Compliance and Ethics Program - Measuring Program Performance

Measuring Program Performance

By using accurate, timely data on the organization’s performance, managers know whether they are moving the entity closer to its objectives. Measuring compliance and ethics program performance help organizations gauge their improvement and learn whether the company's tactics are contributing to the success of the company's strategy. Keeping the board informed is a critical activity and robust performance reporting facilitates that important effort too. An organization’s compliance and ethics program should be measured like any other critical capability.

There are numerous benefits and challenges to measuring the performance of a program. A well-known maxim is "what gets measured gets done.” The compliance and ethics program and capability is no different.

The Open Compliance and Ethics Group, OCEG, a non-profit organization that provides a performance framework for integrating governance, compliance, risk management and culture, has developed a Measurement and Metrics Guide (MMG) for assisting in measuring and reporting on the performance of compliance and ethics programs. This measurement platform advocates that program objectives be aligned with and contribute to the enterprise objectives in a tangible way. In order to achieve desired program outcomes, an organization should design processes and practices that effectively measure program dimensions on three key dimensions: effectiveness, efficiency and responsiveness.

Effectiveness describes the quality of a program along two dimensions: design effectiveness and operational effectiveness.

Design effectiveness describes the degree to which a system or process is logically designed to meet legal and other defined requirements. Does the system or process contain all the necessary elements to thoroughly evaluate risk? Has it been designed for maximum effectiveness? If not, what features must be added to improve the system? Design effectiveness is very much a logical test that considers all requirements, risks and boundaries and determines if the system is appropriately designed.

Operational effectiveness describes the degree to which a system or process operates as designed. If the system has been well designed, does it function correctly? Does it operate the way it was designed? If not, how must it be managed to elevate its level of operation? Operational effectiveness helps management understand if, given a strong design, the system is operating as it is intended.

The concept of efficiency captures the cost of the process or system – not simply financial efficiency, the amount of money spent but also the cost of human capital expended.

Financial efficiency describes the total amount of financial capital required to execute a process.

Human capital efficiency describes the type and level of individual(s) required to participate in the process. While human capital costs can be partially captured in purely financial terms, intangible opportunity costs must also be captured. In other words, if the program relies too heavily on senior executive time and focus, it may represent more than just purely financial costs (salary, benefits, and other overhead). An organization must also recognize the intangible costs of the loss of executive time and focus on other strategic objectives such as growth, profitability, talent retention, and customer loyalty.

Responsiveness should be looked at on two dimensions — the system's ability to operate quickly and flexibly in response to changing circumstances. Cycle time describes the amount of total hours and/or total duration that it takes to execute a process. Flexibility/adaptability describes the degree to which the system can integrate changes including new requirements (e.g. a new law, rule or regulation) and/or new business units (due to merger and acquisition activity.)

These changes may be internal; as managers study the results of past performance evaluations and make needed alterations. Or they may be external. New regulatory environments, changing market conditions, or altered public perceptions and concerns require the organization to make adjustments. A responsive system adapts quickly to changes in the environment. It also develops a long-range perspective, foreseeing more distant changes and preparing for them.

A solid measurement system and approach should be implemented that embodies these principles: Focused on Business Objectives, Outcome-Oriented and a Simple Measurement System.

Business objectives should include a program metrics and measurement, helping management understand how the program contributes to overall enterprise objectives. But while process and activity metrics are important, the outcomes are the ultimate goal – never lose sight of this.

The measurement system and approach should be simple, cost-effective and elegant to ensure sustainability. Management should look for opportunities to gather data from existing systems rather than creating whole new systems to create data. If it costs more (both in time and capital) than it is worth, the measurement program will ultimately go away.

Senior management and the board of directors should commit to a measurement approach and ensure that a high-level executive is charged with overall accountability. This should include a commitment to the longevity of the program as it will take a few years to realize the full potential of a measurement program.

The measurement system and approach should be a positive contributor to help improve performance. It should not be used for punitive purposes.

Key metrics and indicators should be specific/simple, measurable, actionable, relevant and timely.

Balance of Leading and Lagging - Lagging indicators show how the company has already done (revenue growth in the past quarter; number of workplace accidents in the last year). Leading indicators are those that may predict future performance. Examples are on-time delivery rate, which can lead to higher customer satisfaction ratings and, in turn, more sales to existing customers.

Indicators should provide visibility into both short-term and long-term objectives. Overemphasis on short-term objectives can stifle a company's long-term growth, by short-changing new product development. Emphasis on short-term financial results, such as quarterly profits, can lead to reduction in spending on research for new product development, or purchasing cheaper components to raise profit margins, leading to lower product quality, more product returns, complaints from customers, and loss of business.

Focus on Internal Trends before External Benchmarks - Program metrics and measurement should help management understand internal trends. Once internal trends are understood, the use of external benchmarks will be more meaningful.

Performance measurement system should be reviewed and improved on an ongoing basis. It is only by gaining experience measuring performance that the organization can really refine and improve the system.