Back in December, I blogged on the concept that companies need to be looking at leading indicators if they want to ensure their future performance. As we continue to analyze what caused the economic melt-down, this very concept is being discussed. The US government now wants to force investment companies to hold back part of their executives’ bonuses for several years and make them contingent on long-term performance. If you were one of these executives, what would you want to start measuring in order to give yourself some level of confidence that your company is on the right track?
Good past performance, even with a positive trend over a long time period, does not ensure future performance. Many companies have had positive trends in their injury rates, only to then have a catastrophic incident. Or after hard economic times or a major technological innovation when the rules of the game change, a company that had been very profitable suddenly gets into trouble.
Some of the causes of the Deepwater Horizon explosion and spill were failures in the decision-making process, communication, and training. So, what would be leading indicators that could be tracked in order to predict good decision-making, communication, and training? Just looking at decision-making, consider that the decisions during the incident were made under much stress. So, to understand if people are capable of making good decisions under stress, you must simulate it. The military does this all the time. You don’t train for war by starting a war. You train for war by conducting realistic training exercises. Then, you fully analyze the results and learn from them.
What are some other operational metrics that can be predictive of good future performance?
Overtime levels – We need our rest and relaxation. Extremely high overtime leads to incidents.
Maintenance effectiveness – Poorly maintained equipment is more likely to fail in a way that will cause an incident.
Adherence to production schedule – When equipment is not producing at the expected rate or quality, workers may take shortcuts to make up lost production.
Number of EHS audits and inspections – This is a measurement of how proactive a company is. Instead of waiting for something to go wrong, you are checking to see if there are weaknesses or system failures. And then of course you must take action to fix those problems.
Completion of corrective and preventive actions – This is a powerful measure of whether or not people are actually completing the actions that management decided were the proper actions to take.
Food for thought: I don’t think you will find any of these metrics in a company’s annual report.
And another food for thought: Companies are now reporting some metrics related to Sustainability and Social issues. For example, they may report on number of women at executive levels. Or in what country their product was manufactured. Should we not also demand that they report on metrics that are predictive of the effectiveness of their operational risk management?