Performance management (PM)1 is translating plans into results - execution. It is the process of managing your strategy. Strategy is of paramount importance and is senior management's number one responsibility. For commercial companies, strategy can be reduced to three major choices.2
- What products or service lines should we offer or not offer?
- What markets should we serve or not serve?
- 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 aiding managers to sense earlier and respond more quickly to uncertain changes. It does this by driving accountability for executing the organization's strategy to the lowest possible organization levels.
In contrast to the popular 1990s business process reengineering (BPR) approaches, where after radical redesign every single step and task were explicitly mapped, PM relies on the power of focusing on the pertinent and relevant. After determining the strategic objectives and the supporting projects, measures, and appropriate (not old-style) budgets to achieve these strategic objectives, the rest will naturally follow. That is, the work activities align to pursue strategy, often intensely customer-focused, as job number one. Do not confuse PM with business process management (BPM) or workflow tools and their software vendors. PM is inclusive of BPM tools and much more. PM includes the thinking as well as the number crunching.
So if PM includes much more, then what is it comprised of? PM is an umbrella-like concept covering the tightly integrated and universally applicable methodologies of strategic planning, scorecard measurements, budgeting, costing (including activity-based management [ABM]), forecasting resource requirements, and financial consolidations. PM also includes the important adjacent neighboring methodologies that are independent of any industry: customer intelligence systems (e.g., customer relationship management [CRM]); supplier intelligence systems; shareholder intelligence systems (e.g., cost of capital, economic profit and value); human capital management (HCM) systems; and six sigma and lean operations.
Similar to the popular plan-do-check-act (PDCA) iterative cycle made popular by W. Edwards Deming, the famous quality improvement expert, PM also has an iterative cycle. As Figure 1 illustrates, imagine PM as a wheel with three elements or arcs: focus, communicate with feedback, and collaborate. The figure also shows how fact-based managerial accounting data and operational data provide input to the PM wheel.
The basic premise of the wheel is this: Employees can effectively implement a strategy only when they clearly understand the strategy and when they clearly see how they contribute to its achievement. That sentence encompasses a lot. It also supports why a mantra of the middle arc ("communicate") is the powerful question that all employees and managers should be able to quickly answer: "How am I doing on what is important?"
One can think of strategy maps and scorecards similarly to how financial analysts rely on balance sheets and income statements to describe an organization's financial health. Strategy maps and the feedback from their companion scorecards describe an organization's strategic health and consequently its chances for increasing prosperity. 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. Scorecards with data management systems resolve this. Scorecards express the strategy in measurable terms, communicating what must be done and how everyone is progressing.
In summary, employees and managers should be provided with the tools to align their work with the strategy and to be recognized for their contribution to the organization's success. A strategy-focused organization enables targeted feedback on strategic performance to specific employee teams, in order to effect continual strategy implementation. An organization must be vigilant and look for potholes on even the best roads.
Some of the elements, or arcs, of this iterative cycle, are:
- Focus. The process of managing strategy begins with making choices and focus. There is never enough money or resources to chase every opportunity or market on the planet. We are continually limited by 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. Next, by mapping cause-and-effect relationships, it selects and defines strategic objectives and higher-impact action steps and projects that will achieve those objectives. Strategy maps are the key tools for developing focus. Do not underestimate the importance of strategy maps. They have been overshadowed by the popular scorecard that stars in arc number two; but those in the know place far greater respect and emphasis on strategy maps compared to scorecards as the key to successfully executing strategy.
Companies can ideally turn big goals into small, manageable projects that can be accomplished. This can happen!
- Communicate with Feedback. The process of managing strategy continues with communication. This context is reserved for senior management articulating to its employees its strategy. Along with articulating strategy comes the all-important feedback to employee teams. Remember the mantra, "How am I doing on what is important?" A scorecard is the key tool for reinforcing communication of 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 its relative level of importance that are weighted in the strategy map. 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 the organization's mission and vision.