership cost in acquisitions. This initiative brought significant changes in DoD policies, including the near-elimination of MIL SPECs, elimination of employee performance appraisals ("Management by Objectives"), and simplifications in the Federal Acquisition Regulations (FAR).
The Baldrige Award
The civilian initiative of 1987 was the Malcom Baldrige National Quality Award, named after the first Secretary of Commerce under Ronald Reagan (who died tragically in a horseback accident). Realizing the significant strides Japan had made in industrial quality, particularly in the auto industry, Baldrige sought a way to rebuild American competitiveness. The Republican administration was unwilling to offer direct corporate handouts, but they wanted to do something to encourage the new management philosophy. So they created a prestigious award that would be given to large and small product and service companies that showed the best scores on a carefully-designed questionnaire, the "Baldrige Criteria". Winners would receive a handsome trophy in a high-visibility ceremony in Washington, and could use the publicity in their advertising. In exchange, they would be asked to reveal some of their management's best practices so that other companies could benefit from their experience.
After more than ten years of experience, the Baldrige Award has proven to be a good incentive for many companies, and a predictor of future stock performance for its winners. Although a few winners have faltered, their overall growth has outperformed the S&P 500 and other common market indices. The Baldrige Criteria, which are refined each year, have become a credible set of guidelines for business success. American competitiveness has indeed rebounded, as recent economic data amply indicate.
What is so special about the Baldrige Criteria? What 'best practices' have they revealed?
The Baldrige Award questionnaire booklet is published each year by the National Institute for Standards and Technology, which also administers the award reviews. The booklet contains, in addition to the questions, several pages describing various underlying concepts and values. In brief, what the Baldrige Award winners have in common is a management system that incorporates something like Deming's Plan-Do-Check-Act cycle, in which both strategic and tactical plans are deployed along with a measurement system, and feedback is obtained from the data to monitor results and revise the plans. This is not implemented as a special project but as a continuous cycle that is aimed at continuous improvement and continuous adjustment of strategy to new business conditions.
Lacking such a measurement system does not necessarily mean that managers are not doing a good job, nor that people are not productive or happy. The Baldrige Information and Analysis Criteria are simply looking for data to answer the question, "How well do we know how well we do our work?"
The Measurement Imperative
In private companies, measurements are simply essential in order to provide a rational basis for decisions. Jac Fitz-Enz (Benchmarking Staff Performance, 1996) offers the following admonition:
"Measurement of any work process or practice is more than possible. It is imperative. It applies in both routinized process work and in individual professional practices. Whether we are talking about a benchmarking project or just tending to day-to-day management, without number we don't really know what we are doing. If managers do not know [measurements], I have only onequestion: What do you think they are managing? Without metrics, managers are only caretakers. They are administrators of processes."
In government, is performance-based management another management fad that is going to disappear tomorrow? On the contrary, it appears to be becoming more entrenched. An illustration of that is the passing in 1993 of the Government Performance and Results Act (GPRA) - the relevant excerpt of the Act ishere. This Act requires all government agencies to deploy a strategic plan, set performance targets, and measure performance over time. Future budgets for the agencies will be set (by the Office of Management and Budget, not the Departments) with consideration given to progress in achieving performance targets. This is reality -- the US taxpayer wants to see a government that has demonstrable results and progress. Otherwise, there will be massive outsourcing of every possible function to private industry, where market forces promise better performance.
In the Department of Defense in particular, it is clear that the GPRA will be taken seriously. The Secretary of Defense, William Cohen, in his previous position was one of the Senate sponsors of the GPRA. Recently he has flatly announced that there will be new rounds of Base Realignments And Closings (BRACs). His goal is to cut civilians in the DoD by 40%. At the same time, he and Congress agree that there is a need for the country to preserve its technology base and special skills, so there is a desire for judicious, surgical-style force reductions. Quantitative metrics such as scores of Baldrige-based self assessments will be one of the criteria considered in making future decisions about these reductions.
The handwriting is on the wall. Government leaders that want to survive must make significant efforts to improve performance -- and be able to prove it with verifiable measurements.
But What Must Be Measured?
The earlier era of measurement-based mangement was focused on industrial production. In operations such as automobile production, there are numerous tangible, repetitive processes that can be precisely measured and monitored. Shewhart, as early as the 1930's, had begun to institute such methods as Statistical Process Control (SPC) for industrial processes. However, in the 1990's the economic drivers are not industrial mass production companies and blue-collar workers, but office-oriented production by 'knowledge workers'. In this environment, there is much that is intangible, and some processes, such as R&D, are not even repetitive. So how can performance be measured adequately in a modern enterprise?
In most traditional industrial and government organizations, there have always been ample measurements of one particular kind: financial data. In private companies, profit or the 'bottom line' is the ultimate indicator of success, and earnings are carefully watched. Public agencies often operate at a loss and are subsidized, but the loss is targeted to a specified limit; the metric to compute this is called the Net Operating Result (NOR). This is the dial that senior staff are constantly watching.
Financial data are precise and objective. However, they do not tell the whole story of a company's health. Financials are lagging indicators -- they show what happened in the past. What we would like to have are some leading indicators to get an idea of what may be ahead. Lacking these, companies often drive straight ahead in the fog and suffer the consequences.
The balanced scorecard offers an alternative to the traditional financial indicators. It describes and explains what has to be measured in order to assess the effectiveness of strategies. The balanced scorecard approach to aligning strategy with action is just as applicable in the public sector as in the private sector, particularly for the reason that it does not focus so heavily on financial metrics, such as profit, which are not relevant in governmental organizations. Hence the balanced scorecard is being seen as an appropriate way for the government to implement the requirements of the Government Performance and Results Act. Read more about this in the other articles on this web site.