Performance Management

Integrating Strategy Execution, Methodologies, Risk, and Analytics

Gary Cokins

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470471197
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

Praise for Praise for Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics

"A highly accessible collection of essays on contemporary thinking in performance management. Readers will get excellent overviews on the Balanced Scorecard, strategy maps, incentives, management accounting, activity-based costing, customer lifetime value, and sustainable shareholder value creation."
— Robert S. Kaplan, Harvard Business School; coauthor of The Balanced Scorecard: Translating Strategy into Action, The Execution Premium, and many other books

"Gary Cokins demonstrates in this book that performance management is not a mysterious black art, but a structured, process-oriented discipline. If you want your performance management system to be a smoothly running analytical machine, read and apply the ideas in this book—it's all you need."
— Thomas H. Davenport, President's Distinguished Professor of Information Technology and Management, Babson College; coauthor of Competing on Analytics: The New Science of Winning

"Drawing on a deep reservoir of knowledge and experience gained from hundreds of customer engagements around the world, Gary Cokins offers an authoritative examination of the major dimensions of performance management. Cokins not only paints a rich and textured view of the major principles and concepts driving performance management implementations, he offers a nuanced look at the important subtleties that can spell the difference between success and failure. This is an informative and enjoyable text to read!"
— Wayne Eckerson, Director of Research, The Data Warehouse Institute (TDWI); author of Performance Dashboards: Measuring, Monitoring, and Managing Your Business

"[In this] very insightful book, the view of an integrated performance management framework with a goal to link various operational activities with business strategy is an excellent approach to manage and improve business. Gary's explanation of risk-based performance management, for providing the capability to achieve long-term objectives with reliably calculated risks, is definitely thought provoking."
— Srini Pallia, Global Head and Vice President of Business Technology Services, Wipro Technologies, Bangalore, India

"Gary Cokins is clearly one of the world's thought leaders in the area of performance management, and the need for integrated performance management, improvement and execution is clearly at a premium in these challenging economic times. This book is a must read for CEOs, CFOs, and management accountants around the globe seeking higher levels of sustainable business performance for their stakeholders."
— Jeffrey C. Thomson, President and CEO, Institute of Management Accountants

Part One

Introduction

A man’s mind stretched by a new idea can never go back to its original dimensions.

—Oliver Wendell Holmes, U.S. Supreme Court Justice, 1897

Sometimes a little satire is an effective way to better understand what performance management is all about. I begin this book with a tongue-in-cheek description of an organization that is doing the wrong things to pursue a performance management culture. Chapter 2 is the longest chapter of the book, because it is describes the broad view of performance management that all the subsequent chapters relate to. Chapter 3 boldly hypothesizes that predictive analytics may be comparable in impact to the major management breakthroughs of the past century.

Chapter 4 describes enterprise risk-based performance management—the comprehensive view that combines governance, risk, and compliance with performance management. Risk management is a top-of-mind concern for executives. It is important not to isolate risk from performance management but to explain how they are connected.

Chapter 1

Rules for Ensuring Poor Performance

In 1773, Benjamin Franklin, one the founding fathers of the United States, wrote a pamphlet aimed at the royalty of England, titled Rules by Which a Great Empire May Be Reduced to a Small One. Satire is one way to get your point across. I apply my own style of satire in this chapter to appeal to organizations to cease their hesitation and skepticism and embrace the benefits of performance management. I apologize in advance if I offend anyone, but sometimes there is truth in humor.

Imagine I took over the management of a poorly performing organization and wanted to keep it that way. For example, I might not want it to grow so quickly that it would leave me less time to pursue my hobbies. What steps would I take?

First, I would ensure that all of the managers and employees are totally ignorant of the executive team’s strategy. That way, no one will understand how the work they do each week or each month contributes to successfully achieving the strategy. Next, I would figure out ways to ensure that managers and employees do not trust one another. I would discourage dissent and debate. It would be tricky to preserve some level of harmony by not allowing healthy conflict among managers who are already distrustful of each other, but I think I could do it.

Next, I would avoid holding anyone accountable. That would be fairly easy, because I would disallow reporting of performance measures. Anyone mentioning the phrase “the balanced scorecard” would be summarily fired. I would allow employees to measure their local processes and results in dashboards. After all, I do not want the organization to go bankrupt; I just want poor performance. But I would restrict any measures from being key performance indicators because we would not want to monitor our progress toward any targets that are strategic. I would try to disallow setting of targets, but some managers have a nasty habit of liking them. I think those managers believe that if they could make it appear that they are better performers than others, then I would reward them with a “pay-for-performance” bonus system. If I allow people to be motivated this way, performance might improve. I am not going to fall for that trick.

I would freeze our managerial accounting system to remain in its archaic state. It probably was designed in the 1950s, but our external financial auditors would always be giving us an OK grade. I would allow managers to hire more support overhead to manage the resulting complexity, but I would preserve the primitive overhead cost allocations to processes and products using those distorting and misleading broad averages, such as product sales volume or number of units produced. Most employees would already know that these cost allocations cause big cost errors, but I would want to keep them guessing about which products make or lose money and what it actually costs to perform our key business processes. I do not think my financial controller will correct this, but I need to keep a watchful eye because my accountants are getting much smarter about how to improve operations and serve as strategic advisors to me.

We would need to be careful about how much information we collect and report about our customers. Obviously, we would report their sales volume data, but I would not segment our customers into any groupings. I would keep sales reporting at a lump-sum level. I do not want anyone asking questions such as “Which types of customers should we retain, grow, acquire, or win back from competitors?” To keep our company from tanking, I would encourage sales growth by putting big signs in the marketing department saying “More sales at any cost!” I would prevent my chief financial officer from harboring any thoughts of measuring customer profitability. That would be easy, because our arcane cost accounting system would not be capable of calculating that information. The marketing people typically spend their budget with a spray-and-pray approach, anyway. Targeting specific types of customers and getting a high-yield payback from our marketing spend would be beyond their level of thinking. I would maintain our advertising spending as the black hole that no one understands.

I would, of course, implement an enterprise resource planning system. I would not want to be at a cocktail party with other executives and admit I do not have one. That would be too embarrassing, like a teenager without an iPod. Luckily, ERP systems alone will not improve performance; they produce mountains of transactional data for daily control, but not meaningful information from which anyone could make wise judgments or good decisions.

Our budgeting system would be another way to ensure our poor performance. Since the budget numbers are obsolete a couple of months after we begin the fiscal year, assembling the budget for six months during the prior year would provide a great distraction and prevent anyone from working on more important things. Plus, I would love to send the budget back down a few times to be redone to lower the budgeted costs. Everyone would moan. I would be very stingy about giving managers any budget for one-time projects. When those kinds of initiatives sneak in, companies always get a jolt of productivity improvement, which is counter to poor performance.

We would squeeze our suppliers. We could talk about partnering and collaboration, but any attempt to actually do so would be squashed immediately. Never trust a supplier. If you drive one out of business, you can always find another.

I do not think I could stop employees from using spreadsheets. They are contagious. But since every department would have its own spreadsheets, it would be like a Tower of Babel. Employees would waste a lot of time trying to make their numbers match. I might allow a few departments to purchase a common database to warehouse their information. Fortunately, there would be lots of incorrect input data in it, so that bad experience would burst their bubble. Those employees with spreadsheets might want to use them for forecasting and planning. I would put a stop to that by calling it gambling and promote our company as being conservative. Gambling is for fools, so I would set a policy forbidding risk taking.

I know that operating a poorly performing business is an extremely difficult job, but I think I would be up to the task. Suppressing the efforts of all those employees and managers who want to think, contribute, and make the business successful requires constant vigilance. The business world is full of subversive ideas that could hamstring my efforts to keep the business floundering aimlessly.

I am particularly concerned about this new concept called performance management. Whatever it is, I will stop it from happening. I believe that with hard work and dedication, I could keep any company from reaching its profit-making potential.

Chapter 2

Performance Management: Myth or Reality?

There is confusion in the marketplace about the term performance management. Just Google the term and you will see what I mean.

The confusion begins with which phrase we should use to refer to performance management. This confusion in part is due to semantics and language. We often see in the media the acronyms BPM for business performance management, CPM for corporate performance management, and EPM for enterprise performance management. But just as the words merci, gracias, danke scḧn, and thank you all mean the same thing, so do these acronyms. Fortunately, information technology (IT) research firms like IDC and Gartner are accepting the short version, and simply calling it performance management.

Additional confusion is that the term performance management is perceived by many as far too narrow. It is often referenced as a bunch of measurement dashboards for feedback and better financial reporting. It is much, much more. More recent confusion comes from the term being narrowly applied to a single function or department, such as marketing performance management or IT performance management.

Historically, performance management referred to individual employees and was used by the personnel and human resources function. Today, it is widely accepted as enterprise-wide performance management of an organization as a whole. Clearly the performance of employees is an important element in improving an organization’s performance, but in the broad framework of performance management, human capital management is just one component.

Most new improvement methodologies typically begin with misunderstandings about what they are and are not. Perhaps that is why the famous business management author, Peter Drucker, observed that it can take decades before a new and reliable management technique becomes widely adopted. Misunderstandings are typically not a result of ignorance, but rather inexperience. The latest buzzphrase, performance management, is predictably laden with misconceptions due to the lack of experience with it. That is now changing.

One purpose of this book is to remove the confusion and clarify what performance management really is, what it does, and how to make it work. We begin by discussing a major reason why there is such high interest in performance management.

EXECUTIVE PAIN: A MAJOR FORCE CREATING INTEREST IN PERFORMANCE MANAGEMENT

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 that is forcing management to come to grips with truly managing their resources for maximum yield and internal organic sales growth. A company cannot forever cut costs to prosperity. 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 repeatedly reveal increasing rates of involuntary job turnover at the executive level compared to a decade ago.¹ Boards of directors, no longer having a ceremonial role, have become activists; and their impatience with chief executive officers (CEOs) failing to meet shareholder expectations of financial results is leading to job firings of CEOs, chief financial officers (CFOs), and executive team members.

In complex and overhead-intensive organizations, where constant redirection to a changing landscape is essential, the main cause for executive job turnover is executives’ 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 sustained economic value creation for shareholders and other more long-term strategic directives? Performance management provides managers and employee teams at all levels with the capability to move directly toward their defined strategies.

One cause for failures in strategy execution is that managers and employee teams typically have no clue as to what their organization’s strategy is. Most employees, if asked, cannot articulate their executive team’s organization strategy. The implication of this is significant. If managers and employee teams do not understand their organization’s strategic objectives, then how can the executives expect employees to know how what they do each week or month contributes to the achievement of the executives’ strategy? That is, employees can effectively implement a strategy only when they clearly understand the strategy and how they contribute to its achievement. The balanced scorecard (see Chapter 17, “The Promise and Perils of the Balanced Scorecard”) has been heralded as an effective tool for the executive team to communicate and cascade their strategy down through their managers and employees to improve strategy attainment.

A balanced scorecard is designed to align the work and priorities of employees with the strategic objectives that comprise an organization’s defined mission. But there is confusion with this methodology. Many organizations claim to have a balanced scorecard, but there is little consensus as to what it is. Worse yet, very few have designed a strategy map from which the scorecard is intended to be derived as its companion. The strategy map is orders of magnitude more important than the scorecard itself—the latter of which should be viewed as merely a feedback mechanism.

Is it enough to have a strategy map and its balanced scorecard with visual at-a-glance dashboards that display key performance indicators (KPIs)? Or do these provide merely one component needed for delivering economic value creation through achieving the strategy?

Ultimately, an organization’s interest is not just to monitor scorecard and dashboard dials of measures but, more important, to move those dials. That is, reporting historical performance information is a minimum requirement for managing performance. Scorecards and dashboards generate questions. But beyond answering “What happened?” organizations need to know “Why did it happen?” and, going forward, “What could happen?” and ultimately, “What is the best choice among my options?”

WHAT IS PERFORMANCE MANAGEMENT?

Performance management is all about improvement—synchronizing improvement to create value for and from customers with the result of economic value creation to stockholders and owners. The scope of performance management is obviously very broad, which is why performance management must be viewed at an enterprisewide level.

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:²

1. What products or service lines should we/should we not offer?

2. What markets and types of customers should we/should we not serve?

3. How are we going to win—and keep winning?

Although performance management provides insights to improve all three choices, its power is in achieving choice #3—winning by continuously adjusting and successfully executing strategies. Performance management does this by helping managers to sense earlier and respond more quickly and effectively to uncertain changes.

Why is responding to changes so critical? External forces are producing unprecedented un...

Table of contents

• Praise
• Title Page
• Copyright Page
• Dedication
• About the Author
• Preface
• Part One - Introduction
• Part Two - Performance Management Overview
• Part Three - Performance Management Supports Business Intelligence and Decision Making
• Part Four - Implementing Performance Management
• Part Five - Strategy Maps, the Balanced Scorecard, and Dashboards
• Part Six - Financial Performance Management
• Part Seven - Customer Value Management
• Part Eight - Performance Management and Shareholder Wealth Creation
• Part Nine - Environmental Performance Management
• Part Ten - Conclusion
• Index