Performance Management Making It Work By Gary Cokins, SAS;

Transcription

1 Performance Management Making It Work By Gary Cokins, SAS; This article is an excerpt from Gary Cokins book, Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap). John, Wiley & Sons; ISBN # ; Permission to publish granted. As a student getting exposed to the complexity involved in managing an organization, it sometimes is bewildering to understand how do all the controls and improvement methodologies, like Six Sigma, fit together. You sometimes wonder where does financial and managerial accounting fit in and what are the appropriate performance measures to monitor. Fortunately, thanks to advances in database technologies and a dose of systems thinking, all of the improvement methodologies and core processes that a management team operates can now be understood as a single, unified and over-arching system. It is being called performance management. This article will provide you an overview to understand it. Organizational Direction, Traction, and Speed Direction, traction, and speed. When you are driving a car, you directly control all three. You can turn the steering wheel to change direction. You can downshift the gears to go up a steep hill to get more traction. You can step on the gas pedal to gain more speed. However, for senior executives who manage supply chains, they do not have direct control. Why not? Because they can only achieve improvements by influencing other people namely, their employees. And employees can sometimes act like children. They do not always do what you tell them to do, and sometimes they do the opposite of what they are told! It is a tough time for senior managers. Customers increasingly view products and servicelines as commodities and place pressure on prices as a result. Business mergers and employee layoffs are ongoing, and inevitably there is a limit which is forcing management to come to grip with truly managing their resources, not just monitoring them. There is evidence that it is also a tough time to be a chief executive. Surveys by the Chicago-based employee recruiting firm, Challenger, Gray & Christmas, Inc., repeatedly reveal increasing rates of job turnover at the executive level compared to a decade ago. 1 In complex and overhead-intensive organizations where constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure to execute their strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward economic value creation and other more strategic directives? How do they re-gain control of the direction, traction and speed for their enterprise? Performance management (PM) provides managers and employee teams at all levels with the capability to move directly toward their defined strategies like a laser beam. 1 Webber, Alan; CEO Bashing has gone too far; USA Today; June 3, 2003; p. 15A Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 1

2 What is Performance Management? A simple definition of performance management 2 is the translation of plans into results execution. It is the process of managing an organization s strategy. For commercial companies, strategy can be reduced to three major choices 3 : 1) What products or service lines should we offer or not? 2) What markets and types of customers should we serve or not? 3) How are we going to win? Although PM provides insights to improve all three choices, its power is in achieving number three winning by adjusting and executing strategies. PM does this by helping managers to sense earlier and respond more quickly and effectively to uncertain changes. Think of PM as an umbrella concept that integrates the business improvement methodologies you are already familiar with (or likely have heard the terms) with technology. In short, the methodologies no longer need to be applied in isolation they can be orchestrated. PM is sometimes confused as a human resources and personnel system. It is much more encompassing. PM describes the methodologies, metrics, processes, software tools, and systems that and manage the performance of an organization. PM is overarching from the C-level executives cascading down through the organization and its processes. From the top desk to the desk top. To sum up its benefit, it enhances broad cross-functional involvement in decision making by providing tremendously greater visibility with accurate, reliable, and relevant information all aimed at executing an organization s strategy. To minimize anyone s confusion, there is no single PM methodology because PM spans the complete closed-loop management planning and control cycle. Think of it as a broad end-to-end union of solutions including three major purposes: collecting data, transforming and modeling the data into information, and web-reporting it to users and decision makers. Many of PM s component methodologies have existed for decades or have become recently popular, such as the balanced scorecard. Some of PM s components, such as activity-based cost management, are partially or crudely implemented in many organizations, and PM refines them so that they work in better harmony with PM s other components. Early adopters have deployed parts of PM, but few have deployed its full vision. The term knowledge management is frequently mentioned in business articles. It sounds like something an organization needs, but the term is somewhat vague and does 2 There are several variants of PM including business performance management (BPM), enterprise performance management (EPM), corporate performance management (CPM). Consider these other terms synonymous with PM. 3 Brache, Alan; How Organizations Work; John Wiley & Sons; 2002; page 10. Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 2

3 not offer any direction for improving decisions. In contrast, the main thrust of PM is to make better decisions that will be evidenced, and ultimately measured, by outputs and outcomes. Management s Quest for that Elusive Magic Pill Improvement Program Executive management s greatest challenge is in communicating its strategy. If asked to describe their organization s strategy, most employees and managers cannot adequately articulate it. Employees can effectively implement a strategy only when they clearly understand the strategy and how they contribute to its achievement. An integrated suite of methodologies and tools the PM solutions suite provides the mechanism to bridge the business intelligence gap between the CEO s vision and employees actions. Many organizations, however, 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. PM tightly integrates the business improvement and analytic methodologies executives are already familiar with. These include strategy mapping, balanced scorecards, costing (including activity based cost management), budgeting, and forecasting, and resource capacity requirements. These methodologies fuel other core solutions such as customer relationship management (CRM), supply chain management (SCM), risk management, and human capital management (HCM) systems, as well as Six Sigma. It is quite a stew, but they all blend together. In the end, organizations need top-down guidance with bottom-up execution. PM does this by converting plans into results. PM integrates operational and financial information into a single decision-support and planning framework. And based on a common database platform, it provides one version of the truth rather than disparate inconsistent data that annoys both employees and customers. Simply put, PM helps an organization to understand how it works as a whole. The Roles of Strategy Maps and the Balanced Scorecard Leadership s role is to determine strategic direction and motivate people to go in that direction. However, senior executives are challenged and usually frustrated with cascading their strategy down through their organization. Executives and management consultants have hailed the balanced scorecard as the new religion to resolve this frustration. It serves to communicate executive strategy to employees and also to help navigate direction by shaping the alignment of people with strategy. The balanced scorecard bridges the substantial gap between the raw data spewed out from business systems, such as enterprise resource planning systems (ERP) and the organization s strategy. In addition, it provides immediate and visual feedback through graphical meters displaying differences between actual performance and the targets set by management. Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 3

4 Despite much publicity about the balanced scorecard, the strategy map that precedes the development of the scorecard is considered to be much more important. Strategy maps enable leadership to motivate people by serving as a guide with signposts and guardrails. Strategy maps explain high-level causes and effects with if-then logic, helping executives choose the best strategic objectives and the supporting projects and action items that will help the company attain them. Performance Management is an Iterative Process Similar to the popular plan-do-check-act (PDCA) iterative cycle made popular by W. Edwards Deming, the famous quality improvement expert, performance management also has an iterative cycle. As Figure A illustrates, imagine performance management as a wheel with three elements or arcs: focus, communicate, and collaborate. The figure also shows how fact-based managerial accounting data and operational data provide input to the performance management wheel. (Figure A The PM Wheel Process) 1. Focus - The process of managing strategy begins with focus. You never have enough money or resources to chase every opportunity or market on the planet. You have to think in terms of that you are continuously limited to scarce and precious resources and time, so focus is key and strategy yields focus. In this important initial step senior management defines and continuously adjusts its strategy. And next, by mapping cause and effect relationships with its strategy map, it defines strategic objectives and higher impact action steps and projects that will achieve those objectives. Companies can ideally turn big goals into small, manageable projects that can actually be accomplished. The first step in this translation is to create a set of strategic themes that will bridge the gap between the existing state of operations and the desired state. These themes then organize the work of the company. By focusing on critical areas, everyone can identify the true sources of business failure, as well as the best practices that lead to future success. 2. Communicate - The process of managing strategy continues with communication. The key is for senior management to articulate its strategy to employees in a way they understand it. Along with articulating strategy comes the all-important feedback to employee teams. How am I doing on what is important? The balanced scorecard is the key tool for communicating the strategy. Think of scorecards as the drive gears of the strategy map. Think of a scorecard as having carefully selected and defined indicators and measures, each weighted to reflect their relative level of importance. Think of a scorecard as a set of chain-links of the strategy map s strategic objectives where each chain-link uses if-then relationships with leading and lagging measures to drive work efforts to align with organization s mission and vision. If properly implemented, a scorecard enables all employees and managers should be able to quickly answer a Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 4

5 powerful question: How am I doing on what is important? By integrating, distributing and analyzing enterprise-wide information an organization gains the power to act on this information ahead of its competitors. 3. Collaborate - The process of managing strategy ends with collaboration. By aligning various strategies among business units, the organization taps into the collective knowledge of its employees and unleashes each person s potential. From the top desk to the desk top, discussion threads can be created for faster consensus and truly make executing strategy everyone s job. Employees do not need to wait for their managers to direct them but rather they can actively make decisions. Collaboration in this sense is all about collective dialog. Ultimately, executives can move beyond the traditional practice of focusing on backward-looking financial results by using scorecards and strategy maps to focus on their organizations strategic objectives in the areas of learning, growth, innovation and process. They can focus on non-financial leading indicators, measured during the period, and that ultimately result in the organization s financial performance. By doing so, organizations can achieve their customer-facing objectives and subsequently meet their financial objectives. The Role of Reliable Fact-based Data Primarily Cost and Profit Measurements In the absence of facts, anyone s opinion is a good one. And usually the biggest opinion wins. A major benefit of PM is that when everyone gets the same facts, then they generally reach the same conclusions on how to act. What makes today s PM systems so effective is that work activities what people, equipment and assets do are the foundations of PM reporting, analysis and planning. These work activities are the keys in defining the actions and projects essential for meeting the strategic objectives constructed in strategy maps and measuring the outcomes highlighted in scorecards. Activity-based cost management (ABC/M) systems can be used to accurately measure work activities such as process costs, output costs and customer profitability. As illustrated in Figure B, ABC/M then applies its data for both top line revenue growth and operational cost management with a subset of ABC/M s measures serving as key performance indicators (KPIs) used in the balanced scorecard. < insert Figure B > Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 5

6 ABM supports Strategy Maps Operational ABM (efficiency) Process costs Value Shareholder Value Process improvement Product (output) costs Profit mgmt. Activity based management Strategic ABM (effectiveness) Profit margins ACB DB EFHG I'B D0DB EF. $0/21$3#4* ( #"%$'&)($* +,- Activity based costing Copyright SAS Institute, Inc. ([email protected]) All rights reserved. Is PM Old Wine in a New Bottle? Some view the successful coordination and integration of PM methods and tools as simply old wine in a new bottle meaning PM is just a repackaging of existing methods and software already available and not a radically new solution. In contrast, others view performance management as new wine in an old bottle. That is, PM systems provide us executives, managers and employees with visible, relevant, accurate and timely intelligence from existing data not previously available. Regardless of which view is correct, the term performance management is now widely accepted by the IT research analyst firms, who proclaim that combining the components of PM in a unified approach makes more sense than treating individual methods in isolation. The appeal of PM is that it realizes that there is no sun around which lesser improvement programs, management methodologies or core processes orbit. PM helps to orchestrate all these efforts to improve an organization s alignment with its strategic objectives, resulting in better direction, traction and speed and most importantly sustaining improved performance longer term. PM provides managers and employees with the power to know how to act proactively, before events occur or proceed so far that they demand a reaction. The Quest for a Complete Solution using Business Intelligence 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 Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 6

7 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. Advances in software vendors offerings can solve today s problems in commerce and government. The market has been evolving from wanting just business intelligence tools to wanting complete solutions. This includes customizable horizontal solutions that apply across all markets (e.g., human capital management and scorecards), as well as vertical solutions for specific industries such as retail, banking, health care, or manufacturing. Figure C illustrates the location of key components of a performance management information system. The figure also reveals how data from disparate sources can be extracted and stored for later retrieval for analysis. < insert Figure C > Performance Management: Making It Work Rising specialization, complexity, and value-adding services cause the need for more, not less, PM. Despite the impact that technology and more flexible work practices and policies have on continuously changing organizational structures, without ongoing adaptation the correct work at acceptable service levels will not get done. All employees must have some grasp of managing for results. Somehow their collective performance must be coordinated. A united and sustained performance is a challenging part of management. PM aids in accomplishing this goal. ABOUT THE AUTHOR Gary Cokins is a strategist for performance management solutions with SAS, which with 9,000 employees is the world s largest privately owned supplier of database management, mining, and business intelligence software. He is an internationally recognized expert, speaker and author in advanced cost management and performance improvement systems. Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in He received his MBA from Northwestern University s Kellogg School of Management in His career began with FMC Link Belt as a financial controller and operations manager followed by fifteen years as a management consultant with Deloitte and Touche, KPMG Peat Marwick, and Electronic Data Systems (EDS). Gary s business books have ranked as bestsellers in their topical area. His most recent book is Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap) ( Gary can be reached at [email protected]. Copyright 2003 [email protected]; All Rights Reserved. Do not use without permission. 7