Benchmarking and Performance Measurement: What can Airport Managers Learn?

1. Benchmarking and Performance Measurement: What can Airport Managers Learn? David Gillen Wilfrid Laurier University & University of California-Berkeley GARS Bremen November 2004

2. Outline • The Evolution of Benchmarking. • ‘Why Benchmark’ in an airport context? • TQM and Competitive Strategy • Benchmarking and Performance Measurement • the differences • Criticisms and benefits • Methods – an assessment • Key for airport managers-Linking Performance Measures, Enablers and Strategy • Implementation Issues and Pitfalls • ATRS work • Summary – Airport Management & Benchmarking GARS Bremen November 18-19, 2004

3. Evolution • Part of TQM literature and performance measurement practice • Focus was on processes (relatively homogeneous) not units or organizations • e.g Xerox and L.L. Bean • Used in within and between firm comparisons • Range of metrics – cost, productivity, customer service delivery, profit, revenue, for example GARS Bremen November 18-19, 2004

4. Why Benchmark – Institutional Change • Aviation is dynamic and undergoing continuous change • airports have shifted from a public utility to modern business • Airports approaching different capital markets • Rapidly evolving institutional environments, • other industries have turned to benchmarking as an important management tool • Shift from producer driven to a customer driven economy • Benchmarking identifies centers of excellence and outstanding business practices, used to: • raise profitability and facilitate organizational change • Airports shifting from operational to customer driven organizations GARS Bremen November 18-19, 2004

5. Why Benchmark - Benefits to Management Management • Understanding of corporate strengths and weaknesses • Report card to airport stakeholders – customers, community, financial sector • Identify strategic opportunities Operations – • Improve operational efficiency • Identify industry best practice • Focus on areas with greatest opportunity for improvement – cost structure characteristics Marketing/Customer Relations • Focus on adding value to customers • Identify new revenue opportunities & pricing practices • Emphasize competitive strengths Finance – • Assess impact of financing alternatives • Positioning for capital market GARS Bremen November 18-19, 2004

6. Benchmarking point of reference in time and [quality] space process of continuous measurement comparison with established leaders creates attention and momentum for change focus is on the organization as a system Performance Measurement identify enablers covers productivity , cost efficiency, operating excellence, level of quality and service delivery identify incentives for contracts and assigning property rights Benchmarking & Performance Measurement GARS Bremen November 18-19, 2004

7. Performance Measures-Across Airports • Cost and productivity measures - why do they differ? • Revenue differences - what can the airport manage? • Environmental, structural and managerial impacts • for all measures need to ask: • are they partial • do they report outcomes rather than processes • are they linked to instruments that permit improvement • do they identify ‘best-in-class’ • do they link cause and effect GARS Bremen November 18-19, 2004

8. Purposes • Link performance to management strategies (terminal and overall airport) • e.g. Pearson Airport Toronto • Identify areas of weakness and strength • Peter Mckenzie-Williams work • Use in assisting regulators (setting price-caps) • Assess investment and operating costs • Assess airport charges and quality (Nicole Adler) GARS Bremen November 18-19, 2004

9. Methods • Quantitative – econometric (TFP, VFP) using OLS and Stochastic frontier Analysis and, DEA • Partial Statistical measures – output/input, or per unit analysis • Gross/residual measures-identify drivers – control (?) • Airport size, Average aircraft size using the airport • Share of int’l traffic, Share of air cargo services • Ownership forms and congestion delay • Surveys – soft indexes (e.g. service quality) • Examples • TRL Cranfield, Adler, Gillen/Lall, Graham, Pels GARS Bremen November 18-19, 2004

10. Methods • Statistical model: • Let specification control for factors • Broad data set • Range of outputs, sizes, input combinations • Peer Model – pre-select comparison group • fix range of output and examine input level • Can pre-determine outcome with careful selection • What is a ‘peer’? GARS Bremen November 18-19, 2004

11. Issues • Understand drivers – activity cost accounting versus cost functions • How to treat the entity and the individual processes? • QM is about satisfying customers on continuous basis-demand side • Quality attributes-identification, monetization • Profit maximizers are not necessarily cost minimizers • Competitive market forces generally relied upon to provide ‘best in class’ (MES and product attributes) • Is it productive inefficiency or X-inefficiency that is being proxied? GARS Bremen November 18-19, 2004

12. ATRS Benchmarking • Examine the affect of: • Airport operating environment • Outsourcing • Airport ownership and management forms • Business diversification • Service quality • ON • productivity, unit cost and other performance measures GARS Bremen November 18-19, 2004

13. ATRS Benchmarking • Use quantitative methods to compare broad range of airports across number of metrics • Address key problem areas: • Strategic objects of airport (objective function) • Structural, operational & environment and managerial variables • Distinguish gross and residual measures • Unit of analysis (airport, airside vs terminal) • Define the output properly GARS Bremen November 18-19, 2004

14. Criticisms and Benefits • Criticisms • Not robust over time (consistent orderings) • Choosing the correct ‘peer’ group • Heterogeneity of unit of assessment • e.g. airport versus airside and terminal • Data quality – e.g. service quality (standards) adjustment • Gross versus residual measures (what is controllable?) GARS Bremen November 18-19, 2004

15. Criticisms and Benefits • Benefits • Inform regulators when asymmetric information is a problem • Identify economic agents strengths and weaknesses – link to drivers • Integral part of performance management and data management design • on cost side (unit, incremental) • on the demand side how to add customer value GARS Bremen November 18-19, 2004

16. Pitfalls of Benchmarking • Lack of Sponsorship • Wrong Team • Homework and documentation • Lack of Focus • Short Term Needs Drive Process • Confuse Metrics and Processes • Process Isolation • Goals and Objectives Coincident • Failure to Monitor and Manage GARS Bremen November 18-19, 2004

17. Lessons/Observations • Benchmarking is a reflection of customer driven firms • commodities traditionally rely on market forces • Public utilities rely on administration (government, regulators) • Markets ‘benchmark’ the firm, whereas benchmarking in a TQM environment is process oriented • Processes are homogeneous – airport services/outputs are not • Externalities and common elements are not explicitly considered in a benchmarking environment • Measuring right gains • Pecuniary gains - see our costs are low relative to others! • Real resource gains – cost efficiency, value added services, Supply chain sources GARS Bremen November 18-19, 2004

18. Summary • What can airport managers learn? • Benchmarking requires consistent quality data for both inputs and outputs • PM’s and Benchmarking are part of TQM - a management philosophy, it affects the entire firm • Benchmarking may act as a substitute for the market? • Regulators and investors • Airports have resources (exogenous) and capabilities (endogenous) – benchmarking is a first step in linking the two • Benchmarking provides airport managers with a direction not a solution – need enablers • PM’s are required to identify enablers for quality and competitiveness • Metrics should cover - achievement, diagnostic and competence. GARS Bremen November 18-19, 2004