What gets measured gets managed

Peter Drucker’s famous quote, whilst originally applied to organisations, applies equally to contracts. This article by Rennie Advisory’s Business Advisory team, explores ways to improve contract performance measurement and how to better focus management attention on the things that matter.

How and why do we measure performance?

All contracts will feature one or more measures of performance. A contract for the supply of bricks will have a measurable specification, quantity, delivery point, schedule and other attributes.

Across asset-intensive industries such as energy, infrastructure, mining and defence, measuring performance in contracts can be complicated – with calculations, triggers, data definitions, exceptions, exclusions, and freedom of judgement. The types of things that can get measured range from asset uptime, to stock on hand, key personnel availability and power output…and are given acronyms such as KPI, KHI, and SPM, to name a few.

No matter how simple or complex, buyers and suppliers focus on these measures because they heavily influence payment, contract duration, and the need for remediation or intervention. And because of this, they can be a point of contention – a KPI can be met that triggers payment even when the key contract outcomes or expectations remain outstanding.

Getting a more ‘balanced’ measure of performance

There are four types of contract performance measures:

• Ends – measuring outputs or outcomes.
• Means – measuring how those outputs or outcomes are achieved. Often termed ‘health’ measures.
• Lag – looking at past performance.
• Lead – looking forward, predicting performance.

Contracts that are output-oriented (such as buying bricks) tend to have ends measures, and those that are input-oriented (such as providing a doctor to a hospital) tend to have means measures. Most often measures lag, waiting for the result to be achieved or not. This can make it difficult to get a good grasp on performance, and what you can do about it.

Ideally, contracts will have a mix of all four types; ends, means, lag and lead measures, providing a more ‘balanced’ view of performance.

Regardless, performance measurement is never perfect, and contracts will invariably suffer from two major shortcomings:

• Performance measures distil performance down to a couple of elements, that try to be unambiguous and easily measurable. Sadly, this may not always be the performance you actually want.
• Contracts tend to only measure the supplier’s performance – ignoring that the buyer often has a critical role in creating a successful environment for the supplier to be able to perform!

A better way of measuring contract performance is to go beyond the contract

Rennie’s experience is that the shortcomings of contract performance measurement can be overcome when the contract is used in conjunction with a broader measurement system of performance and behaviours that takes in perspectives from multiple stakeholders – buy-side, sell-side, investors, customers. This helps all parties to better manage their performances, and identify if the contract and commercials are actually helping them achieve the performance they want.

Measuring performance is only part of the solution

Henry Mintzberg flipped the management-measurement paradigm when he said:

If you can’t measure it, you’d better manage it

Measurement definitely helps us manage performance. But whether they are measured or not, there are a range of things that still need managing to get your contract to work – your own conduct, relationships with the people who work with the contract, and the systems, processes, governance, deliverables and services that help make it all happen.

Bringing it all together

• Use a mix of ends, means, lag and lead measures.
• Bring multiple stakeholder perspectives into your measurement system.
• Remember to keep managing the things the measurement system misses.
• Take time to understand your counterparties and what they need from you to be successful.