This is the second article in a three-part series on corporate performance management (CPM). In Part 1 (see the December 2003 issue of DM Review), we discussed the definition of corporate performance management as the "methodologies, metrics, processes and systems that monitor and manage the performance of an enterprise."1 We reviewed the business and technology drivers for CPM as companies seek to develop and practice more effective responses to increasingly challenging economic environments. Part 1 of this series also discussed critical success factors for CPM initiatives and the benefits that can be realized from such initiatives.
This article will review the components of CPM, present a framework for understanding how these components fit with each other, offer a road map that establishes the proper foundation for extending CPM throughout the enterprise and discuss next steps companies can take to move further along the path to a meaningful and powerful CPM environment.
Characteristics of Companies Practicing CPM
In Part 1, we examined how 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."
The critical components of CPM were described to 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 performance 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.
It's now time to take a closer look at each of these characteristics of a CPM framework in order to understand how each component contributes to the overall success of a company.
Most companies are actively seeking an effective CPM strategy. However, many questions present themselves in this quest including: What do we do first? How can we build on what we do today? What is the most effective path to where we want to go?
In order to begin to understand how to get the answers to these and other questions about CPM, it is important to first understand the CPM framework. CPM is not a slogan, a cliché or a technology. CPM is the application of fundamentally sound business management practices, enhanced by timely and accurate information, in order to effectively communicate, comprehend and control (C3) the performance of an organization.
If CPM sounds like common business sense to you, you're right! There is no magic software, no special database or new hardware platform that is going to provide you with instant CPM. In order to build the proper foundation for your CPM initiative, you must have a solid understanding of the business context in which your company is operating and what business drivers will help you achieve performance objectives. Technology is simply an enabler of the communication, comprehension and control of these objectives.
Simply put, communication, comprehension and control define the exercise of business management over the resources of the organization in the accomplishment of corporate performance objectives. C3 is performed through the arrangement of people, equipment, facilities and operational processes employed by management to plan, direct, coordinate and control the enterprise in the achievement of its objectives. C3 builds upon the foundation of existing business processes, operational systems and business intelligence applications to:
- Identify key corporate performance objectives.
- Measure progress toward achieving corporate performance objectives.
- Provide the information necessary to communicate expectations and overall progress and understand exceptions as necessary.
- Comprehend the meaning of performance trends over time.
- Take action to control the organization in achieving performance objectives.
Communication, comprehension and control define the exercise of business management over the resources of the organization in the accomplishment of corporate performance objectives.
Figure 1 presents a framework for understanding CPM, depicting the C3 capabilities as sitting above the existing business intelligence, operational systems and business processes of the organization. Once performance objectives and standard measurements are defined, the CPM initiative must enable the appropriate collection of data to report on progress, exceptions and anomalies for measurement, analysis and reporting. These measurement, analysis and reporting capabilities are the technology-enabled components of CPM.
Figure 1: The Technology-Enabled Components of CPM
A Common- Sense Road Map to CPM
We've already implied that a company can't "buy" CPM. So how can CPM be successful? Where do we start? The answer is that there is not one single place to start. Most companies have adopted or implemented some early component of a CPM framework by virtue of the fact that the business intelligence layer of the CPM framework is relatively mature, and early adopters have developed scorecards, digital dashboards and the like to present operational results to various segments of the corporate management community. The problem with some of these early forays into CPM is they sometimes neglect one of the C3 components.
For example, a chief operating officer (COO) of a major energy company recently referred to their early approach of delivering scorecard results without the ability to examine underlying information detail as putting "lipstick on a pig." The systems and information infrastructure of this company was highly fragmented as a result of rapid growth through acquisition. As a consequence, the organization was starved for meaningful and integrated information. While the corporate scorecard was initially a huge success with management, their inability to comprehend the information in the appropriate business context led to its rapid replacement by a project that would extend the supporting data infrastructure appropriately. In this case, the company needed to add capabilities for management to retrieve definitions and algorithms for performance scorecard elements as well as the functionality to drill down into anomalous results to determine and swiftly act upon the causal elements of business performance.
Another example of a first attempt at CPM for a major retailer also resulted in a solution that fell short of management expectations. In this example, company management embraced the concept of the executive dashboard and proceeded to deploy flashy graphical results for key operational indicators that were tied to very specific corporate performance objectives. The problem was that each operational unit defined its specific indicators to portray the best possible performance results for the respective unit. When compared across business units, the results were neither consistent nor coordinated. In this case, the lack of communication between corporate management and the operational units, and among the operational units themselves, led to results that in the end did not provide an effective vehicle for comprehending or controlling corporate performance.
Whether you start from the top or the bottom, performance measurement must be explicitly defined for participating functional organizations and aligned to corporate objectives. This is the reason that financial planning is often a key initial component of CPM solutions. For example, corporate revenue objectives for the year are defined and communicated throughout the organization. Each business unit or division can subsequently plan the activities in their organizations that will account for their relative contributions to the overall objective. While these activities are likely to be very different across business units, there is a common linkage between the performance results of all the business units: their impact on the corporate revenue objective.
The key to achieving long-term benefit with a CPM solution is to keep the ultimate performance objectives in mind. The CPM vision and strategy must be driven by these objectives for which achievement is often influenced by multiple business activities. The respective contributions of these business activities to the overall objectives must be specifically defined, measured and controlled. It's good to keep in mind that CPM should be about improving performance to shared performance objectives, not just improving or reporting on performance of a set of independent functional activities. It's as simple as ensuring the interrelatedness between organizations and processes is taken into consideration when reviewing corporate objectives and defining business performance measures. A simplistic example is the understanding that inventory reduction may reduce expense to improve profitability, but the same reduction may have a negative impact on sales revenue to the extent that profitability actually declines. Avoid building independent CPM "silos" throughout the organization.
Although CPM is not a technology, it relies heavily on technology components to deliver an effective solution. Perhaps the most important consideration for a CPM initiative is how well the company's existing systems (and data) infrastructure can deliver the required information from the appropriate business systems at the proper points in time for the measurement and monitoring of progress to corporate performance objectives. If the required information is not available or must be developed or modified in a manual fashion, this results in a CPM solution of relatively little value because the performance results being communicated can no longer be understood in their proper business context. Performance results can't be analyzed or audited in a systematic fashion back to the source business activities and/or supporting systems to which the results are attributed. This is a common mistake made in implementing early CPM solutions.
Keep C3 in mind when developing the CPM road map. The CPM solution should communicate progress toward corporate objectives, provide the necessary comprehension of the interrelated processes and activities that influence corporate performance objectives, and assist management in discerning anomalies early enough to control and adjust the processes which directly impact corporate performance outcome.
How do we develop a solid road map for a CPM initiative?
There are two major components of CPM road map development: the assessment and planning cycle, and the deployment and execution cycle. These cycles, subsequently depicted, are strongly connected. A company should normally begin with an assessment and plan for CPM, followed by deployment and execution of measurement and monitoring processes. Results should be compared to the plan and revised as required. This continuous loop process creates a solid foundation with iterative refinement and extension of CPM capabilities as the company achieves considerable success in communicating, comprehending and controlling performance and progress toward meeting its objectives.
Let's take a closer look at how this works.
Assess and Plan
In this phase, a company goes through the process of planning how it will quantify and measure progress toward strategic and operational objectives. As part of this planning effort, the company must identify and prioritize performance objectives and key business drivers for their CPM initiative. There are a number of business activities that will influence the realization of every performance objective. The goal of the assessment process is to determine how these activities can be improved, monitored and controlled to bolster their impact on the attainment of overall performance objectives. During the CPM assessment and planning phase, the company begins to put their CPM road map into business context by developing the answers to business questions such as:
- Which processes have the largest impact and influence on the performance objectives?
- How will we accurately and effectively quantify the effect each of these business processes has on the accomplishment of performance objectives?
- Can we modify existing business activities to improve their efficiency and relative contribution to the accomplishment of our performance objectives?
- How do we integrate and standardize existing business processes such as budgeting and forecasting and methodologies such as activity-based costing or balanced scorecard initiatives across the organization?
- What management actions or reactions will be enabled as a result of the solution?
- What return on investment (ROI) can we expect?
In addition to the CPM business assessment and planning activities, there are a number of technology assessment and planning activities that need to occur. The company must address the technology requirements of their planned CPM solution, including answers to questions such as:
- How will we architect our CPM solution to continually measure and monitor the impact of key business processes?
- How can we leverage our systems infrastructure for competitive advantage?
- What technologies will provide the most benefit to our CPM solution?
Deploy and Execute
During the deploy and execute phase, the company takes the first steps toward implementing its CPM solution. Key business activities, processes and technologies that were defined in the assess and plan cycle are used to deploy the first iteration. The overall goal of deployment and execution is to deliver the ability to communicate, comprehend and control the results of activities that contribute to attaining corporate performance objectives.
Figure 2: The Continuous Loop Process
In the deploy and execute phase, the company develops the processes required for continual monitoring and evaluating of progress toward objectives, and analyzes results and validates that existing measurements provide adequate information for agile business response to risks and opportunities.
Once the initial component of the CPM solution is deployed, the company reevaluates the solution against their original CPM plan in order to review and refine performance objectives, contributing business activities and technological capabilities to fine-tune the ability to effectively manage and control performance.
In this manner, the company successfully traverses the first complete iteration of implementing a component of their CPM solution. Perhaps the company chose to deploy a performance scorecard for the budgeting process or implemented the collection of information for a set of operational performance metrics. The company now repeats the cycle to extend and enhance their performance management solution with the next step of what was defined in the assessment and planning stage.
The road map to CPM should focus on incremental deliveries of tangible results. It is recommended that a company start with the "vital few" corporate performance objectives and related business processes that provide the highest return on investment, both to provide economic justification for the CPM initiative and to promote the cross-functional collaboration that must become a part of corporate culture if CPM is ultimately to succeed.
Incremental deliveries of tangible results must be supported by a systems infrastructure - applications, tools, technologies and data - that will support long-term results. Understanding the extent to which these components provide the necessary information for the monitoring and measuring of performance results is an integral and important step in the road map to CPM.
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. The road map to CPM is not straight and narrow. Instead, a company should be prepared to use an iterative model to continually improve its solution with incremental deliveries of timely information and improved business performance insight.
To develop a road map to CPM, a company must assess its business objectives and plan for both business and technology components of its CPM solution. The CPM solution is deployed and executed by delineating the metrics associated with each objective for the organization as a whole and as the sum of many interconnected, influencing parts, and designing a solution that provides unquestionable value through communication, comprehension and control of corporate performance objectives. This is what CPM solutions strive to deliver.
Part 3 of this series will be published in the May issue of DM Review. Stay tuned!
1. Gartner Group, "Managing Corporate Performance: What You Need to Know," May 2003.
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