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Take the Plunge

  • August 01 2002, 1:00am EDT

There is a story that involves a man working on an oil platform in the North Sea. He was awakened one night by an explosion and found the platform engulfed in flames. For the following reasons, he had been trained to never consider jumping from a burning platform. It's a 150-foot drop from the platform to the ocean, and there is often debris, including burning oil, on the surface. If you survive the jump into 40-degree water, you will die of exposure within 15 minutes. However, being faced with the situation firsthand, he decided to jump. Fortunately, he survived and was quickly rescued. Why did he jump? He reasoned that probable death was better than certain death.

Our businesses often face "burning platforms." For example, the business is struggling and a solution looks risky, yet business leaders take the plunge in order to survive. Some leaders may face the potential insolvency or bankruptcy of their business as their burning platform. Others may see a need to dramatically improve customer satisfaction as theirs.

As information professionals, we need to understand our companies' burning platform and assist our business leaders by providing information that can help them measure progress against business goals that direct our collective strategic risk-taking. That's where the business intelligence activity of measuring and managing an organization's overall performance is of use. It may be called enterprise performance management (EPM), business performance management (BPM) or corporate performance management (CPM). There may be other names as well, but it involves an approach to monitoring and managing the business performance of an enterprise. Call it what you will, but organizations need EPM/BPM/CPM to direct the enterprise going forward. This article will discuss EPM methodologies and suggest a checklist of questions to ask regarding an organization's specific situation. The answers to these questions will guide information professionals in helping business leaders take the plunge.

EPM is a marketspace that is fraught with acronyms. Focusing on the acronyms themselves can be confusing; however, it is more important to understand what they represent and how a particular organization addresses the concept behind the acronym. Here's one to start with: key performance indicators (KPIs). A KPI is a metric, or measure, that is important for the organization to monitor. It is a metric that rises above other potential metrics as being truly indicative of the organization's performance. KPIs can be both financial and nonfinancial. A change in a KPI usually results in taking action to assist or improve business operations. While KPIs vary by industry and by company, some examples include return on equity, days sales outstanding, percent defective, capacity utilization, customer satisfaction index and average customer profitability.

In addition to KPIs, it is important to understand the EPM methodologies employed by a specific enterprise. A methodology is a particular process, or method, by which the enterprise measures its performance. Methodologies come in many forms, and many organizations use multiple methodologies. Some organizations may use methodologies with a similar concept, but with a different name. Here is a sample list of methodologies:

  • Activity-Based Costing (ABC). ABC is an accounting technique used to determine both direct and indirect costs allocated to various parts or steps involved in each product or service produced by an organization. It is often used in customer profitability analysis and replaces an accounting method that allocates a company's expenses more broadly across business units. While it can prove easier to take general ledger information and industry-provided general cost information to make broad allocations to business units, that methodology does not provide the detailed cost information needed to get a true measure of one customer's cost of product usage against another's. ABC is undertaken to provide transaction-level detail and results in a much more accurate comparison of profitability.
  • Shareholder Value Add (SVA), also known as Economic Value Add (EVA). The concept of SVA has been around since 1890, but it has only recently come into favor in terms of being a primary financial metric for strategic and business planning. SVA basically involves the concept of earning enough income to justify the capital invested by the shareholders. There is a high correlation between SVA and the price of a stock. Many companies see SVA growth as being a good indicator of ongoing earnings strength and the ability to use capital effectively. While SVA has been traditionally used in the manufacturing industry, it is now more broadly used in other industries such as financial services. The calculation of SVA can be complex; however, in its simplest form, the formula is: cash basis net income - capital charge (capital used X cost of capital) = SVA.
  • Balanced Scorecard (BSC). Perhaps you remember "the old days" of business intelligence when there were executive information systems (EISs). Well, EISs have grown up to become BSCs. The concept behind the BSC is to provide a balance among various types of measures that are important in determining enterprise success. The BSC is a very popular methodology that replaced previous methodologies providing only financial measures. With the BSC, other perspectives in addition to financial metrics, such as customer perception, process efficiency, employee satisfaction, etc., are provided in order to obtain a more balanced view of enterprise performance. Like the EIS, the BSC may have a dashboard-like presentation; unlike the EIS, the BSC is typically distributed far more widely within the organization than just the executive level.
  • Six Sigma, Total Quality Man-agement (TQM) and other quality and productivity methodologies. Quality methodologies have been adopted by many organizations and can have a profound effect on the measurement of process efficiency. While the methodologies vary in scope and implementation, they are all about the measurement of quality. For example, Six Sigma refers to the concept of standard deviation (the sigma), which measures how much something differed from a set standard. Six Sigma is an extremely small deviation from a standard. Many metrics associated with quality initiatives may be among the key performance indicators for an organization.
  • Hoshin planning. Hoshin means "compass" and signifies setting direction and alignment of resources. The concept behind Hoshin planning or other strategic planning methodologies is to ensure that people at all business levels in an enterprise are working toward the same long-term goals.

With so many methodologies available, the task of implementing enterprise performance management can be very complex. Understanding what is critical to the business, and obtaining and providing the right information to direct it, can also be complex. Finding answers to the following questions, however, can provide a jump-start to the process (not to mention that you will be a lot smarter about the business when you have the answers!). Answers to these questions serve as the "requirements gathering" phase of an EPM initiative and should precede any determination of where the information should be derived. Answers to these questions should also precede a look at the business intelligence tool situation.

EPM Approach Questions

  • What are the key strategic drivers for the organization?
  • What burning platforms exist for the business today?
  • What five or ten things does the enterprise need to do to grow revenues and earnings and improve customer satisfaction?
  • What are the company's key performance indicators today?
  • What does each KPI specifically illuminate about the company's performance?
  • What actions are taken when a particular KPI goes up (or down)?
  • Are there KPIs that management would like to use, but don't for some reason? If so, what are they, and why aren't they used? (Is the information difficult to obtain?)
  • Are any KPIs tied to the organization's incentive and compensation structure? If so, which ones and how are they tied?

EPM Methodology Questions

  • Does the company utilize Hoshin planning (or another form of strategic planning)?
  • Are those plans widely available? What do they contain?
  • Are plans produced at the departmental level in addition to the enterprise level?
  • How does the organization decide resource allocation issues?
  • How does the organization prioritize multiple initiatives?
  • As a new strategic initiative is determined, how are resources allocated between it and existing strategic initiatives?
  • Is customer profitability a KPI? How is customer profitability calculated? Is activity-based costing used to determine costs allocated to the products or services used by a customer?
  • Is shareholder value add a key financial metric for the organization? Is it measured only at the enterprise level, or is it calculated at the initiative level to help determine prioritization of business initiatives?
  • Is a balanced scorecard methodology in use? Is the BSC only at the enterprise level, or has it been driven down to individual operating units?
  • What metrics does the BSC contain? How are they calculated?
  • Does the organization employ a quality and productivity methodology? If so, which one?
  • What KPIs exist for the quality management process? How are they calculated?

Although developing an EPM strategy may be challenging, knowledge of KPIs and methodologies can help zero-in on any burning platforms the business is facing. With answers to the questions listed in this article, the task of determining the appropriate business intelligence tool(s) can begin. There are many tools that offer point solutions for a particular methodology. In order to capture more of the market, some vendors are beginning to offer a suite of products aimed at a broader EPM approach. Looking at tools should begin with a review of what the company is currently using for EPM functionality, as well as obtaining an understanding of gaps in EPM tool functionality. While it may not make sense to replace an analytic application already in use within the organization, any functionality gaps do need to be addressed. Answers to the methodology questions should guide decisions on whether a tool or suite solution needs to tackle activity-based costing or balanced scorecard, for example. It is quite possible, based on the complexity of an enterprise's EPM approach and methodologies utilized, that customized tool integration would need to occur among application point solutions and EPM suites. The following general questions related to EPM tool vendors can be added to complete this checklist.

EPM Tool Vendor Questions

  • How viable is the company from the business, market and financial perspectives? (Will the company still be in business after you implement its product?)
  • Is the solution focused on a particular vertical market?
  • Does it integrate with any legacy operational applications (such as enterprise resource planning or supply chain management)?
  • How easy is it to integrate this product with other EPM/BI products?
  • Does the product already provide drill-down functionality by integrating with any OLAP products?

There is no question that in times of economic uncertainty, enterprises will face burning platforms ­ risky decisions involving strategic changes in direction and even continued existence. Enterprise performance management can and should provide information critical to the methodologies and metrics chosen by the business. Although implementing EPM is a complex and challenging task, obtaining answers to the questions in this article (and others) can guide information professionals in supporting the need for business leaders to measure what's really important to the business. In fact, EPM can be a significant contributor to achieving the business/technology alignment that enterprises seek. Burning platforms are a reality in today's business environment. The organization prepared to take the plunge is the organization that can survive ­ and even prosper.

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