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Identifying Organizational Performance Gaps

IT Acquisition Template 1

This page explains what a performance gap is and how it is identified. It then describes the "value chain," which demonstrates why even support activities, such as an employee training program, can affect the organization's performance and its return on investment. It then points out that IT is in virtually every significant activity in the organization, which means there usually are many opportunities to employ IT to enhance the organization's performance and the achievement of its strategic goals.

The importance of including quantitative information in your Template 1 entries is then explained and examples are provided.

Finally, Template 1 is provided along with two examples of its use. Template 1 is used to document a performance gap and a tentative solution strategy.

Key Performance Indicators and Performance Gaps

What is a KPI (key performance indicator)?

Organizations perform strategic planning to establish strategic goals and related objectives. They define key performance measures to measure the achievement of those goals and objectives. These high-level performance measures are referred to as key performance incdicators (KPIs). KPIs are the most important organizational performance measures in that they are used by senior executive decision makers to monitor the performance of the organization.

The performance of the organization and the performance of its chief executive are both measured by the same KPIs. The number of KPIs varies with the organization, its size, and its characteristics. The Balanced Scorecard is an approach used by many organizations to document their KPIs (much information is available about the Balanced Scorecard on the Web). Also, many organizations use "dashboards" to constantly monitor their performance on their KPIs.

Individual departments and divisions in an organization define lower-level performance measures, and these performance measures must align with and support the high-level KPIs. (For more information on KPIs, Wikipedia has an easy-to-read document, available at this writing at:

http://en.wikipedia.org/wiki/Performance_indicator

What is a Performance Gap?

A "performance gap" exists when the actual performance on a KPI is below the planned or expected level of performance. Examples of KPIs include return on investment (ROI), product or service quality, and extent of customer satisfaction.

Many organizations have more than one line of business. For example, one line of business may be to provide consulting services, another might be to manage IT applications that have been outsourced to it by customers, and a third might be to develop custom software for customers. The managers of each line of business use KPIs to measure performance, so they will know how well they are doing.

Similarly, the senior executives and board members of the organization rely on KPIs to monitor how well the organization is performing in relation to its goals and performance objectives, including the performance of each line of business. For example, the KPIs could indicate that production is lower than planned in one line of business, that costs in another line of business are higher than planned, and that risk exposures in a third line of business significantly exceed those planned for in the risk management plan. These constitute three "performance gaps" that the organization will have to close if it wants to achieve its goals and objectives. The executives responsible for these lines of business would be expected to take action to close the performance gaps.

Value Chains - Chains of Results in the Organization

The terms "value chain" and "results chain" generally can be used interchangeably. Some like the term "value chain" because the generation of value is a critical goal of organizations. Others argue that the term "results chain" should be preferred because a critical goal of any organization is to produce certain desired results. We'll use both terms, with a slight edge toward value chain.

What is a Value Chain?

The strategic goals and objectives of the organization generally focus on producing products and services customers want and will pay for. As stated above, how well these goals and objectives are being achieved are measured by the organization's KPIs. A value chain (or results chain) consists of the work activities required to produce a product or service. The product or service needs to be aligned with one or more strategic goals as measured by one or more KPIs. In other words, a value chain is the mix of direct and indirect work activities required to produce a product or service required by customers, and the KPIs measure how well the organization is performing in providing the product and service. Among the KPIs are those that evaluate feedback from customers.

Typically, a value chain contains many interrelated work activities, which means that poor performance of any work activity in the chain can affect the output performance of the organization as measured by the KPIs. The graphic below illustrates the value chain concept. The graphic depicts both direct work activities and indirect (i.e., support) activities. Both classes of work activities are essential for achieving the desired organizational performance.

Figure 1. Value Chain Illustration (Based on the work of Michael E. Porter, Harvard Business School)

When we look at Figure 1, it is not difficult to see that if any work activity represented by the orange boxes (the direct work activities) is significantly underperforming, it will affect the quality, timeliness, and/or cost of products delivered to customers. The result would be a "performance gap" because the KPIs for quality, timeliness, cost, and/or profit would communicate the underperformance to management.

But what could be the cause of the underperformance? There are many possibilities. The four indirect work activities (pink circles) support all of the direct work activities. One of the sub-activities of the work support activity Human Resources Management is staff training. Whether the quality of the training is outstanding or poor, it will affect the performance of the direct work activities that receive the training. In other words, a person could trace the positive or negative results of the Human Resources Management work activity (and its sub-activities) to the results provided to the customer. There is a results chain (or "value chain") that can be traced from this support work activity through other work activities until it reaches and affects the customer.

What if the Procurement support activity (another pink circle) is significantly underperforming? Let's say it is procuring parts that are of poor quality or that it is buying from vendors who cannot meet contractual delivery dates. The results of the underperformance by the Procurement support activity will flow through each of the direct work activities of the organization and produce poor results for the customers. This problem could be identified by more than one KPI, such as a quality KPI, a customer satisfaction KPI, and a return-on-investment KPI.

A question often asked is how does a person know if a particular work activity is in the value chain for a specific product or service. The answer is: If the quality, quantity, and or timeliness of a final product or service relies on that work activity, that work activity is in the value chain for that product or service.

Every service or product produced by an organization relies on the performance of a group of work activities. The group of work activities varies somewhat for each product and service because not every work activity supports every product or service. Knowing which work activities are responsible for producing the results being measured by specific KPIs is important. It aids in analyzing the causes of performance successes as well as performance gaps. It also demonstrates to the individuals performing those work activities how important their work is to the success of the organization. This is why leading organizations document value chains.

Direct and Indirect Work Activities

In Figure 1, above, there are three internal direct work activities for this value chain and four internal indirect work activities. All are located within the organization.

External suppliers as well as customers, which are outside of the organization, can also affect an organization's value chains. For example:

  • If an external vendor supplies software with numerous bugs, the bugs will in turn cause costly errors and delays in the value chain.
  • The preferences of customers can change--they may decide that they no longer want wired networks, but instead want wireless networks. This could require a change in the value chain to produce wireless networks.

External factors must always be taken into account in designing, revising, and otherwise managing a value chain. Documenting a value chain, especially the external inputs, can help in identifying the cause of underformance and in determining how best to solve the problem.

IT in Direct and Indirect Work Activities

Virtually every work activity in an organization is supported by IT. IT is used in every one of the direct and indirect work activities depicted in Figure 1. IT can be the cause of poor performance as measured by a KPI (e.g., a current system may lack the needed capacity and speed) or it can be a principal enabler of performance improvement and customer satisfaction.

The pervasiveness of IT throughout a value chain means that it must always be considered when analyzing performance problems. However, the best solution may not require a change in the IT. For example, a poor policy or poor management practice can cause a problem that can be corrected by changing the policy or practice.

It is always desirable to try to solve a performance problem without having to invest in a new capital asset, such as acquire new IT. Acquiring new IT should be considered only when analysis indicates that it is the best value solution to the problem.

The individual or team sponsoring a proposal to acquire IT must always seriously investigate possible methods of solving the problem without acquiring IT. If the team concludes that the best value solution requires new IT, the team must be able to convincingly defend its recommendation that the acquisition and implementation of new or different IT is the best way to solve the performance problem and the best use of the funds that would be required. Of course, the team may not have information about all of the other possible uses of the funds, which is why the team must make the best possible case for the investment in IT. Management will make the ultimate decision about the best use of the investment funds.

Template 1

Template 1, Documenting a Performance Gap and Tentative Solution Strategy, is provided below, along with comments on selected sections of the template. This and subsequent templates are used only when a decision has been made that an acquisition of IT services (with IT products, as needed) is necessary in order to solve the problem or take advantage of a business opportunity.

A. Importance of Including Quantitative Information

When it is completed, Template 1 produces a document that identifies a performance problem and describes a preliminary solution strategy. In most organizations, there is much competition for funds to solve various performance problems. The Template 1 documents that appear to be the best use of the limited funds for such activities will be selected to continue to the next step (using Template 2 and others).

It is important for the Template 1 document to communicate well with executive decision makers. The best way to do this is to include quantitative information to help describe the problem and the benefits of solving the problem. Failure to include quantitative information will seriously reduce the likelihood that a Template 1 document will earn an approval to continue to the next steps.

What is quantitative information? It is information that is quantified. One definition of "quantify" is "to express as a number or measure or quantity." Executives desire quantitative information because it tells them the dimensions of the problem and the value of solving it.

B. Description of the Problem

This section of the template MUST provide a narrative description of the problem. It is not always necessary to include quantitative information in this section, but including some can have advantages. Some executives may not read beyond this section unless it stands out from other Template 1 documents. One way to make it stand out is to selectively include summary quantitative information that will impress them. Where can you get such information? It comes from--that is, it summarizes--detailed quantitative information that must be provided in the Actual Performance, Target Performance, and Performance Gap sections of Template 1.

C. Actual Performance

This section MUST include quantitative information, such as how often the problem occurs, who and how many are affected, how are they affected (such as number of labor hours lost, number and severity of errors that result), and the estimated cost of the problem to the organization.

D. Target Performance

This section MUST show the target performance, which is the measurable performance required to solve the problem. It can be express, for example, as the percentage decrease in the occurrence of the problem, the reduced number of labor hours achievable, the reduced number of errors achievable, or the percentage increase in productivity achievable. It should include the estimated dollar savings or financial gain expected to result and any expected reduction in the risk exposure.

E. Performance Gap

This section MUST include quantitative information. It must state the difference between the Actual and the Target performance. If you've provided quantitative performance information in those prior sections, than it may be simply a matter of subtraction (target performance less actual performance) to show the performance gap. See "Quantifying Information Illustration" below.

Quantifying Information Illustration

Let's say the problem is that too many malicious attacks are getting through the organization's firewall, an average of 50 per day. The analysis by the integrated project team (IPT) indicates that solving this information security problem can reduce the average number of daily attacks by 80% and the risk exposure from such attacks by 90%, from $1 million dollars to $100,000. The problem now requires 12 labor hours per day to combat the problem, which would be reduced to 4 hours per day with the solution. The IPT might create a table, such as the one below, to make the calculations. The table, "Daily Malicious Attacks Penetrating Firewall," illustrates that the Performance Gap figures are arrived at by subtracting the Target Performance from the Actual Performance. Incidentally, saving 4 labor hours per day at a cost of, say, $60 per hour, times 240 work days a year results in an annual savings of $57,600 for labor cost alone.

Daily Malicious Attacks Penetrating Firewall

.
Number Malicious Attacks
Ongoing Risk Exposure
Labor Hours Required
Actual
50
$1,000,000
12
Target
10
$100,000
4
Gap
40
$900,000
8


Template 1 - Documenting a Performance Gap and Tentative Solution Strategy

Two examples of using Template 1 are given below. Note that adding quantitative information does not have to be complicated but it can do much to communicate the dimensions of the problem to executive decision makers and others.

Note that Template 1 summarizes a performance problem and a tentative solution strategy. It is "tentative" because solution strategies tend to change as new information becomes available. It is a "summary" because it does not contain all of the detailed information developed by the IPT in analyzing and documenting the performance problem.

It is of great importance that the information provided in the template be understandable and convincing to executive decision makers. These executives make the decisions about which Template 1 documents will be approved and their IPTs permitted to go to the next step. They decide which Template 1 documents will be rejected, delayed for consideration in the future, or sent back for revision. The IPT's objective is to gain approval to proceed to the next step with continued funding.

The last row of the template is a confirmation from the IPT preparers that the problem can only be solved through the acquisition of IT services (and IT products needed) from a contractor selected in open competition. If you are a preparer, be sure you can correctly answer "yes." If your answer is "no," do not submit a Template 1 document because the acquisition of IT services is not needed.

First Example of a Completed Template 1

Organization:

Component:

Submitted by:

Date:

Jaguar Consulting of America

Business Capture Group

Jane Smart

January 26, 2013

Description of the Problem The problem is that the amount of time required to prepare graphics for construction design architecture proposals and to integrate them with the text is costly in terms of time, money, and demands on proposal team members. This limits the number of proposals the organization is able to prepare which, in turn, limits the revenue to the organization.
Business Activities and Processes Affected by the Problem The problem directly affects proposal preparation activities. It also has a major impact on all processes that depend on proposals to generate their work.
Actual Performance (e.g., current baseline) At present, we are able to provide graphics to support an average of 10 proposals per month. Graphics support for proposal preparation costs $6000 per month, or an average of $600 per proposal.
Target Performance Provide graphics to support an average of 15 proposals per month, which is the target established in the last strategic planning session, for the $6000 per month cost of graphics support. The average cost will be $400 per proposal.
Performance Gap The performance gap is graphics support for an average of 5 proposals per month and the opportunity to increase sales revenue by about one third.
Organizational KPIs Affected Sales revenue, return on assets, return on investment
Principal Stakeholders Chief Executive Officer, other chief officers, manager of Sales Department, and managers of departments that perform work resulting from proposals
Tentative Solution Strategy Investigate the feasibility of acquiring and implementing a speedy, easy-to-use tool or tool set for graphic creation, graphics inventory management, the integration of graphics with text, and the ability to interface with related systems.
Acquisition Need Confirmation We/I confirm that this problem can only be solved through the acquisition of IT services (and IT products as needed) from a contractor selected in open competition.

Template 1 (Example 1). Performance Problem and Tentative Solution Strategy

Second Example of a Completed Template 1

Organization:

Component:

Submitted by:

Date:

Future Financial of America

Financial Services Department

Elio Smith

January 26, 2010

Description of the Problem The problem is the inefficiency and poor quality of our loan management system. Our Financial Services Department lends money to franchisees for special purposes, such as to further develop their property. We manage these loans through a series of complex spreadsheets, which is slow, labor intensive, and subject to human error.
Business Activities and Processes Affected Loan management process; franchisee relations process
Actual Performance (e.g., current baseline) At present, the loan management process requires an average of 160 labor hours per month to enter and manage loans and an average of 30 labor hours per month for resolving data entry problems
Target Performance With business process improvements, an achievable target is for the loan management process to require an average of 80 labor hours per month to enter and manage loans and 10 labor hours per month to resolve data entry problems. In addition, there will be an improvement in the franchisee relations process, from a 70% satisfied rating to a target satisfied rating of 90%, which will help to retain franchisees and attract new franchisees.
Performance Gap The performance gap totals 100 labor hours per month in excess of the established target performance. At an average cost of $60 per hour, this is a savings of $6000 per month in labor cost. Also, a 20 percentage points improvement in satisfactory ratings from franchisees--to a target of 90%--is forecast.
Organizational KPIs Affected Return on investment, return on assets; franchisee relations
Principal Stakeholders Managers of the Franchisee Services Department and the Customer Relations Department; loan processing personnel; franchisees receiving loans.
Tentative Solution Strategy Investigate feasibility of acquiring and implementing a speedy, easy-to-use, commercially-available loan management software that will automate the loan management process, including entering loan information, tracking loan performance, sharing data with other systems, and generating timely loan reports.
Acquisition Need Confirmation We/I confirm that this problem can only be solved through the acquisition of IT services (and IT products as needed) from a contractor selected in open competition.

Template 1 (Example 2). Performance Problem and Tentative Solution Strategy

IMPORTANT! Use This Evaluation Guide to Check Your Template Document After You Have Prepared It

Here is a Guide you need to use to evaluate the quality of your Template 1 after you have prepared it. Given the importance of Template 1 as the foundation for subsequent templates, it is important that you take advantage of this Guide. It is available at EVALUATION GUIDE .

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