Michael Coveney, FSN writer and author of the highly successful book “Strategy to the MAX”, challenges the fundamentals of Corporate Performance Management and suggests that many organisations simply use technology to implement time-bound processes driven by the corporate reporting cycle rather than the need for prompt decision making.
The concept of linking strategy to every day actions was made popular in the 1990’s by the writings of Norton and Kaplan in their successful series of books on the Balanced Scorecard. But it wasn’t until early 2000 that integrated software solutions that could support such an approach, started to appear.
Today, every major vendor has a Corporate Performance Management (CPM) solution to support a market that is growing strongly, and yet there are indications that organisations are not getting the benefits that are claimed.
CPM is an approach that aligns strategy with resources and that focuses management attention onto the achievement of corporate goals. But surveys have shown that most plans fail due to breakdowns in planning and execution. So it’s not surprising to find that for the third year running, the Board Report has cited the ‘execution of strategy’ as the No. 1 issue facing CEOs.
Execution – like planning and reporting – is a management process. However, Gartner reports that 50% of organisations implementing a CPM solution simply replicate their existing processes and do not take time to improve them.
The Impact of Technology
Technology has transformed today’s business environment so much that most, if not all, of the management practices of the past are no longer adequate for managing performance.
For example, the Internet has made the business environment global and that operates on a 24/7 basis. News about products and promotions can be instantly transmitted around the world in a variety of interactive media, while social networks such as Twitter and Facebook have taken the power of marketing out of the control of manufacturers and suppliers.
Technology has enabled the rise of intermediaries that buy and sell on behalf of manufacturers; given birth to the availability of market-relevant information; and provided analytical capabilities that can analyse vast amounts of data to highlight trends and opportunities.
In addition, through technology, products can be out of date within months of manufacture, while the cost of materials to produce them can fluctuate wildly on a daily basis.
As a consequence the traditional processes of annual planning, quarterly forecasting and monthly reporting no longer make sense and are unable to manage company performance with any degree of certainty or accuracy. Instead it is those organisations that are able to react the quickest to changing events, which have the best chance of achieving their ultimate aims.
Event-based Management
To cope with today’s turbulent business environment requires organisations to manage performance based on processes that are driven by events and exceptions, rather than an arbitrary date on a calendar.
Continuous Planning as it is sometimes called is not about doing the same old processes only more often and faster. It requires a complete re-think of their purpose and the way in which they are run. To enable this reengineering, two steps are required:
- First, a network of management activities needs to be mapped out that show how strategy is formulated, resourced and turned into actions.
- Second, the circumstances that would trigger a particular activity, outside of a ‘normal’ process, need to be recorded.
By combining both kinds of activity, organisations can then develop a continuous approach to performance management. Let’s look at this in a bit more detail:CPM Processes and ActivitiesPerformance management processes are typically seen as six distinct processes – strategic planning, tactical planning, financial planning, management reporting, forecasting and risk management. They tend to be treated separately and implemented as different applications. But on closer inspection of each process, things are not so clear-cut.
Fig 1. Activities within the traditional CPM processes
Within each process there are a number of key interconnected activities that cannot be run in isolation (see figure 1). They each depend on the successful conclusion of a prior activity and they do not always run in such a straight-forward sequence. For example, Risk Management plays a part in a number of processes and there is a loop between the adjustment of plans following a forecast and the tactical and financial planning processes.
To make matters more complex, within each activity there are many interactions between departments. For example when setting a budget, the market forecast should be reflected in the sales target, which in turn should drive the production budget. However, production capacity may impact the sales that can be achieved. Once these departments have finalized their plans, other departments will need to do theirs - support services, finance department, IT and so on.
These different tasks form a network of inter-dependencies in which some will depend on the completion of others before they can be started. It is only when all these tasks and activities are combined do they form part of one overriding process of managing strategy.
CPM Activity Triggers
Once this network has been defined, the next step is to decide how each task/activity is triggered. With some tasks it will be the completion of other tasks. For example, the budget process activity can take place once the tactical plan has been agreed and top-down targets set; the budget approval process can start once all the submissions have been received.
Just as important are those activities that are triggered by an exception or an event. For example a competitor may dramatically reduce their prices, or the market suddenly contracts. Or it could be that material costs are way above budget, or a sales forecast shows that end of year targets are going to be easily beaten.
In these and most other cases, the organisation must initiate a set of planning and risk management tasks for the affected parts of the business if it is to stay on track or better its performance. This could involve changing or introducing new initiatives, which may need resources that could affect other parts of the company.
Waiting until the next annual planning round to accommodate these changes is illogical, inefficient, potentially hazardous and is guaranteed to lead to a gap between strategy and execution.
Re-engineering the management processes involves recording what events need to be monitored. These will almost certainly be the assumptions and targets set in the strategic and tactical plan. For each event, there needs to be an upper and lower limit set on each measure and an action that will trigger the relevant management activity should those limits be breached. In this way, only those parts of the business that are directly affected would be involved in re-planning.
The role of technology
As can be imagined, the only real way of ensuring the above network runs effectively and efficiently is by implanting workflow technology. Simple menu systems are simply not good enough to perform this role in any sizable organisation. At the current time, few CPM vendors have such sophisticated process management capabilities, but there are signs this is about to change.
As with ERP that only succeeded when organisations re-engineered their financial processes, so it is with CPM. To get the benefits organisations must re-engineer their performance management processes to one that makes sense.
