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Demystifying Performance Management

  • June 01 2004, 1:00am EDT
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If you ask five managers within your corporation to write down the three foremost corporate goals within your enterprise, how many goals would you get? Would you get five distinct goals? Ten? Fifteen? How about twenty because a few of the managers wouldn't follow the directions correctly? If you answered only three, there is an excellent chance that your corporation has already implemented an enterprise performance management (EPM) initiative that is well on its way to becoming a success.

While many may think of EPM in terms of software toolsets, EPM is much, much more than that. However, before we delve into what EPM is, let's take a look at why many organizations are undertaking an EPM initiative.

The goal of an EPM initiative is to steer the entire organization in the same direction. An EPM initiative serves as a road map for the entire corporation. It allows all levels of the organization to chart their way toward a common destination. It also provides upper management the visibility to see through the fog to know when portions of the organization are going off course and facilitates their ability to make course corrections along the way.

An EPM initiative can also serve to remove confusion within the enterprise. By providing upper management visibility deep within the enterprise, it can prevent departments from optimizing their efficiency to the detriment of the corporation's overall efficiency. It can readily identify business unit and departmental sub-optimizations and ensure that investments are aligned with the corporation's goals.

These goals are resonating very well with executive management in today's climate of increased regulation and, quite frankly, fear. While compliance with the Sarbanes-Oxley Act may be the catalyst that is driving many EPM initiatives in publicly traded companies, it is the implications of Sarbanes-Oxley ­ unwanted media attention along with threat of jail terms ­ that are driving many corporations to increase their corporate governance and insight into all levels of the business. Now that the Sarbanes-Oxley Act requires that a public company's CEO and CFO attest to the accuracy of their financial statements, those individuals want to make sure they have all the information necessary to compile a complete and accurate financial statement. Many organizations are turning to EPM to provide these capabilities.

An EPM initiative not only charts where you've been, but also allows you to plot the next few steps along the way. As stated within the prospectus of virtually all stock and mutual funds, past results are not an indication of future returns. This holds true for your company's financial statements as well as its stock price. Financial statements, the typical measure of an organization's progress, only provide point in time or historical period results. While much can be inferred from these reports, the lag in producing them often results in little problems being identified on an aging report only after they have grown into a much larger problem. A well-crafted EPM implementation melds the trailing indicators that typically constitute financial reporting with leading indicators that can help predict future trends. Depending on the methodology you choose, an EPM implementation often combines financial metrics with non-financial metrics that can identify the health of your enterprise from a variety of perspectives.

What is Enterprise Performance Management?

An EPM initiative is made up of the following components:

  • Strategy
  • Process
  • Methodology
  • Change Management
  • Business Intelligence
  • A Toolset


You can't implement EPM without knowing your corporation's strategy. If the purpose of EPM is to steer your organization toward a common destination, you'll have a rather difficult time getting there unless you know that destination. This sounds simple enough, but the mistake of attempting to implement EPM from the bottom up has been made countless times. While an EPM system may come with industry standard key performance indicators (KPIs), these KPIs are just noise if they haven't been validated and accepted as supporting your corporation's strategy.

Your corporation's strategy must also be actionable and measurable. Increasing top line revenue and reducing risk is not a strategy, it's common sense. Beginning an EPM initiative at this level will almost guarantee the misalignment of the enterprise's true objectives with the measures within the EPM system. Similarly, an EPM initiative should never be approved if all it promises are vague objectives such as "better and faster decision making" or "better insights into the enterprise's performance." An EPM initiative, however, does have the capability of serving as a catalyst for developing and refining your corporation's strategy into one that is actionable and measurable. However, in order to be successful, this needs to be a Phase 0 type activity that occurs at the beginning of your EPM initiative..


An EPM implementation sits at the intersection of two of your enterprise's key process cycles, the Strategic Cycle and the Operations Cycle. The Strategic Cycle focuses on strategy formulation and execution. This process is far more virtual than it should be in many enterprises, but in theory, it should be the driving force in designing an EPM solution. The outputs of the strategy formulation are then used as inputs into the planning and budgeting steps of the Operations Cycle. The Operations Cycle is not your organization's operations, but the operational execution of the strategic direction by the business unit and departmental managers of your corporation.

EPM Process Model
Figure 1

Sitting at the intersection of these two cycles, an EPM system facilitates the communication of the strategy to the operational areas of the enterprise and, at the same time, reports back to executive management on the progress being made toward the corporation's objectives. It also facilitates what many organizations have struggled with for years: the ability to monitor progress being made in near-real time and adjust the overall strategy as information on the practical progress of the current strategy's execution comes pouring in.


Your EPM initiative should be built on a specific methodology. Ultimately, when selecting an EPM toolset, the tool itself must support your chosen methodology. Never heard of an EPM methodology before? Actually, chances are that you have. The balanced scorecard is by far the most prevalent. Developed in the early 1990s by Kaplan and Norton in an attempt to move beyond pure financial measures that focus solely on how things have been, the balanced scorecard attempts to achieve balance by measuring the four key perspectives of an organization: financial, customer satisfaction, processes, and learning and growth. All organizations survive on their financials, but the three other perspectives offer leading indicators on organizational health that ultimately drive financial performance.

Some methodologies are purely financial methodologies while others, such as the balanced scorecard, look at non-financial metrics as well. Some other popular methodologies are:

EVA: Created and promoted by the consulting firm Stern Stewart, EVA is based on the assumption that the prime financial objective is to maximize shareholder value. It emphasizes maximizing return on assets. This methodology focuses solely on financial measurements.

ABC: A methodology for allocating both direct and indirect costs to an activity, ABC assists enterprises in defining profitability and is popular with CRM proponents for identifying customer profitability. It focuses only on hard-dollar financial measures.

EFQM: The EFQM performance management framework is much more popular in Europe than in the United States. It is similar to the balanced scorecard, as it uses multiple perspectives that are both financial and non-financial.

Choosing a methodology is the first step in selecting the metrics that you will measure within your EPM system. The wealth of best practice KPIs and metrics that are delivered with most commercial EPM systems is a tremendous benefit, but has underlying dangers. Those best practice KPIs are really "rest practices" ­ what the "rest" of the industry is doing. Can you effectively measure your organization, maintain competitive advantage and focus on your key differentiators by using industry standard "rest practices"?

Most EPM systems also inundate you with far more KPIs and metrics than you will ever use. In Jim Collin's book, Good to Great, he recommends focusing on that one strategic economic indicator by which everything else is measured. While this approach may be overly spartan for most enterprises, creating an EPM system that contains the same number of metrics as the number of dials and gadgets in the cockpit of the space shuttle is a sure way to effectively hide useful information in a choppy sea of informational noise.

Change Management

Every project needs change management, right? However, like training, change management is one of the first components of a project to get cut. Because implementing an EPM solution is much more about processes and methodologies than software implementation, the successful execution of a well conceived change management and communication plan is absolutely critical. If you implement a new general ledger package and do a poor job of change management, your users may complain, morale may suffer, unnecessary long hours may be put in and mistakes made, but ultimately the new system stays, and gradually ­ albeit painfully ­ the users will learn how to use the new system. If you implement an EPM system without building a shared vision for its use and obtain the appropriate buy-in, it can easily become a very expensive piece of shelfware. Ultimately, you can't force the potential users of an EPM system to actually use the system.

There are also some hidden implications of an EPM initiative that make change management even more critical. By getting the entire organization moving in the same direction, some levels of management will find themselves measured in different ways than ever before, and some of those measurements may not be entirely within their span of control. Metrics are often selected because they are the natural outputs of the current system. The old joke about the drunk searching for keys under the street lamp even though he dropped his keys thirty feet away is the perfect analogy for the kind of management behavior that EPM initiatives attempt to break down. It points out the futility of not taking the time to figure out WHAT needs to be measured before figuring out HOW to measure it.

Everyone wants to be measured by things under their direct control. Managers have successfully argued for years that it is unfair to judge ­ and pay ­ them based on results of work that other departments/business units may or may not complete successfully. EPM initiatives break down these traditional barriers and force people to work toward optimizing the entire system rather than gaming the metrics to the benefit of their personal fiefdom.

Business Intelligence

An EPM initiative is also a business intelligence initiative. Whether you purchase an EPM toolset or build one on your own, the architecture under the hood will look suspiciously like a data warehouse architecture. An EPM system has data sources, ETL routines, a data warehouse structure, data marts and/or OLAP cubes, a security model and a front-end (most likely Web-based) user interface. Like building a data warehouse, implementing an EPM solution is a complex, time-consuming process. How long will it take your organization to implement EPM? While that's an impossible question to answer because the time varies widely per company, chances are it will take your organization approximately as long as it took to implement any other major financial module. If your organization required six months to implement your current general ledger system, there's a very good chance your EPM implementation will take that long as well.


When selecting a commercial toolset, it is easy to become confused by the different software tools. Even the terminology is confusing. Thus far in this article, I've only discussed EPM. However, what about CPM (corporate performance management), SEM (strategic enterprise management), BPM (business performance management) and SPM (strategic performance management)? These acronyms are all vendor-created terms for the same overall concept: performance management. The differences exist because different vendors created similar products at approximately the same time with no clear leader of the pack. For all intents and purposes, EPM is the same as CPM, which is the same as SEM, and so on.

While there are differences in each vendor's implementation, the overall function of their performance management implementation is the same. In general, each implementation should contain most, if not all, of the components listed in Figure 2.

Performance Management Components
Figure 2

The components of an EPM solution may be implemented in more than one piece of software. Many EPM vendors have software suites with separate modules providing the individual functionality components.

Which Toolset to Choose

When choosing a toolset, the most difficult decision to make is whether to build or buy. The benefits of implementing a packaged application are the reduced development effort required due to the prebuilt data structures, canned ETL processes for some of your source systems, a built-in security model and a rather complete set of KPIs. The disadvantages of a packaged application are hidden in the details of the actual benefits. Development time is reduced but not nearly eliminated. A packaged EPM tool may understand some of your organization's source systems, but probably not all of them. You may also run into version compatibility issues if your source ERP system is on an older or newer version than your EPM software supports, or you may have to delay the upgrade or your ERP system until the appropriate EPM upgrade is available.

There is a wealth of toolsets in the marketplace within the EPM space. However, there are currently no clear leaders of the pack. In the latest Gartner Magic Quadrant of CPM tools, they point out that the "leaders" quadrant is currently empty. Undoubtedly, your short set of EPM tools will be based on your source systems. For example, if you have a PeopleSoft ERP system, PeopleSoft EPM would most likely be at the top of your short list. However, if you use SAP, SAP's SEM product would be on the top.

While there are perhaps no clear leaders today, the opportunity is there. The reality is that many organizations have implemented at least a portion of the processes that would make up an EPM system. While completely absent on Gartner's Magic Quadrant list, the tool of choice for most organizations is Microsoft Excel and the countless person-hours that go along with compiling and maintaining the myriad of reports and analysis that organizations create. The opportunity to fill in the vision with a tool that can readily compile, organize, aggregate and present all the information an organization needs for performance management, while challenging, is huge. Vendors will undoubtedly continue to invest in and expand their EPM offerings.

Bottom Line

Unlike a few years ago, EPM solutions now come in a box. However, a successful EPM implementation will require that the majority of the work occur prior to ever pulling the shrink-wrap off the box. If you can successfully formulate your strategy, identify the appropriate methodology for your corporation and sell the EPM vision throughout the enterprise, you'll find yourself more than up for any challenges the actual software implementation may throw at you.

Note: The author would like to thank his colleague, Mike DeWitt, for many of the ideas that contributed to this article.

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