Before a meaningful discussion can be had about any management improvement methodology, there should ideally be sufficient agreement that the methodology is valid and useful rather than being another short-lived fad or fashion. Let's put the test to performance management. Is it really being applied or just talked about - and will it be lasting?
The first thing we need to appreciate is that performance management is not a new management methodology that everyone has to learn, but rather it is a broad assemblage and integration of existing improvement methodologies that managers and employee teams are already familiar with. And most organizations have already begun to implement some of the performance management portfolio of methodologies. The problem is organizations have been implementing their improvement programs in silo-like isolation in relation to each other: a Six Sigma program here, a CRM project there. It is as if managers live in parallel universes. Performance management takes a much broader view. Performance management is more than just strategy, planning and finance with an emphasis on measurements.
We must realize that there is no single performance management methodology because it spans the complete closed-loop planning and control cycle. But we should also recognize there are substantial interdependencies among improvement methodologies and systems. In a sense, everything is connected and changes in one area can affect performance elsewhere. For example, you cannot separate cost management from performance as increases or decreases in expense funding generally impact performance results. For performance management to be accepted as the over-arching integrator of methodologies, it must meet this test: will performance management prove to be a value multiplier?
Performance Managementas a Value Multiplier
Before assessing the incremental value-add of integrating performance management's multiple methodologies, let us first ask ourselves how many organizations believe the realized return on investment rate or payback from their most recently implemented system met or exceeded their expectations (or the estimate from the software vendor or consultants assisting them). Gee. No one is raising their hand. This is no surprise. The CIO has been increasingly criticized for expensive technology investments that, although probably necessary to pursue, have fallen short of their planned targets. The executive management team is growing impatient with IT investments.
How does performance management create more value lift? One fundamental thing performance management does is it transforms transactional data into decision support information. For example, employee teams struggle with such questions as, "How do we increase customer service levels without increasing our budget?" Or, "Should we increase our field distribution warehouse space 25 percent or have our trucks ship direct from our central warehouse?" How can employees answer those questions by examining transaction data from a payroll, procurement, general ledger accounting or ERP system? They cannot. Those systems were designed for a different purpose - short-term operating and control with historical reporting of what happened.
By transforming raw transactional data into decision-relevant information, performance management helps further answer the questions of: Why did it happen, what optional actions can then be taken and which of the alternative actions appears to be the best for us?
Why is performance management relevant to operations personnel as well as the executive team? It is because operating managers and employee teams toil daily, making choices involving natural tension, conflicts and trade-offs within their organization. An example is how to improve customer service levels and cost-saving process efficiencies while restricted to fixed contract-like budget constraints and profit targets. The classic conflict in product companies is that the salesforce wants lots of inventories to prevent missed sales from stock-out shortages, whereas the production folks want low in-process and finished goods inventories so they can apply the more proven just-in-time production methods rather than continue with the less-effective batch-and-queue production methods of the 1980s. Managers acknowledge that the impact from their decisions may adversely affect their coworkers elsewhere in their organization - but they don't know who, where and to what extent. Performance management resolves the uncertainty of estimating impacts and predicting outcomes.
Performance Management for Risk-Based Decision Making
Ultimately when we remove the confusion about what performance management is and what it is not, we will recognize that its basic purpose is risk-based decision making about direction and the best use of resources to get there. It is the old cliche of "doing more with less" but combined with a risk-mitigating compass that accepts uncertainty as a given. And by adding managerial accounting as a foundational component to performance management, we involve the language of money to support decision making and build better business cases.
There are many components in the portfolio of performance management, such as strategy maps, balanced scorecard, activity-based costing, customer relationship management, supply chain management, rolling financial forecasts, etc. They all have interdependencies, so we know they should be integrated. These components are like pieces of a tabletop puzzle that everyone knows somehow fit together, but the picture on the box is missing! Performance management provides that picture of integration both technologically and socially. Performance management makes executing the strategy everyone's job #1 - it makes employees behave like they are the business owners.
There are universal needs of an organization for measurements that align employee priorities and their work with the organization's strategic objectives and to understand what do things truly cost so they can understand where they make or lose profits - today and in the future. Since key pillars of performance management are key performance indicators and progressive managerial accounting, a long-term sustainability of an integrated performance management system is a sure bet as a reality.