Performance Management: Finding the Mssing PiecesLinking: Performance Management: Finding the Missing Pieces (中譯本: 績效管理-尋找消失的片段，彌補智慧資本的落差)
Author: Gary Cokins
Hardcover: 304 pages
Publisher: Wiley (March 29, 2004)
Direction, traction, and speed. When you are driving a car, you directly control all three. You can turn the steering wheel to change direction. You can downshift the gears to go up a steep hill to get more traction. You can step on the gas pedal to gain more speed. However, senior executives who manage supply chains do not have direct control. Why not? Because they can only achieve improvements by influencing other people, namely their employees, and employees can sometimes act like children. They do not always do what you tell them to do, and sometimes they do the opposite of what they are told!
It is a tough time for senior managers. Customers increasingly view products and service-lines as commodities and place pressure on prices as a result. Business mergers and employee layoffs are ongoing, and inevitably there is a limit which is forcing management to come to grip with truly managing their resources, not just monitoring them. There is evidence that it is also a tough time to be a chief executive. Surveys by the Chicago-based employee recruiting firm, Challenger, Gray & Christmas, Inc., repeatedly reveal increasing rates of job turnover at the executive level compared to a decade ago. In complex and overhead-intensive organizations where constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure to execute their strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward economic value creation and other more strategic directives? How do they re-gain control of the direction, traction and speed for their enterprise? Performance management (PM) provides managers and employee teams at all levels with the capability to move directly toward their defined strategies like a laser beam.
VALUE CHAIN ANALYHCS PROVIDE COST TRANSPARENCY
A supply chain simply moves products and service-lines e.g. a bank loan, across multiple trading partners whereas a value chain generates a profit accomplishing this. Measuring true performance, not just hundreds of metrics destined for little use in briefing books, is a major challenge for managers. Increasingly measures must widen their horizon beyond the four walls of a company to encompass trading relations with upstream suppliers or contractors and downstream customers. This is because today it is no longer sufficient to be the most agile, lean and efficient finn. You are co-dependent on all of your trading partners to also be agile, lean, and efficient
This fosters the need for collaboration among trading partners, but most companies do not know how to get started. With improved measurement and displaying of cost data, and the root cause cost driver data, cost transparency across the value chain is made visible. Collaboration can be stimulated. Performance management is a catalyst for improvement.
WHAT IS PERFORMANCE MANAGEMENT?
A simple definition of performance management is "the translation of plans into results - execution." It is the process of managing an organization's strategy. For commercial companies, strategy can be reduced to three major choices :
1. What products or service lines should we offer or not?
2. What markets and types of customers should we serve or not?
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 helping managers to sense earlier and respond more quickly and effectively to uncertain changes.
Think of PM as an umbrella concept that integrates the business improvement methodologies you are already familiar with (or likely have heard the terms) with technology. In short, the methodologies no longer need to be applied in isolation. They can be orchestrated.
Performance Management is sometimes confused as a human resources and personnel system. It is much more encompassing. It describes the methodologies, metrics, processes, software tools, and systems that and manage the performance of an organization. Performance Management is overarching from the C-level executives cascading down through the organization and its processes. From the top desk to the desk top. To sum up its ben- efit, it enhances broad cross-functional involvement in decision making by providing tremendously greater visibility with accurate, reliable, and relevant information - all aimed at executing an organization's strategy.
To minimize anyone's confusion, there is no single PM methodology because it spans the complete management planning and control cycle. Think of it as a broad end-to-end union of solutions including three major purposes: collecting data, transforming and modeling the data into infonnation, and web-reporting it to users and decision makers. Many of PM's component methodologies have existed for decades or have become recently popular, such as the balanced scorecard. Some of PM's components, such as activity-based cost management, are partially or crudely implemented in many organizations, and PM refines them so that they work in better harmony with PM's other components. Early adopters have deployed parts of PM, but few have deployed its full vision.
The term knowledge management is frequently mentioned in business articles. It sounds like something an organization needs, but the term is somewhat vague and does not offer any direction for improving decisions. In contrast, the main thrust of PM is to make better decisions that will be evidenced, and ultimately measured, by outputs and outcomes.
MANAGEMENT'S QUEST FOR THAT ELUSIVE MAGIC PILL IMPROVEMENT PROGRAM
Executive management's greatest challenge is in communicating its strategy. If asked to describe their organization's strategy, most employees and managers cannot adequately articulate it. Employees can effectively implement a strategy only when they clearly understand the strategy and how they contribute to its achievement. An integrated suite of methodologies and tools, the PM solutions suite, provides the mechanism to bridge the business intelligence gap between the CEO's vision and employees' actions.
Many organizations, however, jump from improvement program to program hoping that each new one may provide that big yet elusive competitive edge. However, most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change, particularly a long-term sustained change. The key for improving is integrating and balancing multiple improvement methodologies.
Performance Management tightly integrates the business improvement and analytic methodologies executives are already familiar with. These include strategy mapping, balanced scorecards, costing (including activity based cost management), budgeting, and forecasting, and resource capacity requirements. These methodologies fuel other core solutions such as customer relationship management (CRM), supply chain management (SCM), risk management, and human capital management (HCM) systems, as well as Six Sigma. It is quite a stew, but they all blend together.
In the end, organizations need top-down guidance with bottom-up execution. PM does this by converting plans into results. PM integrates operational and financial information into a single decision-support and planning framework. And based on a common database platform, it provides one version of the truth rather than disparate inconsistent data that annoys both employees and customers. Simply put, PM helps an organization to understand how it works as a whole.
THE ROLES OF STRATEGY MAPS AND THE BALANCED SCORECARD
Leadership's role is to determine strategic direction and motivate people to go in that direction. However, senior executives are challenged and usually frustrated with cascading their strategy down through their organization. Executives and management consultants have hailed the balanced scorecard as the new religion to resolve this frustration. It serves to communicate executive strategy to employees and also to help navigate direction by shaping the alignment of people with strategy. The balanced scorecard bridges the substantial gap between the raw data spewed out from business systems, such as enterprise resource planning systems (ERP) and the organization's strategy. In addition, it provides immediate and visual feedback through graphical meters displaying differences between actual performance and the targets set by management.
Despite much publicity about the balanced scorecard, the strategy map that precedes the development of the scorecard is considered to be much more important. Strategy maps enable leadership to motivate people by serving as a guide with signposts and guardrails. Strategy maps explain high-level causes and effects with if-then logic, helping executives choose the best strategic objectives and the supporting projects and action items that will help the company attain them.
One can think of strategy maps and scorecards similar to how financial analysts rely on balance sheets and income statements to describe an organization's financial health. Strategy maps and the feedback from its companion scorecard describe an organization's strategic health and consequently its chances for increasing prosperity. The Scorecard expresses the strategy in measurable terms communicating what must be done and how everyone is progressing.
PERFORMANCE MANAGEMENT IS AN ITERATIVE PROCESS
Similar to the popular 'plan-do-check-act (PDCA) iterative cycle made popular by W Edwards Deming, the famous quality improvement expert, performance management also has an iterative cycle. Imagine performance management as a wheel with three elements or arcs: focus, communicate, and collaborate.
The process of managing strategy begins with focus. You never have enough money or resources to chase every opportunity or market on the planet. You have to think in terms of that you are continuously limited to scarce and precious resources and time, so focus is key and strategy yields focus. In this important initial step senior management defines and continuously adjusts its strategy. And next, by mapping cause and effect relationships with its strategy map, it defines strategic objectives and higher impact action steps and projects that will achieve those objectives. Companies can ideally turn big goals into small, manageable projects that can actually be accomplished. 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. By focusing on critical areas, everyone can identify the true sources of business failure, as well as the best practices that lead to future success.
The process of managing strategy continues with communication. The key is for senior management to articulate its strategy to employees in a way they understand it. Along with articulating strategy comes the all-important feedback to employee teams. "How am I doing on what is important?" The balanced scorecard is the key tool for communicating 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 their relative level of importance. Think of a scorecard as a set of chain-links of the strategy map's strategic objectives where each chain-link uses "if-then" relationships with leading and lagging measures to drive work efforts to align with organization's mission and vision. If properly implemented, a scorecard enables all employees and managers should be able to quickly answer a powerful question: "How am I doing on what is important?" By integrating, distributing and analyzing enterprisewide information an organization gains the power to act on this information - ahead of its competitors.
The process of managing strategy ends with collaboration. By 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 discussion threads can be created for faster consensus and truly make executing strategy everyone's job. Employees do not need to wait for their managers to direct them but rather they can actively make decisions. Collaboration in this sense is all about collective dialog.
Ultimately, executives can move beyond the traditional practice of focusing on backward-looking financial results by using scorecards and strategy maps to focus on their organizations' strategic objectives in the areas of learning, growth, innovation and process. They can focus on non-financial leading indicators, measured during the period, and that ultimately result in the organization's financial performance. By doing so, organizations can achieve their customer-facing objectives and subsequently meet their financial objectives.
THE ROLE OF RELIABLE FACT-BASED DATA, PRIMARILY COST AND PROFIT MEASUREMENTS
In the absence of facts, anyone's opinion is a good one. And usually the biggest opinion wins. A major benefit of PM is that when everyone gets the same facts, then they generally reach the same conclusions on how to act.
What makes today's PM systems so effective is that work activities, what people, equipment and assets do, are the foundations of PM reporting, analysis and planning. These work activities are the keys in defining the actions and projects essential for meeting the strategic objectives constructed in strategy maps and measuring the outcomes highlighted in scorecards. Activity-based cost management (ABC/M) systems can be used to accurately measure work activities such as process costs, output costs and customer profitability. ABC/M applies its data for both top line revenue growth and operational cost management - with a subset of ABC/M's measures serving as key performance indicators (KPIs) used in the balanced scorecard.
Some view the successful coordination and integration of PM methods and tools as simply "old wine in a new bottle," meaning PM is just a repackaging of existing methods and software already available and not a radically new solution. In contrast, others view performance management as "new wine in an old bottle." That is, PM systems provide us-executives, managers and employees-with visible, relevant, accurate and timely intelligence from existing data not previously available.
Regardless of which view is correct, the term performance management is now widely accepted by the IT research analyst firms, who proclaim that combining the components of PM in a unified approach makes more sense than treating individual methods in isolation.
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. A strategy-focused organization enables targeted feedback on strategic performance to specific employee teams in order to effect continual strategy and implementation improvements. An organization must be vigilant and look for potholes on even the best roads. Performance management 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 performance measure affects another. It also involves digging deeper to see causal relationships and manage work activities across your entire enterprise so that everyone is on the same page.
The appeal of PM is that it realizes that there is no sun around which lesser improvement programs, management methodologies or core processes orbit. PM helps to orchestrate all these efforts to improve an organization's alignment with its strategic objectives, resulting in better direction, traction and speed - and most importantly sustaining improved performance longer term. PM provides managers and employees with the power to know how to act proactively, before events occur or proceed so far that they demand a reaction.
THE PERFORMANCE MANAGEMENT FRAMEWORK FOR VALUE CREATION
One of the most ambiguous terms in discussions about business and government is value. Everybody wants value in return for whatever they exchanged to get value. But whose value is more important and who is entitled to claiming it? Customers conclude that they receive value if the benefits they received from a product or service meets or exceeds what they paid for it including time, investment, cost, etc. But shareholders and stakeholders believe if their investment return is less than the economic return they could have received from equally or less risky investments, then they are disappointed. Value to employees is another issue altogether, most likely tied to compensation and job satisfaction.
Three groups believe they are entitled to value: customers, shareholders/stakeholders, and employees. Are they rivals? What are the trade-offs? Is there an invisible hand controlling checks and balances to maintain an economic equilibrium so that each group gets its fair share? Are some groups more entitled to receiving value than others?
PERFORMANCE MANAGEMENT OPERATING AS AN INTEGRATED SYSTEM
If you are the CEO, the answer must be "Mission and Strategy." That is the CEO's primary job, to define and constantly adjust organizational strategy as the environment changes. That is why CEOs are paid high salaries and reside in large corner offices. However, after the strategy definition is complete and maintained as current, then the core business processes takeover, with competent process owners held accountable to manage each one.
Customers would probably say that customer satisfaction is most important. Customer satisfaction encompasses four customer-facing trends:
1. Customer retention, a recognition that it is relatively more expensive to acquire a new customer than to retain an existing one
2. Source of competitive advantage, gaining an edge by shifting from commodity-like product differentiation to value-adding service differentiation
3. Micro-segmenting of customers, with a focus on customers' unique preferences rather than mass selling
4. The Internet shifting power from suppliers to customers and buyers.
It's easy to conclude that a customer focus is critical. Three anows are at the center of the figure, starting and ending with the customer satisfaction ellipse. In practice, these anows circulate counter-clockwise. The two fat green arrows represent the primary universal core business processes possessed by any organization, regardless if they are in the commercial or public sector: take an order or assignment, and fulfill an order or assignment. These two processes apply to any organization: orders, assignments or tasks are received, and then organizations attempt to execute them. The IT support systems needed to fulfill these two core processes represented by the green arrows are called front office and back office systems.
The customer-facing, front office systems include customer intelligence (CI) and customer relationship management (CRM) systems. This is also where sales and work order management systems reside. The back office systems are where the fulfillment of customer or work orders, process planning and operations resides - the world of ERP and Six Sigma quality initiatives. The output from this process planning and execution box is the product service, or mission intended to meet the customer needs. To the degree that that customer revenues exceed all of an organization's expenses, including the cost of capital, then profit (and free cash flow) eventually accumulates into the shareholder's ellipse in the figure's lower right
The need to satisfy customers is the major input into senior management's ellipse in the figure's upper left: "Mission and Strategy." As the executive team adjusts an organization's strategy, they may abandon some key performance indicators (KPIs) intended to align work behavior with the outdated strategy. In this case, KPIs associated with outdated strategies are not unimportant but rather now less important. The team may also add new KPIs or adjust the KPI weightings for various employee teams. As the feedback is received from the scorecards, all employees can answer a key question: "How am I doing on what is important?" With analysis for causality, conective actions can then occur. And note that the output from scorecards does not stop at the organization's boundary, but it penetrates all the way through to influence the employee behavior. This in turn leads to better execution.
AN AUTOMOBILE ANALOGY FOR PERFORMANCE MANAGEMENT
All organizations have been doing performance management well before it was labeled as such. It can be argued that on the date all organizations were first created, they immediately were managing, or attempting to manage, their enterprise performance by offering products or services and fulfilling sales orders. If you will, imagine an organization at start-up as a poorly tuned automobile. We would observe the consequences of unstable business methods: unbalanced wheels, severe shimmy in the steering wheel, poor timing of engine pistons, thick power steering fluid, and mucky oil in the crankcase. Take that mental picture and conclude that any physical system of moving parts with tremendous vibration and part-wearing friction dissipates energy, wasting fuel and power. At an organizational level, the energy dissipation from vibration and friction translates into wasted expenses where the greater the waste, the lower the rate of shareholder wealth creation, and possibly destruction. In a different case, you may find a car that seems perfect in the mind of the customer in every way, but it is not priced to make a profit, making the shareholders unhappy. In another, the focus may be on producing an automobile at the lowest cost to the point of undermining customer satisfaction.
Now imagine an automobile with its wheels finely balanced and well lubricated. The performance framework, i.e. the automobile, remains unchanged but the shareholder wealth is more rapidly created because there is balance in quality, price and value to all. No vibration or friction. That is how good performance management integrates the multiple methodologies of the performance management portfolio of components and provides better decision analysis and decision making that aligns work behavior and priorities with the strategy. Strategic objectives are attained, and the consequence is relatively greater shareholder wealth creation.
Activity-based costing (ABC) data, a key component in performance management, permeates every single element in this scenario to help balance these sometimes competing values. ABC itself is not an improvement program or execution system like several other systems in the figure. ABC data serve as a discovery mechanism and an enabler for these systems to support better decision making. For example, ABC links customer value management, as determined by CI and CRM systems, to shareholder value creation, which is heralded as essential for economic value management. The tug-of-war between CI/CRM and shareholder wealth creation is the trade-off of adding more value for customers at the risk of reducing wealth to shareholders. Ultimately, businesses will discover that customer value management is the independent variable in the equation to solve for the dependent variable for which the executive team is accountable to the governing board: shareholder wealth creation. Performance management provides the framework to model this all important relationship.
How does this work? When combined with effective forecasting and risk management tools, ABM enables the only financial calculation engine that can quantitatively translate changes in customer value to measure the impact on shareholder value. We know all these components connect, but we struggle with how they do it. Research and work remains to be done as described by this observation:
"Customer value can be regarded as the key driver of shareholder value . . . [but] surprisingly, although being of obvious importance, literature taking a more comprehensive view of customer valuation has only recently been appearing. A composite picture of customers and investors is hardly found in business references."
Is my figure the best diagram to represent of the Performance Management framework? I do not know. It is my diagram. Professional societies, management consultants, and software vendors have their own diagrams. Perhaps a business magazine or web portal can have a contest where diagrams are submitted and voted on by readers. But the key point is that performance management is not the nanow definition of "better strategy, budgeting, planning and finance." Clearly, it is also about balancing sometimes competing values.
THE QUEST FOR A COMPLETE SOLUTION USING BUSINESS INTELLIGENCE
Organizations that are enlightened enough to recognize the importance and value of their data often have difficulty in actually realizing that value. Their data is often disconnected, inconsistent, and inaccessible resulting from too many non-integrated single-point solutions. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily. Unlocking the intelligence trapped in mountains of data has been, until recently, a relatively difficult task to accomplish effectively. Typically one finds different departmental data warehouses built on different platforms using combinations of tools, some non-standard, some with expired maintenance support, and some pre-built in a tool purchased from a vendor no longer in business. This results in unintended baniers blocking systems from cleanly communicating amongst themselves. All organizations are reaching a point where it is important for computers to talk to other computers.
Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power heralding a new era where creating vast pools of digital data is becoming the preferred solution. As a result, there are now superior tools that offer a complete suite of analytic applications and data models that enable organizations to tap into the virtual treasure trove of information they already possess, and enable effective performance management on a huge scale.
These advanced software vendors' offerings are timely to solve today's problems in commerce and government The market has been evolving from wanting just business intelligence tools to wanting complete solutions. This includes customizable horizontal solutions that apply across all markets, e.g. human capital management and scorecards, as well as vertical solutions for specific industries such as retail, banking, health care, or manufacturing.
Rising specialization, complexity, and value-adding services cause the need for more, not less, PM. Despite the impact that technology and more flexible work practices and policies have on continuously changing organizational structures, without ongoing adaptation the conect work at acceptable service levels will not get done. All employees must have some grasp of managing for results. Somehow their collective performance must be coordinated. A united and sustained performance is a challenging part of management. Performance Management aids in accomplishing this goal.
~Cited from Gary Cokins. AACE International Transactions. Morgantown: 2006. p. PM5.1-5.6.