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I-22 CHAPTER 3 Performance Targets 3.1 The Role of Targets Step 2--Select Scope of Measures for Targets. This step in Performance-Based involves identifying the performance measures that are Resource Allocation suitable for target development. Some measures may not lend themselves to quantitative targets; others may not have Introduction sufficient baseline or trend information available for the Performance management is a business process that links agency to be comfortable with establishing a target. organization goals and objectives to resources and results. Per- Step 3--Develop Long-Term Goals. A distinction is made formance measures and their corresponding targets are the between long-term goals about desirable performance lev- lynchpin in the process. They provide the direct link between els and short-term targets that represent the best that can the stated goals of an agency and the effectiveness of its invest- be done given resources. ment decisions in reaching those goals. Performance measures, Step 4--Consider Funding Availability. This step involves used along with well-defined and well-communicated tar- creating realistic estimates of future resources that can be gets, provide transparency and clarity to the resource allocation used as the basis for financially constrained performance decision-making process. Targets provide the critical context targets. for evaluating the effectiveness of investment decisions. For Step 5--Analyze Resource Allocation Scenarios and example, a performance measure will define how an invest- Tradeoffs. The performance implications of different ment decision will be evaluated in terms of its impact, in resource allocations are analyzed both within and across absolute terms; in fact, performance measures are often referred program categories. Use of analytic tools that project to as evaluation criteria. The corresponding target provides the future performance as a function of investment level is perspective for evaluating the impact of the investment decision fundamental to this activity. Step 6--Consider Policy and Public Input. The process is in relation to the desired end-state, i.e., how significant is a particular investment in helping an agency attain a particular supported by two-way communication between the agency goal. Targets provide the means in which the relative effec- which provides easily understandable information about the tiveness of a particular investment decision can be clearly implications of different resource levels and stakeholders providing their feedback on desired performance levels and communicated. priorities across different measures. Because targets play such an important role in PBRA, this Step 7--Establish Targets and Track Progress. This final study focused on the factors that influence target selection step involves selecting target values for performance mea- and the approaches by which targets are actually established. sures and putting the procedures in place to track progress Towards that end, the case studies included validation of towards achievement of targets. the seven-step process for setting targets found in NCHRP Report 551. The steps are as follows: While these basic steps were validated by many of the case studies, the actual use of the steps varied among organizations. Step 1--Define Contexts and Time Horizons. This ini- In addition, several factors used in setting targets, which are tial step involves developing explicit statements about discussed in the next chapter, need to be explicitly linked to how targets will be used and what time horizons they will the seven steps. This linkage is made in Volume II--Guide for cover. Target-Setting and Data Management.

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I-23 Public Sector Experience The need to avoid setting and communicating to the pub- lic and transportation stakeholders unattainable targets, in As evidenced by many of the case study results summarized light of significant financial constraints. in this report, the use of specific targets by agencies using PBRA is still somewhat limited. When it does exist, not all of Where the data and the technical resources exist, trans- the steps listed in the previous section are taken as part of the portation agencies are using targets as a way to measure the process. The robustness of the approach is largely dependent effectiveness of particular investment decisions, in relation to on the following: transportation goals, most often as a means to support addi- tional funding for a particular investment type or program, The method used to develop targets--internally developed or to justify the cost of investments already programmed for by agency staff or developed via stakeholder outreach/ funding. In this sense, target-setting becomes a strong account- planning team consensus process; ing tool for decision-making authorities. Amount of time available for planning a comprehensive Several of the state case studies provide excellent examples of performance-based approach--the more time available, the role that performance measure targets play in PBRA, espe- the greater chance an agency has to think through each of cially the selection of projects for the state highway construction the steps defined in the previous section; and program. The Minnesota DOT (Mn/DOT) case study, how- Support by management for agency staff to conduct the ever, provides one of the best examples because that agency has exercise and analyses needed to support a well-thought-out done the following: performance-based approach. Recently updated its 2003 statewide performance-based For transportation agencies at the state, regional, and transportation plan; the 2009 version contains changes in local level, target-setting is most often seen in relation to performance measures and targets which not only illus- asset management systems (e.g., bridge and pavement) trate the evolution of performance management but also where a strong data resource is available for infrastructure provide an example of the significant funding infusion condition, collected by almost all state DOTs and local juris- states need to meet their performance targets; dictions over the last 10 years, in part because of Governmen- Implemented performance management during three sep- tal Accounting Standards Board Statement 34 (GASB34). arate administrations; The amount of data resulting from the GASB34 financial Developed an annual "Snapshot" which compares actual reporting requirements has reinforced performance-based performance goals to targets; infrastructure management processes and has provided a Adopted a performance-based formula for distributing strong foundation for understanding the relative impact of state and Federal highway construction funding to its dis- various resource allocation levels on infrastructure condi- trict offices; and tion over the years. This, in turn, has enabled a strong Secured new state funding by describing highway system analytic process in which trends can be reasonably extrap- needs within the context of a performance management olated into the future and meaningful performance targets framework that sets targets for most of its performance can be set. measures. For many agencies reviewed, the PBRA process involves allocating resources based on how well each potential invest- After completion of the 2003 Statewide Transportation ment performs in relation to other potential investments, or Plan, Mn/DOT integrated PBRA into its highway planning, in a more general sense, whether it provides a positive or neg- programming, and project development process. Each year ative impact in relation to one or more evaluation criteria. every Mn/DOT district, following uniform guidance, identifies This is often the case, as opposed to evaluating the perfor- investment priorities. These priorities are based on quantifiable mance of an investment in relation to a more discrete target. performance measures and targets that establish an impartial More often than not, this is due to the financial and staffing statewide basis for identifying critical transportation improve- resource constraints that most transportation agencies are ments for the entire trunk highway system. This process, first under, which impact the following: identified in 2003 and refined over the last 5 years, is illustrated in Figure 3.1. The ability to collect the data needed to track progress This five-step investment process, described in the 2009 toward meeting targets; Statewide Transportation Plan, provides the framework and The ability to develop new technical tools to project future guidance for developing Mn/DOT district 20-Year highway performance as a function of varying levels of investment; investment plans. These 20-year investment plans, newly and updated in 2009, provide the link between the policies and

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I-24 Step 1 Step 2 Step 3 Step 4 Step 5 Identify Project Future Set Investment Develop Prioritize Investment Revenues Goals Investment Plan Unfunded Needs Investment Needs Investments to Meet Performance 20-Year Highway Total Unfunded Targets Investment Investment Plan Revenue Goals: Outlook Balanced STIP 2009-2012 Statewide Regional and Mid-Range HIP 2013-2018 Community Program High Priority Long-Range HIP 2019-2028 Improvement Priorities Legislative System Stakeholder Direction Performance Input (Chapter 152) Figure 3.1. Mn/DOT highway investment plan development process. strategies established in the Statewide Plan and the capital projected so that investment needs and expenditures could be improvements that are made to the State highway system. estimated in year-of-construction dollars. A more complete Together, the eight district plans constitute a State 20-Year description of revenue and cost trends and projections is Highway Investment Plan for 20092028. The plans were devel- provided in Chapter 5 of the Statewide Transportation Plan. oped in accordance with the following five steps which are Given the volatility in both costs and revenues and the cur- described in detail in the case study write-up in Volume III and rent discussion of increased Federal infrastructure funding which differ from the seven steps in NCHRP Report 551. as an economic stimulus package, the projections assumed in the new plan represent a snapshot in time and will need Step 1--Identification of Investment Needs. Investment to be updated annually as long-range investments become needs fall into two categories: improvements to address sys- programmed in the four-year State Transportation Improve- tem performance and improvements to address regional ment Program. or community priorities. Performance-based needs include investments to meet established system performance targets Step 3--Set Goals: A Balanced Program of Investments. related to traveler safety, infrastructure preservation, inter- The investment priorities reflected in the 2009 update of the regional corridor mobility, Twin Cities mobility, and Greater District Plans differ significantly from the 2004 plans. At that Minnesota urban mobility. The analytical models and method- time, Mn/DOT identified infrastructure preservation as its top ologies used to calculate the investments to meet these system priority, and districts were directed to fully fund preservation performance targets are described more fully in the District needs before other priorities, including safety, mobility, and Plan Summary section of the Statewide Transportation Plan. local community priorities. The revenue and costs outlook in Regional priorities include a wide range of highway improve- 2004 projected sufficient long-term funding to meet not only ments to support local business or community development preservation needs but other areas of need as well. goals, from major highway expansions and new interchanges to Between 2004 and 2008, revenues have not grown as antic- intersection modifications, trails, and sidewalks. These regional ipated, and construction costs have increased dramatically. priorities ($3 billion to $5 billion) illustrate the fact that there Even with the increased transportation revenues provided are many demands on available transportation funding beyond through Minnesota law 2008, Chapter 152, the costs to fully the investments needed to meet established statewide perfor- preserve bridges, pavements, and other roadway infrastruc- mance targets ($62 billion) in the next 20 years. ture during the next 20 years will exceed projected funding. The investment goals for the 2009 district plans reflect Step 2--Project Future Revenue. Next, revenues were Chapter 152 legislative direction, consideration of system projected based on the trends in state and Federal revenue performance trends and stakeholder input. While infrastruc- sources for state highway construction. No new sources of rev- ture preservation continues to be an important priority for enue were assumed but the increased bond funding for trunk Mn/DOT, it cannot be the exclusive priority. The goal for the highways enacted by the 2008 Legislature was factored into the 2009 District Plan updates is to lay out a balanced program of projection. Construction cost trends also were analyzed and investments that achieves three objectives:

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I-25 1. Supports the continued development of the statewide econ- identified high-priority unfunded investments are distributed omy and livability of Minnesota communities; across all four strategic investment categories. 2. Represents the optimum allocation of projected revenues among the four strategic investment priorities of safety, Private Sector Experience mobility, infrastructure preservation, and regional and community improvements; and Institutional Context for Private Sector 3. Results in a consistent level of investment effort across Decision-Making districts towards statewide system performance targets, including the investment directions established in Chap- Private and public sector goals are analogous in the sense ter 152 for the rehabilitation or replacement of fracture that in both cases, a strategy drives decisions about organi- critical and structurally deficient bridges and other high- zation and processes. Organization and process decisions, in way improvements. turn, drive a need for resources and help set targets. Finally, the gap between performance and the agreed targets is the ultimate Step 4--Develop Investment Plan. Given the needs, pro- basis for re-allocation of resources. jected revenues and investment goals, each district developed Private companies set up transportation as either a profit investment plans for 20092028. The investment plans are center, a cost center, or a service center. This form of orga- divided into three timeframes: 20092012 STIP (State Trans- nization drives the overall policy goals and objectives. A profit portation Improvement Program), 20132018 HIP (Mid- center would focus on maximizing profit. A cost center would Range Highway Improvement Plan), and 20192028 LRP focus on minimizing cost. A service center would focus on (Long-Range Highway Investment Plan). Investments identi- maximizing service. fied for the STIP include projects that have developed scopes Acquisition, operation, and maintenance processes are and cost estimates. Investments identified for the HIP repre- organized to support the overriding goals and objectives. sent very preliminary cost estimates subject to change as proj- Acquisition, often of fleets and terminal equipment, is orga- ects are developed. The Long-Range Plan investments in the nized to achieve targets such as return on investment, operating second 10 years represent general estimated investment levels cost, and/or expansion. Transportation companies measure in various improvement categories. The case study contains a and use return on investment in order to decide whether to buy table that summaries investment needs by strategic investment new equipment, build new hubs, or upgrade systems. Opera- priority and planning period. tional processes are geared to meeting either cost or service tar- gets or both. Maintenance processes are usually geared to Step 5--Prioritize Unfunded Needs. With a total esti- lowering operating costs. Private sector transportation compa- mated investment need exceeding $65 billion during the nies use the Operating Ratio (operating expenses divided by next 20 years and projected revenues of about $15 billion, sales) as a primary measure of performance. Underneath this Mn/DOT's analysis indicates that almost $50 billion remains and other profitability metrics, private sector companies almost in "unmet needs" in present dollar value. To place this level of universally track operating metrics such as on-time arrivals and funding in perspective, every 5 cents on the motor vehicle fuel departures and root causes of delays. tax in Minnesota provides just under $100 million per year to Information Technology (IT) processes are geared to sup- the State Road Construction fund. To generate an additional port operational processes and usually need to meet return on $2.5 billion in revenue over 10 years would require the equiv- investment criteria. Radio frequency identification (RFID), alent of a 12.5-cent increase in the state gas tax. Global Positioning Systems (GPS), Transportation Manage- The 2009 plan fully acknowledges that future transporta- ment Systems (TMS), fleet equipment, and terminals need to tion funding will never be increased to meet this degree of support the overall mission of the organization. "unmet need." The plan's policies and strategies, therefore, Environmental regulations regarding noise, air, and water emphasize a new approach to meeting system improvement pollution constitute a minimum threshold for the allocation needs through stronger partnerships and innovation. This is of resources, but private sector companies generally have a especially evident in the plan's vision for mobility in the Twin relatively ill-defined approach for setting resource alloca- Cities, calling for more comprehensive and fiscally realistic tion decisions to meet social or environmental commitments. approach to congestion mitigation. Seven approaches provide some insight into the wide range of The plan also stresses the need to set priorities. Towards this approaches in current practice, which include: compliance with end, Mn/DOT has identified five percent of the "unmet needs" mandatory regulatory standards; compliance with voluntary as high-priority investment options should additional revenue industry standards; subjective evaluation; using last year's per- be available during the next 10 years. Additional funding, such formance as a benchmark; quotas; linkage to a profit-oriented as a Federal economic stimulus bill, would likely carry specific goal; and increases in brand equity. Industry standards eligibility criteria or investment direction. For this reason, the such as ISO 14001 offer companies benchmarks and standards

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I-26 for environmental stewardship. Subjective approaches can can measurably increase the shareholder value and the market reward social or environmental awareness but rarely commit to penetration of a railroad. any consistent or documented standard. This approach can be Also, there may be a difference between the way the private very motivational if the evaluation is positive, but it is subject and public sector DOTs disburse funds, which may result in to review, revision, and even reversal depending on the man- a difference in the method and the timing of data collection ager in charge. As with charitable giving, many private sector and aggregation and in the timing of allocation of resources. companies use last year's contributions as a benchmark for Private sector funds are budgeted in one cycle and released in next year's level of resources allocation. Following the model another. Expenses are released via use of a purchasing card of minority hiring, where performance is measured as a per- (p-card) or purchase orders (PO). Public sector funds may cent of sales dollars, some companies target earning or spend- operate on a different release schedule than private sector. ing a certain percentage of their sales dollars on social or political contributions. Many companies strive to find overlap Corporate Planning and Control Processes between social and economic goals. The underlying premise is that the elimination of waste is consistent with cost reduc- PBRA is part of a broader corporate planning and control tion. Therefore, "green" goals also are coincidentally profit- process. This process has four components: strategy, plan- increasing. Finally, some companies participate in socially ning, execution, and control and feedback (Figure 3.2). Each responsible spending because it increases their brand equity. component consists of the following subprocesses: Brand equity is frequently measured at large private sector com- panies, whether they are in consumer products or in transpor- The Strategy-setting process consists of having a mission, tation. For example, the brand equity that can be gained by understanding the competitive landscape, and developing emphasizing that rail transport is "greener" than road haulage a strategy to be successful in that competitive environment. Strategy Planning Execution Control and Feedback Operation, including Outsourcing Mission Metrics Processes Performance versus Competitive Benchmarks Metrics Analysis Applications Strategy Targets Hardware Backbone Budget Source: Boston Strategies International. Figure 3.2. Corporate planning and control process.

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I-27 The Planning process consists of agreeing on or developing subjective judgment to the metric. Sometimes companies metrics that help track and sometimes predict success by use the same metrics as their competitors, or as "best-in- referencing benchmarks from competitors or best-in-class class" companies, so they can compare levels of performance companies that represent the state of the art in a given func- through benchmarking. tion or process (for example, transportation management). Targets. The prevalent practice in the private sector is to The Execution process includes organization, process man- foster competition amongst business units so a natural tar- agement, and information architecture. The organization get evolves. An alternative is to set the target according to structure includes a determination of which activities to out- what other companies achieve. Using external benchmarks source and which to perform in-house. Process manage- requires careful consideration of the similarity of the refer- ment includes the definition of key business processes and ence organization to one's own, as well as to ensure that codified sequences of activities. The IT architecture deter- both companies are computing the metric the same way. mines the way in which information supports and/or shapes Resource Allocation. Most private sector companies set the organization and the processes. individual compensation to vary according to the degree to The Control and Feedback process can consist of many which they reach the target. Other common mechanisms for management controls, but the primary instruments are the allocating resources are the annual budgeting process and annual budget and cost accounting. When the feedback is the capital expenditure authorization process. good, the budget usually increases. When the feedback is bad, Results Monitoring. Private sector companies invariably the budget usually decreases. gather operational and financial data from the Enterprise Resource Planning (ERP) or legacy information systems, and make it accessible to users. Some make it easier than Evolution and Current State of PBRA others. Some companies post the results to their intranet in Private Sector Companies and have drill-down query capabilities, while others make The history and evolution of performance-based manage- users request reports from IT. As users' computer skills ment is deep and rich at most private sector companies. Pri- increase and systems become more accessible and menu- vate sector companies have had metrics in place for as long as driven, results are being monitored by a larger proportion most senior managers have been at their companies, which in of employees. This democratization of data is enhancing many cases is over a dozen years. the ability to reach the target. The key incentive for achieving individual objectives is compensation. Another key incentive is the motivation gained Goals are often prioritized using the Keep It Simple, Stupid from competing among business units in the same company (KISS) Principle. They prefer one or two universally recog- and winning. nized goals to a dashboard of nuanced goals. Some companies, That being said, not all private sector companies practice all however, have a simple and intuitive hierarchy--safety, then five elements of the PBRA model. While the vast majority of financial results, then operational excellence. companies have goals and track performance data, many do not Targets are set on an annual basis in most private sector set targets and many do not have explicit feedback mechanisms companies, and these are valid for one year. Although senior to allocate resources based on varying levels of performance. managers and the Finance department usually have long- Here is how the five elements of the PBRA model often play out range goals, most targets are set and performance monitored at major private sector companies: on an annual basis. To link individual performance to long- term goals, companies sometimes use equity as an incentive Goal Setting. Goal-setting is typically initiated by the CEO for employees rather than to share multiple annual targets and his or her top-level advisors such as the CFO. These flow with them. to business unit heads and then on to operational staff. The In the private sector, most companies' processes operate goals are often, or are driven by, top-level financial impera- such that every goal should have a target and every target tives. These often seem arbitrary to people below the senior should align with a goal, at least according to the companies management level, who can perceive the goal as indirect or interviewed for this study. Alignment of metrics and goals is imprecise. so important that most companies prefer to reduce the num- Metrics. Nearly every private sector company chooses met- ber of goals and targets rather than risk misalignment or con- rics to track. These can be either financial or operational, or fusion between goals and targets. Again, this reverts to what a combination of the two. The historical legacy of the met- is a recurring theme of simplicity as an underpinning princi- ric is as important as the precision with which it addresses ple of performance measurement and management. the desired outcome. Organizations learn to interpret mea- Realistic goals are essential to making rewards and penal- surements over time, and if they are imprecise, they apply ties effective. While "stretch targets" used to be common,