Performance management, or at least certain elements of it, has been around for more than 10 years. However, in the last decade it saw widespread adoption and growth. That growth came in the form of both many new users as well as added functionality. Transformation is a two-way street, and as performance management helped transform the way businesses analyzed data and made decisions, businesses helped transform performance management into a more comprehensive system capable of meeting their growing requirements.

What is performance management? At its most fundamental level, it is a set of management processes, supported by technology, that enable a business to execute on its strategy. It is not only the processes that have changed so much over the past 10 years, but also how technology supports and enhances them.

Budgeting First

The first area that most companies use performance management for is budgeting. Ten years ago almost every company, no matter how large or sophisticated they were in other areas, used a spreadsheet as its primary means of budgeting. Even when a spreadsheet wasn't the main “system” used for budgeting, it was at least a key part of the process. This was one of the first areas that performance management helped transform. Because even senior management at most companies felt the pain of their budgeting process, they were anxious to find a suitable replacement.

A spreadsheet-based budgeting process is fundamentally flawed. It is chaotic, labor intensive, error-prone, difficult to use for those who are not power users of spreadsheets, and not very secure, maintainable or auditable. This resulted in budget processes that involved as few users as possible (because of the complexity and work involved), took too long and produced final data that no one trusted nor relied on. A budget that was out of date was deemed useless the moment it arrived. It was filed away never to be looked at again. By the way, if this still sounds like your company, you may be at least 10 years behind the times (and most of your peers).

The first wave of performance management changed all this. Solutions were delivered that leveraged users' familiarity with the look and feel of spreadsheets, but wed it to a centralized and secure database and a consistent set of metadata. Workflow, with its management of the submission, review and approval process, was also part of the mix. In some cases, the system used a real spreadsheet as the front-end, enabling continued use of existing budgeting templates and models with minor adjustments. More often, though, performance management systems used their own spreadsheet look-alikes as the main user interface. Companies that adopted these systems saw a dramatic change in their next budgeting cycle.

Performance management helped streamline the budgeting process, and it significantly reduced errors and the time and labor required. Ease of use wasn't great initially, but has improved quite a bit over time. The result is that companies using performance management for budgeting today are able to involve more users, iterate quickly and produce a timely, meaningful budget that people can trust. Once the budget is done, companies can use the same systems for forecasting, which enables them to do so more frequently. Some performance management adopters have even moved to a continuous-planning approach. These businesses are able to manage their operations using the most current plans, a distinct competitive advantage and a far cry from where we were just 10 years ago.

Performance Reporting

Reporting, or more specifically performance reporting, is also dramatically different from where it was 10 years ago. End users were largely dependent on IT for the creation and maintenance of their reports, a situation neither group was too happy with. Changes to production reports required a long lead time for coding and testing, and end user ad hoc reporting was largely a dream. The reports themselves often compared current month performance to prior months and prior years, not the budget targets in a spreadsheet somewhere.

The key measures on the reports, or key ratios as they were often called, were textbook metrics set in stone years ago. Managers could not easily get the information they needed to run their businesses and, therefore, were forced to make less-informed decisions. Again, if this is still how your company operates, you have some catching up to do. To be fair, some companies had moved past this stage even 10 years ago. They were the early adopters of some of the reporting solutions available from several vendors in the '90s. Even those solutions fell short, though, compared with where we are now.

While there have been reporting solutions available for many years, integrated performance management reporting solutions offer a number of advantages. For one thing, since performance management systems are financial in nature, so are their report creation tools. In the past, pure BI reporting tools required users to think in terms of grids of rows and columns and cells. Using a report writer in a typical performance management system, an end user selects the accounts (sales, expenses, etc.), organizational entities (corporate, U.S. region, etc.) data categories (actual, budget, forecast, etc.) and time periods they are interested in. These types of selections are obviously much more intuitive for a business user.

In addition, there are significant advantages when the reporting capability is part of the performance management solution. For one thing, it can leverage the built-in financial intelligence. The system already knows how the income, expense, asset and liability accounts roll up. It also knows how the cost centers roll up into the consolidated regions. The reports incorporate this information so a user doesn't have to spell out, for example, that row 1 “revenues” minus row 2 “expenses” equals row 3 “net income.” In addition, the reports dynamically change as the performance management accounts and entity structures change.

The most important benefit of integrated reporting within a performance management system is the ability to do performance reporting: actual results versus budgeted targets. When both sets of data reside in a single data repository with a common set of metadata, this becomes a straightforward task. Since the budget is created in the system, it natively resides there. Using extract, transform and load tools provided as part of the solution, the monthly transactional data is mapped over at a summary level. Layered on top of this are the key performance indicators central to any performance management initiative. These measures, when properly selected, are tied back to the corporate strategy. So now when you look at a performance variance report  that features these KPIs (or graphically display it on a performance dashboard), you are focusing on attainment of measures that matter. In other words, you are measuring how well you are executing on your strategy.

The Future

As businesses and the global markets they operate in continue to change, performance management will continue to evolve. Capabilities that have been found off to the side in specialized applications (and, therefore, only utilized by a limited number of companies) will be embraced by performance management and become mainstream. One current example is profitability optimization. As the economy continues to drive companies to tightly manage their costs and focus their limited resources on their most profitable products, customers demand for profitability analysis and optimization has grown. The one-off solutions in the market today are still difficult to implement and use, and in the end are disconnected from the primary database housing the key data needed for decision-making.

As profitability optimization becomes a core component of performance management solutions, this will change. It will utilize the same interfaces that users are already familiar with, as well as the same metadata, and will be part of the trusted central repository of business data they have come to rely on for decision-making. Clearly performance management will continue to be transformed by evolving business needs, and in turn continue to transform and improve how businesses make their key management decisions.

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