Introduction – KPIs and financial proxies
Members of the ADF develop skills and gain life experience in an environment that is largely foreign to the civilian workforce. Defence speaks its own language and employs entrenched processes built on centuries of tried and practiced methods to deliver Defence capability.
Given that defending Australia and its National interest is a specialisation, can the private sector running commercial operations offer Defence leaders relevant insights into running the “business” of Defence?
This article acknowledges that at the strategic level of Defence, detailed plans are in place to define outcomes linked to capability and focuses on two key elements of commercial business thinking that could accelerate the achievement of these outcomes. Integration of Key Performance Indicators (KPIs) and monetising value through financial proxies as a unit of measurement applied to all work streams.
KPIs (also referred to as measures of effectiveness, milestones, and even stage gating) are common in many organisations including Defence. This article discusses the benefits of integrating KPIs to align and synchronise staff effort and key enablers in guiding collective progress. This one tool can distil the complexity of multiple plans to coordinate and measure planned outcomes. With the addition of a standardised measure of achievement of key deliverables through actual or proxy, Defence leaders would be provided a clear metric of progress, including the impact that rates of completion have on interrelated Defence group plans.
One caveat is that this article relates to the ‘business’ of Defence versus the ‘conduct’ of Defence by speaking to the creation of capability and not the operational employment of capability. Simply stated as generating what we take to the fight versus what we do when we get there.
Returning to the question of accelerating the delivery of capability through this corporate lens requires two enabling mechanisms applicable to sound business practice. Synchronisation of collective effort and individual accountability of outcomes. Both can be measured in terms of the value individual workstreams contribute to achieving an outcome through a series of KPIs integrated into a business system. This effectively “battle tracks” overall organisational progress. Success is realised when the total workforce understands the holistic intent to drive sequencing of critical enablers for achieving planned outcomes on time and within budget.
Integrating KPIs and defining organisational success
Unlike public service organisations, the realities of operating in the commercial world are worth considering given the catastrophic consequences of failure such as terminations, restructures, and even liquidation. Accepting there are always exceptions and degrees of variation in the following premise, success in business largely relies on two primary outcomes. Firstly, that the organisation realises a monetary profit to fund its continuing existence and secondly, that this ability to resource is sustainable over consecutive periods of a management team’s tenure.
A mature organisation adds a third element to this definition of success by demanding stability and/or predictability of an outcome. This requires a balance between the organisation’s potential to achieve, and ensuring stakeholders or shareholders retain confidence in the management team to deliver a regular income stream. All this success or failure is captured in the balance sheet. Black – good, red – bad.
Before exploring the application of integrated KPIs in Defence, it is worth noting the method by which commercial operations measure this success. That is, through a series of cyclic measurements informing change over time. Businesses that know themselves well, integrate these measurements to gain an understanding of holistic organisational change and the impact of interdependent variables as opposed to functions in isolation.
Looking at ways to define success in the business of Defence should certainly be linked to the Government’s description of capability being the ability to connect Government’s priorities through to prepared forces that are available to be committed to operations. This current vision and therefore by definition the purpose of the Australian Defence Force (ADF), should align collective effort across the Joint Force with sufficient clarity for all levels of the organisation to understand what needs to be achieved. The degree of integrated effort is the difference between overall alignment of the workforce and the risk of creating competing or counterproductive siloes of work.
There are several ways this vision can be described through lines of effort, but an example of foundational goals in which KPIs can be formulated to measure a tangible outcome could be:
- People – Recruit, retain, and professionally career manage the total force.
- Preparedness – Train and sustain the force based on a scalable mobilisation model. This will ensure there is a “fight tonight” capability that includes resourcing, acquisition, and the capacity to force generate greater capability over time through a sustainable training model.
- Effect – Integrate force elements as part of a joint force contribution. This guides a total force design considerate of all services, available funding, and available personnel.
With a clear vision based on foundational goals, building successful KPIs requires two primary elements. The KPIs must be defined in meaningful terms against a planned outcome and be measurable against a baseline or current state.
These three organisational goals of people, preparedness and effect apply to the entire ADF. Current projects and initiatives can all be defined in terms of a contribution to one or more of these goals with cascading lines of effort clearly linked and integrated across the Joint Force.
Ensuring KPIs are measurable and accurate in reflecting progress towards an outcome is difficult in an organisation not driven by profit and loss. There is an art to distilling achievement through metrics. However, operating within budget, achieving non-financial targets, and delivering key enablers are all applicable. Where possible, distilling as much as possible to time and money provides a consistency of measurement that can transcend multiple cycles of organisational tasking.
One idea applied outside of the traditional balance sheet is to ‘monetise value’ through financial proxies. By developing a series of algorithms, Defence could adopt this process to calculate a financial value associated with indirect work functions contributing to an outcome.
For example, time saved through streamlining a process applied against a rank level’s hourly cost. Expediting an outcome equals a financial saving in labour and overhead. This could also apply to aligning complimentary work streams, pooling staff under a shared service centre to improve efficiency in delivery or even removing redundant or duplicated work streams. You can apply this cost effectiveness by financial proxy to reducing administrative burden through changes in policy and justifying outsourcing critical skills to Subject Matter Experts or commercial contractors. Morale can be measured through retention and absenteeism rates, and all linked to a cost impact.
Ultimately this collectively builds to a cost-weighted activity index to measure non-market economic activity related to generating Defence capability. Currently the Australian Bureau of Statistics has defined six nonmarket economic services including schools and hospitals as a technique for measuring the changes in the output of an organisation over time. When data is appropriately stratified, this approach can measure outcomes reflected as the cost weights change over time.
This takes us to the step of integration. Defining KPIs at the highest level provides a complementary link to all work streams that contribute to or enable an outcome. This should be integral to the agreed goals stated in each Defence member’s performance appraisal. In the commercial world, KPIs drive bonuses and promotion. Defence could use KPIs to provide tangible proof to not only support promotions but also honours and awards.
Establishing integrated KPIs across an organisation is only half the challenge. The fundamental enabler in ensuring they are an effective measurement of progress toward a successful outcome is accountability. Every KPI requires a single owner who is ultimately responsible for the result measured by the KPI. The owner is one person who manages and reports on the KPI on a regular basis. In turn, success in a posted role is primarily linked to achieving the assigned set of KPIs whether they are directly attributable or under management.
Logically, multiple KPIs will fall under the most senior leaders with the expectation that they manage their subordinates to achieve individual objectives devolved into equally measurable KPIs. Note that this requires the requisite authorities and delegations to manage the process or plan linked to specific KPIs.
For this system to work, KPIs cannot be set in isolation nor allocated without dialogue and an informed review. There is a requirement to commence any tenure with a baseline to ensure a mutual appreciation of what is inherited, what is required to progress, and the probability for success. There is a benefit to negotiating KPIs to ensure risk and consequence is fully understood up and down the chain of command.
Ultimately, driving outcomes through defined KPIs can prevent the divergence of effort from the necessary tasks and resources that often take the form of fascination pieces and proverbial good ideas. Nonalignment to a KPI provides the basis for a logical argument against undertaking a non-contributory task. That is not to say there is not a place for innovative ideas, rather that KPIs ensure priorities can be set and resources allocated. This all makes the management of generating Defence capability a reasonably linear path for what is by comparison to the corporate world, a very short tenure for the executives who lead.
Efficiency through alignment of the total workforce
In suggesting there are two basic categories of employees, all will fit into either a strategic or an operational role noting there is always a blurring of these boundaries. Senior management should lead through vision and operational teams should execute the vision in the most optimal way possible under a safety net of bureaucratic processes. These bureaucratic processes provide governance and structure but do not guarantee efficiency. Efficiency is influenced by leaders inevitably biased in their management style toward being an agent for change or alternatively an administrator confident in a system they understand. Efficiency can be equally generated by both approaches, but inefficiency must be recognised and the delegation to make changes granted to KPI owners.
In presenting such procedural changes to the business of Defence, leaders also need to consider the workforce. The total workforce needs to be engaged, from the newcomers inspired by the art of the possible, contrasted with those who have reached their ultimate position and are skilled at operating within existing business processes and maintaining the status quo. The former being excited champions of perhaps unfiltered and uninformed ideas and the latter falling into either the organisational stalwarts or at the very worst, toxic naysayers to change.
Of these groups, organisational stalwarts remain the backbone of any organisation. They know the system, know their role, and are dedicated and committed to processes and leadership regardless of the quality of decisions being made. They are both a guard against risky change and potentially a well-meaning impediment to the speed of organisational progress. This group does however represent the engine room that keeps the lights on and remain the key to successful organisational change.
Good leadership optimises this engine room as an essential resource to accelerate the achievement of planned outcomes. Integrated KPIs simply measures the rate of this progress to inform the achievement of goals and objectives. In doing so, KPIs can align the next generation and identify the blockages and impediments to achieving planned outcomes. Progress becomes transparent and tangible in a complex organisation. To quote the father of management thinking, Peter Drucker… “If you can't measure it, you can't improve it”.
So I think you have raised the essential question – how do we identify integrated KPIs that will support MBO and mission achievement, AND allow us to maintain the essential focus on the person/worker that was also an important part of Drucker’s teachings.
I look forward to the next instalment!