Performance Management Best Practices – Part 1 (1 of 4) By Tom Bayer, CPA, CSPM, CExP, Partner Sikich LLP Human Capital is an Asset – Don’t Ignore It. This is the first of a series of 4 articles on performance management. Our goal with this series is to provide businesses with a simple approach to adopting a performance management system. In the day to day management of your business, you must install performance measures to monitor your operation. Kaplan and Norton introduced us to the Balanced Scorecard which focuses on four performance areas of a business, and David Parmenter has expanded that to six areas. In general, what these experts have taught us is that there is more to the management of the business than the financial results. There are leading indicators that must be monitored, indicators that are predictive in nature to our success. Consolidation is occurring in all industries, and the small business owner is forced to compete against businesses who do in fact manage their business with performance measures like average sale per customer and leading economic indicators that facilitate operational and merchandise planning. If the small business owner doesn’t implement a performance management system, regardless of how simplistic it is, he or she will be at a competitive disadvantage. Enter Human Capital. People are the lifeblood of our business. A recent study published by Accenture, a global consulting firm, concludes that in today’s workforce, attention to people is more critical than ever. In short, businesses must hire effectively, mentor and train effectively, measure productivity effectively, and we must recognize and reward effectively. This requires focus and carefully designed systems that provide a consistent work environment for your employees. For a small business owner, this is difficult. We tend to allow our people to learn on the job and create their own systems. A few years ago, a customer in the insurance services business was convinced that she needed to invest in more marketing activities to drive more customer traffic to the business. This was based on her evaluation of slumping sales results. By implementing a very simple performance management system, we quickly learned that the employees were not trained properly. The sales opportunities were not the problem – the employees turning opportunities into sales were. Another customer, an office furniture retailer had significant turnover in their sales staff. They believed that their hiring process was not effective in finding candidates that sales oriented and a good fit for the job. They implemented a process in which they benchmarked the position and then evaluated the candidates against the standard. They quickly found that in fact they were hiring candidates that should be successful. Their focus then turned to their management practices and they found that their management practices were seriously lacking. The biggest problem was that the employees were not clear on the sales expectation and were not being mentored to meet the expectation. Eventually, the sales manager was replaced. We recommend implementing some performance management systems to measure and monitor this critical area of Human Capital. It is critical to have motivated and productive employees in your business – it affects the level of satisfaction of your customer for sure. You should start with a very simplified approach – you can always enhance or expand your performance measurement system. Human Capital metrics should address the following questions: 1. Are your employees productive in their specific position? 2. Are your employees focused on quality and timeliness? 3. Are your employees happy? 4. Do your customers like your employees? 5. Are you communicating feedback to employees as per their expectation? 6. Are your employees being properly trained? 7. Does every employee have opportunity within the business? 8. Do you have a selection process that is scientific? By no means can you formally implement systems to address all of these questions immediately. But remember, turnover is probably a product of your failure of one of these systems, and not necessarily due to nonperformance as we often believe. In short, here are some metrics to implement immediately that will help you answer some of these questions: Employee satisfaction - I recommend that you perform a confidential employee satisfaction survey every 6 months. There is lots of information on the internet on the types of questions to ask, but I recommend a very simple survey with a simple scoring system. It’s good feedback from employees and you have to respond to issues that are raised. Productivity – Sales per employee, profit per employee, gross margin per employee, margin per hour worked are all good productivity metrics. Obviously you have to departmentalize this metric because productivity for sales staff is different than productivity for your accounting staff. Create productivity measures for all departments. Human Capital Process – Do you have structure within your organization including an organization chart, job descriptions, a selection process, performance appraisals more frequently than annual, training plans for employees, reward and recognition, and a 360 degree evaluation process? People want to know where they stand and how they fit in to the overall organizational goals and you have to implement systems to ensure that happens. In summary, Human Capital is an under recognized asset. Show me a financially successful business that has high turnover and I will show you a business that will eventually self-destruct. Remember that employee turnover is a key performance measure, but I would consider it more of a lagging indicator of our success in the area of Human Capital. Jim Del Rosario, vice president of talent acquisition at Veritude, an HR services company in Boston, recommends that in getting started with Human Capital metrics to pick a few problem areas and figure out how to start measuring them. I agree, that starting simple is always a good strategy. About Sikich LLP Sikich LLP is a public accounting and consulting firm providing public accounting and tax services, operations and management consulting, entrepreneurial services, information technology products and services, investment banking, human resource services, marketing and design services, retirement plan services, and wealth management. With more than 350 employees and nine offices located in Aurora, Buffalo Grove, Chicago, Decatur, Naperville, Rockford, Springfield, Illinois; Indianapolis, Indiana; and St. Louis, Missouri, Sikich serves individuals and small and middle market companies, as well as governmental and not-for-profit organizations. Visit www.sikich.com to learn more. Securities are offered through Sikich Corporate Finance LLC, a registered broker dealer with the Securities Exchange Commission and a member of FINRA and SIPC. Advisory services offered through Sikich Financial, a Registered Investment Advisor. General securities offered through Triad Advisors, Member FINRA/SIPC.
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