This article is the third in the series for Financial Systems News (FSN) concerning the implementation of a performance management framework focused on helping organisations plan, resource, execute and monitor corporate strategy.
In Part I FSN Writer, Michael Coveney, looked at the components of such a framework that consisted of a central CPM system, supported by a range of BI applications and reported through management reports, dashboards and strategy maps.
In Part II he looked at the content of the central CPM system and how the dimensions can be defined to combine the ‘business as usual’ model with the ‘strategy improvement’ model.
In this article Michael looks at the way in which this combined business/strategy model can be used to support decision-making within the management processes of planning, budgeting, forecasting and management reporting.
Decision Support and Management Processes
Performance management is all about taking decisions on the operation of both the business model and any associated strategy improvement initiatives. What goals should we go for? What things have to be done to achieve those goals? How much will it cost? How much did it cost? What will it cost in the future? Is the outcome worth it? What changes should we make? And so on.
These decisions are made through a series of activities that tend to be classified into the management processes of strategic planning, tactical planning, financial planning, forecasting, management reporting and risk management. There are three important things to bear in mind when designing processes:
• Although these are often seen as discreet processes, in reality they are each comprised of multiple activities that have strong links with activities within other processes.
• For effective performance management, none of these processes can be left out.
• In today’s volatile business environment these activities need to act as a single continuous process.
Figure 1 – CPM Management Processes
As a consequence, what goes on within these processes and how they are interconnected will determine whether performance actually gets managed.
To construct the right processes, which for CPM should together focus on achieving the organisation’s mission, the following needs to be determined for each:
Process purpose: What is the purpose of each process and what decisions need to be supported?
Process activity: Who is involved in those decisions and what information do they require? What input is expected from them based on the decision taken/to be taken? How is the decision validated / approved?
Process monitoring: How are decisions monitored? What happens if the decisions made do not have the required effect?
The answers to the above should be documented and agreed, which then paves the way for designing how the supporting CPM system should operate.
Here is an example for some CPM processes. Given the limited space within this article, these are not fully covered here, but they should give a good idea on how to proceed.
For strategic planning, the purpose is to produce a long-term plan that identifies goals to be achieved within set resource constraints for a defined business environment. The decisions to be supported include:
• What are the overall goals we are planning to achieve in the next 3-5 years?
• What are the resource constraints in which we are to operate in each of those years?
• What assumptions are we making about the business environment over that period?
• What are the broad strategies to be implemented (i.e. the way in which we want to achieve the goals)?
• How is the success of each strategy to be measured?
For tactical planning, the purpose is to agree a set of improvement initiatives for each strategy that ensures the organisation achieves its goals within the defined constraints. The decisions to be supported include:
• What initiatives are required to implement each strategy? How much would each of these cost, who would be responsible and how will we know if they are being implemented?
• Which combinations of initiatives give us the best use of resources within the defined constraints?
• Which initiatives are to be approved that will then become the focus of the financial plan?
For financial planning/budgeting , the purpose is to create a financial plan for both the operation of the business model and the strategy improvement model. The decisions to be supported include:
• What resources should be assigned to the ‘business as usual’ model? How does this compare to last year and the current forecast?
• What resources need to be assigned to the strategic initiatives?
• How does the total financial position compare to the strategic plan?
• Is the financial plan realistic and does it adequately support our strategy?
• How will the plan be funded?
We could go on through the other processes but hopefully you have the idea of what’s involved.
Now we have the questions we can start to work out the information requirements of each. This will comprise of information that needs to be given to users and the input that is expected back in return.
The best way to define this is to create an activity map that shows the different activities involved, their dependencies, and who is responsible. The diagram shown in figure 1 provides a good starting point but each of these need to be broken down further into individual tasks to be performed, as shown in figure 2.
Figure 2 – CPM Process activity map
At many stages there will probably be the need for responses to go through some form of approval that may result in a submission being rejected.
In Part II of this series, we looked at the definition of a CPM model to hold data. For each activity shown in the activity map, we need to define what ‘slice’ of data each user will need to make their decisions, and what slice of data they will need to complete as part of their response. If the data can’t be defined from the business model, then that model will need to be amended.
Similarly, when presenting or gathering information, numbers don’t tell the whole story. There will need to be provision for handling text that forms the basis of a two-way communication.
Finally, for each activity, there needs to be a timescale in which the user must respond. This will include when the activity can start (which itself may be dependent on the completion of another activity) and when it is to be completed.
We have just mapped out a sequence of tasks and the order in which they take place. This will include monitoring the plan as part of the management reporting process. But what happens if something doesn’t go to plan? What if our assumptions on the business environment were not right? Or if forecast expenses are going to be greatly over budget? What if a particular initiative is not achieving the right effect?
There’s no point in waiting for the next planning round, which could be in a years’ time, in dealing with these issues. To manage performance, organisation’s need to take action as soon as potential issues arise. And that means triggering some or all of those activities defined in the activity map, but in the context of putting the plan back on track.
To do this we need to make a list of possible ‘exceptions’ and define what activities are to be triggered should those exceptions materialise.
From the above we are now in a position to setup the CPM system. As you can imagine, the processes defined in this article cannot be effectively handled by simple menu systems. It needs the CPM system to contain dynamic workflow software that can trigger planning and monitoring activities based on events and exceptions as well as a date on a calendar.
In the next and final part of this series, we will look at how to evaluate CPM technology solutions and how you can ensure they support a performance management framework