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I-35 peers, they get rewarded for their results. In the aggregate, done at the end of the fiscal year so as to have a proper budget high-performing teams get rewarded, teams on high- for the upcoming fiscal year before it starts, and operating performing projects get rewarded, and even high- budget variances are tracked monthly. They also have more performing business units also get rewarded as the sum of controls than smaller companies. Larger companies have more the individual rewards adds up. A culture of turnover is metrics and more sophisticated measurements (end-to-end, more permissive of outgoers. with clearer definitions, etc.) because there are more people Capital Investments. Compared to fleets that are used in the to inform. Finally, large companies have longer reaction time private sector (often standard trucks, tractors, and trailers), than smaller companies because they have to collect fragmented public DOTs sometimes have more specialized fleets information from a wide network of many locations and aggre- that involve a different resource allocation approach. This gated and analyzed in order to determine the appropriate includes customized and expensive vehicles (such as school corrective action. buses) as well as emergency vehicles (such as snowplows, police cars, and ambulances) that have inherently lower uti- 3.3 Approaches for Target-Setting lization rates. While both the private sector and public sector DOTs use infrastructure such as terminals, maintenance As discussed earlier, one of the three key objectives for depots, IT systems, warehouses, and commercial/industrial NCHRP Project 8-70 is "to provide a comprehensive descrip- real estate and buildings, DOTs also might manage some tion of the process and methods by which targets are set for use unique buildings and facilities; for example, they may man- in performance-based resource allocation." In support of this age toll booths, depots, ports (airports, seaports), and high- objective, a number of private sector and public sector case ways that are more local and involve specialized maintenance studies were developed to provide an illustration of PBRA and repair. So while private sector capital investments are practices, with an emphasis on target-setting as an element of often allocated on the basis of their utilization and payback, the process. Unique to this study is the in-depth review of pri- public sector fleets are often purchased to meet the peak vate sector applications of PBRA and its best-practice examples demand. of target-setting approaches. Some private sector best practices Operating Expenses. While private sector companies are applicable to the public transportation sector and can be frequently outsource many aspects of their operations, applied within transportation agencies to improve the public including IT system development and maintenance, freight sector application of the PBRA process. auditing, brokerage, and freight carriage, the public sector A summary of public sector practice, as illustrated by the may use less outsourced services, which makes the public case studies in Volume III which is being published as NCHRP sector's labor cost more solidly fixed cost rather than a Web-Only Document 154, is provided in the following sections. resource that can be flexed up and down as needed. The A summary of the general PBRA process applied within the pri- flexibility that comes with outsourcing gives private sector vate sector follows, along with a description of common target- companies more flexibility to base resource allocation on setting approaches. Public and private sector approaches are customer contracts. reviewed in the context of the seven-step target-setting approach documented in NCHRP Report 551 and a set of Furthermore, public sector DOTs may be more representa- potential revisions to the seven-step approach is provided, tive of large companies, which are characterized by more for- based on case study review. mal and documented strategies, more timely and predictable planning cycles, more management controls, and longer Public Sector Approaches to Target-Setting response times between data gathering and resource decision- making. They have more formal and documented strategies As demonstrated in the public sector case studies in Vol- than smaller companies, in part because they work on a longer ume III, there is a wide range of agency implementation of time horizon (5 years is the norm for large companies). They PBRA processes and an equally as diverse range of implemen- also have a more defined competitive positioning than smaller tation approaches for target-setting as an element of PBRA. companies, which often compete in fragmented, more com- The target-setting approach is determined largely by the ini- petitive environments in which competitive analysis is less tial impetus for developing a performance-based process for actionable. Finally, they document their business strategy more resource allocation, whether externally driven (e.g., through formally, in part because large companies frequently have an political or legislative intervention) or internally driven (e.g., obligation to shareholders and in part because legislation like strategically developed as a proactive response to the trans- Sarbanes-Oxley requires disclosure. portation planning and funding environment). Approaches Larger firms have more timely and predictable planning that transportation agencies currently are using mirror, in cycles than smaller companies. Capital budgeting is usually many respects, the approaches identified in the private sector

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I-36 examples, with variations occurring primarily in the targets, gets that are closely aligned with the needs of the traveling themselves, and the feedback mechanisms that link actual public (the "customer"). investment performance to changes in resource allocation. Use of benchmarks from peer agencies, with targets estab- Perhaps the most significant distinction between public and lished based on review of similar investment approaches private sector approaches is the private sector's greater uti- and results experienced by other transportation agencies. lization and application of targets within the PBRA process, Under this approach, criteria should be set for peer group compared to the public sector, where the use of targets is not selection and analysis. Once the peer group is set, the analy- as common. sis will provide a relative status of each state's performance Approaches that public sector agencies currently use to set measures and targets. The comparison among states will targets, either in isolation or in combination with one another, help guide the final determination of targets within selected include the following: performance measure categories. Policy-driven targets established by agency executive man- Policy-Driven agement or other external political body (i.e., "top-down" approach). This is an approach in which targets are set in a As noted in Section 3.2, one of the most critical factors in hierarchical fashion by senior agency management or an establishing targets can be political or legislative intervention external political or legislative authority operating outside of in the transportation planning process. In some examples, the transportation planning arena. Oftentimes this occurs in a political body, senior transportation agency management response to public outcry or growing public discontent over (sometimes guided by a technical advisory committee), or a transportation issue, with direct action from elected offi- higher level agencies (e.g., U.S. DOT) will establish a target cials being called for. Under this approach, agency senior as an element of the transportation plan and development management or a political body defines targets in the con- process. This is a very direct approach and can be a very posi- text of larger transportation goals or policies; staff is tasked tive impetus for performance-based planning. It also can cre- with developing a transportation investment plan to meet ate a difficult situation for transportation agencies to navigate the target and conducting modeling and technical analysis if practitioners were not involved in the target-setting process needed to demonstrate attainment of the target under a and/or if the process was not informed by real-world planning, future funding scenario. funding, and technical constraints that may impact attainment Modeling is often used by agencies to evaluate progress of the target. towards targets, even when modeling was not used to estab- Targets set under this approach may often be developed in a lish the target itself. Project and policy scenarios can be tested more qualitative manner, with less rigorous up-front analysis using travel demand models, combined with other postpro- supporting the target-setting process or, more specifically, with cessing tools to include metrics such as benefit/cost to evalu- less attention paid to how a target may actually be tracked by ate their relative contribution to progress towards targets. transportation authorities given certain technical and resource Consensus-based process where targets are established constraints. Once developed, the targets tend to be well- internally through a collaborative planning process and communicated and well understood (well publicized) and con- reviewed/approved by outside, typically management/ vey a strong message, but success in meeting the target can be Board-level sources (i.e., "bottom-up" approach). Under very difficult if the agencies and transportation staff responsible this approach, transportation staff develop targets based for meeting a target are not involved in helping to develop it. on comprehensive analysis of planning context and con- FDOT provides a strong example of a policy-driven target- straints on possible investment performance, with input setting process, with targets that were established by the State from a variety of transportation stakeholders that have an legislature. In FDOT, resource allocation decisions are driven opportunity to impact the process; targets are typically by a number of output- and outcome-oriented performance approved by senior management. targets in the areas of highway maintenance, Strategic Inter- Reliance on formal and informal customer feedback in modal System (SIS) funding, and transit funding, as required which the transportation system user is viewed as a "cus- by Florida statute. These include the following: tomer," and the transportation planning and development process is oriented towards customer-service. Under this Eighty percent of pavement on the State Highway System approach, direct feedback on system performance and meets department standards; objectives for transportation investment are gathered from Ninety percent of FDOT-maintained bridges meet depart- the transportation system user through a variety of survey ment standards; and outreach methods. This feedback is then used by trans- One hundred percent of the State Highway System meets portation agency staff to develop specific measures and tar- acceptable maintenance standards;

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I-37 Fifteen percent of discretionary capacity funding must be land resources are decreasing. Historically, FDOT reset engi- used for transit projects; and neering consultant targets to whatever level is projected in the Fifty percent of discretionary capacity funding must be Work Program for four common years. They perform a trend applied to the SIS (the department's own performance comparison to construction levels and project what levels of target for this is 75 percent). preliminary engineering are needed. The Department is con- sidering alternative methods for setting targets. The remaining primary targets are set by the Executive Board, and secondary measure targets are set by the program Modeling offices and the districts (i.e., the "measure owners"). As these targets are mandated by state law, meeting them is the depart- Modeling is often used by agencies to evaluate progress ment's first priority. Determining the standards against which towards targets, even when modeling was not used to establish these measures are applied is the Executive Board's responsibil- the target itself. Project and policy scenarios can be tested ity, and so the standards are reviewed as one of the first steps in using travel demand models, combined with other post- the Program and Resource Plan and Work Plan update process. processing tools to include metrics such as benefit/cost to eval- Figure 3.4 illustrates the relationship between goal and uate their relative contribution to progress towards targets. target-setting and performance measures in FDOT's bridge Both top-down and bottom-up modeling are used to set tar- program. gets in many companies. Top-down modeling most commonly There are additional secondary targets for Preliminary drives the target by high-level requirements. Top-down model- Engineering Consultant levels. When FDOT is building their ing determines the strategies or funding needed to achieve the new Work Program, there is an opportunity to bring for- target; bottom-up modeling determines what level of perfor- ward new specialty projects. However, there is political pres- mance is possible, and then uses that to calculate the expected sure to add highway capacity expansion projects with any target, as Japan's MLIT does annually. available resources left over. Consultant targets are set so that The exact use of modeling depends to some extent on the the level of engineering activity is maintained and the pro- way in which an agency is utilizing PBRA. For what part of the duction pipeline keeps going. investment process is the agency setting targets? For example, FDOT currently is postponing, reducing the size/cost, or are the annual financial targets, long-term targets for a long- removing projects due to revenue reductions. The first area range transportation plan, or mid-term targets for a package of likely to be cut is capacity expansion projects because main- projects and programs to be included in a TIP? tenance targets are "sacred." One would logically expect that Many agencies have found innovative ways to incorporate consultant levels also would go down, but FDOT is struggling performance-based processes and targets into their planning with how to set the target to determine the appropriate level of processes and duties, supported by modeling. The MTC uses its reduction. FDOT previously used right-of-way (ROW) acqui- own StreetSaver PMS to calculate preventative maintenance sition targets as a measure to keep production going, but the funding targets for its local jurisdictions; the ratio of "actual ver- Executive Board chose to do away with them because ROW sus targeted" determines the jurisdiction's performance score Goal: Protect the public investment in transportation POLICY Evaluate data and Objective: report percent 90% of bridges meet meeting standards FDOT standards PERFORMANCE Program and FINANCE MONITORING contract to repair/replace deficient bridges PROJECT DELIVERY Figure 3.4. PBRA for FDOT bridge program.

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I-38 and is a factor in calculating the amount of funding that will be selves up for failure in regards to not meeting targets, in light allocated to that jurisdiction. of so many success factors being outside of their control. Consensus-Based Customer Feedback In many cases, transportation agencies develop targets As stated in Section 3.2, those agencies that have taken a through an internal, consensus-based planning process as part clear customer-service approach within the resource allocation of a more comprehensive PBRA exercise. Typically, the use of decision-making process understand the need to use targets specific targets derived from an internal process is seen in agen- that communicate to the system user, the "customer," the cies with a more sophisticated and well-developed PBRA sys- return on their investment. Customer satisfaction is a funda- tem that has developed over several iterations. Staff resources mental aspect of performance for these organizations and per- and time permitting, an internally developed process can lead meates the process for how potential investments are evaluated to very meaningful and effective targets within an agency's and selected to receive funding. PBRA process. Coral Springs, Florida, provides a very strong example of The MTC provides an excellent example of an externally a municipality that has taken a very direct customer-service mandated (policy-driven) intervention that supported, rather approach towards its resource investment process, in which than dictated, an internally managed, consensus-based, target- customer input drives the decision-making process for a wide setting approach. In this case, the California state legisla- range of services, to include transportation. Target-setting is a ture had required PBRA to be a part of transportation plan key component of the Coral Springs process as it provides a development, and for some critical areas, established targets direct translation of progress as feedback for a community that itself (e.g., CO2 reduction). This political intervention served to has been actively engaged and empowered as part of the plan- strengthen the role performance assessment played in the plan- ning process. Community feedback is gathered through a vari- ning process and allowed real leadership to emerge in this area, ety of methods to include, but not limited to, an Annual Citizen in MTC's case, at the Executive Director level where the oppor- Survey, public hearings, a city blog, regular visioning exercises tunity was provided for PBRA to be championed with staff and focus group discussions, a complaint tracking system, and and elected officials. As part of the ongoing 2035 RTP, targets employee surveys. The Coral Springs customer input process is have been established for three principal focus areas: Economy, extensive, formal, iterative, and continuous and impacts, to a Environment, and Equity. Environmental targets, for example, significant degree, the target-setting approach. With regard to include a 40 percent reduction in CO2 below 1990 levels, 10 per- transportation, three targets have been established directly from cent reduction in PM2.5 below 2006 levels, 45 percent reduction customer feedback which indicated growing concern over in PM10 below 2006 levels, and 10 percent reduction in VMT traffic mobility and safety issues. These include a 10 percent per capita below 2006 levels. MTC staff have recently com- speed reduction on traffic-calmed street, reducing intersection pleted an exercise to test how different system expansion strate- crashes to no more than 165, and increasing city transit rider- gies contribute to achieving these predefined performance ship to 125,000 annual trips. targets. Because the MTC is in the early stages of conducting Hennepin County, Minnesota, also provides an example of plan analysis against performance targets, there is no direct a customer-oriented approach to target-setting. Hennepin impact on resource allocation that can be determined or is County is the largest local government in Minnesota, located documented yet. within the Twin Cities Metropolitan Area, and has been For those targets that the MTC developed, an internal rated among the best managed large counties in the country. planning team (bottom-up) approach was used. This type of Beginning in 2002, Hennepin County introduced a strategic approach is common for transportation agencies using PBRA. management framework that focused on results and cus- Goals and objectives were established at an executive level, tomers. Hennepin County uses the Balanced Scorecard (BSC) and a subcommittee of the MTC representing the various juris- approach as a management tool, which helps to align county dictions in the region derived the measures and associated tar- daily work with the county vision and goals in the context of gets through a more technically informed process. The MTC community needs. The "customer" is one of the four perspec- Board formally adopted the targets as part of the larger PBRA tives that the BSC approach is viewed from as part of the PBRA system. Note that the MTC emphasized that keeping flexibility process (the other three being: Finance, Internal Process, and in the target-setting process, by using language such as "volun- Leaning and Growth). The Hennepin County Public Works tary" and "interim" in regards to Board adopted policy, was Line of Business has six functional areas, including (1) emer- critical in getting targets approved. As noted in Section 3.1, it gency services, (2) environmental, (3) energy, (4) housing and is important for transportation agencies to keep in mind the public works, (5) transportation, and (6) administrative ser- litigious environment in which they work and not set them- vices. These functions are at varying stages in setting perfor-

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I-39 mance measure targets. For some measures targets have not things. The NPI data are noteworthy not only for the breadth yet been set. However, the Business Line is on track to develop and sophistication of the indicators used but also because a complete menu of measures and targets for all functions in they present consistent and comparable data across a trans- the near future. In the transportation service area, a number portation system managed by nine separate agencies in two of specific targets already exist and include targets related to countries, allowing unprecedented benchmarking possibili- bridge and pavement sufficiency ratings, reducing crash rates, ties. Specifically, benchmarks against other jurisdictions also completion of the Bicycle System Plan, and project delivery are being introduced into VicRoads' process. standards. MTC developed a pavement management system called StreetSaver that is used by nearly all local jurisdictions in the Bay Area. Local pavement condition data is used by MTC at the Benchmarking regional level to generate a regional pavement condition sum- Benchmarking as a target-setting approach provides a mary and PCI index, which they then use to predict regional transportation agency with the means to establish targets in a needs for pavement maintenance as part of their regional relatively quick and efficient manner that can be realistically transportation planning process and which can be used as a achieved. Benchmarking is often handled by a scan of peer benchmark among local governments. agencies that have attempted to reach similar goals through While there are five basic approaches to setting targets, the similar types of investment packages. It allows peer agencies policy-driven approach tends to dominate the target-setting to observe realistic performance outcomes for various types methods used by the agencies reviewed, followed by consensus- of transportation improvements and investment levels, and based approaches. This makes sense in light of the significant therefore supports a realistic target-setting approach. transportation funding issues that have impacted all transporta- In the case of the Maryland State Highway Administration tion agencies at the state, regional, and local level throughout (SHA), for example, targets are developed with input from the country over the last few years. These funding issues have appropriate managers and data owners, using outside data, created a situation in which competition is increasing for trends, and best practices to assist when possible (e.g., bench- ever-decreasing transportation dollars and in which more marked against peer states). Performance measurement has accountability is being demanded of elected officials and been integrated into daily agency operations and elevated as transportation authorities in how limited dollars are spent. a planning and technical necessity. Targets are established This creates a situation in which performance-based processes by the agency performance measure "lead" who is respon- flourish and one in which decision-makers may establish sible for maintaining and reporting data for a particular investment mandates or requirements quickly to show action measure and ensuring data accuracy. Note that by identify- being taken. ing a measure "lead," the SHA also is facilitating a sense of While the policy-driven approach to target-setting is the ownership and responsibility for performance measure- most frequently used today, the advantages and disadvantages ment and integrating the practice into an overall agency cul- of all four approaches need to be considered as practice ture of performance. matures. These advantages and disadvantages are summarized While most public sector agencies do not formally use in Table 3.1. benchmarking to set performance targets, there is nonetheless an emerging interest in comparing the use of measures and Private Sector Target-Setting Approaches targets across jurisdictions. The AASHTO Standing Commit- tee on Quality, recently renamed the Standing Committee on Organization accountability in the private sector is strong Performance Management, conducted a study in 2007 which and direct. Organizational hierarchies are critical in deter- identified best practices for highway project delivery times and mining reward and penalties for performance versus target. cost. The committee also has identified best practices for The classic pyramidal hierarchy still often drives behavior, smooth pavements. despite the existence of numerous more modern organiza- The current movement to establish a more performance- tional structures that divide businesses by strategic business based Federal-aid highway program also underscores the unit (SBU) or product line. Matrix structures also have importance of establishing measures and targets that can be become popular, but practically speaking, reporting rela- uniformly applied across states and MPOs. This interest is con- tionships are typically characterized by one dominant boss. sistent with trends in New Zealand and Australia. The Aust- The implication for transportation management is that roads National Performance Indicators (NPI) system includes accountability to that one boss is critical, and performance dozens of indicators in 11 broad groupings, covering safety, is usually judged by one person with abundant data. This asset management, environmental impacts, system capac- may contrast with organization accountability in the pub- ity, user satisfaction, and project management, among other lic sector.

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I-40 Table 3.1. Managing risk of public sector target-setting approaches. Target-Setting Approach to Balancing Advantages Approach Advantage Disadvantage with Disadvantages Policy-Driven Linked to PBRA elements Political process may ignore Establish PBRA with legislative PBRA participation to ensure support and understanding Modeling Defensibility. More time and money Continue to refine modeling Better understanding of intensive. techniques. future performance. Models change over time. Use hybrid approach. Consensus-Based Insures broad May flounder in effort to be Appoint internal champion to lead understanding and inclusive effort to identify the "critical few" acceptance within agency measures and targets Customer Feedback Insures more transparent May be confusing to discuss Describe measures and targets in process technical measures with the simplest terms possible public Benchmarking Provides a peer group Can be misused for Continue to refine comparative comparison comparative rankings analysis techniques The Budget-Setting Process (3) Service level maximization, including flexibility (the ability to respond quickly to temporary changes in circum- Budgets play a critical role in decision-making. Whereas in stances) and agility (the ability to adapt to structurally changed the public sector a balanced budget may be an option, in the circumstances). private sector it is the only way businesses work. The fiscal Transportation cost, in its various permutations such as year's budget must balance. In addition, budget variances are cost per shipment, cost per mile, cost per order, cost by traf- tracked, and monthly variances are addressed promptly. fic lane, and others, is often separated into several different Large variances usually result in some sort of realignment categories: of resources--especially headcount, job responsibilities, or equipment allocation. In addition, IT systems and processes Total unit cost--the cost per unit with the numerator are often re-engineered to achieve the budget figures. being cost and the denominator being a volume metric such Key Performance Indicators (KPI) are prevalent and are as miles, stops, or orders or a resource metric such as the usually prominently posted in managers' offices. These reflect number of vehicles or drivers the measures for which individuals are responsible and often Transportation cost separated from product costs-- to which compensation is tied. transportation budget or actual total transportation cost, The budgeting process begins with functional and business tracked rather than imputed as an "adder" as a percent of rev- unit heads agreeing on key performance indicators that accu- enue, which is a common practice among many companies rately reflect their unit's success. The metrics typically fall into Landed cost--transportation plus other costs incurred five categories: cost, quality, service, speed, and delivery. in moving product through a supply chain such as cus- The determination of metrics that are important to the toms, insurance, interest, and storage costs. Landed cost organization as a whole includes identifying the hierarchy of is most often used in importation since duties and inven- metrics, including especially which ones are important enough tory carrying can represent substantial costs compared to to be on the executive dashboard. Usually, this consists of a set transportation. of metrics that are common to all subsegments of the business. Cost avoided--money that would have been spent but does It should also include a determination of which metrics should not have to be due to a change, for example, in processes. be visible at different levels of the organization. Usually, these Quality-adjusted cost consist of the metrics that are important to specific subdivi- sions with common geographic areas, types of infrastructure, Profitability also is reported in several different ways: or financial structures. The selection of metrics should reinforce the objectives of Revenue--If transportation is a profit center for the the company, which usually include at a minimum: (1) Fixed company. asset minimization, both in terms of the number of units, as Operating ratio--operating cost divided by operating well as the value per unit; (2) Operating cost minimization; and revenue.

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I-41 Customer profitability--profit measured in various ways, cost of transportation, duties and taxes, shipping, handling, such as revenues minus expenses or percent profit margin and insurance. at the customer level. This metric is used by companies that Operations shares its direct operating and maintenance have sophisticated enough information systems to track costs for the equipment that Procurement buys. and attribute transportation cost to specific deliveries and Logistics shares its transportation, warehousing, and pack- customers. aging costs. In addition, Logistics may track inbound freight costs for the material it acquires from external suppliers, Return on investment is measured by relatively few compa- since it is part of the overall supply chain. nies (as it applies to transportation operations). It is mostly applied on a case-by-case basis to specific investments in equip- Accounting, usually a part of the Finance department, often ment or warehousing. However, the following three new trends compiles the budget and the actual cost data, and produces are making return on investment a more popular performance variance reports that are shared among line managers who measure: have profit and loss (P&L) responsibilities, as well as executive managers to whom those P&L heads report. Where there is an The drive to remove assets from the balance sheet through ERP system or other executive dashboard, these metrics may off-shoring and outsourcing; auto-populate and be accessible to authorized managers via a The evaluation of investments in off-shoring have gained corporate intranet. popularity recently, especially as much sourcing shifted Executive management interprets the variance reports in overseas to China, and the value of the U.S. dollar has fallen light of a wide array of factors, including the following: so sharply as to cause many of those same companies to evaluate moving the production back onshore; and External market conditions influencing demand for the Intense interest in public-private partnerships (PPP). In company's products and/or services; such models, each party lobbies for their share of public Competitive conditions, including price and non-price money while trying to give up as little of their own private competition; and capital as possible. The pace of internal ongoing research and development (R&D) programs, cost management initiatives, and other Beyond profitability and return on investment, shippers and corporate programs that could affect the managers' ability carriers use a wide variety of important performance metrics to meet their budget targets. that often measure their ability to fulfill customer orders reliably and quickly. These include metrics related to volume, Based on the review and assessment, executive manage- velocity, total supply chain costs, quality of customer interface, ment may exercise considerable discretion in reacting to volatility, and security. updates. Good variances may elicit no response, a pat on the Then, through a process that may be automated to varying back, a resetting of the budget targets, a promotion, or a raise. degrees, Production, Procurement, Operations, and Logistics Depending on the seriousness, bad variances could elicit no all share important information that is used to facilitate the con- response, a root-cause analysis, a review, or resetting of the trol and feedback loop. The actual metrics depend greatly on the individuals' targets or budget allocation, a demotion, or even company itself and on the mission, vision, objectives, and tar- termination. gets set in the Planning process. To use cost as an example, the following departments provide cost feedback: Organizational and Motivational Approaches to Target-Setting Production (if a manufacturing company) shares its direct costs and its indirect costs: Private sector companies take a variety of different ap- Direct costs are based on labor consumed, material proaches to governing the target-setting process. The follow- consumed, and net of any byproducts created that have ing four different approaches can be seen in companies, market value. including a hybrid approach: Indirect costs, often called Manufacturing Overhead, are allocations of fixed costs such as plant and equip- Edict. Don't over analyze. Just state the goal and have every- ment that is used to produce multiple product types or body try to hit it. The underlying principle of this approach serve multiple channels, and labor that is dedicated to is that success in hitting the target is entirely a function planning and control. of motivation and execution and that planning is a rela- Procurement shares its acquisition costs. Acquisition costs tively minor part of reaching the target. This approach include the cost of purchasing an item or service, plus the also is called "Ready-Fire-Aim." The advantage of the

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I-42 Edict approach is that the target is unequivocal and well- terminals and warehouses but usually after a lag. Moreover, the understood throughout the organization. The challenge prime driver of such an increase in resources is a pass-through is that the approach is not inclusive or consultative; it is of savings to the customer, who then decides to increase volume more characteristic of old-fashioned hierarchical leader- through the system due to that company's (or individual's) cost ship. For example, the choice of metrics and targets is made savings. by senior management and is not subject to discussion. Therefore, the initial response to cost savings is often a Benchmarking. There are three basic varieties of bench- downsizing--reduction of warehouses, reduction of inven- marking: Best-in-Company, Best-in-Industry, and Best- tory, reduction of vehicles in the fleet, and reduction of sup- in-Class. In all the cases, benchmarking means identifying pliers. The second-order effect of such reductions is to decrease a reference point or points and using them as the basis for the cost of distribution; this savings is passed on to customers one's own target. The internal target can be higher or lower in the form of lower prices, which can subsequently generate than the benchmark, but in either case the reference point increased sales. These increased sales then require more infra- is used to determine the target. Benchmarking also can be structure to handle a higher volume of goods moving through qualitative. For example, strategic benchmarking can iden- the distribution network. tify similar companies' strategies as a basis for setting one's Aside from the budgeting process, private sector compa- own strategy. Organizational benchmarking can be either nies' approach to resource allocation also includes the use of qualitative or quantitative. One common form or organi- variable compensation, team competition, wide access to per- zational benchmarking is measuring staff levels used to formance data, and simple and stable performance metrics. service a given level of activity. Most companies use compensation. However, they use each Best-in-Company benchmarking fosters competition lever to varying degrees. The following paragraphs describe between operating units on the basis of the key metric(s). these methods in further detail: Best-in-Industry benchmarking analyzes the perfor- mance of companies in the same industry or segment Salary and incentive bonuses are powerful motivators and and highlights the best in the group as the benchmark, result in targets that are driven by what people can achieve even if its activities are not directly comparable to the rather than calculated guesses. Also, compensation that subject company. varies depending on performance versus the target is widely Best-in-Class benchmarking analyzes the performance of viewed as an effective way of motivating performance. a broad range of entities, including some with unrelated Intracompany team competition also is an effective way to activities, and highlight the best in the group as the bench- motivate performance and establish the right targets based mark, even if it is in a different industry than the subject on what can be achieved through competition rather than company. on a calculated target. Seeing a business unit succeed can Modeling. Both top-down and bottom-up modeling are stimulate an aggressive response from a competitive peer. used to set targets in many companies. Top-down modeling The Baldrige winners use internal competition extensively most commonly drives the target by high-level financial to instill creativity and better results. requirements. Top-down modeling determines the opera- Wide and easy access to targets and performance data helps tional effectiveness needed to achieve the financial target and stimulate better knowledge of current performance and sets the operational target around that. Bottom-Up Model- performance gaps, hence the ability to improve perfor- ing determines what level of operational performance is pos- mance and to do it more rapidly. In contrast, complexity and sible and then uses that to calculate the expected financial waffling will dampen attempts to improve performance, result. according to most interviewees. Three Baldrige winners-- Hybrid. Hybrid approaches use some combination of the FedEx, Cargill, and Ritz Carlton--plus several Balanced other approaches. Different approaches may be more or Scorecard users such as CSX, Caterpillar, and BASF, rely less effective in different departments or business units heavily on the wide dissemination of performance data with different management styles as well as over time as the inside their companies. needs of an organization change. Hybrid approaches can Simple measurements. Complex measurements and multi- be extremely effective because of their versatility and dura- faceted metrics dashboards, while intellectually appealing, bility. Their drawback is that they can dilute the strong are counter to common wisdom in the private sector, where message that might come from the other approaches, espe- one simple and clear target for transportation and logistics cially the edict approach. per year can achieve significant improvement through align- ment of goals. Companies that use Total Quality Manage- Positive execution versus targets can result in increased ment (TQM) rely heavily on simple metrics because changes allocation of resources for upstream infrastructure such as are implemented at the shop floor level where data must be

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I-43 readily obtained and recorded in order to be credible and from the advantages and then the highest-scoring result would immediately actionable. be the best approach. Stable measurements. Changes in the definition of metrics over time can stifle motivation to achieve the target, as well Application of the Seven-Step as raise non-value-added confusion and ambiguity about Target-Setting Approach how to interpret the target or how to interpret performance Within the Public Sector compared to what it was when historically different metrics were used. Companies that use balanced scorecards need The seven-step process for setting targets found in NCHRP stability of metrics more than most because unstable metrics Report 551 is exemplified in varying degrees for each approach. make the scorecard appear unbalanced. The following are the seven steps: Using each approach to measuring comes with some risks. 1. Define the context for target-setting and establish time Table 3.2 outlines the advantages and disadvantages of each horizon(s); approach as well as approaches to mitigating those dis- 2. Determine which measures should have targets; advantages. To develop the best approach for target-setting 3. Develop long-term goals based on consideration of tech- in a given environment, the advantages and disadvantages nical and economic factors; could be quantified on a scale with the disadvantages netted 4. Consider current and future funding availability; Table 3.2. Managing disadvantages of private sector target-setting approaches. Target-Setting Approach to Balancing Approach Advantages with Advantage Disadvantages Disadvantages Incentive Bonuses Strong motivator Inequalities Team or group bonuses Results in a "natural" target Could sacrifice performance on Nonmonetary rewards one parameter in trying to maximize another Intra-Organizational Results in a "natural" target Could sacrifice performance on Stimulate internal competition Competition Stimulates sharing of best one parameter in trying to based on a balanced scorecard practices maximize another of metrics Wide Access to Targets Facilitates more improvement Education and interaction with Apply varying levels of access and Data ideas peripheral users of the data permissions could derail progress Technology to disseminate the Use web-based gathering and information could be costly filtering of input Simple Metrics Focuses effort, resulting in Could encourage gaming, Use a set of simple metrics that quicker target attainment whereby people sacrifice prevent gaming by imposing performance in some areas in tradeoffs order to hit a simplistically defined target Stable Metrics Deeper penetration of targets Slow to adapt to changing Periodic review cycle to ensure into processes external environments metrics are optimal Baldrige Awards Process focus allows for Targets may not be simple or Hybrid approach evolution of targets easy to remember Balanced Scorecard Prevents gaming and Complex; diversity of metrics Hierarchy of metrics suboptimization inhibits the progress that often results from focusing on one simple target Total Quality Deep penetration into culture Requires a long-term Hybrid approach Management when fully implemented commitment Source: Boston Strategies International, Inc.

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I-44 5. Analyze resource allocation scenarios and tradeoffs; to target-setting that included so many disaggregate steps. 6. Consider policy and public input implications for target- In most cases where target-setting was developed through a setting; and consensus-based approach, the agency was working within a 7. Establish targets and track progress. framework where long-range goals were defined (Step 3); these provided the foundation for the establishment of objectives In general, the seven-step process is not used in a formal fash- and performance measures and targets, as appropriate based ion for a policy-driven process. For internally developed on technical resources (Step 2); this process was informed by processes, there tends to be more leeway and opportunity to stakeholder discussion of the larger planning context to ensure allow the full seven-step process to take place, although in most the development of reasonable targets that are politically cases only some of the seven steps are actually implemented. For palatable and attainable given real-world planning and fund- approaches relying on customer feedback, the process is driven ing constraints (Steps 1, 4, and 6), and targets were then estab- more by customer demand as opposed to a comprehensive lished with progress tracked, resources permitting (Step 7). analysis supported by the seven-step approach, and, similarly, Note that Step 5--"analyze resource allocation scenarios"-- with a benchmarking approach, the seven-step process is not as was not shown to be a step often taken in the target-setting critical because targets are set based on other agency practices. process, but rather as a part of transportation plan and proj- The application of the seven-step process in the public sector is ect development where potential resource allocations were described in more detail in the following paragraphs. analyzed in terms of how well they helped the agency meet In a policy-driven approach, the motivation for the per- particular targets. formance-based process and target-setting may be politically Modeling applies most directly to Step 5, though it is likely driven. Unless guided by a technical advisory committee or a done in concert with other processes (such as consensus-based technical stakeholder group, this process is not likely to take processes) applied to earlier steps. However, when modeling into account in real detail the very critical aspect of data and is being used to determine targets, model and data limitations tools needed to develop meaningful targets and to track per- are likely to help determine which measures should have tar- formance of potential investment in relation to the targets gets (Step 2). Step 4 can directly lead into Step 5 by determin- (e.g., data availability, data history, data forecasting capabili- ing the scenarios to be modeled based on financial constraints; ties, performance analysis, etc.). In addition, timeframes to set conversely, Step 5 can be used to determine the amount of targets may likely be limited so that policy bodies can show funding necessary. action being taken in an effective manner. With this in mind, For approaches based on Customer Feedback, the seven- Steps 1, 3, 5, and 7 are not often applied as these address the step process is not as applicable because the primary driver in more comprehensive requirements for a complete target- the process is developing targets that communicate to the cus- setting approach. However, policy bodies, senior manage- tomer the investment performance in terms that the customer ment, and elected officials often times are able to focus on key cares about, as opposed to communicating performance in measures of interest (as they relate to a particular transporta- terms of transportation planning and development standards. tion issue) and can determine which of these need targets to The target-setting process is still informed by and supported by demonstrate progress to the public and their constituencies transportation practitioners that provide the appropriate con- (Steps 2 and 6). For example, traffic congestion and environ- text for establishing targets (e.g., what percentage of crashes mental issues such as climate change or air quality that garner might be expected given certain funding levels, or how much significant public interest may help to focus decision-makers speed may decrease as a result of traffic calming measures), but on these two steps that address how the performance of trans- ultimately processes oriented towards the customer are driven portation investment should be evaluated, and how it should by the customer perception of what needs to be improved and be communicated and reported considering public input. by how much. As such, most of the seven steps have not shown With consensus-based processes, where targets are estab- to be strictly applied. lished internally through a collaborative approach, there is Benchmarking approaches tend to be even less supported by more time to pursue a comprehensive methodology that the seven-step process. Targets set under this approach are done is more inclusive of each of the seven steps. By default, a so based on experience in peer states and/or given similar types consensus-based approach will require more time and greater of investment packages to support similar transportation level of technical and planning effort because of the variety goals. Case study review or scans of peer agency transportation of stakeholders that will be involved in the process, each pro- investment performance provide an assessment of what can be viding a unique perspective that will warrant attention. As expected in terms of impact and performance for various types demonstrated in the public sector case studies in Volume III, of transportation improvements and investment levels. Targets no one agency included all seven steps in its consensus-based are then established based on a relative comparison between target-setting approach, nor did any agency cite an approach peer regions.