Enterprise Performance Management: The Japanese State of the Art Professor Takashi Shimizu Graduate School of Accountancy, Waseda University, Japan Professor Andy Neely and Dr Bassil Yaghi Cranfield School of Management Centre for Business Performance Nigel Youell Oracle
2 Enterprise Performance Management: The Japanese State of the Art About the Authors Professor Takashi Shimizu is Associate Dean of the Graduate School of Accountancy at Waseda University, Japan. Takashi Shimizu has authored many books and articles on strategic management systems and strategic performance systems and consults on the introduction of Japanese management accounting practices into Europe and U.S.A.. 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 2 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.
Enterprise Performance Management: The Japanese State of the Art 3 Executive Summary In the 197s and 198s Japan was seen as an economic powerhouse. Industrialists, academics and consultants from around the world flocked to visit Japanese companies in an attempt to understand their outstanding success. Techniques such as Target Costing, Lean Manufacturing and Kaizen were identified and adopted globally, often driving significant improvements in business performance. Today there are other economic powerhouses China and India most notably. Japanese companies face stiffer and more intense competition. Some of the traditional approaches that have been used need to be supplemented with other ideas and methods. One such method enterprise performance management appears to be gaining in popularity, but we have remarkably little empirical evidence about the range and extent of adoption and/or the impact of enterprise performance management. To overcome this paucity of knowledge Oracle joined forces with Cranfield School of Management to conduct the first global study on enterprise performance management. We have collected data from executives in five different countries the UK, the US, Australia, Japan and China. This report, one a series of country reports, summarises the Japanese data gathered by Waseda University. Chief amongst it conclusions are: Japanese companies are making significant progress with their enterprise performance management systems. A decade ago few companies would have formal enterprise performance management systems in place. According to our data over 6 percent of Japanese companies have now adopted performance management frameworks such as the balanced scorecard. Despite this widespread progress companies still face significant challenges with their enterprise performance management systems. Only 43 percent of the respondents attribute part of their companies overall business performance to their enterprise performance management activities and only 3 percent report gaining insights from their enterprise performance management information. Questions of structure, integration and of acceptance are the three main reasons why Japanese organisations are failing to make the most of their enterprise performance management systems. In terms of structure, less than percent of people report that they have the right number of measures in their organisations. 44 percent report that they have too few measures, while 16 percent report that they have too many. In terms of acceptance, while 67 percent of the respondents report that the main audiences for their enterprise performance management systems are middle managers and front line staff, only 28 percent claim that their employees are advocates of enterprise performance management. In terms of integration, while respondents report good progress on integrating their enterprise performance management systems with their planning and budgeting systems and their financial reporting systems, many are concerned about integration with risk management systems, forecasting systems, project management systems and customer relationship management systems. So what should we do to improve our enterprise performance management systems? For the Japanese companies studied there are two issues questions of development and questions of focus. In terms of development, relatively few organisations look outside to understand and adopt good practice in enterprise performance management. 81 percent of respondents develop their solutions internally. Once these enterprise performance management systems have been developed they are rarely supported by appropriate infrastructure. 73 percent report that they use spreadsheets, while only 2 percent claim to use enterprise performance management solutions. The net effect is that measurement data are rarely used to inform strategic decisions, with only 3 percent reporting that they gain insights from their enterprise performance management information.
4 Enterprise Performance Management: The Japanese State of the Art Fig.1: What is measured? % reporting use 1 9 8 7 6 4 3 2 1 What is measured? Despite widespread calls for a balanced approach to assessing organisational performance financial measures still dominate. According to the data collected in Japan the most common indicators are financial (97.1 percent), customer (66. percent), internal process (49. percent), people (3.9 percent) and environment (3.9 percent). While the least common are regulator (16. percent), supplier (19.4 percent), learning and growth (2.4 percent) [see Figure 1]. The dominance of financial measures is even more starkly illustrated when one considers that 43 percent of the respondents report than financial measures represent more than percent of their performance measures [see Figure 2]. How good are the measures? Fig.2: Financial measures clearly dominate 4 3 3 2 2 1 The bias towards financial measures has both positive and negative implications. In terms of quality of measures - 61 percent report that their measures are based on good quality data [see Figure 3]. However, only 7 percent claim that their measures clearly and accurately measure their business [see Figure 4]. Interestingly this figure is contradicted by the claim of 76 percent that their measures reflect their organisations strategy [see Figure ]. How can measures which are based on good quality data and which reflect the organisation s strategy not clearly and accurately measure the business? Is the problem in the clarity of measurement how easy are the measures to 1 1-24% 2-49% - 74% 7-99% 43 report that more than half of their measures are financial in orientation. Fig.3: How good are the measures - data quality? 6 Fig.4: Do measures clearly and accurately reflect the business? 4 4 3 2 4 3 3 2 2 1 1 1 61% claim their measures are based on good quality data. Only 7% feel that their measures clearly and accurately measure their business.
Enterprise Performance Management: The Japanese State of the Art understand and communicate? Or does the problem lie in the accuracy of the measures? While the data is good, where it is available, there are too many important drivers of value that cannot be tracked. One way of exploring this question is to understand why performance is being measured. Is the aim of measurement to drive strategy? Or does it seek to improve operational efficiency? To drive strategy measures have to be used to send signals about what constitutes success in the organisation. In the Japanese companies surveyed, 3.4 percent of them claimed that one of the core roles of enterprise performance management was to align employee behaviours [see Figure 6]. It is interesting to note the strategic focus of measurement in Japanese companies 43.7 percent of respondents claim that strategic decision making is one of the core purposes of enterprise performance management, 4.8 percent claim that validating strategy is one of the core purposes and 37.9 percent claim that strategic planning is one of the core purposes. This contrasts with the 29.1 percent that see financial control, the 2.2 percent that see operational efficiency and the 22.3 percent that see compensation/reward as the core purposes of enterprise performance management. As well as the strategic and behavioural role of measurement there is also a clear hard edge to enterprise performance management, with 7 percent of top management teams ing or strongly ing that performance measures should be used to assess outputs [see Figure 7] and percent of them ing that they should be used to control inputs [see Figure 8]. Fig.6: The roles of measurement 6 4 3 2 1 Primary reason for measurement Aligning Employees Behaviours Assessing Performance Strategic Decision Making Validating Strategy Strategic Planning Financial Control Operational Efficiency Compensation/Rewarding External Reporting The most common reasons for measurement: aligning employee behaviours, assessing performance and strategic decision making. Fig.7: Focus on assessing outputs 6 4 3 2 1 74.8% that their top management teams see the primary role of EPM as assessing output. Fig.: Do measures reflect strategy? 7 6 Fig.8: And controlling input 4 4 3 2 4 3 3 2 2 1 1 1 76 or strongly that their measures reflect their strategy. % that their top management teams use performance measures to control input.
6 Enterprise Performance Management: The Japanese State of the Art Fig.9: Where is the impact? 7 6 4 3 2 1 Strategic decisions Operational decisions Positive impact on KPIs Respondents report that EPM helps them make better strategic decisions (7%), operational decisions (64%) and has a positive impact on KPIs (68.3%). Fig.1: The impact of EPM 4 4 3 3 2 2 1 What is the impact of Enterprise Performance Management? So given the balance between using measures to guide behaviour and influence strategy, along with the assessment of outputs and inputs, what is the impact of enterprise performance management? The greatest reported impact is on improving performance versus key performance indicators, with 68 percent of respondents claiming that their enterprise performance management systems help them improve the performance of their key performance indicators. 64 percent report that their enterprise performance management systems help them make better operational decisions and 7 percent report that their enterprise performance management systems help them make better strategic decisions [see Figure 9]. Despite this only 43 percent attribute part of their companies overall business performance to their enterprise performance management activities [see Figure 1]. Why the relative lack of impact in terms of overall business performance? The most significant issue appears to be the difficulty of gaining real insight. Only 3 percent report gaining insights from their enterprise performance management systems [see Figure 11]. Why well an overwhelming 9 percent of the respondents have either an incomplete or a partial understanding of cause and effect relationships in their companies [see Figure 12]. 6 percent of respondents do not visualize causal links between their measures [see Figure 13] and only 37.9 percent claim to use their performance indicators to test the validity of cause and effect relationships [see Figure 14]. 1 42.9 or strongly that improvements in company performance can be attributed to enterprise performance management. Fig.11: How much insight is extracted? 4 4 3 3 2 2 1 1 Only 3.3% think that their EPM systems deliver insight. Fig.12: Understanding cause-and-effect links Complete Partial Incomplete 9.1% have an incomplete or partial understanding of the cause-and-effect relationships in their firms.
Enterprise Performance Management: The Japanese State of the Art 7 Why is it so difficult to extract insight and create impact? Fig.14: Testing cause-and-effect relationships 4 The data collected during through this study suggest there are three broad categories that explain why it is so difficult to extract insight and create impact through enterprise performance management in Japanese companies: The Question of Structure 3 2 2 1 1 In terms of structure the majority of companies have adopted the balanced scorecard or a variant of it. 6.3 percent of Japanese companies report that the balanced scorecard lies at the heart of their enterprise performance management system [see Figure 1]. However, the balanced scorecard is only part of the answer. As a measurement framework it does not provide guidance about what or how to measure. One consequence is that many respondents think they do not have the right number of measures in their enterprise performance management systems. Another is that many respondents focus on how to measure not what to measure, often because they do not understand the measures selection process. The problems caused are illustrated by the fact that less than half of the respondents think they have the right number of measures - 44 percent report that they have too few measures and 16 percent report that they have too many [see Figure 16]. nor 62.1% do not test the cause-and-effect relationships between their measures. Fig.1: The most popular frameworks 7 6 4 3 2 1 Balanced scorecard Six sigma EFQM Other 6.3 have adopted the balanced scorecard. Fig.13: Visualizing cause-and-effect links 7 Fig.16: Do you have too many measures? 6 4 3 4 3 2 3 2 2 1 1 1 None Between perspectives Between strategic objectives Between performance measures 6.4% do not visualise the cause-and-effect links in their EPM system. Only 4% feel they have the right number of measures.
8 Enterprise Performance Management: The Japanese State of the Art Fig.17: Challeges of integration and alignment 3 CRM Project management 3 Financial reporting 2 Risk management 2 Forecasting 1 Management reporting Reward systems 1 Planning & budgeting Either strongly or that EPM is well integrated Fig.18: Who are the advocates of EPM? 1 CEO 9 Top executive team 8 Senior managers 7 Middle managers 6 Employees 4 3 2 1 Advocate of EPM The Question of Integration Beyond the question of what and how to measure, there are substantive issues of integration. Enterprise performance management involves much more than simply reporting against a balanced scorecard. Issues such as planning and budgeting, financial reporting, management reporting, incentivisation and compensation and customer relationship management all have to be addressed. Japanese companies report that they have made good progress aligning their enterprise performance management systems with their planning and budgeting systems and their financial reporting systems. 94 percent and 81 percent respectively or strongly that their planning and budgeting systems/financial reporting systems are aligned with their enterprise performance management systems. There are, however, worrying statistics in other areas. Less than half that their enterprise performance management systems are aligned with their risk management systems (44 percent), their forecasting systems (44 percent), their project management systems (38 percent). The lowest reported level of alignment is between the enterprise performance management system and the customer relationship management system only 33 percent of companies report alignment here - and this in an age of customer focus and serious concerns about service delivery [see Figure 17]. The Question of Acceptance Perhaps because of these questions of structure and integration, there are also significant questions of acceptance. 67 percent of respondents report that a primary audience for their enterprise performance management systems is middle management and front line staff, while 63 percent report that a primary audience is senior management and external stakeholders. Despite these primary audiences, only percent claim that their CEOs are advocates of the enterprise performance management system and this figure drops steadily the deeper in the organisation we go until we reach the employee level, where only 28 percent claim they have advocates for the enterprise performance management system [see Figure 18].
Enterprise Performance Management: The Japanese State of the Art 9 Why the challenges? For Japanese companies the data collected in this survey identifies several potential focus areas for improvement in relation to their enterprise performance management systems. First there is the question of impact while over 6 percent report that they have made significant progress with their enterprise performance management systems - only 43 percent of the respondents attribute part of their companies overall business performance to their enterprise performance management activities and only 3 percent report gaining insights from their enterprise performance management information. The data suggest that the impact of enterprise performance management systems in Japanese companies is being impacted by questions of structure, integration and acceptance. There are clear concerns, both about the design and deployment of enterprise performance management systems, in terms of how well they are aligned with other organisational systems and the degree of acceptance they generate especially at lower levels in organisations. Possible explanations for these issues are also provided by the data. First, few organisations appear to look outside and draw on the experience of others in designing and deploying their enterprise performance management systems. 81 percent of respondents claim to have developed their enterprise performance management solutions internally [see Figure 19]. And when they have developed them, few draw on state of the art infrastructure support - 73 percent of respondents report that their primary software tool for enterprise performance management is the spreadsheet. Less than 3 percent have adopted enterprise performance management software, one of the aims of which is to help integration and alignment across operational systems [see Figure 2]. Fig.19: Lack of export support Fig.2: The most popular software tool No software Spreadsheets ERP software EPM software Customer EPM Consultant led Collaboratively By far the majority developed their EPM systems in house 81.4%. 1 2 3 4 6 7 8 In house
1 Enterprise Performance Management: The Japanese State of the Art Fig.21: Lack of causal models 6 4 3 2 1 Indicators not structured Indicators structured Indicators linked to strategic objectives Only 1% have indicators linked in cause-and-effect models. Indicators linked in cause effect diagrams Beyond the question of software, there are questions of focus and design. Despite it being widely recognised that the state of the art in designing and deploying performance measurement systems involves building causal maps, percent of respondents report that their performance indicators are not structured and only 11 percent report that their performance indicators are explicitly linked in cause-effects models [see Figure 21]. It seems reasonable to contend that the failure to adopt external support both in terms of system design and infrastructure undermines the ability of Japanese companies to extract insight from their enterprise performance management systems. Failing to extract insight undermines the credibility of the system and results in lower and lower levels of acceptance. In turn this means that there is less and less motivation to try and integrate and align the enterprise performance management system with other systems in the organisation, further limiting the impact of enterprise performance management. These are all issues that other companies, elsewhere in the world have struggled with and addressed. Given enterprise performance management has come relatively late to Japan, Japanese companies wishing to adopt robust enterprise performance management systems would be well advised to look globally for examples of good practice. So what to do? So, given the data presented in this report, how might Japanese companies make progress with their enterprise performance management systems? There are five specific recommendations we would make in light of our analysis. Pay attention to the enterprise performance management system design process. The challenges faced by Japanese companies which we have identified as questions of structure, acceptance and integration all originate with the enterprise performance management system design process. A well executed enterprise performance management system design process will mitigate against many of these. Learn from others Japanese companies report that they tend to develop their enterprise performance management systems in house but globally there is a wealth of experience in how and how not to design and deploy enterprise performance management systems. Tapping into this knowledge and experience is essential. Engage people through the process many people find enterprise performance management threatening. When enterprise performance management systems are used as control systems rather than learning systems people resist them, looking for ways to undermine and subvert the system. Engaging people through the design process and ensuring that the resultant system meets their needs is essential if organisation wide buy-in is to be achieved.
Enterprise Performance Management: The Japanese State of the Art 11 Create the infrastructure as with companies in other countries, the information systems infrastructure underpinning the enterprise performance management system is hopelessly inadequate. Relying on spreadsheets to manage global organisations is hardly an appropriate approach in the 21st century. Build the skill base successfully using an enterprise performance management system requires a shift in attitude and skill base inside many organisations. The potential of the data provided by well designed systems is massive, but people have to understand how to access, analyse and interpret the data. Careful consideration of the organisation s skill base and capability is essential to maximise the return on the investment in an enterprise performance management system. About the Research We selected a sampling frame which contains private companies located in Japan. A sample of 8 companies was selected. They are the top in sales revenues in non-financial business and the top 3 in operating revenue in financial business. After piloting the survey with academics and practitioners, we administered the mail-based survey to members of top management teams in the sampled companies. We received 13 responses. The usable survey responses were 13 resulting in a response rate of 17.8 percent. The respondents were in all sectors of the Japanese economy [see Figure 22]. Manufacturing companies accounted for 6 percent of the respondents and 87 percent of the companies were publicly held [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. Fig.22: Respondents by sector Banking/Securities Contracting Services Wholesale/retail Manufacturing 1 2 3 4 6 Fig.23: Respondents by company type Private sector Public sector
Centre for Business Performance, Cranfield School of Management, Cranfield University, Cranfield, Bedford, MK43 AL UK T: +44 ()1234 71122 F: +44 ()1234 7186 www.som.cranfield.ac.uk To contact Andy Neely, email: a.neely@cranfield.ac.uk To contact Bassil Yaghi, email: bassil.yaghi@cranfield.ac.uk Oracle Corporation UK Ltd., Oracle Parkway, Thames Valley Park (TVP), Reading, Berkshire, RG6 1RA. UK T: 118 924 F: 118 924 3 www.oracle.com To contact Nigel Youell, email: nigel.youell@oracle.com Graduate School of Accountancy, Waseda University 1-6-1 Nishiwaseda, Shinjuku-ku, Tokyo, 169-8, Japan T: +81-3-323-4141 F: +81-3-322-8638 www.waseda.jp To contact Professor Takashi Shimizu, email: ts814@waseda.jp