The Performance Matrix
Performance Matrix
It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change
. . . attributed to Charles Darwin
All businesses employ a set of resources and perform a series of basic processes in the course of their business. By and large, all businesses earn revenue by creating and selling one or more products or services. Generally speaking, business performance is ultimately measured by subtracting the total cost of supply of a product or service from its selling price; i.e. PROFIT. The problem is that this traditional approach does not measure the underlying drivers of the business.
The ACTIVA PERFORMANCE MATRIX is an extension of this view that further considers the operational inputs and outcomes in the context of their optimum operational efficiency.
For the sake of simplicity, all resources can all be regarded as assets, even if they are only a desk, chair, telephone, office and some intangible bits such as intellectual property; rights, knowledge and technical skills.
Assets will always generate two streams of expenditure which we call the COSTS OF OWNERSHIP [fixed costs] and the COSTS OF OPERATION [predominantly variable costs].
Fixed costs are incurred regardless of whether the business performs work or not because they are related to the existence of the resource [you have to finance it, insure it, pay the rent, pay salaries etc].
Variable costs only accrue as work is done and are therefore is business process related. These are generally directly related to consumables. This is a bit simplistic but it is basically true.
The following formula represents an integrated process view of measuring business performance at a practical level incorporating cost and performance indices into a dynamic relationship. The objective here is to provide a simple set of management tools that can be used to manage processes and flow rather than accounts and budgets.
Conceptually, it interprets the output of normal business activities, revenue, expenditure, production and consumption, as fundamental performance metrics. Since each of these individual input transactions is already dynamically linked in the system database it dynamically builds the metadata necessary for empirical analysis of performance at both the macro and micro levels without the need for external cubes. It shows what has been done, it indicates what needs to be done, and it highlights how to do it.
The ACTIVA PERFORMANCE MATRIX is an extension of this view that further considers the operational inputs and outcomes in the context of their optimum operational efficiency.
For the sake of simplicity, all resources can all be regarded as assets, even if they are only a desk, chair, telephone, office and some intangible bits such as intellectual property; rights, knowledge and technical skills.
Assets will always generate two streams of expenditure which we call the COSTS OF OWNERSHIP [fixed costs] and the COSTS OF OPERATION [predominantly variable costs].
Fixed costs are incurred regardless of whether the business performs work or not because they are related to the existence of the resource [you have to finance it, insure it, pay the rent, pay salaries etc].
Variable costs only accrue as work is done and are therefore is business process related. These are generally directly related to consumables. This is a bit simplistic but it is basically true.
The following formula represents an integrated process view of measuring business performance at a practical level incorporating cost and performance indices into a dynamic relationship. The objective here is to provide a simple set of management tools that can be used to manage processes and flow rather than accounts and budgets.
Conceptually, it interprets the output of normal business activities, revenue, expenditure, production and consumption, as fundamental performance metrics. Since each of these individual input transactions is already dynamically linked in the system database it dynamically builds the metadata necessary for empirical analysis of performance at both the macro and micro levels without the need for external cubes. It shows what has been done, it indicates what needs to be done, and it highlights how to do it.
Performance based management relies on the collection of relevant key data from operational activities at source. Activa does this dynamically by defining metrics for key resources and combining the collection of performance data for a particular resource with other natural system functions such as invoice processing.
In this context a business RESOURCE may be a single activity, one asset, a group of assets or an entire 'system' such as a manufacturing production line or a commercial investment property. The PERFORMANCE METRICS collected in Activa are automatically impacted onto the actual COSTS OF OWNERSHIP [fixed costs] and the actual COSTS OF OPERATION [predominantly variable costs] from the Fixed Assets Register, Procurement Capex WIP and Opex Requisitions functions as an integral part of the performance matrix.
By way of example, one key metric is UTILISATION; this can be defined as the relationship between the actual hours of operation of a resource in a given period, its PRODUCTIVE TIME, and the maximum number of hours that the resource is available for work in the same period, its THEORETICAL TIME. This is usually recorded in hours and expressed as a simple percentage or decimal value. Obviously factors influencing productive time are downtime due to maintenance and idle time, but lets's not complicate the example just yet.
Another key metric is PRODUCTIVITY or work done [per productive hour]; this is the number of units of a commodity produced by a resource in a given period versus the maximum rated output of the same resource. Recorded in units, this is also expressed as a simple percentage or decimal value. In revenue producing systems 'productivity' may simply the be actual revenue generated in the period versus the maximum possible revenue.
By extension, the EFFICIENCY rating of any business activity is therefore the product of these two metrics, UTILISATION and PRODUCTIVITY.
Metrics can be established for almost any purpose related to performance measurement with simple screens and parameters allocated from stock formats to promote uniformity and consistency of data collection. Most data input screens are triggered automatically by standard system processes.Generally speaking, factor ‘c’ represents the cost per dollar revenue; the inverse of the basic margin assessment in any target pricing strategy. 'f','k','u','v' and 'R' are key indices in monitoring performance assessment and represent the cost of ownership, cost of operation, resource utilisation, productivity and effort respectively.
In this context a business RESOURCE may be a single activity, one asset, a group of assets or an entire 'system' such as a manufacturing production line or a commercial investment property. The PERFORMANCE METRICS collected in Activa are automatically impacted onto the actual COSTS OF OWNERSHIP [fixed costs] and the actual COSTS OF OPERATION [predominantly variable costs] from the Fixed Assets Register, Procurement Capex WIP and Opex Requisitions functions as an integral part of the performance matrix.
By way of example, one key metric is UTILISATION; this can be defined as the relationship between the actual hours of operation of a resource in a given period, its PRODUCTIVE TIME, and the maximum number of hours that the resource is available for work in the same period, its THEORETICAL TIME. This is usually recorded in hours and expressed as a simple percentage or decimal value. Obviously factors influencing productive time are downtime due to maintenance and idle time, but lets's not complicate the example just yet.
Another key metric is PRODUCTIVITY or work done [per productive hour]; this is the number of units of a commodity produced by a resource in a given period versus the maximum rated output of the same resource. Recorded in units, this is also expressed as a simple percentage or decimal value. In revenue producing systems 'productivity' may simply the be actual revenue generated in the period versus the maximum possible revenue.
By extension, the EFFICIENCY rating of any business activity is therefore the product of these two metrics, UTILISATION and PRODUCTIVITY.
Metrics can be established for almost any purpose related to performance measurement with simple screens and parameters allocated from stock formats to promote uniformity and consistency of data collection. Most data input screens are triggered automatically by standard system processes.Generally speaking, factor ‘c’ represents the cost per dollar revenue; the inverse of the basic margin assessment in any target pricing strategy. 'f','k','u','v' and 'R' are key indices in monitoring performance assessment and represent the cost of ownership, cost of operation, resource utilisation, productivity and effort respectively.
Fixed costs are incurred regardless of whether a resource is used or not. Since these costs can only be recovered when the resource is performing revenue earning work, the resulting fixed cost per unit is inexorably tied to the overall efficiency of the operation. This is expressed in the following component of the matrix which combines fixed costs with resource utilisation and productivity.
'f’ implies fixed costs per theoretical hour; standing costs [rates & taxes, cost of net funds invested, depreciation, insurance, accreditation, compliance costs, fixed salaries and so on, divided by the number of theoretical hours in the given period] and they are accrued over the full time that the resource is theoretically available for use.
'u' represents the actual utilisation of resources and is simply an expression of actual productive time divided by the maximum theoretical time that the resource is available to do productive work in any period.
Productive time is the time that any resource [including labour] is actually engaged in revenue earning work. It does not include downtime due to maintenance or sickness or repairs or any time that the resource is idle or unavailable for productive work due to external dependencies.
Theoretical time is the maximum time that a resource is theoretically available to do productive work.
Productive time is the time that any resource [including labour] is actually engaged in revenue earning work. It does not include downtime due to maintenance or sickness or repairs or any time that the resource is idle or unavailable for productive work due to external dependencies.
Theoretical time is the maximum time that a resource is theoretically available to do productive work.
'v' is a measure of work outcomes [production] against resources applied. This is bit of a mental stretch but in real terms it represents the organisation’s effectiveness in generating revenue and all of the inputs that this implies. To this extent it reflects customer pricing policy, service levels, management policies, operational, sales and marketing effectiveness. This is the real ‘work done’ that is being measured.
In performance analysis the ‘v’ factor is always compared to the optimum potential for work, or if you like, the ‘revenue earning potential’ [KPI]. Put like this it becomes totally relevant. When it is rolled up with the utilisation factor it produces a measure of overall efficiency. So, basically even the best revenue rates are of little comfort unless resource utilisation is equally high.
‘R’ represents the productive time per dollar revenue [In this example the inverse of ‘v’ and
traditionally represents a measure of work effort required per unit of production. In this case,
productive time required to generate a dollar of revenue]
‘k’ variable cost per productive hour [includes all variable operational and overhead costs, divided
by the number of productive hours achieved]
traditionally represents a measure of work effort required per unit of production. In this case,
productive time required to generate a dollar of revenue]
‘k’ variable cost per productive hour [includes all variable operational and overhead costs, divided
by the number of productive hours achieved]
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| Article last updated : Mar 12 2012 4:37PM |  |