Reciprocity

A company should use key performance indicators (KPIs) to monitor and manage the relationships in its performance network, but these metrics must not focus myopically on optimization of the company's own, internal performance. They should be reciprocal, showing both what the stakeholder adds to the organization's performance and how the organization contributes to the stakeholder's performance. Extending the traditional stable of top-down metrics to a wider audience of stakeholders makes no sense. The Performance Prism, developed at Cranfield University in the U.K., is helpful in defining reciprocal performance indicators. Exhibit 2 identifies facets of success with each of an organization's key stakeholder groups. (See also The New Spectrum: How the Performance Prism Framework Helps in the November 2003 issue of BPM Magazine.)

Companies that revamp their KPIs in the brave new world of performance networks must develop metrics that reflect performance for their full spectrum of stakeholders. Monitoring only shareholder returns or customer satisfaction surveys no longer represents an acceptable level of performance oversight if a company's processes — or very business — is defined by diverse relationships with an array of individuals and other organizations. For each stakeholder that it deems important, a company should monitor not only what it is getting from the stakeholder (for example, the benefits listed in exhibit 2's “needs of the organization” column), but also what it is providing to the stakeholder (in the “needs of the stakeholder” column). To make sure they stay on the right track, companies need to keep their eye on what is important to stakeholders. Failure to do so leads to loss of stakeholder satisfaction; if the costs of switching to a competitor are relatively low, it also leads to stakeholder defection.

Within a transactional relationship, the purpose of reciprocity is to optimize one's own performance. Reciprocity within added-value relationships has a bigger impact on an organization's performance. To achieve reciprocity in added-value relationships, the organization needs to track its stakeholders' success. Performance indicators should point out how much money the company saved a stakeholder, how much return it generated, how much opportunity it created, or similar gauges of the relationship's results. Ultimately, the success of an added-value relationship for one partner impacts the bottom line of the other partner as well. For joint-value relationships, an organization's performance indicators should measure the same things the company is measuring to gauge its own success. Because they share objectives, all parties are looking for success in the same areas, but each organization should measure not what it has achieved for the benefit of itself or the other organization, but rather what it has achieved for advancement of the relationship.

Trust

Every successful organization is built on trust. Employees trust the company's management, and vice versa. Without a basic level of trust, a business cannot be productive. The same kind of trust — probably even more — is needed between organizations. Trust, more than control, fuels performance within any relationship (even a transactional one). In fact, too much accountability can hurt strategic relationships. An atmosphere of strong accountability does not fit well with the idea of creating trust; an atmosphere of open commitment does. A relationship that does not involve open commitment between parties can be terminated at any time because accounts can be settled easily. The costs of switching to a new partner are lower, and behavior tends to be more transactional. This is not to say that an organization should not take action to control and measure success in its relationships. But the aim of performance indicators and management processes should be to build trust, thus lowering the costs within its relationships.

Transactional relationships require contractual trust, meaning that all parties involved believe that contractual obligations will be met. Simple performance indicators reflecting the results of service delivery, as put forth in a straightforward service-level agreement, suffice. But successful added-value relationships, in which one organization relies on the processes and systems of another organization, require greater trust. They demand competence trust, which means all parties believe not only that their partners will meet contractual obligations, but also that they have the right skills, technologies, and other resources. Performance indicators reflecting the level of competence trust focus on the inputs of the service — how processes have been performing, how people have been trained, how resources have been allocated, etc. — not just on the outputs. Competence trust requires much more transparency than contractual trust.

A final level of trust, goodwill trust, develops when a party knows that its partners will represent it fairly and, when representing it, will make the same decisions it would make. This high level of trust between organizations can occur only when the parties involved share the same norms and values. Goodwill trust should be present in joint-value relationships, where organizations share intellectual property — along with resources such as capital, staff, information, and facilities — and where materials flow freely between the organizations. A joint-value relationship puts an organization in an intrinsically vulnerable situation.

The link between performance and trust is complex. Different stakeholders have different expectations for an organization. If a company's strategy is aimed at cost leadership and it is doing a good job, then its cost-related performance indicators will have excellent results. But this doesn't necessarily mean the organization is trusted. Stakeholders who measure the company based on quality, rather than cost, may give it bad grades regardless of how well it is executing its chosen strategy. Trust is earned only when the organization's strategy matches the external stakeholder's expectations. A well-known anecdote — which is not true, yet makes a great point — illustrates how customers' trust in a brand might have little to do with how the organization is actually performing. It describes two car companies that perform a similar recall on a specific line of cars. Both companies send a letter advising all owners of cars in the faulty line to report to their dealer and have their car serviced free of charge. Owners of the more prestigious brand applaud their carmaker for being diligent and quality-oriented, while response to the less-trusted manufacturer is negative; for owners who expected quality problems, the recall proves them right.

It's important to note that the relationship between performance and trust is not always symmetrical. In some services, good performance is not noticed, while bad performance leads to immediate distrust. Think of an outsourcing company that processes payroll. Its service is either considered to meet expectations but draw no kudos (100 percent accuracy), or is considered to be poor (less than 100 percent accuracy).

When developing KPIs that can enhance trust across a performance network, companies should keep in mind that financial and operational metrics are not the only factors stakeholders use to evaluate an organization's performance. Shell's image took a hit during the Brent-Spar affair of the mid-'90s. The company felt that sinking the oil platform was its most economical and environmentally friendly option, but the public disagreed. Shell's products and services were not compromised by its decision; still, the company suffered from decreased trust.

Management of Today's Businesses

All stakeholders in an organization's performance network — its business partners, shareholders, government agencies, unions, customers, and employees — are interdependent. They need one another to be successful. And the contributions of all these stakeholders are part of the organization. A company needs to optimize the performance of all stakeholders to stay profitable in the long term.

Performance management is more crucial now than it was during the boom years; accurate insight into what's working, and what's not, may mean the difference between survival and failure over the next few years. To gain accurate insight into the factors truly driving their success, many organizations need to reconsider the focus of their performance management activities. Monitoring, and responding to, factors outside the scope of traditional, introspective performance metrics may become imperative. An organization that separates its partnerships based on the nature of the relationship — then pays close attention to the transparency, reciprocity, and trust in each relationship — should find itself in a much better position for survival of the downturn, and for success once the global economy rights itself.

Frank Buytendijk is a vice president and fellow in Oracle's EPM group and a visiting fellow at Cranfield University School of Management.