1.4 Performance Indexes

Often it is necessary to present information from several related areas simultaneously. This is done to provide a statistical measure of how performance changes over time. The performance index is a management tool that allows multiple sets of information to be compiled into an overall measure. This section provides examples on different approaches that can be taken to develop a performance index.

Overview

Up until this point you've learned about developing and working with single performance measures. Now it is time to branch out into the world of performance indicators and indexes. For the purpose of this section, a performance indicator (PI) is defined as the result of the comparative analysis of a performance measurement outcome to a corresponding performance goal. These measurements give an indication of performance. However, when you have too many indications to consider, performance indexing becomes a useful performance management tool. The philosophy behind using performance indexes is simple: they condense a great deal of information into one number. We know that when dealing with a small number of indicators, PI-related information is easy to assimilate. But what happens when you're not dealing with just one or two PIs? What happens if you have 10, or 15, or 20 separate but related indicators to review. With some increasing, and others decreasing, while still others remain the same, how do you determine what is happening overall? The answer is to use an index.

Consider this: if I handed you a newspaper and asked, "How's the stock market doing?" would you examine the trend associated with each of the 5000+ stocks listed on the financial pages before giving me your answer? Hopefully, not. A quicker, simpler, and more efficient method would be to turn to the financial pages, and look at one of many business indexes that appear there, say the Standard and Poors 500 Index (S&P 500). The advantage of the S&P 500 Index is that it gives you a general indication of trends in the stock market at a glance. The downside of the index is that it will not give you specific information on any one particular stock.

So, what exactly is an index? Simply put, an index is a statistical measure of how a variable, or set of variables, changes over time. The purpose of an index is to give a quick, overall picture of performance.

The power of using indexes as management tools clearly resides in their ability to capture the information contained in a large number of variables in one number. For instance, economists can use one number, the Consumer Price Index (CPI), to capture pricing information on several hundred different consumer products. Now, instead of having to track over 400 different prices, they only need to track one number-the CPI. Economists place a lot of trust in this index; annual cost-of-living adjustments and retirement benefits for over 50 million civil servants are directly linked to fluctuations in the CPI.

How do you create an index? This is not an easy question to answer because there is no one set formula or algorithm for generating indexes. However, there are certain concepts that apply to all indexes, the most important being that all indexes are designed for a particular purpose, and that the design process involves choosing the correct (related) indicators and then combining them in a manner that supports the intended purpose of the index.

Now, simply because there is no patent method for producing an index does not mean that creating one has to be a complicated matter. In fact, it can be as simple as computing the ratio between two numbers.

It is not the intent of this handbook to address each and every method that can be used to develop index numbers, nor will it make you an expert in the statistics behind developing indexes (for those interested in a more in-depth study of indexing methods, a list of references has been included). What it will do, hopefully, is give you an appreciation of the power of using performance indexes as a management tool, and provide you with a few examples of methods that are currently being used throughout the DOE complex and private industry to create performance indexes. These methods range from fairly simple to fairly complicated. They include:

the DOE Occupational Injury/Illness Cost Index
the Westinghouse Hanford Company Conduct of Operations Event Index
the Eastman Kodak Company Safety Performance Index
the Defense Programs Average of Performance Relatives

Each of these methods will be discussed in detail in the following section.