Less performance talk, more walk needed in mining, says Boston Consulting
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But often, the action plans they craft for improving performance are disconnected from the company's overarching goals, don't address the root causes of poor performance, and seek to fix poor performance after the fact versus preventing it. Finally, many mining companies report on so many performance metrics that business leaders spend more time compiling and reviewing reports than interacting with front-line teams to drive performance-improvement efforts.
In a cyclical industry, this approach to performance management is especially worrisome, because it prevents miners from focusing on what truly drives performance throughout the market cycle—such as when commodity prices fall or rise. A more disciplined approach to performance management can help miners respond quickly and effectively to such market changes. Drawing from our work with clients, we recommend a three-step process for implementing such an approach.
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Start with a top-down framework
We advise miners to use a top-down framework to tie business goals to front-line operations. One such framework is total shareholder value (TSR)—a widely accepted measurement of a public company's performance.
Using TSR as a high-level metric offers several advantages. For instance, getting this top-level ‘lens' right supports efficient, effective performance reporting down through the organization. Additionally, TSR captures short-term performance as well as longer-term expectations, and is hard to manipulate through accounting practices. TSR can also be benchmarked among industry peers, generating insights into what a company could—and should—be doing differently. Finally, attention to TSR helps miners understand what matters most to investors.
TSR comprises three main drivers, each steered by specific KPIs (figure 1):
• EBITDA (profit) growth is a vital source of long-term value creation, with revenue and cost the primary KPIs.
• Cash-flow contribution (dividends and share buybacks) is steered by KPIs such as dividend yield and percentage changes in shares outstanding.
• EBITDA multiple is a ratio used to determine the value of a company. For miners, this multiple is typically steered by KPIs including dividends as a percentage of EBITDA, return on gross assets (ROGA), net debt-to-assets ratio, forecasted growth, share buybacks as a percentage of EBITDA and performance on measures related to health, safety, environment and community (HSEC).
Cascade top-level indicators
TSR-related KPIs are monitored by a mining company's board of directors, often quarterly or yearly. But to help leaders at other levels in the company understand and measure performance, these KPIs must be cascaded and translated into metrics that have meaning for leaders at each level—by reflecting the activities that most drive performance in their part of the business.
Take revenue. Senior executives need monthly updates on revenue-related KPIs, such as tonnes produced or delivered. Managers helming different parts of the business need daily or weekly updates on operational KPIs related to those used by senior executives. To illustrate, for the KPI ‘tonnes produced,' a manager will want to track performance on total material moved, strip ratio, weight yield and overall equipment effectiveness for the mine's worst productivity-constraining bottlenecks. For the front line, the KPI ‘total material moved' may be translated into metrics such as drill productivity, truck payload and compliance with planned maintenance.
Once a mining company has cascaded KPIs through the organization, it needs to build simple, standardized dashboards depicting performance at each level in a visual, easily understood way (figure 2). Dashboards don't replace detailed technical reports. Rather, they help leaders throughout the company review the most pertinent performance information, presented as a single source of truth; arrive at agreed-upon interpretations of the data; and align on actions needed to address performance shortfalls.
Leaders throughout the company can also use dashboards to track and measure performance on targets for each KPI they're responsible for. Many dashboards use green indicators to show which performance targets have been met, and red for missed targets. These cues are handy—but progressive companies take care not to be blinded by them. KPIs that have been green for a while may make everyone feel good—but they also mask opportunities to set more ambitious targets to supercharge performance to even higher levels. Automaker Toyota deliberately resets targets to create ‘red alerts' when KPIs have stayed green for too long.
Does your KPI system include lagging and leading indicators?
The most effective KPI systems comprise both lagging and leading indicators:
• Lagging indicators are often results-oriented—showing performance that has already been achieved, such as tonnes produced. They're easy to measure, but difficult to influence, as the output has already happened.
• Leading indicators usually relate to inputs (such as equipment utility) that will affect future performance. They're harder to measure—but companies can influence them. Examples of TSR-related leading indicators in mining include overall equipment effectiveness, near-miss incidents and compliance with training.
By including lagging and leading indicators in their KPIs, companies compile a more comprehensive picture of their performance. Lagging indicators help them compare performance across years and across different parts of the business. Leading indicators illuminate where something may be awry—such as reports on near-miss safety incidents versus actual safety incidents.
Integrate KPIs into a broader performance-management system
Miners must also integrate cascaded KPIs and performance dashboards into a cohesive performance-management system. If a company shifts its strategy, for example, leaders may need to revise their KPIs so they can easily see whether the company is on track to deliver the new strategy. To illustrate, a miner that redefines its strategy to focus on production growth updates its KPIs to include metrics such as bottleneck-asset productivity and return on capital.
Savvy mining executives also engage front-line teams in managing their own performance. This means influencing the choice of KPIs used in their part of the business, and creatively seeking out aspects of performance they can directly improve. To these ends, leaders can use dashboards to fuel focused discussion and analysis during performance-review meetings. Participants can discuss variances between targeted and actual performance, explore ways to address root causes of performance shortfalls and to prevent future such problems, and discuss new risks and opportunities facing the business.
Comparing performance on operational KPIs against drivers of customer and employee satisfaction can also yield valuable insights. For example, if commodity prices and customer satisfaction are declining, managers should investigate this disconnection to see whether deeper underlying problems need addressing.
Miners also need to ensure that each KPI's definition is clear and broadly communicated. Data used to populate the KPI should come from a single source of truth, such as the company's enterprise resource planning (ERP) system. Data can then be stored in data ‘warehouses' or ‘lakes' and used for real-time decision making. But companies shouldn't automate the gathering and presentation of performance data unless they've first confirmed that the manual processes for doing so are being carried out correctly. Otherwise, information on the performance dashboards will be unreliable—and could even trick a company into taking misguided actions.
Finally, companies should link KPIs to how they incentivise, evaluate and reward managers' and employees' performance. To illustrate, benchmarking helps mining companies see how their peers are being measured on TSR-related KPIs and informs short- and long-term incentive plans for executives.
To stay competitive in a notoriously challenging industry, mining companies need to infuse discipline into their performance-measurement and management systems. But discipline doesn't necessarily mean greater complexity.
Indeed, simplifying a company's KPI system focuses everyone's attention on what most drives performance in their part of the organisation. Equally important, it helps leaders at all levels understand how enhancing performance in their part of the business fuels greater performance by the company overall.
*Marc Gilbert (gilbert.marc@bcg.com) is a senior partner and managing director; Christine Wurzbacher (wurzbacher.christine@bcg.com) is a partner and managing director; and Damon Bland (bland.damon@bcg.com) is an associate director at BCG. Raminder Gill (gill.raminder@bcg.com) is a project leader at BCG. Andréanne Leduc (leduc.andreanne@bcg.com) is a consultant at BCG.