Managing Performance in a Rapidly Expanding Business
“In order to bind different talents within an organization together to form a cohesive and formidable force, it is very important to set clear goals and strategies, and establish an effective performance management system that is linked to the achievement of these goals. Well-designed performance indicators serve to guide staff behaviour, forge goal congruence between the employees and the organization, and ultimately result in mutual benefits.”
— Mr. Jie Kang, CEO of Shanghai Min
Xiao Nan Guo Restaurants Holdings Limited, or better known as Shanghai Min Group (“Shanghai Min” or the “Group”), was set up in 1987. Starting its business with only four tables, the Group has thrived and excelled amid keen competition to become a chain of 75 Chinese restaurants. Their restaurants are spread throughout the richest and fastest-growing cities in the Greater China Region, including Shanghai, Beijing, Shenzhen and Hong Kong. The mainstream brand “Min” comprises 67 restaurants. In recent years, the Group extended its reach into the high-end fine-dining segment with the “Maison De L’Hui” brand, and to general mass-market dining segment with “The Dining room”. This multi-brand strategy gives the Group the ability to better position itself in serving different consumer groups.
The present Executive Director and Chief Executive Officer (“CEO”) of Shanghai Min, Mr. Jie Kang, joined the Group in 2008. Endowed with a wealth of management experience and insights into the Food & Beverage industry, he is responsible for the overall running of the business.
“Shanghai Min’s strategy is to ‘Grow via Expansion’”, Mr. Kang introduced. Take 2012 for instance, the main contributors to the Group’s growth were the 22 new restaurants opened in the previous year. In order to support the effective execution of this strategy, the Group adopts a “Hub-and-Spoke” model in the opening of new restaurants. When Shanghai Min expands its business into a new region, it first creates a “hub” at the main economic centre of that region. The hub will be used as a base to support a network of restaurants that would eventually be opened. At the hub, there will be a central kitchen and warehouse built to centrally manage the preparation of food, procurement and logistics. This enables the Group to achieve consistency in the standard of food as well as efficiency in its supply chain. Once new restaurants are opened in the neighbouring cities within the region, i.e. the “spokes”, they would leverage on centralized facilities at their respective hubs. Currently, Shanghai Min has hubs in Beijing, Shanghai and Hong Kong that serve seven other cities.
Target-Driven Performance Management
“Before getting into performance management, it is important to first clearly define our corporate goals and strategies,” Mr. Kang said. The key to performance management is the art of effectively translating these corporate goals into benchmarks for guiding employee behaviour.
At present, the Group has already developed a basic Corporate Performance Management (“CPM”) methodology that is aligned to its corporate goals and the aforesaid expansion strategy. There are two dimensions to this CPM methodology:
- The first dimension is the measurement of operating results at each restaurant outlet, linking the bonus of each frontline manager and staff to the performance of their respective outlets. In planning for the opening of every restaurant, key factors such as location and customer traffic, as well as financial indicators such as return on investment and return on equity, will be built into its business forecast for investment approval. Once the investment green-light is received, an annual budget will be developed based on the approved business forecast. This budget will then be used as a benchmark for eventually measuring the actual operating performance of that restaurant. It will also form the baseline from which budgets for subsequent years would be prepared, giving due considerations to variations in prices and costs.
Specifically, in the measuring the operating results of each restaurant, the concepts of “controllable profit” and “controllable cost” will be applied. Controllable cost refers to raw materials, labour, energy and materials to be consumed; controllable profit is hence the operating revenue less the above-mentioned controllable costs. During the budgeting process, a “target controllable profit” will be developed by the management of the Group. The excess between the actual and target controllable profits shall be set aside as incentive bonus for the frontline staff of that restaurant outlet. For the rest of the non-frontline managerial staff, their incentive bonus will be pegged to the “net profit” of the restaurant outlet. This is defined as the controllable profit less all other non-controllable expenses.
- The second dimension of the Group’s CPM is the break down of performance targets into key performance indicators for each level of employees. Corporate goals as set out in the annual budget shall be decomposed into specific targets for employees all the way from the CEO down to the most ordinary employees working at the restaurant fronts. These targets, also called Key Performance Indicators (“KPIs”), are then used as benchmarks against which performance is measured. The KPIs are reviewed again in the middle of the fiscal year to take into consideration possible changes in business conditions. At the end of the year, annual performance evaluations are conducted based on the same set of KPIs, whereby salary increments, incentive bonus and promotions are determined.
The Group’s annual plan and KPIs both consist of two parts: “Quantitative” and “Qualitative” targets. Quantitative targets, being result-oriented indicators that could easily be assigned numerical values, include revenue and costs; Qualitative targets, being indicators that are closely associated with the realization of corporate goals but may not be easily quantified, include people development, standard of execution, etc.
In Mr. Kang’s view, Shanghai Min Group has organically infused the financial indicators into the KPI system, be it revenue or raw material costs. This was done after systematically decomposing the greater goals into bite-size targets for individual employees. Specifically, there are two tiers to this system:
- The first tier is “Decomposition and Quantification”. The enterprise’s overall financial goals can be broken down into specific responsibilities for each employee in-charge, in accordance to relevant drivers. Performance of each employee can then be measured by his rate of contribution in achieving those stated goals. For example, the procurement and kitchen staffs are both responsible for managing costs. When there is an improvement in gross margin, the performance should be analysed from two possible perspectives: the procurement staff had proactively taken measures such as effective vendor selection and price negotiation to reduce overall costs, and at the same time, making sure quality is not compromised; ② the kitchen staff had reduced wastage without changing the quantity of food produced. With the reduction in material consumption for each unit output, gross margin improved.
- The next tier is “Accountability and Responsibility”. The work scope and responsibility for each employee have been defined and documented in the Group’s organization structure and job description. Based on this document, different types of KPI drivers are then assigned to specific departments and their staffs. For example, the energy and materials consumption are costs that can be controlled by the staffs at each restaurant outlet. Hence, they should take responsibility and accountability for reducing those costs.
On the other hand, senior managerial staffs would be accountable for other KPI drivers. For example, the VP for operations is responsible for the operations of all restaurants in the country. This includes making hiring decisions based on the business conditions of each restaurant. Hence, his personal KPI should include accountability over labour costs. Another example to illustrate this concept is restaurant space rental. The negotiation of rental at the onset of opening the restaurant, including subsequent extension of its lease, would be the responsibility of the store development team. Hence, the KPI of the team’s VP should include overall accountability over rental costs. Along the same vein, Shanghai Min’s headquarters comprise supporting departments such as finance, human resources and IT. The VP for human resources should be accountable for the payroll costs of the headquarter operations.
Practical Challenges in Implementing Performance Management
As described at length, the KPI system should ideally encompass both performance indicators that can be easily quantifiable and those that cannot be quantified but are critical to the achievement of organizational goals. The KPIs of the mass frontline staffs mainly comprise indicators that can be easily quantified, such as income and costs. This makes it easy to design and evaluate. However, for back office staffs, especially the senior management personnel, their KPIs tend to be more sophisticated and include many aspects of running the business which are not readily quantifiable. The key challenge therefore is the “how” of breaking down qualitative KPIs and assigning them to each these personnel, as well as measuring of the extent to which such qualitative KPIs are achieved.
Mr. Kang explained that in order to overcome this challenge, he first has to determine the co-relation between the behaviour of managerial/back office personnel and the achievement of specific organizational goals. KPIs would then be designed around that co-relation. Thereafter, the management would need to collect and compile statistical data over time to support the measurement of such KPIs, eventually developing quantifiable benchmarks. Mr. Kang took “Customer Satisfaction” as an example of a company goal based on which appropriate KPIs are designed:
During the recent annual planning session, “Customer Satisfaction” was highlighted as the most important management objective. Since the frontline staffs are the ones that are serving customers on a day-to-day basis, one could easily imagine that their KPIs should directly include the effects of “customer complaints and comments”. Such KPIs can be quantified via statistical methods. However, customer satisfaction should not be the mere responsibility of the frontline staffs. It is an objective that employees at all levels should strive for together. The question then is how to decompose such a target, which is hard to quantify, and assign them to back office personnel.
The back office functional departments do not face customers directly; they do however provide support to the frontline staffs to enable them to provide quality services to customers. Following this logic, the quality of support that the back office personnel provide to the frontline staffs is co-related to the ultimate quality of services rendered to the customers. Hence, “customer satisfaction-related” KPIs can be developed for the back office team by relying on information such as complaints and feedback from the frontline on the back office staffs.
In summary, Mr. Kang pointed out that to make such KPIs “tick”, it is still important to obtain consensus through various means, ranging from collecting of opinions from staffs to facilitated meetings, before the exact design of the KPIs could be finalized. Typically, after designing the initial draft of the KPIs, Shanghai Min would put them to test over a period of time, while collecting relevant statistical data at the same time. Based on findings from the test run, adjustments are made before a well-accepted set of KPIs around “Customer Satisfaction” can go live.
A scientific and reasonable performance management methodology will give the management of an organization a systematic safeguard that the daily operations are executed effectively. At the same time, it also serves as an engine that encourages innovation, development and continuous improvement. Of course, each organization has its own unique characteristics. A performance management system that is both scientific, highly efficient and yet fits into an organization’s development and cultural needs is itself a test of the top management’s determination and wisdom.