Current business literature is filled with references to corporate performance management, or CPM. According to Gartner, Inc., "... fewer than 10 percent of enterprises will have implemented CPM by YE02, however, 40 percent will adopt it by 2005 (0.7 probability).1" Gartner Research states, "Corporate performance management is an important concept" and "enterprises that effectively deploy CPM solutions will outperform their peers.2" It sounds like we need to pay attention to CPM, but what exactly is it?
In short, corporate performance management refers to the "methodologies, metrics, processes and systems that monitor and manage the performance of an enterprise.3" From an implementation perspective, CPM is often associated with concepts or phrases such as key performance indicators (KPIs), business activity monitoring (BAM), Six Sigma Quality and the Sarbanes-Oxley (SOX) Act of 2002. CPM is also frequently used in the same sentence as balanced scorecards, executive dashboards, business performance metrics and financial planning and forecasting. Confused?
This article will describe what the corporate performance management "buzz" is all about, why an effective CPM strategy and implementation plan can significantly improve the performance of a company and the critical success factors for achievement of CPM objectives.
CPM Drivers Business and Technology Evolution
Corporate performance management (CPM) resonates with businesses today because they are looking for effective responses to increasingly challenging economic market environments. These environments demand improved planning, better operational process monitoring, enhanced ability to analyze and anticipate changes and opportunities, and more effective operational execution. Added to the competitive business pressure is increased scrutiny, both internally and externally, since the Sarbanes-Oxley Act of 2002, which prescribes regulatory compliance with financial controls, reporting and auditing processes. It is in today's business climate that CPM is becoming not simply a strategic advantage, but a requirement for continued survival of the enterprise.
In parallel with the renewed challenges of the business environment, the technology direction of many companies has been on an increasingly demanding path, especially with regard to decision support technologies and infrastructure the data warehouse and business intelligence applications. IT organizations, especially the data management components of these organizations, are embracing the concept of corporate performance management as the next logical step in the evolution of decision support systems.
In fact, it is easy to reach the conclusion that the concept of corporate performance management is a natural extension of data warehousing and business intelligence. For several years, companies have been progressing down the path of developing decision support infrastructures characterized by reliable, consistent and integrated information, stored in a data warehouse or data mart(s), and front-end presentation environments, enabled by business intelligence analytic applications that provide end users with drill-down, drill-across and drill-through capabilities to support reporting, ad hoc queries and "what if" analysis. Most recently, many business intelligence applications have been developed and deployed using a digital dashboard, a graphical user interface as part of the presentation layer, to provide intuitive arrangement of measurements for key business performance measures.
Let's look at an example. Our hypothetical company is a distribution company with two major product lines. Sales are made to retailers. Products are shipped to retailers from distribution centers. There is a call center to field customer comments, inquiries and complaints. In this company, the sales organization had sponsored the development of a data warehouse with retailer, customer and product information. Key performance indicators for the sales organization are the number of products sold and total sales dollars. Sales (units and dollars) are measured daily. Transaction data flows from the operational systems into the data warehouse every night.
The sales dashboard contains several metrics, including:
- Total Sales Units Yesterday, Week-to-Date, Month-to-Date and Year- to-Date
- Total Sales Dollars Yesterday, Week-to-Date, Month-to-Date and Year-to-Date
When the data warehouse initiative started, these sales figures were simply reported, via the company intranet, on a daily basis to let management know how the sales organization was doing. As the company gained experience with relying on sales data, they realized that these measures would be more effective if there were a target against which they could see their incremental progress.
The next step this company took was to establish KPIs, or business performance metrics, that would give more meaning to the sales transactions being measured. The company decided to use last year's actuals, for the same time period, as a way to determine whether the current year's numbers were better than, worse than or equal to last year's sales. The presentation layer evolved to include graphical representation of totals compared to the measurement objectives last year's sales. Now the organization had colors applied to thermometers, speedometers, bar and pie charts on the new sales dashboard. Any sales manager or company executive could, at a glance, easily tell whether sales were ahead of, trailing or even with last year's sales.
Into this mix, we introduce the concept of corporate objectives. After some experience with using the new, intuitive and sleek-looking sales dashboard, our hypothetical company executives make the decision that one way to reach their corporate objective of growth is to plan to increase revenue by ten percent this year. Enter the corporate performance objective sales units and sales dollars that are ten percent higher in this year's plan than last year's corresponding actual units and dollars. The dashboard is modified to contain new standards against which actual performance is measured this year's growth objectives. Now, at one glance, or with one click, an executive, manager or analyst can see not just where the company is relative to last year's performance, but whether or not the company is on track with this year's planned objectives.
Because the amount of information being displayed on the dashboard has increased significantly, the company determines that a better way to design the dashboard is to highlight exceptions so they can be easily distinguished from other information and acted upon. This conclusion makes sense and is very much akin to the Six Sigma Quality objectives already in place at the company. The essence of Six Sigma is a well-defined process that helps companies focus on delivering near-perfect products and services. "Sigma" is a statistical term for the measurement of how far a given process deviates from flawlessness. The central idea behind Six Sigma is that the measurement of the number of defects in a process can lead to the ability to eliminate these defects and close the gap to achieve "zero defects."
Our hypothetical company decides to use the traffic signal convention for identifying exceptions in sales activity. That is, when sales exceed growth targets, a green light will be displayed, and where sales fall short of growth targets, a red light will be displayed. When a red light is displayed, the sales dashboard provides analytic capabilities to drill down to identify and analyze the root cause of the exception.
As the company begins to analyze causal factors of anomalous sales performance, the company determines they must improve their understanding of how their distribution operations impact sales. They tap into data from their ERP system to extract and format meaningful information related to product inventory management and distribution center operations. These KPIs are now displayed on the updated dashboard. The company has evolved their solution, over several iterations, from initially reporting on product sales to providing additional business insight about the meaningful correlation between the functions of supply and demand.
This company's IT organization hasn't yet taken an official stand on corporate performance management; instead it is evolving its decision support capabilities naturally, through the extended use of data warehousing and business intelligence tools, technologies and products to improve its delivery of the right information to the right people at the right time and place. This natural evolution places our company on the right path toward an effective CPM strategy. What's next?
Critical Components of Corporate Performance Management
While we've examined the premise that the concept of corporate performance management is a natural extension of the application of business intelligence, CPM takes conventional business intelligence applications a step further by adding the processes surrounding the management and planning of performance as well as the delivery of performance results. While many companies, including the company in our hypothetical example, have executed effective business intelligence initiatives the delivery of meaningful, actionable information to the right people at the right time in the right condition they have not integrated the plans and execution of actions that ultimately improve performance. CPM extends the concept of delivering information to include what is done with that information to improve results. In other words, it expands "knowing" to "planning" and "doing."
At minimum, the critical components of CPM include the following:
- A set of well-defined, measurable, and published corporate performance objectives that act as the focal point for developing performance measures in functional areas within the company.
- A set of standard metrics that are used to define and describe the relative contribution or influence that business functions within the organization have on the performance objectives.
- The first two components provide a common framework for measurement, collaboration and cross- functional understanding of the effect of each area's performance on the overall company objectives, as well as the influence each organization has on the performance of other organizations within the enterprise.
- The ability to predict outcomes based on the common framework for understanding and collectively managing performance from high-level objectives to operational activities.
How CPM Enables Improved Performance
The objectives of an effective corporate performance management strategy and implementation plan are to realize improved performance increased profitability, growth, competitiveness, quality and customer satisfaction, to name a few. Executive sponsors of CPM initiatives should strive for the following types of improvements to be realized:
Alignment and Accountability. Timely, reliable and consistent information enables managers to be held accountable for their area's performance and increases their ability to quickly respond in order to take advantage of competitive opportunities as well as identify and mitigate potential risks. The move toward real-time access to performance information enables near real-time monitoring of detailed operations, providing the enterprise with the ability to adjust rapidly to changing conditions. In addition, expectations and contributions of each functional area are widely and more effectively understood across the enterprise. There is more information in the hands of individuals who can most effectively impact change. Accountability is improved and, perhaps more importantly, empowerment is present throughout the various levels of the enterprise.
Improved Business Insight. Business managers and analysts have a more complete understanding of actual enterprise performance on a timely basis, as well as access to quick and accurate representations of what is likely to happen in the future (trend analysis).
Unification of Analytical Information. All functional areas are able to measure and plan performance using commonly defined business performance measures. This eliminates time spent on comparison and reconciliation across business areas, and also eliminates conflicting actions being taken because those actions are based on inconsistent or incomplete information. Performance measures specific to a functional area (such as sales) are linked to other functional area measures (such as inventory management and distribution) and tie to overall corporate performance metrics. This helps to focus all business organizations on the most important objectives for the enterprise and encourages collaboration among dependent business functions. It is the true embodiment of the phrase, "Think globally, act locally."
Business Agility. Business management strategy, along with the related actions necessary to execute it, can be adjusted as quickly as necessary in order to remain competitive. This is accomplished through streamlined communication and by developing a common understanding of each functional area's role, contribution and impact relative to other, interrelated parts of the company. Developing and exploiting a near real-time understanding of actual performance enables the company to more quickly adapt to changes in the present environment. There is more precise execution of business plans because of the linkage established from high-level corporate objectives to lower-level tactical activities.
Strategic Modeling. A company has the ability to model various business scenarios, such as acquisitions or modifications to inventory management, distribution, sales or marketing activities, in order to predict their impact on corporate performance objectives. For example, if we reduce the amount of inventory managed at a distribution center to reduce operations cost, what is the anticipated impact on retail sales revenue?
Critical Success Factors
There are many challenges that face companies as they seek to implement corporate performance management processes and systems. A few of the most common critical success factors follow:
Executive Sponsorship. Any CPM strategy must be driven from the executive level because CPM, by definition, involves cross-functional areas of the business. There must be long-term and ongoing commitment to the initiative. Just as with past experiences with data warehousing and business intelligence, companies that view and manage their CPM initiative as an evolutionary process will be more successful than those who attempt to build it all at once. Therefore, it is important to note that the CPM initiative may begin with the executive level of an individual business unit or functional area and spread to other parts of the corporation as it delivers meaningful results.
Strategic Objectives. At the beginning and center of any corporate performance management strategy are clearly defined performance objectives. These objectives provide focus to building organizational consensus as to what will be measured. Objectives must be specific, measurable, and documented. In some companies, corporate performance objectives stem directly from those published in a strategic plan. In a company that does not normally publish such objectives, it is a challenge to define them, agree upon them and develop a culture that understands and emphasizes their importance.
Settling of Organizational Turf Wars. There is often disagreement between functional organizations on preferred systems, business rule definitions, performance measures, data ownership and other fundamental business components that comprise the CPM initiative. In order to define an effective CPM strategy and implementation plan, these turf wars must be settled as soon as possible.
Information Integration. Most companies have a variety of business intelligence systems in place, as well as multiple repositories for data and meta data for the enterprise. Just as it is important to establish the focus of the business on a few critical corporate objectives, it is equally important to establish an integrated repository of information to use to evaluate operational performance against those objectives.
Drive Growth and Long-Term Success
Companies require swift, responsive, perceptive and adaptive decision-making based on factual information in order to be successful in today's business environment. The term "corporate performance management" defines an evolving solution that all companies should be considering as both a key strategic initiative to drive growth and long- term success, as well as a tactical initiative to hone organizational focus and operational excellence. The essence of CPM is a consolidation of concepts companies have been practicing for quite some time (data warehousing, business intelligence, quality management, financial planning and forecasting) into a single, integrated concept focused on enhancing corporate performance through organizational concentration on specific, measurable and documented performance objectives.
It is vital to establish a CPM strategy and road map to improve planning and monitoring of business process execution, establish fact- based decision-making, comply with increased scrutiny and enhance ability to compete. When correctly executed, CPM can offer companies improved insight into performance, bringing business functions across the enterprise together through technology to collaborate, plan and act using a common, timely and exception- based view of corporate performance.
Corporate performance management is not a technology or software solution. Although many software vendors are creating packaged application suites to support CPM, no technology alone can embody CPM. Any CPM solution must include the methodologies, metrics, processes and systems that support the integrated performance measurement and management of an organization. *
Editor's Note: In the February 2004 issue of DM Review, Brenda Moncla will describe and define a generic road map to CPM. Building on this article, the February feature will help companies determine their position on the CPM road map and explain the next steps for implementing CPM.
1. Gartner, Inc., "Linking Strategy to Execution: CPM," May 2003.
2. Gartner, Inc., "Managing Corporate Performance: What You Need to Know," May 2003.
3. Gartner, Inc., "Managing Corporate Performance: What You Need to Know," May 2003.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access