1 Enterprise Performance Management: The Australian State of the Art Associate Professor Suresh Cuganesan Macquarie Graduate School of Management, Macquarie University Professor Andy Neely and Dr Bassil Yaghi Cranfield School of Management Centre for Business Performance Nigel Youell Oracle
2 2 Enterprise Performance Management: The Australian State of the Art About the Authors Associate Professor Suresh Cuganesan teaches at the Macquarie Graduate School of Management where he is also the Associate Dean (Research). Prof. Cuganesan has worked in the areas of management consulting and finance, currently occupies a position on CPA Australia s Business Management Centre of Excellence, and is a member of the Asian Board of the American Academy of Financial Management. He has published 3 books and more than articles, conference papers, and book chapters. Professor Andy Neely is Director of Research at Cranfield School of Management, Deputy Director of AIM Research, the U.K. s research initiative on management, and Chair of the Performance Measurement Association. He has authored more than 1 books and articles on performance measurement and management and is widely recognised as one of the world s leading authorities on the subject. Dr. Bassil Yaghi is a lecturer at Cranfield School of Management. Bassil Yaghi is researching, teaching, and consulting in strategic management with an emphasis on strategy development and balanced scorecards. His research and academic and executive teaching is grounded in his extensive practical experience in the industry as practitioner and consultant. Nigel Youell is Director, Global Integrated Marketing for Performance Management at Oracle Corporation. He has over years of experience in IT covering a wide range of senior management roles. Organisations that Nigel has worked for include Hyperion Corp, Comshare Corp, The Strathclyde Institute, Morgan Crucible plc and Marconi plc. Nigel has spoken internationally and authored a number of articles on Performance Management.
3 Enterprise Performance Management: The Australian State of the Art 3 Executive Summary The field of enterprise performance management continues to grow exponentially. New key performance indicators (KPIs) routinely emerge and are said to provide new performance insights and a panacea to the problems of aligning behaviours with key business drivers. Somewhat paradoxically, global research indicates a level of inertia in enterprise performance management systems. While the problems of financial measures are well known, evidence indicates their dominance in organisational decision-making. Concurrently, more nonfinancial KPIs are being used, but their proliferation is also their weakness, with executives left wondering which ones to focus on and how they influence financial performance. As a result, many organisations extract an insufficient return on measurement from their enterprise performance management systems. In Australia, there has been a dearth of evidence on practices in the field of enterprise performance management. This report presents evidence on the state of the art in Australian enterprise performance management. It is one part of a broader global study across five countries: the United Kingdom, United States of America, Australia, Japan, and China. The Australian study was led in Australia by Macquarie Graduate School of Management and was conducted in conjunction with Oracle and Cranfield School of Management. Main Conclusions Overall, enterprise performance management systems in Australia reflect the popularity of balanced scorecard approaches. This performance measurement framework and its prescribed performance perspectives featured prominently across the organisations surveyed. There is still a lack of balance in Australian enterprise performance management systems. Financial KPIs dominate these systems, and the benefits are predominantly operational and tactical rather than strategic. Overall, opportunities exist to enhance the insights generated from enterprise performance management. Barriers to effective enterprise performance management practice include: Tactical use of enterprise performance management systems Insufficient enterprise performance management buy-in and advocacy Internally focused enterprise performance management and over-optimism in business performance Quality of measures and quality of data Enterprise performance management technology and support A lack of causal analysis
4 4 Enterprise Performance Management: The Australian State of the Art Fig.1: Frameworks for EPM Systems % reporting use Balanced scorecard Six sigma EFQM Other 6. claim have a balanced scorecard in place. Fig.2: Range of Measurement Perspectives Detailed Findings Reflecting the popularity of the balanced scorecard as a framework for guiding the design of enterprise performance management systems, 6. percent of respondents claim to have one in place [see Figure 1]. Interestingly, no other framework for enterprise performance management design is prominent in Australia, with 39.3 percent of respondents preferring to use their own basis for designing their enterprise performance management system. Reflecting the popularity of the balanced scorecard further, financial, employee, customer and internal processes (perspectives that align with the prescribed scorecard perspectives) feature as the most utilised in enterprise performance management systems amongst respondents [see Figure 2]. Irrespective of framework utilised, the majority of respondents (7 percent) have attempted to ensure that the KPIs selected reflect their business strategy [see Figure 3]. This finding ostensibly indicates that firms have made significant steps towards both improving their use of enterprise performance management and reconfiguring their KPIs into strategic performance measurement systems. Supporting this, 8. percent of respondents d or strongly d that their enterprise performance management system contributed to improvements in company performance [see Figure 4]. However, other findings of the study suggest a note of caution and opportunities for improvement when assessing enterprise performance management practice in Australia. First, despite claims of a balance in KPIs, 3.7 percent of respondents have enterprise performance management systems where financial measures comprise more than half of the total KPIs [see Figure ]. Indeed, over a fifth of firms surveyed have systems where financial measures represent more than 7 percent of all KPIs. This is despite widespread acknowledgment of the shortcomings of financial measures, which include: They are lagging indicators of performance, encouraging too much emphasis on the short-term Fig.3: Alignment with Strategy Fig.4: EPM and Company Performance or strongly that their measures reflect their strategy. 8. or strongly that their EPM system contributes to improvements in company performance.
5 Enterprise Performance Management: The Australian State of the Art They provide insufficient detail to enable diagnosis of business problems. They do not ably communicate or drive desired behaviours throughout the organisation This finding also casts the results presented in Figures 2 and 3 in a new light, indicating that while various perspectives are measured, the financial perspective clearly dominates, and that although selected KPIs may reflect business strategy, they may not do so sufficiently. Second, the types of benefits gained from enterprise performance management system are predominantly operational [see Figure 6]. Enhancements to operational decision-making were reported by the most respondents (81.9 percent) followed closely by improvements in the KPIs themselves (77. percent). Better strategic decision-making was a distant third, with only 9.1 percent claiming this as a benefit from enterprise performance management. Overall, there appears to be room for improvement in terms of Australian enterprise performance management practice percent of respondents did not that their enterprise performance management system had delivered insights, while only 16.9 percent were in strong ment [see Figure 7]. The remainder of this report considers the barriers to effective enterprise performance management practice and identifies how organisations can overcome this. Fig.: Prominence of Financial Measures None 1-24% - 49% - 74% 7-99% All 3.7 report that more than half of their KPIs are financial measures. Fig.6: The Benefits of EPM Strategic decisions Operational decisions Positive impact on KPIs 1 The main benefits of EPM systems are operational: 81.9% claim better operational decision-making, 77.% cite KPI improvement. Fig.7: Insight Generation from EPM % do not that their EPM systems have delivered insights.
6 6 Enterprise Performance Management: The Australian State of the Art Fig.8: Purpose of EPM System 7 6 Assessing Performance Aligning Employees Behaviours Operational Efficiency Compensation/Rewarding Primary reason for measurement Strategic Decision Making Financial Control Strategic Planning External Reporting Validating Strategy The clear top tier of EPM roles indicates it is primarily operational and tactical in nature. Fig.9: Managerial focus when using KPI Information Assessing Outputs Controlling Inputs Controlling Behaviours Relatively, more focus is placed by management on controlling inputs. Fig.1: Buy-in and EPM Advocacy Barriers to Effective Enterprise Performance Management Practice Tactical use of enterprise performance management systems Assessing firms use of enterprise performance management systems indicates a primarily operational or tactical purpose [see Figure 8]. A clear top tier of enterprise performance management uses is evident from the study s findings, comprising performance assessment (64.4 percent of respondents), aligning employee behaviours (9.8 percent of respondents), and operational efficiency (6.3 percent of respondents). A higher-level focus on extracting strategic lessons from the overall enterprise performance management system is less apparent, with strategic decision-making ranking fifth, strategic planning ranking seventh and validating strategy ranking last of the purposes surveyed. Reflecting further the use of enterprise performance management for operational and tactical reasons, management s focus on using KPI information emphasised the control of inputs over other dimensions of performance [see Figure 9]. Thus performance appears to be assessed from a managerial mindset focused on the level of organisational inputs (people, premises/infrastructure, economic, etc.) and how these are deployed across the business. Insufficient enterprise performance management buy-in and advocacy Effective use of enterprise performance management systems requires buy-in and advocacy at all levels of the organisation. Arguably, operational and tactical use of enterprise performance management places extra demands on and a need for engagement with the organisational front line. However, enterprise performance management buy-in and advocacy clearly diminishes amongst the firms studied as one proceeds down the organisational hierarchy [see Figure 1]. While top management commitment is clearly important and is evidenced across survey respondents (82.1 percent report the CEO as a enterprise performance management advocate, while 7.2 Fig.11: Internal versus external focus of EPM No benchmarking Internal benchmarking External benchmarking Internal & external benchmarking More than half of respondents do not conduct any external benchmarking and 17.9% do not conduct any benchmarking at all.
7 Enterprise Performance Management: The Australian State of the Art 7 Fig.12: Performance relative to peers 4 4 percent report their top executive team in a similar role), less than one-fifth of surveyed firms claim middle management to be enterprise performance management advocates, and only 6 percent report full buy-in from front-line employees. Internally focused enterprise performance management and over-optimism in business performance While business literature abounds with claims about the increasingly demanding business environment, downward pressures on prices, and the emergence of low-cost and globalised competition, enterprise performance management systems appear not to have kept pace with pressures to be externally focused and facilitate performance evaluation relative to competitors percent of respondents do not conduct any benchmarking of performance at all, while more than half fail to conduct any external benchmarking [see Figure 11]. The insular focus of enterprise performance management manifests itself in dangerous over-optimism [see Figure 12], with 62. percent of respondents considering their business performance to be better than competitors, and only 6.3 percent assessing their performance as relatively worse than competitors. Quality measures and quality data Overall, the majority of respondents were happy with the alignment of their enterprise performance management system to business value drivers [see Figure 13] and the soundness of the underlying data [see Figure 14]. However, a significant proportion (approximately 2 percent in both cases) either d with or were neutral on the quality of measures and the quality of data. In relation to whether their enterprise performance management system contained the right number of measures, 4.8 percent of respondents either d or strongly d, while another 27.4 percent were neutral [see Figure ]. Reducing the noise and potential for information overload from enterprise performance management systems represents another opportunity for improvement The majority of respondents or strongly their performance is better than competitors and peers. Fig.13: Are the right things being measured? Only one-fifth of respondents have concerns with or are neutral on the extent to which their EPM system aligns to business value drivers. Fig.14: EPM supported by good data quality The majority of respondents or strongly their EPM systems are supported by good quality data. Fig.: Are the right things being measured? More than half of respondents are concerned with or are neutral on whether they have the right number of measures.
8 8 Enterprise Performance Management: The Australian State of the Art Fig.16: Software tools used for EPM None Spreadsheet ERP software Customised software EPM software Enterprise Performance Management technology and support Despite systems integration being at the forefront of numerous organisational technology initiatives, it is surprising that the most-popular enterprise performance management software tool remains the spreadsheet, with 69 percent of respondents using this, compared to 48.3 percent using an enterprise resource planning (ERP) system [see Figure 16]. Related to this approach is the fact that the majority of organisations have taken an in-house approach to developing their enterprise performance management systems [see Figure 17]. 38.6% have concerns about the quality of their data. Fig.17: Expert support in EPM development 8 Although the costs of a consultant led enterprise performance management system implementation can appear prohibitive, the dangers of a spreadsheeting approach to enterprise performance management are numerous (and potentially significantly more expensive): obsolete or incorrect data In-house Consultant-led Collaborative EPM systems are typically developed in-house, with 77.4% utilising this approach. cost and duplication of effort. numerous rather than consolidated data holdings throughout the organisation. potentially inconsistent data. Larger organisations certainly need to revisit the business case for better enterprise performance management technology, considering the significant savings in terms of less manual activities, the reduced costs of data redundancy and inconsistency, and the benefits of faster and easier access to enterprise performance management information that can be offset against any capital expenditure for technology upgrades and consultancy. Fig.18: Lack of causal models Indicators not structured Indicators structured Indicators linked to strategic objectives Indicators linked in cause effect diagrams Only 13.8% have indicators linked in cause-and-effect models.
9 Enterprise Performance Management: The Australian State of the Art 9 A lack of causal analysis Related to the lack of strategic use of enterprise performance management, the majority of organisations surveyed underperformed in terms of the analysis of business value drivers and factors that cause financial performance. Only 13.8 percent of respondents framed their KPIs in terms of cause and effect models [see Figure 18] and less than 1 percent attempted to visualise these linkages as part of the design and operation of their enterprise performance management system [see Figure 19]. Indeed, almost half of the firms surveyed did not attempt any visualisation of causal links, be they between performance perspectives, strategic objectives, or specific KPIs. Furthermore, although testing for causality utilising an enterprise performance management system can offer strategic insights on whether an existing strategy is performing effectively and where to prioritise improvement efforts, less than half the firms surveyed did this [see Figure 2]. Overall, the deficiencies in designing causality into enterprise performance management systems by visualising linkages and testing either implied or explicitly envisaged causal relationships manifests in terms of either incomplete (23.8 percent of respondents) or partial understandings (6 percent of respondents) of what drives business performance [see Figure 21]. The consequences of this are significant: A lack of focus on resource allocation and managerial attention Effort wasted on performance dimensions that do not offer the greatest returns Too much time spent trying to execute a poor strategy These factors not only diminish business clarity but create a significant risk of competitive underperformance. Fig.19: Visualising links Fig.2: Testing Cause-and-Effect Relationships None 46.4% do not visualise causal linkages in their EPM systems, while less than 1% do so at a KPI level. Between perspectives Between strategic objectives Less than half actually test for causal relationships in their EPM system. Between performance measures Fig.21: Understanding Cause-and-Effect Links Complete Incomplete Partial Almost 8 have an incomplete or only partial understanding of causal relationships.
10 1 Enterprise Performance Management: The Australian State of the Art What to Do? What should organisations do in response to the six challenges outlined in this report? Bring performance measurement into strategy discussions While 7 percent of respondents have KPIs that reflect business strategy, the feedback loop in which firms identify whether and how strategy could be refined or altered is largely absent. Instead, enterprise performance management systems tend to be used for execution only, leading to a return on performance measurement that is largely operational and rarely strategic [see Figure 6]. To capture the strategy benefit, firms need to ensure that business planning forums and strategy days begin and end with a discussion on what performance measures are indicators of the efficiency and effectiveness of their current business model. Think and test cause and effect Often organisations complain that too many aspects of the business are measured, with the result being information overload and a loss of focus. One means of moving beyond this, to an understanding of critical business drivers, is to select KPIs that are not just considered important factors in the business, but are also related to each other in terms of cause and effect. Unfortunately, the majority of firms do not do this. Only 13.8 percent of respondents framed their KPIs in terms of cause-andeffect models [see Figure 18], and less than 1 percent attempted to visualise these linkages as part of the design and operation of their enterprise performance management system [see Figure 19]. The overall result is either incomplete (23.8 percent of respondents) or partial understandings (6 percent of respondents) of what drives business performance [see Figure 21]. Designing and testing expected relationships of causality into and through enterprise performance management systems will not only enhance strategic focus and learning but allow a rationalisation of KPIs as firms learn which are lag and lead indicators and how to prioritise KPI measurement. Drive organisational engagement Organisations are often surprised that implemented enterprise performance management systems do not deliver expected benefits, or worse, result in lower levels of performance than existed previously. While a well-designed system is important for a firm, it is how its people use and react to measurement that determines performance effects. Careful thinking and stresstesting of enterprise performance management systems in terms of the behaviours that are incentivised is required. Enterprise performance management systems also need to be supported by a communication strategy that both educates employees on the rationale behind measurement and mitigates organisational resistance. In this way, shared ownership of the enterprise performance management system throughout the organisation may be achieved.
11 Enterprise Performance Management: The Australian State of the Art 11 Benchmark against peers Firms should seek to benchmark their performance against peers to the extent that data is available. While financial KPI benchmarks in an industry may be more readily available, organisations should seek to orient their business intelligence systems to the collection of external nonfinancial performance information. This not only contextualises performance evaluation in terms of the achievements of others in a similar competitive environment, but would also enhance the testing of causality and strategic learning from enterprise performance management systems. Fig.22: Respondents by revenue % 32% 28% % Create integrated enterprise performance management through technology While the popularity of spreadsheets [see Figure 16] ensures that organisations avoid the systems cost of integrated and automated enterprise performance management systems, costs are incurred in other ways. These costs are incurred through multiple and potential inconsistent data holdings that cannot be integrated, data errors, and the need for a high degree of manual effort if causality and strategy are to be designed into enterprise performance management systems. Firms should seek to evaluate these hidden costs when deciding on an appropriate level of systems integration and automation. Importantly, automation releases management attention away from the tasks of data collection, data integration, and data quality control, and focuses it on analysis and better decision-making. This is where enterprise performance management software can be most effective. 1M - M M - M M - 1B 1B - B Fig.23: Respondents by sector Agriculture Health Utilities Telecoms Services Transportation Pharmaceuticals Construction Financial services Wholesale/retail Other About the Research For the survey, we targeted the top 1, companies in Australia. We received 87 usable responses, yielding a response rate of approximately 9 percent. Approximately 8 percent of respondents reported their annual turnover to be AUD$ million and over [see Figure 22]. The overall sample comprised all sectors of the Australian economy, with manufacturing firms representing the most-significant group in the overall sample (approximately 18 percent) [see Figure 23]. All participants were assured that all responses would be kept confidential. The survey stated that only aggregates would be used for the research and that no individual company would be linked to specific responses. Manufacturing 1 1 2
12 Centre for Business Performance, Cranfield School of Management, Cranfield University, Cranfield, Bedford, MK43 AL UK T: +44 () F: +44 () To contact Andy Neely, To contact Bassil Yaghi, Oracle Corporation UK Ltd., Oracle Parkway, Thames Valley Park (TVP), Reading, Berkshire, RG6 1RA. UK T: F: To contact Nigel Youell, MGSM, Macquarie University, NSW 219. Australia T: F: To contact Suresh Cuganesan,