By Gary Cokins, Global Product Marketing Manager, SAS Institute Inc.
Enterprise performance management is now being adopted due to CEO failures to successfully implement their strategy plus needs to focus on more differentiated customer-service levels. Enterprise performance management integrates methodologies such as balanced scorecards, strategy maps, budgets, Activity-Based Costing (ABC, forecasts, CRM and resource capacity planning. It is not a process or a system, but rather an umbrella concept intended to align manager and employee behavior and limited resources to focus on the organization’s strategic priorities and objectives.
Strategic direction setting is arguably the major responsibility of the Executive Team, whose members must answer the question, “Where do we want to go?” Then it becomes the job of the rest of the organization to help determine the best path for executing the strategy. That is, managers and employee teams should help executives answer the question, “How are we going to get there?”
Which of these two answers is more important for long-term organizational survival? Is it the first one about determining strategic direction or the second one about strategy execution? The consensus I hear is that answering the first question correctly is more critical. Most people believe that good organizational processes and effectiveness will never overcome the adverse effects of a poor strategy. So, strategy formulation by the executives (often aided by consultants) is vital for organizational survival. However, a different type of problem lies between defining a good strategy and having good business processes. A problem remains to successfully ‘implement’ the strategy – and this is a substantial problem.
Strategy execution is considered one of the major failures of executive teams. At a recent conference, Dr. David Norton, co-author of “The Balanced Scorecard: Translating Strategy into Action,” reported, “Nine out of 10 organizations fail to successfully implement their strategy…. The problem is not that organizations don’t manage their strategy well; it is they do not formally manage their strategy.” Empirical evidence confirms that companies execute strategy poorly. Involuntary turnover of North American CEOs in 2006 will beat the record high set just the previous year. In defense of executives, they often formulate good strategies – their problem is failure to execute them.
Performance Management as a Solution
An increasingly popular framework that addresses the problem of strategy execution failure is ‘performance management’ – an abbreviated term sometimes referred to as corporate performance management (CPM). To be clear, performance management is about improving the performance of an overall enterprise and not simply of individual employees.
To further clarify some misconceptions, performance management is not a new management methodology that everyone now has to learn, but rather it is a broad assemblage and integration of ‘existing’ improvement methodologies that managers and employee teams are already familiar with. And most organizations have already begun to implement some of the performance management portfolio of methodologies. The problem is that organizations have been implementing their improvement programs in silo-like isolation of each other: A Six Sigma Program here, a customer relationship management (CRM) project there. It is as if managers live in parallel universes.
Performance management takes a much broader view. Performance management is much more than just strategy, planning and budgeting with an emphasis on measurements.
All these components have interdependencies, so we know they should be integrated. They are like pieces of a tabletop jigsaw puzzle that everyone knows somehow fit together; but the picture on the box top is missing! Performance management provides that picture of integration both technologically and socially. Performance management makes executing the strategy everyone’s job #1 – it makes employees behave like they are the business owners.
How does performance management create value? One fundamental thing performance management does is, it transforms transactional data from operational systems into decision-support information. For example, employee teams struggle with questions like, “How do we increase customer service levels, but without increasing our budget?” How can employees answer that question from examining transaction data from a payroll, procurement, general ledger accounting or ERP system? They cannot. Those systems were designed for a different purpose – short-term operating and control with historical reporting to answer basic questions of “what happened?” By transforming raw transactional data into decision-relevant information enhanced with forecasts and predictive analytics, performance management helps further answer the questions of “why did it happen?” “what optional actions can then be taken?” and “which of those alternative actions appears to be the best for us?”
Performance management resolves the uncertainty of estimating impacts and predicting outcomes. Predictive analytics shorten the time to discover possible outcomes thereby lengthening the time managers have to influence those outcomes. Professor Tom Davenport of Babson College authored a January, 2006 “Harvard Business Review” article proposing that the next differentiator for an organization’s competitive advantage will be analytics. He has coined the phrase, ‘competing on analytics’ and observes that companies that dominate their markets are increasingly aggressive analytic competitors. His premise is that change at all levels has accelerated so much that reacting after-the-fact is too late and risky. He asserts that organizations must anticipate change to be pro-active rather than reactive
In summary, performance management is all about improvement – synchronizing improvement in the value of customers with economic value creation to stockholders and owners. Its scope is obviously very broad, which is why performance management must be viewed at an enterprise-wide level.
Why Is There Increasing Interest in Performance Management
There is no consensus as to what performance management is. Different information technology research firms define it differently. Different consulting firms and software vendors describe it to fit their unique competencies rather than what their customers may require. Since my impression is that most of these organizations view performance management far too narrowly – such as only better budgeting and control – my feeling is it is better to discuss what performance management ‘does’ rather than have arcane debates about defining what it ‘is.’
I argue that, organizations have been doing performance management for decades – well before it received its recent popular references in the media. Organizations have been doing performance management arguably even before there were computers! What then is the explanation for its emergence as a popular buzz phrase now?
Some would argue that the reason performance management regularly appears in the media has been due to the Information Technology (IT) research firms observing that business intelligence software vendors – the type with functionality more towards data-mining and analyzing data rather than producing the raw transactional data – were integrating the analytical information across multiple departments. Others might argue the increasing appearance of performance management at the organizational level arose from the same IT research firms observing those same business intelligence software vendors providing strong combination suites of at-a-glance visual dashboards and scoreboards. Further, these reporting tools are now linked to strategy planning, managerial accounting, and forecasting tools – and they are extremely scalable to handle millions of records for products and customers.
These are certainly factors, but I believe the emergence of performance management in the media and marketplace has deeper root causes. A better way to understand what performance management is about is to understand what problems it solves – the immense forces on management. These include:
- Failure by executives to execute their well-formulated strategy as I earlier mentioned. CEO firings are at record levels due to this frustration.
- Lack of trust among managers to achieve results is an increasing concern. Consequently, there is an escalation in accountability of managers and employee teams for results ‘with’ consequences – more pay-for-performance compensation programs.
- Change is constant. Increasing rapid decisions by employees (without time for higher management input) leveraging trade-off and predictive analytics and employees’ need to understand the executives’ strategy.
- Mistrust of the managerial accounting system and its flawed and/or incomplete product, channel, and customer profitability reporting. This is addressed, in part, with adopting activity-based costing principles.
- Poor customer value management. Surveys report customer retention as the CEO’s number one concern.
- Dysfunctional supply chain management with lack of trust among the traditional adversarial relationships between buyers and sellers along the chain who should ideally be collaborating to attain mutual benefits.
- Balancing risk appetite with risk exposure to optimize financial results with anticipatory risk mitigation actions.
- Unfulfilled Return On Investment (ROI) promises from large transactional systems (e.g., enterprise requirements planning or ERP). Performance management serves as value multiplier unleashing the latent ROI.
Effective performance management technology goes well beyond query and reporting – it addresses and resolves all of these issues. The result is that, rather than just monitoring the dials of its performance dashboards, organizations ‘move’ those dials. The purpose of performance management is not just managing, but ‘improving’ performance.
Poor customer value management is one of the forces listed above that can rival poor strategy execution as a most compelling reason for organizations to formalize performance management as an integrated framework. So let’s discuss in greater depth customer relationship management as one of the major components in the portfolio of performance management.
Managing Customer Value: A Shift of Power from Sellers to Buyers
The Internet, with its powerful search engines and near-instant gratification, has irreversibly shifted power from sellers to buyers. And every supplier of products and services is scrambling to become more customer-focused. Organizations have realized they must be increasingly focused on customers in order to stay in business today. As a result, to survive businesses:
- Need higher customer retention. It is relatively more expensive to
acquire a new customer than to take the steps needed to retain an existing
one
- Shift away from simply producing commoditized products and toward value-added service differentiation for customers and prospects as the source of competitive advantage.
- Need to increase customer profitability through increasing the number of customer segments and better targeting efforts. Micro-level segmenting of customers helps business focus on customers’ unique preferences; a departure from traditional, spray-and-pray mass advertising and selling that has proven very little return.
These forces should not prevent organizations from attempting to grow their business by acquiring new customers. But they should balance their use of financial and manpower resources between growing sales with higher-potential, existing customers and acquiring high-profit customers who share similar characteristics with their existing, high-profit customers.
The Internet has shifted power from suppliers to buyers because shoppers can instantly view comparative pricing from a broad range of vendors while collecting more information from Web-based product and service-line resources. There are dozens of different web-enabled purchasing experiences that you can imagine and not just for consumers in households, but also for purchasing agents in the virtual business-to-business (B2B) marketplace. Buyers are no longer restricted to suppliers from the local geography; now they can shop and order goods globally.
How can suppliers gain a competitive edge? Some suppliers overreact by becoming customer-obsessed when they attempt to transform themselves away from developing innovative new products and services and motivating their sales forces to sell them. Most eventually realize that they should work backwards by first understanding the unique buyer preferences of the types of customers and prospects they want to serve. There is a difference between being customer-focused and customer-obsessed. The latter approach may cast too wide a net and capture savvy, high-maintenance, price-driven, non-loyal buyers who ultimately yield little profit margin in the long term.
As a supplier increasingly micro-segments its customers and sales prospects, the company will need more accurate intelligence on the current and future potential profitability of its products, standard service lines, channels and customers. The idea here is not just to know ‘which types’ of customers to retain, grow or acquire and which not to, but also ‘how much’ to spend retaining, growing and acquiring the desired types. If you bribe loyal customers and prospects with unnecessary deep discounts and excessively costly differentiated services, or if you neglectfully fall short with offerings or services to non-loyal customers and prospects thus risking their abandonment, then you destroy shareholder wealth. The spending and investment of sales and marketing is ultimately a financial optimization problem. This is why an effective managerial accounting system, applying activity-based costing principles used for customer lifetime value calculations, is another one of the key components of the Performance Management portfolio of methodologies.
Companies cannot succeed by standing still. If you are not improving, then competitors will soon catch up to you. This is one reason why Professor Michael E. Porter, author of the seminal 1970 book on competitive edge strategies, “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, asserted that an important strategic approach is continuous differentiation of products and standard services to enable premium pricing. Companies are now realizing that differentiated service-levels to different customer micro-segments are critical to shareholder wealth creation or destruction.
A Gathering Storm That Some Companies May Not Survive
A gathering storm appears to be headed for executives of organizations in the developed economies of Western Europe, the U.S. and Canada. At some risk of oversimplification, strategy is all about shrewd investing and about differentiating products and services to attain a competitive edge. Determining where to spend money to yield financial returns above the cost of capital is a perennial challenge. But a more difficult challenge facing today’s executives is the speed at which competitors are now evaluating and even replicating the differentiated products and services of their industry’s innovators – and then possibly upping the ante by offering their own additional differentiation.
This gathering storm involves the rate at which companies invest and how they organize to manage their human talent and technology. Some companies appear to be ‘hitting a wall’ in both areas. There is evidence that companies are under-investing in their own business. A recent ‘New York Times’ editorial noted that although American businesses are sitting on historically large hoards of cash, they have reverted to paying higher dividends and are buying up their own company shares “in record quantities.” The editorial refers to a Standard & Poor’s estimate that in 2005 the 500 companies in its S&P flagship index would top their 2004 record in dividend payments and stock share repurchases. Short-term thinking can jeopardize prospects for becoming – or remaining – a long-term global competitor.
It is becoming increasingly difficult both to select high-return investments and to identify differentiating tactics to sustain competitiveness. But the surviving competitors must break through the wall. To maintain the momentum necessary to invest wisely and continuously differentiate, managers and employee teams must have access to business intelligence. Increasingly, it is intangible assets like employee skills and information rather than tangible assets like equipment that generate acceptable financial returns to shareholders.
Changes in the work force in developed economies also are a part of the gathering storm. A recent McKinsey research paper reports some eye-opening observations about the distribution of jobs in developed economies of the G8 nations. For example, in the United States roughly 80 percent of nonagricultural jobs involve ‘interactions’ (e.g., order-taking, scheduling, planning, exchanging ideas, decision-making, etc.). The remaining 20 percent of non-farm workers occupy jobs that were prevalent in the industrial revolution at the turn of the 20th century. These workers extract raw materials, and make and assemble products. This shift in the composition of the US workforce reflects the outsourcing of jobs to lower wage developing countries, like China and India, will continue into the future. Therefore understanding ‘interaction’ jobs is important.
One surprise is that of the ‘interaction’ jobs, companies are hiring fewer people for less-complex, lower-paying jobs (e.g., processing routine transactions) and more people for complex, higher-paying jobs (e.g., exercising judgment). Less-complex jobs, such as clerical positions that involve routine and repetitive interactions, can be automated, shifted to customer self-service (e.g., banks’ automated teller kiosks), or outsourced to lower-wage developing countries. In contrast, more-complex jobs, which economists refer to as ‘tacit knowledge’ jobs, require high levels of judgment and an ability to discern ambiguities, both of which are usually acquired through experience and wisdom.
Evidence of this shift towards ‘tacit knowledge’ jobs can be seen by examining the emerging roles in any company’s organization chart. The Business Process Re-engineering (BPR) movement certainly resulted in ‘de-layering,’ with removal of supervisors, but supervisors have been replaced by perpetual project teams, process coordinators and analysts. To paraphrase the late actress Judy Garland, speaking as Dorothy to her dog Toto in “The Wizard of Oz”, we are no longer in a familiar place. This shift toward jobs that require complex interactions has dramatic implications for how companies will compete and the agility with which they can differentiate to sustain an ongoing competitive edge.
But some companies are not shifting their job mix rapidly enough toward more-complex tacit knowledge jobs. This slows their rate of productivity improvement, customer-service-level improvements, and new customer acquisition.
Executive teams that under invest company assets in their own business and that fail to recognize the need for knowledge workers seem to be suffering from mental gridlock. My belief is that pursuing performance management can rescue these companies.
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Predictive Analysis
As forecasting accuracy increases, uncertainty of the future decreases. This leads to increased trust in decisions and more firm commitments to see those decisions through. An example in supply chain management is with better forecasts of demand, suppliers carry lower inventory levels and achieve higher throughput.
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Impact Analysis
As organizations become more complex, internal conflict and tension, which are natural in organizational human dynamics, grow. Decision-makers know there are always trade-offs among customer-service levels, resource requirements, quality levels and profits. They know that some decisions they make may help their group but adversely affect others in their organization, but they do not know who is affected or how severely. An example is better coordination between marketing and operations when sales campaigns require temporary build ups in product inventory.
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Action-Ready Communications
Since the technologies that support the methodologies of performance management are Web-enabled knowledge interaction, employees can react immediately to unexpected outcomes. They can discuss corrective actions with co-workers by e-mail rather than waiting for command-and-control supervisory instructions from managers at higher levels. For example, if a workgroup is scoring unfavorable to the target for their Key Performance Indicator (KPI) in their balanced scorecard, individuals from other workgroups may know what might be causing the problem and send an e-mail describing their thoughts.
The technologies from the software providers of performance management systems offer enablers that support these three common threads to some degree. The leading software provides robust statistical forecasting, what-if scenario analysis (that provide causal models that describe how non-financial factors affect financial results), and performance measurement dashboards with alert messages and communications imbedded ‘within’ the technologies.
Companies that are hitting a wall – by not investing or spending prudently or adequately and by not developing differentiating tactics – will find their survival is at risk. In contrast, those businesses that empower their tacit knowledge employees by providing them with business intelligence from information technologies will break through those walls and provide hope that shareholder wealth will increase, not decrease.
What Differentiates Performance Management from Business Intelligence (BI)
There are two things related to this topic that most managers can agree upon:
BI involves raw data that must first be ‘integrated’ from disparate source systems and then ‘transformed’ into information; and
- Performance management ‘leverages’ that information. In this context, information is much more valuable than data points, because integrating and transforming data using calculations and pattern discovery results in potentially meaningful information that can be used for decisions.
An organization’s interest is not just to ‘monitor’ the dials; it is, more importantly, to ‘move’ the dials. That is, just reporting information does equate to managing for better results; what is needed is actions and decisions to improve the organization’s performance. To differentiate BI from performance management, performance management can be viewed as ‘deploying’ the power of BI, but the two are inseparable. Think of performance management as an ‘application’ of BI. Performance management adds context and direction for BI. The collective suite of integrated methodologies that comprise performance management (e.g., strategy mapping, scorecards, customer value management, risk management, etc.) provides solutions. This list distinguishes a true performance management framework from non-integrated systems:
A shift in emphasis toward applying analytics of all flavors, including predictive analytics with what-if and economic trade-off scenarios, bolsters pro-active decision-making.
Gathering all information onto an enterprise-wide and common information platform with scalable real-time information replaces disparate and disconnected data sources.
Cross-functional communication and collaboration amongst employees and automated rule-based decisions replace self-serving silo and bunker mentality.
The work processes, priorities, initiatives and target setting of managers and employee teams are aligned with the strategic intent of the Executive Team. These replace pet projects, minimal (or non-existent) accountability, and internally competing performance metrics that are sub-optimal and degrade maximizing stakeholder needs – such as for shareholders or customers.
Economic measures of customer profitability and potential customer value are made visible to support differentiated service levels, offers or deals to achieve maximum profit yield from the sales and marketing budget.
The vital few measures that matter (KPIs) are focused on rather than the trivial many (PIs) to distinguish the signal from the noise.
Exception reporting, alert messaging, and at-a-glance visual reporting improves traction and accelerates speed in the strategic direction set (and constantly and necessarily re-set) by the Executive Team.
Understanding what performance management does is more important than trying to define what it is.
Management’s Quest for a Complete Solution
Many organizations jump from improvement program-to-program hoping that each new one may provide that big yet elusive competitive edge. However, most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change – particularly a long-term sustained change. The key for improving is integrating and balancing ‘multiple’ improvement methodologies. In the end, organizations need top-down guidance with bottom-up execution.
Organizations that are enlightened enough to recognize the importance and value of their data often have difficulty in actually ‘realizing’ that value. Their data is often disconnected, inconsistent and inaccessible resulting from too many non-integrated single-point solutions. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily. Unlocking the intelligence trapped in mountains of data has been, until recently, a relatively difficult task to accomplish effectively.
Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power heralding a new era where creating vast pools of digital data is becoming the preferred solution. As a result, there are now superior tools that offer a complete suite of analytic applications and data models that enable organizations to tap into the virtual treasure trove of information they already possess, and enable effective performance management on a huge scale. Performance management is the integration of these tools and methodologies. The performance management solutions suite provides the mechanism to bridge the business intelligence gap between the CEO’s vision and employees’ actions.
Gary Cokins, CPIM, is Global Product Marketing Manager of Performance Management Solutions with SAS. He is an internationally recognized expert, speaker and author in advanced cost management and performance improvement systems. After earning an Industrial Engineering degree from Cornell University in 1971 and an MBA from Northwestern University Kellogg Graduate School of Management, Gary began his career as a Financial Controller and Operations Manager with FMC Corp. He worked 15 years as a Consultant at Deloitte, KPMG Peat Marwick and Electronic Data Systems (EDS), where he headed EDS’ Cost Management Consulting Services. Gary was the lead author of the acclaimed “An ABC Manager’s Primer” sponsored by the Institute of Management Accountants (IMA). His “Activity-Based Cost Management: An Executive’s Guide” recently ranked as the best-selling book of 151 titles on the topic. Gary’s other books include “Activity-Based Cost Management: Making it Work”, “Activity-Based Cost Management in Government”, and his latest work, “Performance Management: Finding the Missing Pieces to Close the Intelligence Gap. ” He has served on committees of professional societies, including CAM-I, AICPA, the Supply Chain Council, the American Society for Quality (ASQ), and the Institute of Management Accountants (IMA). Gary is a member of the editorial advisory board of the Journal of Cost Management. He is an Instructor for the IMA, the Institute of Industrial Engineers (IIE), and the Purchasing Management Association of Canada (PMAC). For article feedback, contact Gary at
gary.cokins@sas.com
 
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