Corporations throughout the world are racing to keep pace with the rapid change in today's business environment e-commerce, global supply chains, the Euro, virtual organizations. As such, senior executives are faced with determining the potential impact of these opportunities and preparing a coherent, coordinated business response. Meeting these challenges requires the ability to quickly identify what is happening, evaluate alternative responses, select an operating strategy and deploy that strategy through the entire enterprise in a coordinated manner. While this encompasses the traditional role of finance, it goes well beyond to issues of aligning the operating strategy of the organization.
PricewaterhouseCoopers recently commissioned a study by the Economist to define these challenges for performance management in today's business environment. The survey was broad and included 168 companies: 41 percent were U.S. based, 30 percent from the U.K. and 29 percent from Continental Europe. There was good representation from larger organizations: 18 percent were larger than $5 billion and another 20 percent were between $1-5 billion. The responses came from the top of the organization: 75 percent were top managers (CEO, managing director, president, vice president), 15 percent were CFOs.
Even with such a large sample of companies across a wide range of industries, the key message from the research was remarkably consistent. Ninety-two percent of respondents perceive they have a critical or important need to improve the way they manage performance. For the largest firms, over $5 billion, this statistic jumps to 100 percent. Every top manager in these large, complex businesses identified improved capability in this area as a key element of the future success of their organization. Critical drivers of this need to improve performance management included intensity of competition, shareholder expectations, customer demands and the need to reduce costs.
What do these top managers mean by improving the way they manage performance? From a tactical standpoint, one of the most significant issues is simply having the ability to translate the strategy into the way in which operating decisions are made. For example, a third of the top executives complained that middle managers are not sufficiently involved in implementing strategy. One of the barriers to their participation is often their own financial and information systems. Unless these systems enable middle managers to analyze how their specific actions can impact execution of the company strategy, there can be little hope of effective implementation.
Where do these leaders feel that improvement is needed? Their answers can be defined in terms of the key lever they had found most important to improve performance and those to which they will look in the future:
- Forty-five percent of the respondents saw enterprise performance management processes as having been the key lever in the past. But looking forward, that number drops to 38 percent.
- People performance management processes are gaining emphasis, from 26 percent to 31 percent.
- Performance measurements and their associated targets held steady at 16 percent.
To meet the challenges of enterprise-wide performance management, these top executives identified improved information management and reporting as the lever that will have the greatest relative impact in the future. It is clear that improved information management and reporting will also be a key enabler to improve "people performance management processes" and is imperative to increase the involvement of middle managers in the implementation of strategy.
How do these international business leaders define the need for improved IS and finance support? The study showed where respondents were unhappy with the support given by key aspects of their information systems/software. Percentage of respondents indicating IS support and delivery is not acceptable:
- Real-time data 63%
- Flexibility 62%
- Report writing 56%
- Benefits vs. costs 50%
- Standardization across units 50%
- Functionality 45%
- Level of detail 38%
How can these issues be addressed? Much of the answer lies in the specific needs for real-time data, flexibility, report writing, data warehousing and so forth. But the primary message from the senior executives goes beyond reporting traditional financial information. In defining the solution, we need to consider the key drivers of the original strategic enterprise performance management challenge: intensity of competition, shareholder expectations, customer demands and the need to reduce costs. Therefore, these solutions must enable:
- Analysis of the impact of potential management decisions on shareholder value, stock price and dividends.
- Rapid incorporation of information about competitors, customers and marketplace trends into operating strategy decisions.
- Understanding and managing the "true" cost structure by understanding what products/services, activities and customers drive costs.
However, it is not enough only to gain an understanding of these drivers. Data warehousing solutions should help translate the understanding of business drivers and strategy into the day-to-day operations of the business including a system of measures that links the activities of functions and individuals to a common business strategy, an integrated budgeting and planning process with a timely feedback mechanism for action and adjustment, and reporting and analytical capability for those who are actually managing the day-to-day operations.
In a future column, I will present more ideas on a specific model and tools for achieving this vision.
Margaret Pommert was the primary author of this month's column. Pommert is the performance management leader within PricewaterhouseCoopers' Global Data Warehousing Practice.
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