PERFORMANCE MANAGEMENT - A Review
Direction, traction, and speed. When you are driving a car or riding a bicycle, you
directly control all three. You can turn the steering wheel or handle bars 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 or pump your legs harder to gain more speed.
However, senior executives who manage organizations do not have direct
control of their organization’s traction, direction, and speed to increase value from
their organization. Why not? Because they can achieve improvements in these
areas only through influencing people—namely, their employees. And employees
can sometimes act like children: They don’t always do what they’re told, and
sometimes their behavior is just the opposite!
Performance management is about giving managers and employee teams of
all levels the capability to improve their organization’s direction, traction, and
speed—and most important, to move it in the right direction. That direction should
be as clear and focused as a laser beam, pointing toward its defined strategy. 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 believe
that you are continuously limited to scarce and precious resources and time,
so focus is key and strategy yields focus.
There is evidence that it is a tough time to be a chief executive. Surveys by the
Chicago-based employee recruiting firm Challenger, Gray & Christmas 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
redirection 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 regain control of the direction,
traction, and speed for their enterprise? Performance management
provides managers and employee teams at all levels with the capability to move
directly toward their defined strategies like a laser beam.
WHAT IS PERFORMANCE MANAGEMENT?
Performance management (PM) is the framework for managing the execution of
an organization’s strategy. It is how plans are translated into results. Think of PM
as an umbrella concept that integrates familiar business improvement methodologies
with technology. In short, the methodologies no longer need to be applied in
isolation—they can be orchestrated. The whole is greater than the sum of the
parts. Each methodology can give good results, but when you integrate them, you
get more. This makes PM a value multiplier.
All organizations have been doing performance management before it was labeled
with this name. So the good news is that performance management is not a
new buzzword and method that everyone has to learn. Rather, it is the assemblage
of existing methodologies that most everyone is already familiar with, and most
organizations have already begun the journey of implementing some of them. But
as just mentioned, these methodologies typically are implemented in isolation
from each other. It is as if the implementation project teams live in parallel universes.
PM serves as a value multiplier by integrating the methodologies.
PM is sometimes confused with human resources and personnel systems, but
it is much more encompassing. It comprises the methodologies, metrics, processes,
software tools, and systems that manage the performance of an organization. PM is
overarching, from the C-level executives cascading down through the organization
and its processes. To sum up its benefit, it enhances broad cross-functional involvement
in decision making and calculated risk taking by providing tremendously
greater visibility with accurate, reliable, and relevant information—all
aimed at executing an organization’s strategy. But why is supporting strategy so
key? Being operationally good is not enough. In the long run, good organizational
effectiveness will never trump a mediocre or poor strategy.
There is no single PM methodology, because PM spans the complete management
planning and control cycle. Performance management is not a process with
recipe steps or an information system that you purchase on a disc. It is the integration
of typically disconnected decision making. Think of PM as a broad, end-to-end
union of solutions incorporating three major functions: collecting data, transforming
and modeling the data into information, and Web-reporting it to users. Many of
PM’s component methodologies have existed for decades, while others have become
popular recently, such as the balanced scorecard. Some of PM’s components,
such as activity-based management (ABM)ABM) described are partially or
crudely implemented in many organizations, and PM refines them so that they work
in better harmony with its other components. Early adopters have deployed parts of
PM, but few have deployed its full vision. In the first few decades of the twenty-first
century, the surviving organizations will have completed the full vision.
Many organizations seem to jump from improvement program to program,
hoping that each one might provide that big, elusive competitive edge. Most managers,
however, would acknowledge that pulling one lever for improvement rarely
results in a substantial change—particularly a long-term, sustained change. The
key to improving is integrating and balancing multiple improvement methodologies.
You cannot simply implement one improvement program and exclude the
other programs and initiatives. It would be nice to have a management cockpit
with one dial and a simple steering mechanism, but managing an organization, a
process, or a function is not that easy.
CONFUSION AND AMBIGUITY WITH PERFORMANCE MANAGEMENT
There is confusion about terminology. For example, there are several variants of
PM including business performance management (BPM), enterprise performance
management (EPM), and corporate performance management (CPM). Consider
them all to mean the same thing. But a larger problem is that PM is typically defined
too narrowly as being only about better strategy, budgeting, planning, and finance
with an emphasis on measurement. It is much more.
As mentioned, PM tightly integrates the business improvement and analytic
methodologies executives, managers, and employee teams are already familiar
with. These include strategy mapping, balanced scorecards, managerial accounting
(including activity-based 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.
The executive team should always begin with a vision statement—and preferably
not those hollow words framed in the organization’s lobby or laminated on
small cards for employee purses and wallets. The vision statement answers the
question “Where do we want to go?” PM relies on the strategy map and its companion
scorecard to answer in a mechanical way “How will we get there?” The remainder
of the PM components answer “What will power us there?”
But PM also addresses trade-off decisions that will always be present because
conflicts are natural conditions of any organization. For example, there will always be tension between competing customer service levels, process efficiencies,
and budget or profit constraints. Managers and employee teams are constantly
faced with conflicting objectives and no way to resolve them, so they tend to
focus their energies on their close-in situation and their personal concerns for how
they might be affected. An organization also constantly faces risk, threats, and opportunities.
Problems surface when risks are not anticipated or there is minimal
risk mitigation and when good opportunities are missed. PM addresses all of these
issues by escalating the visibility of actual and potential quantified outputs and
outcomes—in other words, results. PM provides explicit linkage between strategic,
operational, and financial objectives and provides predictive what-if scenario
testing of the enterprise-wide impact of decisions.
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. Simply
put, PM helps an organization to understand how it works as a whole.
ALIGNING EMPLOYEE BEHAVIOR WITH STRATEGY
“Alignment” is a key word frequently mentioned in PM. Alignment boils down to
the classic maxim, “First do the right things, and then do the right things well.” That
is, being effective is more important than being efficient. Organizations that are
very, very good at doing things that are not important will never be market leaders.
The concept of work alignment to the strategy, mission, and vision deals with focus
and pursuing the most important priorities. The economics then fall into place.
How well the executive management communicates its strategy to managers and
employees, if at all, remains a challenge.Most employees
and managers, if asked to describe their organization’s strategy, cannot adequately articulate
it. Many employees are without a clue as to what their organization’s strategy
is. They sometimes operate as helpless reactors to day-to-day problems.
If asked to briefly articulate their executive team’s strategy, how many employees
could do it? Probably very few—maybe none. The consequence of this is
critical. If employee teams and managers do not understand their executive team’s
strategy, how do we expect them to understand that what they do each week and month contributes to realizing that strategy? In short, there is a communication
gap between senior management’s mission or vision and employees’ daily decisions
and actions. An integrated suite of methodologies and tools—the PM solutions
suite—provides the mechanism to bridge the business intelligence gap
between the chief executive’s vision and employees’ actions.
PM can close this communication gap. Methodologies with supporting tools
such as strategy mapping and PM scorecards aid in making strategy everyone’s
job. PM allows executives to translate their personal visions into collective visions
that galvanize managers and employee teams to move in a value-creating direction.
The traditional taskmaster/commander style of executives who attempt to control
employees through rigid management systems is not a formula for superior performance.
PM fosters a work environment in which managers and employees are genuinely
engaged and behave as if they were the business owners. Destructive beliefs
and unwritten rules that are commonly known in an organization’s culture (i.e.,
“Always pad your first budget submission”) are displaced by guiding principles.
BUSINESS INTELLIGENCE GAP
The gap between the executive team’s strategy and employee operations is more
than a communication gap. It is an intelligence gap as well. Most organizations are
deluged with data, and the amount keeps growing. Estimates are that amount of information
doubles every 1,100 days.2 Yet the amount of time available to deal with
information remains constant at 1,440 minutes per day. What complicates matters
is the challenge of determining the important and relevant data to focus on versus
data that are simply nice to know. Additional challenges involve collecting and
moving data, transforming it from a raw reported state into meaningful information
that can be leveraged, and having accurate, clean, and nonredundant data, or worse
yet inconsistent data. To resolve these problems, PM is based on a common enterprise
information platform (EIP) that provides a one-version-of-the-truth database
rather than disparate inconsistent data that annoy both employees and customers.
But those are problems that advanced information technologies, such as data
warehousing, can overcome. Even organizations that are enlightened enough to
recognize the potential value of their business intelligence and assets often have
difficulty in actually realizing that value as economic value. Their data are often
disconnected, inconsistent, and inaccessible, resulting from too many nonintegrated
single-point solutions. They have valuable, untapped data 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. Typically you find different departmental data warehouses built
on different platforms using combinations of tools, some nonstandard, some with
expired maintenance support, and some prebuilt in a tool purchased from a vendor
no longer in business. This results in unintended barriers blocking systems
from cleanly communicating among themselves. All organizations are reaching a
point where it is important for computers to talk to other computers.
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. Information
technologies—namely data warehousing; data mining, with its powerful extraction,
transform, and load (ETL) features; and business analytics (e.g., statistics,
forecasting, and optimization)—all produce decision-relevant information from
diverse data source platforms transparently. That is, these technologies convert
raw data into intelligence—the power to know. As a result, these superior tools
now offer a complete suite of analytic applications and data models that enable organizations
to tap into the virtual treasure trove of information they already possess
and enable effective performance management on a huge scale.
Most companies are still unable to get the business intelligence they need; and
the intelligence they do get is not delivered quickly enough to be actionable. PM
correlates disparate information in a meaningful way and allows drill-down
queries directly on hidden problem areas. It helps assess which strategies are
yielding desired results without the need to wade through a mountain of raw data.
Executives and employee teams need to be alerted to problems before they become
“unfavorable variances” reported in financial statements and requiring explanation.
PM aids employees and managers to manage change actively—and in
the right direction.
But make no mistake in interpretation; PM is much more social than technical.
You are dealing with people who all have personal preferences, including appeal
for the status quo as well as suspicion and skepticism of change. And elements of
PM involve measurements and accountability, so you influence behavior because
you typically “get what you measure.” In summary, PM integrates operational and
financial information into a single decision support and planning framework.
ACTIVITY-BASED MANAGEMENT:
FACTS FOR JUDGMENT AND DISCOVERY
Methodologies like activity-based management (ABM) described in this book
provide a reliable, fact-based financial view of the costs of work processes and their products, services, and customers (service recipients and citizens for public
sector organizations). Having fact-based information is important. After all, in the
absence of facts, anybody’s opinion is a good one. And usually the biggest opinion
wins—which may be your supervisor’s opinion or your supervisor’s boss’s
opinion. To the degree that they are making decisions based on intuition, gut feel,
outdated beliefs, or misleading information, then your organization is at risk. A
major benefit of PM is that when all people get the same facts, then they generally
reach the same conclusions on how to act. Good managerial accounting is foundational
for PM.
What makes today’s PM systems so effective is that work activities—what
people, equipment, and assets do—are foundational to PM reporting, analysis, and
planning. Work activities pursue the actions and projects essential to meet the
strategic objectives constructed in strategy maps and the outcomes measured in
scorecards. Work activities are central to ABM systems used to measure output
costs and customer profitability accurately as well as to assess future potential customer
economic value. Knowing costs assists not only in judging results better but
also in asking better questions. It is a great discovery tool.
ABM also aids in understanding the drivers of work activities and their consumption
of resource capacity (e.g., expenses). With that knowledge, organizations
can test and validate future outcomes given different events (including a
varying mix and volume of product/service demand). This helps managers and
employee teams understand capacity constraints and see that cost behavior is
rarely linear but is a complex blend of step-fixed input expenses relative to
changes in outputs. Workloads are predicted in resource capacity planning systems
to select the best plans. PM combines strategy maps and its companion balanced
scorecard with intelligent software systems that span the enterprise to
provide immediate feedback, in terms of alerts and traffic-lighting signals to unplanned
deviations from plans. PM provides managers and employee teams with
the ability to act proactively, before events occur or proceed so far that they demand
a reaction.
BALANCED SCORECARD: MYTH OR REALITY?
But cost management cannot be the focus. Cost management must operate as part
of the more encompassing PM. And strategy is critical. 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.
Strategy maps and scorecards are two more of the key components in the PM
portfolio of methodologies. They enable leadership and motivate people by serving
as a guide with signposts and guardrails. Despite much publicity about the balanced
scorecard, the strategy map that should ideally precede the development of
the scorecard is considered to be much more important. Strategy maps explain
high-level causes and effects that facilitate making choices. With strategy maps
and their resultant choices of strategic objectives and the action items to attain
them, managers and employee teams easily see the priorities and adjust their plans
accordingly. People don’t have sufficient time to do everything everywhere, but
some try to. Strategy maps and their companion scorecards rein in the use of people’s
time by bringing focus. Untested pet projects that do not contribute to the
strategy are discarded or postponed.
Scorecards are derived from strategy maps, contrary to a misconception that
scorecards are a stand-alone reporting system. Many organizations unwittingly err
by beginning their reform of their performance measurement system by first defining
their key performance indicators (KPIs) to monitor. They typically select the
measures they already have as opposed to the measures they should have. The traditional
measures they err in choosing are typically without depth. Users can view
a result, but whether it is good or bad, they are unable to investigate the underlying
cause. By starting with KPIs, they are skipping the critical initial steps. The executive
team should first define the strategy map, then employee teams and
managers should suggest the few manageable projects that can be accomplished or
core processes that they must excel at. Once that is complete, then the employees
and managers can properly determine the vital few, not trivial many, nonfinancial
measures that indicate progress on those projects or core processes which in turn
lead toward achieving the strategic objectives. These steps assure that the managers
and employee teams understand the strategy—the major problem affecting
failed strategy execution. If defining the KPIs is the initial step, then how does
anyone know if those measures reflect the strategic intent of the executive team?
Once the appropriate KPIs are selected, then the scorecard provides ongoing
feedback. Imagine if everyone in the organization, from the front-line workers to
the executive team, could everyday answer this single question: “How am I doing
on what is important?” The organization would remain focused. Note that there are two halves to that question. The first part answers the question: “Am I performing
favorably or unfavorably to a target set for me?” But it is the second part
that brings the power. By going through the discipline of first defining linked
strategic objectives in the strategy map, identifying the few and manageable projects
or core processes to excel at with KPIs derived from them, executives have
preset and baked in the critical pursuits that reflect their strategic intent.
When all the employees are provided a line of sight from their measured performance
up through their supervisors’ and executives’ measures, then everyone
can also answer the question “How are we doing on what is important?” This aids
in everyone’s understanding of how one performance measure affects another. It
also involves digging deeper to see causal relationships and manage work activities
across the entire enterprise so that everyone is on the same page. If employees
are given visibility to the feedback scores on KPIs across the organization,
they can communicate with other functions without waiting for instructions to
suggest problem resolutions. A scorecard is a powerful mechanism to constantly
align the workforce with the strategy. It brings that needed direction, traction, and
speed.
Scorecards solve the problem of excessive emphasis on financial results as
the measure of success. Consider that telephone calls are still “dialed” even though
there are hardly any dial phones left. A car’s glove compartment rarely stores
gloves. Eventually the motion picture “film” industry will rely on digital technology,
not film. Similarly, “financial” results will likely be shared with more influential
nonfinancial indicators, such as measures of customer service levels.
Strategy maps assure that both financial and their causal nonfinancial measures
are linked with if-then relationships—which is one reason you hear the term “balanced
scorecard.” Going forward, managers and employee teams will need to be
much more empowered to make decisions, good ones, it is hoped, in rapidly reduced
time frames. A strategy map and its companion scorecard, supported by
business intelligence, improve decision making. Together, they describe an organization’s
strategic health and consequently its chances for increasing prosperity.
The balanced scorecard expresses the strategy in measurable terms, communicating
what must be done and how everyone is progressing. Commercial software plays an important enabling role in PM by delivering an
entire Web-based and closed-loop process from strategic planning to budgeting,
forecasting, scorecarding, costing, financial consolidations, reporting, and analysis.
Commercial software from leading vendors of statistics-supported analytics
and business intelligence (BI) provide powerful
forecasting tools. WHAT IS THE PURPOSE OF PERFORMANCE MANAGEMENT?
So, what is the purpose of PM? PM is the translation of plans into results—execution.
It is the process of managing your strategy. Defining and adjusting the organization’s
strategy is of paramount importance and is senior management’s
number-one responsibility. For commercial companies, strategy can be reduced to
three major choices:
1. What products or service lines should we offer or not offer?
2. What markets and types of customers should we serve or not serve?
3. How are we going to win?
PM provides insights to improve all three choices by aiding managers to
sense earlier and respond more quickly to uncertain changes. It does this by driving
accountability for executing the organization’s strategy to the lowest possible
organization levels.
INCREASING FOCUS ON CUSTOMERS
It is a tough time for senior managers. Customers increasingly view products and
service lines as commodities and place pressure on prices as a result. Business
mergers, employee layoffs, and cutting costs are ongoing. And long gone are the
days that private equity firms could squeeze out profits though balance sheet wizardry.
Inevitably there is a limit on these approaches to impact profits, an impact
that is forcing management to achieve real PM from the underlying business:
Managers must come to grip with getting organic profit growth from existing customers
and truly managing their resources, not just monitoring them. You can’t
simply create the scorecard’s dashboard to look at the dials; you have to be constantly
taking actions to move the dials.
If we had to point to one single reason for the interest in performance management,
we believe it is the result of the shift in power from suppliers to customers
and buyers due four key realizations:
1. It is more expensive to acquire new customers with marketing than to retain
existing customers.
2. The source for competitive advantage is shifting—as products and service
lines become commodities, thus neutralizing any competitive edge
From India, Nasik
15Direction, traction, and speed. When you are driving a car or riding a bicycle, you
directly control all three. You can turn the steering wheel or handle bars 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 or pump your legs harder to gain more speed.
However, senior executives who manage organizations do not have direct
control of their organization’s traction, direction, and speed to increase value from
their organization. Why not? Because they can achieve improvements in these
areas only through influencing people—namely, their employees. And employees
can sometimes act like children: They don’t always do what they’re told, and
sometimes their behavior is just the opposite!
Performance management is about giving managers and employee teams of
all levels the capability to improve their organization’s direction, traction, and
speed—and most important, to move it in the right direction. That direction should
be as clear and focused as a laser beam, pointing toward its defined strategy. 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 believe
that you are continuously limited to scarce and precious resources and time,
so focus is key and strategy yields focus.
There is evidence that it is a tough time to be a chief executive. Surveys by the
Chicago-based employee recruiting firm Challenger, Gray & Christmas 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
redirection 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 regain control of the direction,
traction, and speed for their enterprise? Performance management
provides managers and employee teams at all levels with the capability to move
directly toward their defined strategies like a laser beam.
WHAT IS PERFORMANCE MANAGEMENT?
Performance management (PM) is the framework for managing the execution of
an organization’s strategy. It is how plans are translated into results. Think of PM
as an umbrella concept that integrates familiar business improvement methodologies
with technology. In short, the methodologies no longer need to be applied in
isolation—they can be orchestrated. The whole is greater than the sum of the
parts. Each methodology can give good results, but when you integrate them, you
get more. This makes PM a value multiplier.
All organizations have been doing performance management before it was labeled
with this name. So the good news is that performance management is not a
new buzzword and method that everyone has to learn. Rather, it is the assemblage
of existing methodologies that most everyone is already familiar with, and most
organizations have already begun the journey of implementing some of them. But
as just mentioned, these methodologies typically are implemented in isolation
from each other. It is as if the implementation project teams live in parallel universes.
PM serves as a value multiplier by integrating the methodologies.
PM is sometimes confused with human resources and personnel systems, but
it is much more encompassing. It comprises the methodologies, metrics, processes,
software tools, and systems that manage the performance of an organization. PM is
overarching, from the C-level executives cascading down through the organization
and its processes. To sum up its benefit, it enhances broad cross-functional involvement
in decision making and calculated risk taking by providing tremendously
greater visibility with accurate, reliable, and relevant information—all
aimed at executing an organization’s strategy. But why is supporting strategy so
key? Being operationally good is not enough. In the long run, good organizational
effectiveness will never trump a mediocre or poor strategy.
There is no single PM methodology, because PM spans the complete management
planning and control cycle. Performance management is not a process with
recipe steps or an information system that you purchase on a disc. It is the integration
of typically disconnected decision making. Think of PM as a broad, end-to-end
union of solutions incorporating three major functions: collecting data, transforming
and modeling the data into information, and Web-reporting it to users. Many of
PM’s component methodologies have existed for decades, while others have become
popular recently, such as the balanced scorecard. Some of PM’s components,
such as activity-based management (ABM)ABM) described are partially or
crudely implemented in many organizations, and PM refines them so that they work
in better harmony with its other components. Early adopters have deployed parts of
PM, but few have deployed its full vision. In the first few decades of the twenty-first
century, the surviving organizations will have completed the full vision.
Many organizations seem to jump from improvement program to program,
hoping that each one might provide that big, elusive competitive edge. Most managers,
however, would acknowledge that pulling one lever for improvement rarely
results in a substantial change—particularly a long-term, sustained change. The
key to improving is integrating and balancing multiple improvement methodologies.
You cannot simply implement one improvement program and exclude the
other programs and initiatives. It would be nice to have a management cockpit
with one dial and a simple steering mechanism, but managing an organization, a
process, or a function is not that easy.
CONFUSION AND AMBIGUITY WITH PERFORMANCE MANAGEMENT
There is confusion about terminology. For example, there are several variants of
PM including business performance management (BPM), enterprise performance
management (EPM), and corporate performance management (CPM). Consider
them all to mean the same thing. But a larger problem is that PM is typically defined
too narrowly as being only about better strategy, budgeting, planning, and finance
with an emphasis on measurement. It is much more.
As mentioned, PM tightly integrates the business improvement and analytic
methodologies executives, managers, and employee teams are already familiar
with. These include strategy mapping, balanced scorecards, managerial accounting
(including activity-based 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.
The executive team should always begin with a vision statement—and preferably
not those hollow words framed in the organization’s lobby or laminated on
small cards for employee purses and wallets. The vision statement answers the
question “Where do we want to go?” PM relies on the strategy map and its companion
scorecard to answer in a mechanical way “How will we get there?” The remainder
of the PM components answer “What will power us there?”
But PM also addresses trade-off decisions that will always be present because
conflicts are natural conditions of any organization. For example, there will always be tension between competing customer service levels, process efficiencies,
and budget or profit constraints. Managers and employee teams are constantly
faced with conflicting objectives and no way to resolve them, so they tend to
focus their energies on their close-in situation and their personal concerns for how
they might be affected. An organization also constantly faces risk, threats, and opportunities.
Problems surface when risks are not anticipated or there is minimal
risk mitigation and when good opportunities are missed. PM addresses all of these
issues by escalating the visibility of actual and potential quantified outputs and
outcomes—in other words, results. PM provides explicit linkage between strategic,
operational, and financial objectives and provides predictive what-if scenario
testing of the enterprise-wide impact of decisions.
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. Simply
put, PM helps an organization to understand how it works as a whole.
ALIGNING EMPLOYEE BEHAVIOR WITH STRATEGY
“Alignment” is a key word frequently mentioned in PM. Alignment boils down to
the classic maxim, “First do the right things, and then do the right things well.” That
is, being effective is more important than being efficient. Organizations that are
very, very good at doing things that are not important will never be market leaders.
The concept of work alignment to the strategy, mission, and vision deals with focus
and pursuing the most important priorities. The economics then fall into place.
How well the executive management communicates its strategy to managers and
employees, if at all, remains a challenge.Most employees
and managers, if asked to describe their organization’s strategy, cannot adequately articulate
it. Many employees are without a clue as to what their organization’s strategy
is. They sometimes operate as helpless reactors to day-to-day problems.
If asked to briefly articulate their executive team’s strategy, how many employees
could do it? Probably very few—maybe none. The consequence of this is
critical. If employee teams and managers do not understand their executive team’s
strategy, how do we expect them to understand that what they do each week and month contributes to realizing that strategy? In short, there is a communication
gap between senior management’s mission or vision and employees’ daily decisions
and actions. An integrated suite of methodologies and tools—the PM solutions
suite—provides the mechanism to bridge the business intelligence gap
between the chief executive’s vision and employees’ actions.
PM can close this communication gap. Methodologies with supporting tools
such as strategy mapping and PM scorecards aid in making strategy everyone’s
job. PM allows executives to translate their personal visions into collective visions
that galvanize managers and employee teams to move in a value-creating direction.
The traditional taskmaster/commander style of executives who attempt to control
employees through rigid management systems is not a formula for superior performance.
PM fosters a work environment in which managers and employees are genuinely
engaged and behave as if they were the business owners. Destructive beliefs
and unwritten rules that are commonly known in an organization’s culture (i.e.,
“Always pad your first budget submission”) are displaced by guiding principles.
BUSINESS INTELLIGENCE GAP
The gap between the executive team’s strategy and employee operations is more
than a communication gap. It is an intelligence gap as well. Most organizations are
deluged with data, and the amount keeps growing. Estimates are that amount of information
doubles every 1,100 days.2 Yet the amount of time available to deal with
information remains constant at 1,440 minutes per day. What complicates matters
is the challenge of determining the important and relevant data to focus on versus
data that are simply nice to know. Additional challenges involve collecting and
moving data, transforming it from a raw reported state into meaningful information
that can be leveraged, and having accurate, clean, and nonredundant data, or worse
yet inconsistent data. To resolve these problems, PM is based on a common enterprise
information platform (EIP) that provides a one-version-of-the-truth database
rather than disparate inconsistent data that annoy both employees and customers.
But those are problems that advanced information technologies, such as data
warehousing, can overcome. Even organizations that are enlightened enough to
recognize the potential value of their business intelligence and assets often have
difficulty in actually realizing that value as economic value. Their data are often
disconnected, inconsistent, and inaccessible, resulting from too many nonintegrated
single-point solutions. They have valuable, untapped data 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. Typically you find different departmental data warehouses built
on different platforms using combinations of tools, some nonstandard, some with
expired maintenance support, and some prebuilt in a tool purchased from a vendor
no longer in business. This results in unintended barriers blocking systems
from cleanly communicating among themselves. All organizations are reaching a
point where it is important for computers to talk to other computers.
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. Information
technologies—namely data warehousing; data mining, with its powerful extraction,
transform, and load (ETL) features; and business analytics (e.g., statistics,
forecasting, and optimization)—all produce decision-relevant information from
diverse data source platforms transparently. That is, these technologies convert
raw data into intelligence—the power to know. As a result, these superior tools
now offer a complete suite of analytic applications and data models that enable organizations
to tap into the virtual treasure trove of information they already possess
and enable effective performance management on a huge scale.
Most companies are still unable to get the business intelligence they need; and
the intelligence they do get is not delivered quickly enough to be actionable. PM
correlates disparate information in a meaningful way and allows drill-down
queries directly on hidden problem areas. It helps assess which strategies are
yielding desired results without the need to wade through a mountain of raw data.
Executives and employee teams need to be alerted to problems before they become
“unfavorable variances” reported in financial statements and requiring explanation.
PM aids employees and managers to manage change actively—and in
the right direction.
But make no mistake in interpretation; PM is much more social than technical.
You are dealing with people who all have personal preferences, including appeal
for the status quo as well as suspicion and skepticism of change. And elements of
PM involve measurements and accountability, so you influence behavior because
you typically “get what you measure.” In summary, PM integrates operational and
financial information into a single decision support and planning framework.
ACTIVITY-BASED MANAGEMENT:
FACTS FOR JUDGMENT AND DISCOVERY
Methodologies like activity-based management (ABM) described in this book
provide a reliable, fact-based financial view of the costs of work processes and their products, services, and customers (service recipients and citizens for public
sector organizations). Having fact-based information is important. After all, in the
absence of facts, anybody’s opinion is a good one. And usually the biggest opinion
wins—which may be your supervisor’s opinion or your supervisor’s boss’s
opinion. To the degree that they are making decisions based on intuition, gut feel,
outdated beliefs, or misleading information, then your organization is at risk. A
major benefit of PM is that when all people get the same facts, then they generally
reach the same conclusions on how to act. Good managerial accounting is foundational
for PM.
What makes today’s PM systems so effective is that work activities—what
people, equipment, and assets do—are foundational to PM reporting, analysis, and
planning. Work activities pursue the actions and projects essential to meet the
strategic objectives constructed in strategy maps and the outcomes measured in
scorecards. Work activities are central to ABM systems used to measure output
costs and customer profitability accurately as well as to assess future potential customer
economic value. Knowing costs assists not only in judging results better but
also in asking better questions. It is a great discovery tool.
ABM also aids in understanding the drivers of work activities and their consumption
of resource capacity (e.g., expenses). With that knowledge, organizations
can test and validate future outcomes given different events (including a
varying mix and volume of product/service demand). This helps managers and
employee teams understand capacity constraints and see that cost behavior is
rarely linear but is a complex blend of step-fixed input expenses relative to
changes in outputs. Workloads are predicted in resource capacity planning systems
to select the best plans. PM combines strategy maps and its companion balanced
scorecard with intelligent software systems that span the enterprise to
provide immediate feedback, in terms of alerts and traffic-lighting signals to unplanned
deviations from plans. PM provides managers and employee teams with
the ability to act proactively, before events occur or proceed so far that they demand
a reaction.
BALANCED SCORECARD: MYTH OR REALITY?
But cost management cannot be the focus. Cost management must operate as part
of the more encompassing PM. And strategy is critical. 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.
Strategy maps and scorecards are two more of the key components in the PM
portfolio of methodologies. They enable leadership and motivate people by serving
as a guide with signposts and guardrails. Despite much publicity about the balanced
scorecard, the strategy map that should ideally precede the development of
the scorecard is considered to be much more important. Strategy maps explain
high-level causes and effects that facilitate making choices. With strategy maps
and their resultant choices of strategic objectives and the action items to attain
them, managers and employee teams easily see the priorities and adjust their plans
accordingly. People don’t have sufficient time to do everything everywhere, but
some try to. Strategy maps and their companion scorecards rein in the use of people’s
time by bringing focus. Untested pet projects that do not contribute to the
strategy are discarded or postponed.
Scorecards are derived from strategy maps, contrary to a misconception that
scorecards are a stand-alone reporting system. Many organizations unwittingly err
by beginning their reform of their performance measurement system by first defining
their key performance indicators (KPIs) to monitor. They typically select the
measures they already have as opposed to the measures they should have. The traditional
measures they err in choosing are typically without depth. Users can view
a result, but whether it is good or bad, they are unable to investigate the underlying
cause. By starting with KPIs, they are skipping the critical initial steps. The executive
team should first define the strategy map, then employee teams and
managers should suggest the few manageable projects that can be accomplished or
core processes that they must excel at. Once that is complete, then the employees
and managers can properly determine the vital few, not trivial many, nonfinancial
measures that indicate progress on those projects or core processes which in turn
lead toward achieving the strategic objectives. These steps assure that the managers
and employee teams understand the strategy—the major problem affecting
failed strategy execution. If defining the KPIs is the initial step, then how does
anyone know if those measures reflect the strategic intent of the executive team?
Once the appropriate KPIs are selected, then the scorecard provides ongoing
feedback. Imagine if everyone in the organization, from the front-line workers to
the executive team, could everyday answer this single question: “How am I doing
on what is important?” The organization would remain focused. Note that there are two halves to that question. The first part answers the question: “Am I performing
favorably or unfavorably to a target set for me?” But it is the second part
that brings the power. By going through the discipline of first defining linked
strategic objectives in the strategy map, identifying the few and manageable projects
or core processes to excel at with KPIs derived from them, executives have
preset and baked in the critical pursuits that reflect their strategic intent.
When all the employees are provided a line of sight from their measured performance
up through their supervisors’ and executives’ measures, then everyone
can also answer the question “How are we doing on what is important?” This aids
in everyone’s understanding of how one performance measure affects another. It
also involves digging deeper to see causal relationships and manage work activities
across the entire enterprise so that everyone is on the same page. If employees
are given visibility to the feedback scores on KPIs across the organization,
they can communicate with other functions without waiting for instructions to
suggest problem resolutions. A scorecard is a powerful mechanism to constantly
align the workforce with the strategy. It brings that needed direction, traction, and
speed.
Scorecards solve the problem of excessive emphasis on financial results as
the measure of success. Consider that telephone calls are still “dialed” even though
there are hardly any dial phones left. A car’s glove compartment rarely stores
gloves. Eventually the motion picture “film” industry will rely on digital technology,
not film. Similarly, “financial” results will likely be shared with more influential
nonfinancial indicators, such as measures of customer service levels.
Strategy maps assure that both financial and their causal nonfinancial measures
are linked with if-then relationships—which is one reason you hear the term “balanced
scorecard.” Going forward, managers and employee teams will need to be
much more empowered to make decisions, good ones, it is hoped, in rapidly reduced
time frames. A strategy map and its companion scorecard, supported by
business intelligence, improve decision making. Together, they describe an organization’s
strategic health and consequently its chances for increasing prosperity.
The balanced scorecard expresses the strategy in measurable terms, communicating
what must be done and how everyone is progressing. Commercial software plays an important enabling role in PM by delivering an
entire Web-based and closed-loop process from strategic planning to budgeting,
forecasting, scorecarding, costing, financial consolidations, reporting, and analysis.
Commercial software from leading vendors of statistics-supported analytics
and business intelligence (BI) provide powerful
forecasting tools. WHAT IS THE PURPOSE OF PERFORMANCE MANAGEMENT?
So, what is the purpose of PM? PM is the translation of plans into results—execution.
It is the process of managing your strategy. Defining and adjusting the organization’s
strategy is of paramount importance and is senior management’s
number-one responsibility. For commercial companies, strategy can be reduced to
three major choices:
1. What products or service lines should we offer or not offer?
2. What markets and types of customers should we serve or not serve?
3. How are we going to win?
PM provides insights to improve all three choices by aiding managers to
sense earlier and respond more quickly to uncertain changes. It does this by driving
accountability for executing the organization’s strategy to the lowest possible
organization levels.
INCREASING FOCUS ON CUSTOMERS
It is a tough time for senior managers. Customers increasingly view products and
service lines as commodities and place pressure on prices as a result. Business
mergers, employee layoffs, and cutting costs are ongoing. And long gone are the
days that private equity firms could squeeze out profits though balance sheet wizardry.
Inevitably there is a limit on these approaches to impact profits, an impact
that is forcing management to achieve real PM from the underlying business:
Managers must come to grip with getting organic profit growth from existing customers
and truly managing their resources, not just monitoring them. You can’t
simply create the scorecard’s dashboard to look at the dials; you have to be constantly
taking actions to move the dials.
If we had to point to one single reason for the interest in performance management,
we believe it is the result of the shift in power from suppliers to customers
and buyers due four key realizations:
1. It is more expensive to acquire new customers with marketing than to retain
existing customers.
2. The source for competitive advantage is shifting—as products and service
lines become commodities, thus neutralizing any competitive edge
From India, Nasik
Hi, can u explain to me as in how do u adress issues of attribution or self verification when it comes to giving feedback Srikanth
Hi Srikant,
I am responding in brief. Hope this is self explanatory. In one line you have to rely on the skill of the HR professionals who are involved in such appraisals.
One can never reduce such errors to zero, however their effects can be minimised to a large extent.
To safeguard from problems of attribution one needs to
A) Design forms allowing for both rating and narrating.
B) Good understanding of the job holder, the job, optimal time utilization, important duties, success parameter, how do I Know if a job is done well?
C) Take feedback from many people as possible.(as taken care by 180 or 360 degree appraisal.) Clarify if necessary.
D) Conduct Performance Meetings to explain KRAs and judgement parameters prior to appraisal.
E) Allowing for both Quantitave and qualitave assessment.
F) Allowing self rating(narrative- contents what went wrong & what went right and why?)
G) Conduct Aprraiser and Appraisee meetings to understand the job. simply seek information on " How can I know that you are doing an honest job?"
H) At the end of the day Conduct an Honest Review
Regards,
Shyamali
From India, Nasik
I am responding in brief. Hope this is self explanatory. In one line you have to rely on the skill of the HR professionals who are involved in such appraisals.
One can never reduce such errors to zero, however their effects can be minimised to a large extent.
To safeguard from problems of attribution one needs to
A) Design forms allowing for both rating and narrating.
B) Good understanding of the job holder, the job, optimal time utilization, important duties, success parameter, how do I Know if a job is done well?
C) Take feedback from many people as possible.(as taken care by 180 or 360 degree appraisal.) Clarify if necessary.
D) Conduct Performance Meetings to explain KRAs and judgement parameters prior to appraisal.
E) Allowing for both Quantitave and qualitave assessment.
F) Allowing self rating(narrative- contents what went wrong & what went right and why?)
G) Conduct Aprraiser and Appraisee meetings to understand the job. simply seek information on " How can I know that you are doing an honest job?"
H) At the end of the day Conduct an Honest Review
Regards,
Shyamali
From India, Nasik
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