Development of Performance Management Systems Dmitry Isaev Business Analytics Department Higher School of Economics (HSE) Moscow, Russian Federation disaev@hse.ru Abstract In the paper basic principles and general approach to development of Performance Management Systems (PMSs) are discussed. It is considered that development of PMSs should rely on certain principles, each of them is described in details. Finally, a two-level managerial approach to PMS design and development planning is proposed. The top level, related with PMS in whole, is considered within the bounds of three generic stages functional modeling, dynamic modeling and finalizing. Keywords performance management system; development program; functional modeling; dynamic modeling; development planning; implementation projects. I. INTRODUCTION At present many organizations (both commercial and non-for-profit) are interested in improving of their corporate governance and strategic management processes. For this purpose they pay attention developing of Performance Management Systems (PMSs), including appropriate methods, processes, information systems and personnel skills. As usual such organizations take into consideration certain developments that can be distinguished into four groups: theoretical developments, codes of best practice and statutory documents related with corporate governance, corporate reporting and strategic management that establish general requirements to Performance Management Systems [1, 4, 15, 21]; theoretical developments in the field of Performance Management Systems, including different PMS frameworks [6, 10, 13, 14, 16, 18, 22]; methods, models and analytical software products developed by leading IT companies that can be applied within a Performance Management System [7, 8, 9]; methods and approaches to design and planning of management systems and information systems development [2, 3, 19, 20]. The issues mentioned above are associated with different aspects of Performance Management Systems development and have a considerable effect on management theory and practice. However, at present any integrated methodology for design, planning, implementation and practical use of Performance Management Systems is not available. Consequently many organizations implement nor integrated Performance Management System, but only separate PMS sub-systems, such as scorecarding, budgeting, consolidation, etc. Usually they do it without having general understanding of PMS as a whole and without any assessment of its impact on management efficiency. That s why researches related with principles and approaches to PMSs design and development planning seem actual both from theoretical and practical points of view. II. DIFFERENT TREATMENTS OF THE PERFORMANCE MANAGEMENT SYSTEM TERM First of all it is necessary to clarify what we mean by Performance Management System (PMS). The matter is that this term is relatively new in management theory and practice, and often different authors put different meaning into PMS concept. It is possible to distinguish at least three broad meanings of the Performance Management System term: PMS as a comprehensive management system; PMS as a system of information support of corporate governance and strategic management; PMS as an information system. In the most general context PMS is treated as a comprehensive management system. For example, Ferreira and Otley define PMS as the evolving formal and informal mechanisms, processes, systems, and networks used by organizations for conveying the key objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating organizational learning and change [10]. Information component is also mentioned in the Performance Management Systems framework, proposed by Ferreira and Otley: one of the PMS aspects is Information flows, systems and networks. Its formulation is: What specific information flows feedback and feed-forward, systems and networks has the organization in place to support the operation of its PMSs? [10]. However the information aspect is considered as just one of several PMS aspects: the framework also contains such elements as vision and mission, key success factors, organization structure, reward systems and some others. All this highlights global nature of this treatment of Performance Management System. Such treatment of Performance Management System as a comprehensive management system is also 168

supported by a number of academic writers, business analysts and consultants. Another view at Performance Management System is associated with its treatment as an information support system for corporate governance and strategic management purposes. One of definitions was proposed by Business Performance Management Standards Group, established by few large software vendors and consulting companies. According to the definition, Business Performance Management (BPM) is a methodology to optimize the execution of business strategy that consists of a set of integrated closed-loop, analytic processes, supported by technology that address financial as well as operational data. BPM enable a business to define, measure and manage its performance against strategic goals. The core financial and operational processes of BPM include planning, consolidation and reporting, analysis and the deployment of linked key performance indicators (KPIs) throughout an organization [5]. Such concept is also known as Corporate Performance Management (CPM) or Enterprise Performance Management (EPM). This treatment is associated primarily with processing of quantitative information metrics, plans, financial reporting figures, etc. However there are some tasks (e.g. strategic decision making) that require use of expert estimates and thus associated with quantified data. One of the examples of such methods is Analytical Hierarchy Process (AHP), which is widely applied for decision making in different areas, including strategic management [17]. Such expert-based methods and appropriate information systems (Decision Making Systems, DMSs) go beyond traditional BPM/CPM/EPM-systems. That s why another definition of a Performance Management System was proposed by the author: PMS is a set of methods, processes, information systems and personnel skills, focused into the tasks of gathering, reconciliation, storage, analytical processing and presentation of information, which is critical for an organization s information transparency and strategic decision making performed by external and internal stakeholders [11]. Anyway, both definitions mentioned are very close, presenting PMS as a system of information support of corporate governance and strategic management. Finally, there is a treatment of Performance Management Systems as information systems based on appropriate software. At present such information systems are developed by leading international IT companies Oracle, SAP, IBM, Microsoft, Infor, SAS and some others. Usually Performance Management software bundles from leading vendors include applications for scorecarding, planning and budgeting, financial consolidation, activity based costing, etc. Hereinafter Performance Management Systems will be considered as systems for information support of corporate governance and strategic management, including not only information systems, but also analytical methods, managerial processes and managers skills. III. BASIC PRINCIPLES OF PERFORMANCE MANAGEMENT SYSTEMS DEVELOPMENT Development of Performance Management Systems should rely on certain basic principles that correspond with the nature of such systems. These principles are: strategic compliance; completeness; target orientation; measurability; decomposition; dynamics; rolling planning; feasibility. The principle of strategic compliance means that the program of PMS development should be compliant with the organization s corporate strategy, because the corporate strategy is the main source of requirements to information support of management processes. On the other hand, certain elements of PMS should have an influence on some functional strategies, e.g. on IT and HR strategies. The principle of completeness means that PMS development is to be managed as an integrated system, which includes heterogeneous but nevertheless interrelated and mutually complementary components: methods, processes, structures, personnel, information systems. The principle of target orientation means that there is some target state of PMS derived from information requirements of corporate governance and strategic management, taking into consideration interests of different stakeholder groups. In means that requirements for PMS development is defined by the gap between target and current states of the system. The principle of measurability means that the development of PMS should rely on certain metrics, which describe different parameters of the system and its value. Such metrics may be used for description of current and planned states of PMS, and also for targets setting. The principle of decomposition means top-down formalization of the system, from the general to the particular, relying on consecutive detailed elaboration of PMS elements and its characteristics. The principle of dynamics means that both PMS and its environment should be considered in dynamics, relying on changes in the course of time. Time factor is relevant to all the metrics, both target and actual. Moreover, different characteristics may influence on each other, in addition such influence may be associated with time lags and feedbacks. The principle of rolling planning means that development plans should be continuously updated by adding а further period (e.g. year) and deducting the earliest period. Such principle is beneficial where future parameters of PMS and its environment cannot be forecasted reliably. For this purpose states of current, planned and prospective development projects should be taken into consideration. The principle of feasibility means that implementation of the development program may be successful only if all the projects are assured by the provision of appropriate resources 169

and time bounds. Otherwise the targets of the development program could not be considered as attainable. IV. GENERAL APPROACH TO PERFORMANCE MANAGEMENT SYSTEMS DESIGN AND PLANNING Management of PMS development should be arranged on a regular basis. The development program is on of strategic initiatives of an organization, it is not limited by time bounds. The program should describe projected characteristics of PMS and major projects associated with its development. Implementation of the program is provided by means of time bounded projects, any of them have specific targets. Thus management of PMS development is associated with two levels: the level of overall PMS development program and the level of individual projects. The top level of the development scheme comprises three aggregative stages: functional modeling, dynamic modeling and finalizing. A. Functional Modeling The functional modeling stage is associated with formal design of PMS in general. This stage does not comprise detailed definition of PMS s characteristics, that s why different sets of PMS s parameters may exist within the same functional model. Functional modeling includes: description of requirements to PMS outputs; design of subsystems within PMS and relations between them; definition of functional requirements to PMS subsystems. A typical (basic) functional model of Performance Management System that may be considered as typical for different types of organizations consists of the following functional blocks [12]: strategic analysis and strategic choice; management by key performance indicators; corporate planning and budgeting; consolidated financial reporting. Any of the functional blocks is associated with particular tasks of strategic management process, within a comprehensive strategic management system. For example, the functional block of strategic analysis and strategic choice contains such functional modules as monitoring, forecasting, goals setting, corporate appraisal and positioning, strategic options generation, strategic options evaluation, strategic options choice, targets setting. This functional block deals with gaining and processing of all the information relevant for strategic positioning and decision making. The source data may arrive from a wide range of sources, both external and internal from point of view of an organization. The outputs of the block are useful both for management purposes (particularly for some other PMS functional blocks) and for external stakeholders. The functional block of management by key performance indicators contains such functional modules as key performance indicators setting, development scenarios generation, development scenarios evaluation, development scenarios choice, targets achievement analysis. Its functionality is associated with formalization of corporate strategic objectives in terms of key performance indicators (KPIs). This block use data from the block of strategic analysis and strategic choice and from accounting systems, its outputs are very important for another PMS unit the block of corporate planning and budgeting. The functional block of corporate planning and budgeting contains two functional modules: plans / budgets composition and analysis of plans / budgets execution. This block provides a link between the strategy (corporate level planning and budgeting) and current activities (current financial and operational plans) of an organization. Source data are received from different sources (including the block of strategic analysis and strategic choice and the block of management by key performance indicators), output data are used for development of current plans (e.g. in ERP systems). The block of consolidated financial reporting includes two functional modules: consolidated statements preparation and consolidated statements analysis. It helps to prepare consolidated financial statement either in accordance with certain standards (such as IFRS or US GAAP) or according to some corporate principles (for management purposes, relying on management accounting data or budgeting information). Source data may come in from accounting systems and (for budgeting information) from the functional block of corporate planning and budgeting. Outgoing information may be used by different user of financial and managerial statements, including external stakeholders and management of the organization. This general model represents basic functions of a performance management system, that s why it may be considered as a reference model. The model may be used for development similar models for different types of organizations (industry solutions) and for development of detailed individual models for specific organizations. B. Dynamic Modeling The dynamic modeling stage is associated with description of detailed characteristics of PMS and their changes in the course of time. Dynamic modeling comprises: development of a set of metrics for PMS in general and for its functional subsystems; assessment of the current state of PMS (in terms of actual values of the metrics); forecasting of the values of the metrics, taking into consideration current, planned and prospective projects; formulation of hypothesis related with PMS environment; definition of target values of PMS metrics for different levels of the system maturity; definition of the gaps between target and forecasted values of the metrics; generation of possible scenarios of PMS development and appropriate project portfolios; 170

evaluation of potential scenarios from points of view of their feasibility, effectiveness and efficiency. C. Finalizing The finalizing stage is associated with the choice the specific PMS development scenario and with formulation of the PMS development program, including the functional concept and the general plan of PMS development. Subsequently, these documents will perform a base for planning and implementation of specific PMS development projects. V. CONCLUSION The proposed methodological approach to Performance Management Systems development comprises two levels: the level of development of PMS in a whole and the level of individual projects. The top level of the scheme is associated with three stages, including functional modeling, dynamic modeling and finalizing. Practical implementation of PMS development planning should rely on such principles as strategic compliance, completeness, target orientation, measurability, decomposition, dynamics, rolling planning and feasibility. The final documents functional concept and general plan of PMS development should be used for planning of specific projects, including methodological improvements, reorganization of management processes, human resources development and implementation of information systems. ACKNOWLEDGMENT The author is grateful to Prof. Tatiana Kravchenko for her comments and suggestions. The author also gratefully acknowledges the financial support of Academic Fund of Higher School of Economics (HSE), Moscow, Russian Federation. REFERENCES [1] A Guide through IFRS. International Accounting Standards Board, 2011. [2] A Guide to the Business Analysis Body of Knowledge (BABOK Guide). Version 2.0. Toronto: International Institute of Business Analysis, 2009. [3] A Guide to the Project Management Body of Knowledge (PMBOK Guide). Fourth Edition. Newtown Square, PA: Project Management Institute, 2008. [4] An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes (Sarbanes-Oxley Act), 2002. [5] Business Performance Management industry framework document. Final version 5.0. BPM Standards Group, 2005. [6] R. H. Chenhall, Management control systems design within its organizational context: findings from contingency-based research and directions for the future, Accounting, Organizations and Society, 2003, 28, p. 127-168. [7] G. Cokins, Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap), John Wiley & Sons, Inc., 2004. [8] M. Coveney, D. Ganster, B. Hartlen, D. King, The Strategy Gap: Leveraging Technology to Execute Winning Strategies, John Wiley & Sons, Inc., 2003. [9] W. W. Eckerson, Performance Dashboards: Measuring, Monitoring and Managing Your Business, John Wiley & Sons, Inc., 2006. [10] A. Ferreira and D. Otley, The design and use of performance management systems: An extended framework for analysis, Management Accounting Research, 2009, 20, pp. 263 282. [11] D. Isaev, Information support of corporate governance and strategic management using analytical software, In: Proceedings of 2010 IEEE International Conference on Intelligent Computing and Intelligent Systems (ICIS 2010). October 29-31, 2010, Xiamen, China. Edited by W. Chen, S. Li. Beijing: IEEE, 2010, vol. 3, pp. 44-48. [12] D. Isaev, Performance Management Systems: Conceptual Modeling, In: International Proceedings of Economics Development and Research. Vol. 9: Proceedings of 2011 International Conference on Economics and Business Information (ICEBI 2011). May 28-29, 2011, Bangkok, Thailand / Edited by J. Su. Singapore: IACSIT Press, 2011. p. 17-24. [13] A. K. Merchant and D. Otley, A review of the literature on control and accountability, In: C. S. Chapman, A. G. Hopwood and A. G. Shields (Eds.), Handbook of management accounting research. Oxford, UK: Elsevier, 2007, vol. 1, pp. 785-802. [14] A. Neely, C. Adams, M. Kennerley, The performance prism, London: Prentice Hall, 2002. [15] OECD Principles of Corporate Governance. OECD, 2004. [16] D. Otley, Performance management: a framework for management control systems research, Management Accounting Research, 1999, 10, pp. 363 382. [17] T. L. Saaty, R. Peniwati, Group Decision Making: Drawing out and Reconciling Differences, Pittsburgh: RWS Publications, 2008. [18] C. Schiff, BPM goes mainstream, Business Finance, January/February 2009, pp. 20-33. [19] M. J. Schniederjans, J. L. Hamaker, A. M. Schniederjans, Information Technology Investment: Decision-Making Methodology, NY: World Scientific Publishing, 2005. [20] J. F. Sowa and J. A. Zachman, Extending and formalizing the framework for information systems architecture, IBM Systems Journal, vol. 31, no. 3, 1992. pp. 590-616. [21] Sustainability Reporting Guidelines. Version 3.1. Global Reporting Initiative, 2011. [22] P. Taticchi (Ed.), Business Performance Measurement and Management: New Contexts, Themes and Challenges, Springer, 2010. 171