Real-Time Decisions Need Corporate Performance Management

Transcription

1 Research Publication Date: 26 April 2004 ID Number: COM Real-Time Decisions Need Corporate Performance Management Frank Buytendijk, Brian Wood, Mark Raskino The real-time enterprise model depends on matching management processes with business goals. Without a strategy to tackle problems, you won't benefit from early warnings. You should plan ahead to put problems in context. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

2 WHAT YOU NEED TO KNOW Companies operating under real-time enterprise principles can use technology to gain early warning of critical business events. But this radar is only useful to an organization capable of defining and linking business drivers, metrics and processes coherently. Adopt corporate performance management as a strategic step toward making the management team and processes ready to adopt the real-time enterprise concept. ANALYSIS Companies that adopt the real-time enterprise (RTE) concept progressively remove delays to the execution and management of their critical business processes. In particular, they capture significant events as they occur, assess their potential to create threats and opportunities, and take timely action to defuse threats and exploit opportunities. Companies that are serious about adopting an RTE strategy should make sure they have the right controls in the management processes by creating a strong corporate performance management (CPM) initiative. CPM comprises all the processes, methodologies, metrics and systems needed to measure and manage the performance of a business. CPM works best in an open information culture, and should be aligned with the organizational structure and processes. Although every organization already has many of these elements, they are rarely aligned. Alignment between the management processes, metrics, systems and ways of working is essential to successfully implement the RTE ideal. Without a strong, agile management and control cycle, strategy cannot be implemented effectively (top-down planning and execution) and operational signals like those monitored and escalated by a business activity monitoring infrastructure will not reach their full tactical and strategic effect (bottom-up feedback). The Elements of CPM A CPM initiative should address management culture, processes, methodologies, metrics, systems and organizational aspects. Here, we suggest steps companies can take in each area to help them adopt the RTE concept. The first suggestion in each area will have a low impact on progress toward the RTE ideal, the second will have more effect and the third will have the highest impact. The six elements of CPM are discussed in more detail in "Drivers and Challenges of Corporate Performance Management" and "Mapping the Road to Corporate Performance Management." The self-assessment test in "Are You Ready for Corporate Performance Management?" will help companies judge how mature their organization is. Culture If management information remains unintegrated throughout the organization and is seen as an instrument to preserve the power of middle managers, instead of an asset to share with others, the value of the RTE idea is diminished. Goal: Encourage all managers to share information actively. This will lead to feedback from employees with early warnings and opportunity signals, which are important to the company. 1. Start sharing appropriate performance indicators with all staff, using your intranet or a message board next to the coffee machine, so that employees become aware of how they affect performance. Publication Date: 26 April 2004/ID Number: COM Page 2 of 6

3 2. Instead of punishing people, reward them for highlighting early warning signals by assigning more resources, or providing positive management attention where performance is lagging. 3. Empower lower levels of management to make decisions by encouraging a collaborative culture. Ensure that delegation of decision-making power does not lead to even more "empire building" within the organization. Processes In most large companies, the main management processes budgeting, planning and performance monitoring are often out of control. Although many management processes are touched by an RTE initiative, the budgeting process is one of the biggest inhibitors to effectively adopting RTE principles. The budgeting process is slow, often taking up to five months. It is disconnected because it is based on negotiations instead of business drivers, and it costs hundreds or even thousands of man-days. These processes should be dealt with urgently to allow a company to respond to early warning signals by effectively revising strategic plans and reallocating enterprise resources. Goal: Maximize the agility of budgeting and other management processes. Clearly mapping business management processes and linking them to metrics will help managers understand the causes, effects and consequences of the business operating model. RTE early-warning techniques can be used to give managers more notice of unusual business events. 1. Radically clean up and streamline the budget process, eliminating many exceptions and negotiation steps. Introduce a system of quarterly rollovers, instead of an annual budget. 2. Introduce budget indicators based on available resources and business drivers, and link them to results afterwards, instead of the other way around. 3. Eliminate the cumbersome budgeting process by making planning a continuous management activity based on market opportunities and peer benchmarking (see "New Way to Budget Enhances Corporate Performance Management"). Methodologies There are many CPM methodologies, including activity based management (ABM), European Foundation for Quality Management (EFQM) and economic value added (EVA). The balanced scorecard (BSC) is the most influential methodology. It is not the methodology itself that drives success. Rather, sharing a common framework of measurement and management brings common insight and collaboration, which improves performance. A common framework speeds up the process of translating strategy into action and collecting feedback to fine-tune the strategy. Speed and agility are important assets, and are an integral part of the RTE concept. Goal: Create a shared way of measuring and managing the organization. This will lead to a shared interpretation of the impact of early warning or opportunity signals, and make the appropriate course of action clearer. 1. Choose a methodology (single or composite) and stick with it. Implement an initial version of the framework within four months and refine it over the years. Publication Date: 26 April 2004/ID Number: COM Page 3 of 6

4 2. Actively seek to deploy the methodology throughout the organization, both horizontally across domains, and vertically throughout the various levels of management, so that it becomes a common, companywide management instrument. 3. Every methodology has its shortcomings. Blend elements of other CPM methodologies into a composite methodology and use it to increase insight into the drivers of the business. Metrics Usually every domain within an organization sales, finance, human resources or manufacturing has its own metrics. These metrics sometimes share some data and definition, but on a very limited basis. The first "loop" of management deals with operational, day-to-day short-term management issues and monitoring. The second loop deals with setting the right targets, measuring the right metrics, and addressing other planning and strategic issues. Every organization is managed at both levels, but few align the two loops. For early warnings and opportunities to be escalated and translated effectively, the first and second loops must use the same data and their indicators should be linked. Goal: Make sure that nothing gets lost when operational metrics are escalated. Early warning can often come from observing a deviation in the level of a business activity but determining what is a "material change" requires agreed measures across a management team. Invest in forcing the definition of metrics for critical activity and performance levels. Include an agreed mapping of the key drivers that affect the metric. This will give companies earlier warning of problems by detecting changes in these critical inputs. Action items 1. Standardize definitions across the company. 2. Align the metrics in the first and second loops of management, and make sure the first and second loop of management can seamlessly invoke each other. 3. All managers should have goals reflecting the RTE strategy. For example, to accelerate their processes, empower their people, detect more warning signs or complete scenario planning exercises. Systems CPM is greatly hindered in companies that have locked most of their management information in thousands of spreadsheets. Other IT challenges include meeting the need integrate data from various business domains. These new external pressures and changing business rules highlight the need for an agile data warehouse and business intelligence environment. A data warehouse should be application-neutral and organizations should take an infrastructural approach. Make links with other elements of infrastructure, like those that support business process management. But infrastructure does not include the applications. A suite of CPM applications is needed to support specific CPM processes and methodologies. Goal: Build an agile business intelligence infrastructure with common data and metadata available for several purposes. Performance indicators can only be effective if they are based on high-quality data. Early warning signals from the dashboard will only be useful if false positives can be suppressed. A full understanding of background "noise" (for example, seasonal trends) and a complete model of all relevant information is needed for this. Disparate spreadsheets won't do. A coherent implementation of corporate data is required. Action items Publication Date: 26 April 2004/ID Number: COM Page 4 of 6

5 1. Eliminate as many spreadsheets as you reasonably can from the process, replacing them with more formal systems. 2. Do not underestimate data quality issues poor data is the most common reason for data warehouse projects to run over budget and even fail. 3. Build the data warehouse as a generic infrastructure component, not as an application. Organization The finance department plays an important role. It is the most prominent department to span all the functional domains. It typically houses many of the necessary analytical skills, structures and processes. In companies with successful CPM initiatives, the finance department often does nonfinancial analysis or has created a successful business intelligence competency center (see "The Business Intelligence Competency Center: An Essential Business Strategy"). It is important to clearly delineate drivers and roles to minimize organizational confusion, because different drivers may operate when each CPM component is developed and delivered (see "Define Organizational Roles Before Implementing CPM"). Goal: Ensure analytical skills are available and consistent regardless of the functional domain, and decision rights are explicitly mapped to processes and events. When critical events are detected through early warning systems, employees must know who to contact, who must collaborate on decisions, and how to make the best decisions in response to events. Good CPM requires that information be rapidly directed to the right place for corrective action. 1. Create a CPM roles framework. 2. Give the finance department a key role in coordinating management processes across the company, rather than in executing them. 3. Build a business intelligence competency center, serving all functional domains. Key Issues How should enterprises deploy corporate performance management to prepare for future business requirements? This research is part of a set of related research pieces. See "Early Warnings in the RTE: Mastering Business Prescience" for an overview. Publication Date: 26 April 2004/ID Number: COM Page 5 of 6

6 REGIONAL HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT U.S.A European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW UNITED KINGDOM Asia/Pacific Headquarters Gartner Australasia Pty. Ltd. Level 9, 141 Walker Street North Sydney New South Wales 2060 AUSTRALIA Japan Headquarters Gartner Japan Ltd. Aobadai Hills, 6F 7-7, Aobadai, 4-chome Meguro-ku, Tokyo JAPAN Latin America Headquarters Gartner do Brazil Av. das Nações Unidas, andar World Trade Center São Paulo SP BRAZIL Publication Date: 26 April 2004/ID Number: COM Page 6 of 6