After a sustained period of global economic growth the world is beginning to look a more uncertain place in which to trade. The credit squeeze is impacting the cost of capital, adversely affecting opportunities for deal making, suppressing acquisition activity and making Boards of Management jittery. Gary Simon, FSN's managing editor reports on the changing focus of performance management.
No doubt many companies will point to global economic conditions to explain away lacklustre performance over the coming months and there is no denying that conditions have become more testing. But company failures are not necessarily a consequence of economic slowdowns. Famous brands and businesses wither in good times as well. In fact Professor Gregory Hackett, (formerly of the Hackett Group and its founder) says that according to his research of the 1,000 largest U.S. companies over the past 40 years, only 21 percent are growing. About 80 percent of companies are currently stagnating or are in decline and businesses are failing at a rate three times faster than 30 years ago. This begs the question why?
Given the enormous investment that most businesses have made in ERP platforms and more recently in sophisticated performance management systems that transform ERP data into decision-making information, one would expect the complete opposite. Weren't budgeting, planning, forecasting and reporting systems coupled with dashboards and scorecards supposed to empower organisations and make them aware of every twist and turn in performance?
The answer is of course "yes" but some market observers believe that the technology is merely a leveller – it simply makes you eligible to compete. Realising true competitive edge is another matter.
According to strategists such as Oracle's Frank Buytendijk most organisations have their core processes pretty well licked. "Many have invested millions in business process reengineering projects and implementations of business applications such as enterprise resource planning, customer relationship management, and supply chain management, in order to come to the point where the business processes are clearly understood by everyone and are by and large reliable, uniform and predictable".
What are missing according to Buytendijk are the management processes that envelop the core business processes. He paints an almost Orwellian view of the world in which the business process engine has taken over, churning out KPIs in a regular fashion but detached from reality. "It is concerning, almost scary, that management processes are not as clearly defined as business processes because competitive advantage increasingly vests in management processes rather than business processes."
He has a point. Take the two litre car for example. Every motor manufacturer has access to similar performance data, wind tunnels and CAD/ CAM systems and there isn't much that is not known about perfecting performance from the average family saloon. Production costs have been cut to the bone and quality has been boosted beyond expectations. Operational excellence is no longer the basis of competition because one manufacturer's two litre car is much like another's.
Increasingly the things that drive companies out of business or into terminal decline are unlikely to be found in the monthly reporting pack. Consider the impact of the personal computer on mainframe manufacturers, digital cameras on the photographic film industry and iTunes on traditional music publishers. These powerful changes had a catastrophic effect on established businesses but how many of them saw the changes coming? If they did see the tsunami on the horizon how many managed to change course before it was too late? It is changes such as these that really affect performance.
But where are the management processes that constantly test the market. Who is responsible for scanning the horizon and challenging the business? What business title would they have?
Gary Cokins, a strategist with SAS and author of a book on performance management, believes that there is a shift in managerial methods from after-the-fact reactive controls to proactive decision making. "The emerging competitive edge is companies who achieve competency with all flavours of analytics, particularly predictive analytics. This enables them to take actions before minor problems escalate into major ones," he told FSN.
According to Hackett we are obsessed with controlling the controllable. We are comfortable – too comfortable – with our monthly KPIs and we are internally focussed. Oracle's Buytendijk expresses it another way. He told FSN, "Enterprise Performance Management traditionally focuses on an inside-out approach. This was confirmed by a recent Cranfield University study that found organisations are too internally focussed and did not use sufficient external information or benchmarking."
Quoting Professor Richard Rumelt, at UCLA's Anderson School of Management (interviewed in a McKinsey Quarterly in 2007), Buytendijk says, "Substantially higher performance often starts from exploiting a change in the environment and riding that change with quickness and skill." Buytendijk interprets Rumelt's comments as understanding the contributions and requirements of stakeholders, movements in markets and superior interpretation of data.
Richard Fisher, COA Solutions, agrees with the need for a balance between external and internal focus, he told FSN, "The implication that Performance Management should be inwardly focused is to miss the benefits it can potentially bring; inherently external factors have an impact on the performance of any business. It is true that we can only control the controllable but it critical to appreciate and use those external influences to create real advantage."
Buytendijk, Hackett and Cokins may be coming at the problem from slightly different directions but essentially they have both put their finger on a significant challenge. They have identified a yawning gap in management discipline, where key business processes barely exist, external data is cast aside and stakeholder concerns are neglected.
Ironically, Buytendijk contends that the data is there. "Most organisations have the all of the external data to predict these trends, residing in their competitive intelligence functions. At the same time internal information is readily available on resources and activities, within extensive business intelligence systems. However, rarely are competitive intelligence and business intelligence combined." Cokins extends this by observing, "It is not about just monitoring the dials of a scorecard but rather moving the dials. This is achieved by integrating the various methodologies that constitute the performance management framework and spicing each of them with analytics, particularly risk management and predictive analytics."
What the debate illustrates is that performance management is entering a new and more exciting phase. The focus of discussion is shifting away from technology and tools and much more towards process. Technology has encouraged a culture of measurement mania and an obsession with KPIs. In the more reflective period we are now entering the question is once again much more properly around how and what we should be measuring and do we have the management processes to cope?
