Performance management (PM)1is translating plans into results—execution. It is the process of managing your strategy. Strategy is of paramount importance and is senior management’s number one responsibility. For commercial compa- nies, strategy can be reduced to three major choices:2
1. What products or service-lines should we offer or not offer?
2. What markets should we serve or not serve?
3. How are we going to win?
Although PM provides insights to improve all three choices, its power is in achieving number three—winning—by adjusting and executing strategies. PM does this by aiding managers to sense earlier and respond more quickly to uncer- tain changes. It does this by driving accountability for executing the organiza- tion’s strategy to the lowest possible organization levels.
In contrast to the popular 1990s business process reengineering(BPR) ap- proaches, where after radical redesign every single step and task were explicitly mapped, PM relies on the power of focusing on the pertinent and relevant. After determining the strategic objectives and the supporting projects, measures, and appropriate (not old-style) budgets to achieve these strategic objectives, the rest will naturally follow. That is, the work activities align to pursue strategy, often intensely customer-focused, as job number one. Do not confuse PM with busi- ness process management(BPM) or workflow tools and their software vendors.
PM is inclusive of BPM tools and much more. PM includes the thinking as well as the number crunching.
So if PM includes much more, then what is it comprised of? PM is an umbrella-like concept covering the tightly integrated and universally applicable
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methodologies of strategic planning, scorecard measurements, budgeting, cost- ing (including activity-based management [ABM]), forecasting resource require- ments, and financial consolidations. PM also includes the important adjacent neighboring methodologies that are independent of any industry: customer intel- ligence systems (e.g., customer relationship management [CRM]); supplier in- telligence systems; shareholder intelligence systems (e.g., cost of capital, economic profit and value); human capital management (HCM) systems; and six sigma and lean operations. These are core process solutions and are described in Part Four (see in particular Chapters 17, 18, and 19).
Similar to the popular plan-do-check-act (PDCA) iterative cycle made popu- lar by W. Edwards Deming, the famous quality improvement expert, PM also has an iterative cycle. As Figure 2.1 illustrates, imagine PM as a wheel with
22 PERFORMANCE MANAGEMENT PROCESS
Strategy Map
Balanced Scorecard
Managerial Accounting
Data
Operational Data s
Focu
e
Com mu
nic at
C o llaborate
Strategic Management
Figure 2.1 Performance Management with Fact-Based Data ccc_cokins_02_21-30.qxd 1/14/04 10:19 AM Page 22
three elements or arcs: focus, communicate with feedback, and collaborate. The figure also shows how fact-based managerial accounting data and operational data provide input to the PM wheel.
The basic premise of the wheel is this: Employees can effectively implement a strategy only when they clearly understand the strategy and when they clearly seehow they contribute to its achievement. That sentence encompasses a lot. It also supports why a mantra of the middle arc (“communicate”) is the powerful question that all employees and managers should be able to quickly answer:
“How am I doing on what is important?”
One can think of strategy maps and scorecards similarly to how financial ana- lysts rely on balance sheets and income statements to describe an organization’s financial health. Strategy maps and the feedback from their companion score- cards describe an organization’s strategic health and consequently its chances for increasing prosperity. Many organizations report measures, but they are without depth. Users can view a result, but whether it is good or bad, they are unable to investigate the underlying cause. Scorecards with data management systems re- solve this. Scorecards express the strategy in measurable terms, communicating what must be done and how everyone is progressing.
In summary, employees and managers should be provided with the tools to align their work with the strategy and to be recognized for their contribution to the organization’s success. A strategy-focused organization enables targeted feedback on strategic performance to specific employee teams, in order to effect continual strategy implementation. An organization must be vigilant and look for potholes on even the best roads. PM involves people knowing that all members of their organization are focusing, communicating, and collaborating on strategy from a single vantage point. It aids in everyone’s understanding of how one per- formance 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.
Part Two of this book will delve deeper into the elements, or arcs, of this iter- ative cycle, but for now let’s briefly look at each one:
1. Focus.The process of managing strategy begins with making choices and focus. There is never enough money or resources to chase every opportunity or market on the planet. We are continually limited by scarce and precious re- sources and time, so focus is key—and strategy yields focus.
In this important initial step, senior management defines and continuously ad- justs its strategy. Next, by mapping cause-and-effect relationships, it selects and defines strategic objectives and higher-impact action steps and projects that will achieve those objectives. Strategy mapsare the key tools for developing focus.
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Do not underestimate the importance of strategy maps. They have been over- shadowed by the popular scorecard that stars in arc number two; but those in the know place far greater respect and emphasis on strategy maps compared to scorecards as the key to successfully executing strategy.
Companies can ideally turn big goals into small, manageable projects that can be accomplished. This can happen! The first step in this translation is to create a set of strategic themes that will bridge the gap between the existing state of operations and the desired state. These themes then organize the work of the company and can be used to subdivide work among various operating divisions, departments, and em- ployees. Whether you base your strategy on a balanced scorecard, the Malcolm Baldrige Award criteria, six sigma, total quality management (TQM), or lean man- agement framework, an organization should define and use clear, concise perfor- mance indicators that help its workers see the causes and effects of its strategy.
Strategy maps begin that process. By focusing on critical areas, everyone can iden- tify the true sources of business failure as well as the best practices that lead to fu- ture success. This is also a logical place to link the strategy to the budgeting process.
2. Communicate with Feedback.The process of managing strategy contin- ues with communication. This context is reserved for senior management articu- lating to its employees its strategy. Along with articulating strategy comes the all-important feedback to employee teams. Remember the mantra, “How am I doing on what is important?” Ascorecardis the key tool for reinforcing commu- nication of the strategy. Think of scorecards as the drive gears of the strategy map. Think of a scorecard as having carefully selected and defined indicators and measures, each weighted to reflect its relative level of importance that are weighted in the strategy map. Think of a scorecard as a set of chain links of the strategy map’s strategic objectives, where each chain link uses if-then relation- ships with leading and lagging measures to drive work efforts to align with the organization’s mission and vision.
By integrating, distributing, and analyzing enterprise-wide information, an organization gains the power to act on this information—ahead of its competi- tors. The goal is to communicate a strategic vision to the entire workforce and empower employees to execute its strategy proactively, before events occur that demand a reaction. To stay ahead, individuals must draw on their organization’s business intelligence to make decisions based on hard facts that are timely, not on assumptions and late news. And when it is too late, sufficient enterprise intel- ligence should be accessible to conduct root-cause analysis to fix the situation and get back on track.
3. Collaborate.The process cycle of managing strategy ends with collabo- ration. (The cycle never actually ends; it is a continuous iterative loop.) By
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aligning various strategies among business units, the organization taps into the collective knowledge of its employees and unleashes each person’s potential.
From the “top desk” to the desktop, e-mail-based discussion threads, based on feedback from key performance indicator (KPI) scores from the scorecard, can be created for faster problem solving and consensus. The PM process truly makes executing strategy everyone’s job. Collaboration in this sense is all about collective dialogue. Management is not equivalent to control—management is coaching people for continuous improvements
A simple way to think about this PM cycle is that it embraces both planning and executing. However, PM is greatly aided when managers and employee teams have access to and visibility of fact-based intelligence, such as the rich information from an ABM system. With fact-based intelligence, correct strate- gies are more likely to be formulated, and employee teams can analyze what is happening and what might happen (e.g., what-if scenarios) in order to make better decisions.
PM also links the annual budget process, usually performed by the finance function, with the strategic planning process. If executives approve the projects and initiatives to meet strategic objectives, then they also need to give employee teams the commensurate resource levels. But the budget is typically exposed only in general ledger accounts. In contrast, strategies are expressed in terms of programs and performance measures. What is missing is the mechanism to ex- plicitly link them. PM does that. When all is said and done, much is often said and little is done. PM inspires actions based on calculated risks to support the best or right decisions.
Chapter 5 discusses strategy maps and scorecards. These are the tools that help define strategy and then facilitate the navigational guidance to assure that the organization is keeping on track, altering its direction and speed as shifts in strategy necessitate new courses. Part Three describes ABM as an important cat- egory of data, some of which can serve as a source of KPI measures in a score- card as well to aid in the understanding of drivers of work activities and capacity (i.e., expense) consumption.