Measuring what counts: Performance measurement can make carriers more competitive

Once upon a time when regulation reigned, carriers gave little thought to the pricing of their products because prices rarely had anything to do with actual costs.

Today, deregulation has unleashed start-up competitors that cherry-pick the high-margin businesses of established carriers and undercut prices on many of their goods and services. To fight back, carriers must get a firm grip on the costs associated with producing their products, and many are discovering that performance measurement processes hold the solution.

As financial accounting systems have evolved over the past 10 years, new management techniques-such as activity-based costing, added economic value and the balanced scorecard-have refocused finance departments to partner with operations on measuring performance, in addition to continuing to report financial results in accordance with accounting and regulatory principles.

An effective performance measurement process integrates these management techniques, resulting in a plan/do/check/act business cycle, helping to focus strategic direction and enable continuous improvement.

Effective performance measurement focuses on the business basics required to win in a competitive environment:

* What are we doing and how much does it cost?

* What do our customers value?

* What factors influence shareholder value?

* What is the profit we realize from each customer?

The answers arm carriers with information needed to make the tough decisions: minimizing work and costs not valued by the customer, prioritizing actions that affect shareholder value drivers, implementing strategies to retain profitable customers and understanding potential tradeoffs resulting from the actions taken.

Perhaps the best illustration of performance measurement for telecommunications providers is to understand how it works for manufacturers.

We have all seen cartoons that depict the manufacturing process. Raw materials are conveyed to an enormous hopper which is attached to a huffing, puffing "box" bristling with levers and adorned with wildly gyrating gears and steam whistles. The materials disappear into the hopper and are processed by the box's unseen inner workings. Moments later, at the opposite end of the box, the finished product emerges ready for consumption.

Although unrealistic, the illustration represents how manufacturers and telecommunications providers create their products from raw materials. Performance measurement focuses on the activities that take place inside the box and addresses questions: What are we doing? How much does it cost? Why are we doing this?

Installing a fiber optic cable is a good example of an activity in which performance measurement techniques can provide a competitive advantage. The cost of materials, equipment and transportation are combined with the time required for the lineman to install the cable. This is the process that takes place inside the cartoon box. Traditional accounting divides these costs into buckets such as materials and salary. Performance measurement demands that the contents of those buckets be re-allocated among appropriate activities.

The performance of installing the cable depends on maximizing time and materials and reducing waste. Performance measurement looks at how the cost drivers that create or contribute to wasted time and materials influence the activities of installing the cable. Performance measures can then be defined to help quantify the activities. This results in a new look at cost, providing additional insights (Figure 1).

Performance measurement strategy A performance measurement system should bring together financial and operational information into a single repository, enabling carriers to analyze business processes, profitability and key performance measures including the ability to plan and budget using this same information. A performance measurement strategy should consider the trends and pressures that affect every other deregulated organization doing business in the world today-forces that drive their business decisions, technology decisions and systems decisions:

Customer profitability. Customer expectations are as high as ever and continue to increase. These increasing demands influence how carriers price products and serve customers.

Changing work force. Downsizing, empowerment, flatter organizations and self-directed work teams are all affecting how organizations are structured, how they work and who makes the decisions. Measuring the cost and efficiency of business processes is becoming more prevalent today in leading organizations.

Shareholder value. Increasing shareholder value is a primary objective for senior executives. This requires understanding, analyzing and making decisions that address the time value drivers for the business.

Technology breakthroughs. Data warehouse capabilities provide the ability to consolidate disparate information sources into one location and enable a broad user to access the information for decision support.

Ideally, a performance measurement system should target a specific group of business objectives: managing costs, analyzing profitability, tracking financial and operational measures, resource planning and budgeting to bridge the gap between financial information and strategic decision-making.

Strategic cost management incorporates the most advanced techniques-activity-based costing, added economic value and target costing. The ability to perform these functions will enable carriers to createa cost management system that supports decisions on pricing, product or service mix, sourcing, product design, customer service and process re-engineering.

Carriers should analyze dimensions such as products, product lines, customers, services, channels of distribution and geographic areas. Managers at all levels can understand cost and profitability according to a company's various operating dimensions.

Balanced performance measures track both financial and operational measures and provide telephone companies with a fast and comprehensive view of the business and aids the company in answering four basic questions:

* Customer measures-How do customers view the company?

* Internal measures-What must the company excel at?

* Innovation and learning measures-How can the carrier continue to improve and create value?

* Financial measures-How does the business look to shareholders?

The planning and budgeting features of a performance management system should enable carriers to perform resource planning and prioritization based on activities, products, services and customer portfolio. Budgeting by business activities will enable carriers to determine the amount of resources necessary to meet their business volumes and address customers' needs while achieving profitability goals.

With a sound performance measurement system in place, telecom providers can greatly enhance their decision-making capabilities with the control and flexibility necessary to manage revenue, costs and profitability throughout their operations. Moreover, a properly executed performance measurement strategy enables an established telecom provider to model its business to improve bottom-line performance.