As the pace of change quickens, competition intensifies and shareholders demand profit growth. Organisations must draw up winning strategies, motivate their staff to implement them and monitor what is going on in every part of the business. They must recognise early signs of problems before they happen and take corrective action or adjust the strategy.
“Most organisations develop their business strategy in a vacuum and do not link it into their operations,” says Melvin James, principle consultant at Morse, a technology consultancy. “This makes it impossible to manage performance throughout the business, as the causal relationships of how the strategy will be executed have not been defined. A performance management system ensures that everyone understands what they need to do and how they can contribute to the corporate objectives.”
Performance management software suites are being assembled from best-of-breed solutions. Their functionality includes modelling, planning, budgeting, forecasting, reporting, scorecards, dashboards and financial consolidation.
“Performance management is an emerging and growing market as organisations shift from spreadsheets to packaged suites,” says Neil Chandler, research director at Gartner. “It has ‘crossed the chasm’ out of the early adopter phase and into the mass market. The vendors are now addressing the mid-market, which is still untapped as it is primarily using spreadsheet applications. We expect annual growth to be well above 10 per cent year and probably nearer to 20 per cent.”
Key to the whole process is to create an integrated framework of key performance indicators (KPIs) that link historical financial measures with the forward-looking operational activities that actually drive them. Examples might be the sales pipeline, volume of customer support desk calls, customer satisfaction, employee satisfaction, percentage of revenue from recently-released products or internal productivity.
Performance management software suites must support a fully integrated closed-loop management process that starts with corporate strategy development and preparation of a long range plan. This is translated into a series of KPIs and targets across the organisation.
These translate the overall strategy into operational measures that relate directly to each department and group of individuals. As each level of the organisation has different responsibilities and accountabilities, the KPI at each level must be translated into a set of different contributory KPIs at the next level down. For example, margin is an important KPI for the board, but is meaningless to the manager of the call centre.
The KPIs must be expressed in terms that everybody in the organisation can understand and be aligned with each other and the overall strategy. Incentives and remuneration may need to be changed in order to influence individual behaviour towards achievement of the corporate objectives.
Performance against these KPIs is monitored and reported back up through the organisation. Critical information is presented to users through personalised visual interfaces, such as dashboards and scorecards, which make use of coloured graphs and charts. These are designed to allow end-users to work interactively with the data, “slicing and dicing” it to analyse it and identify variances and “drilling down” to more detail in order to find the cause.
“The business doesn’t need to undertake a full-blown strategic review every few months,” explains David Ketchin, lead practice director for Parson Consulting. “However, certain elements of the overall strategy may need to be revisited to respond to changing market or competitive situations.”
KPIs are not inherently software issues. It does not matter how functional the software is, if the KPIs are wrong the organisation will not benefit. Similarly, if it gets the KPIs right, software is unlikely to be much of an inhibitor. However, the need to drill down to different contributory KPIs is a challenge to a software industry that is used to drilling down to the same figure at a lower level.
Establishing a link between historical financial measures and the leading operational indicators that drive them is absolutely critical to successful performance management. Martin Richmond-Coggan, European vice-president at Applix, a performance management software vendor, points out that operational processes, planning and analytics are a major source of differentiation.
“It defines one company’s business model against another’s,” he says, “which differentiates them in their market. Capturing them in a flexible performance management system means that the business model becomes embedded within the organisation, which can be a strong source of competitive advantage.”
Nick Whitehead, European director for business intelligence solutions at Oracle points out that spreadsheets are mostly used for planning in operations. “There is no real cross-enterprise implementation of performance management systems,” he says, “and that needs to change.”
Mr Whitehead says that it is important to build an overall performance management system to bring together information from transaction processing, operational and financial systems. This will link top level plans to operating plans. “Otherwise there is sparse, disconnected and incomplete information on which business managers can make their plans and assumptions,” he says. “The system must be ‘pervasive,’ which involves driving it down to a much wider body of decision makers.”
Mr Richmond-Coggan points out that when finance drives strategy through the financial model, it must impact operational activities and change behaviour. The operational systems then pass key information back to the financial systems, such as labour requirements, volumes and mix expectations. “The dilemma we have today,” he says, “is that a lot of operational systems do not feed into finance systems.”
Embedding a performance management system into an organisation is a massive undertaking, but addressing even one aspect of it can bring enormous rewards. Mr Ketchin at Parson Consulting describes a client whose planning process changed from a detailed bottom-up finance-oriented process taking 20 weeks to a KPI-driven process taking seven weeks. The forecasting process changed from a monthly detailed variance analysis and explanation and full set of accounts to a KPI-led process that focuses on risks, opportunities and gap management.
“Performance management is gaining momentum,” concludes Matt Dunstan, application platform group manager at Microsoft. “Consulting firms are embracing it as the next wave of big IT-driven consulting engagements, in the same vein as a previous interest in knowledge management, compliance and enterprise resource planning.”
