9
INSTITUTIONALIZING PERFORMANCE MANAGEMENT
CHAPTER INTRODUCTION
In earlier chapters in this section on performance management we covered the importance of stating objectives and developing a context. We then outlined best practices in selecting key performance indicators and building dashboards. We now turn to the process of institutionalizing performance management – that is, successful implementation and integration into all critical management processes. This step is the final and arguably most important aspect of successful performance management. If performance management is not integrated with other management processes, it will not be successful.
GAINING TRACTION
There are several critical steps that are necessary to effectively adopt performance management (PM) (see Figure 9.1). These include obtaining executive support, communication and training, using performance improvement tools, and developing a delivery mechanism.
FIGURE 9.1 Establishing a Performance Management Framework
Executive Support
Few initiatives are successful in a company without the passion and support of the CEO, CFO, and other members of the senior management team. Managers and employees are very adept at reading the level of commitment of leadership to any new project. Senior managers must support performance management in both word and action. The CEO will determine the ultimate success of performance management. Is she insisting on a review of dashboards at management meetings? Is he using the performance measures as a critical element of evaluating managers' performance? Is performance management going to be integrated across all management processes? If the answer is no, then PM will be an interesting activity but will fail to achieve its full potential impact on the organization. It is extremely important to win the support and buy‐in across the executive suite before proceeding with PM.
Communication and Training
After selecting and developing the performance measures, it is important to provide managers and employees with appropriate training and other tools to use the measures and make performance improvements.
The effectiveness of a performance management system and related initiatives will be greatly enhanced if accompanied by manager and employee training. A substantial part of the value in performance management is in connecting the dots between operating performance, financial performance, and value creation. A comprehensive training program for managers and executives should include the following topics:
- Fundamentals of Finance
- Valuation and Value Drivers
- Linking Performance to Value
- Developing and Using Key Performance Indicators
- Use of Dashboards to Monitor and Improve Performance
The training should be tailored to various levels within the organization. The core concepts can be modified to be appropriate to the executive team, midlevel managers, and other employees.
Managers should also be educated on the development and use of key performance indicators (KPIs), the use of dashboards to monitor and improve performance, and the use of any software employed to deliver this vital information. For example, if actual results are falling short of targets, the manager must be able to identify the root causes of the variance and even possible actions to improve performance.
Additional assessment tools and training topics are discussed in Chapter 5.
Process Improvement Tools
In order to achieve improvements in performance in critical areas and measures, managers and employees must be provided with tools to evaluate and improve key business processes. In Chapter 17, we review examples of process evaluation tools for the revenue and supply chain management processes. In addition, there are several very useful process evaluation and quality management tools that work across all business processes, including:
- Six Sigma
- Total Quality Management (TQM)
- Process assessment and improvement
- Lean management
- Benchmarking
Delivery Mechanism
Many software vendors have developed and are refining products that will deliver key performance indicators and financial results in real time to designated managers throughout the organization. Critical information is available on demand and using best practices to present business information, including data visualization. These are effective long‐term solutions in many cases. However, many companies become bogged down in attempting to use or even evaluate and procure these technology tools. Often, the introduction of the software solution is done without defining the objectives and context described in Chapter 7. Many of the “canned” KPIs and dashboards miss the mark in terms of measuring what is most important and relevant to this specific organization. The performance measures and dashboards that are developed in this way often fail to fully achieve the objectives of implementing PM. In addition, the implementation is often delayed until the technology is procured and installed. In some cases, valuable time is lost in critical performance areas.
While generally not a good long‐term, total solution, many companies begin producing dashboards on spreadsheet tools such as Microsoft Excel. The advantage in this approach is that a few key dashboards can be produced in hours or days rather than in weeks or months. This can be a good way to get started, especially in situations where improving business performance is a matter of urgency, for example in a business turnaround situation. Long‐term technology solutions can then be put in place as time permits and objectives and definition of needs are understood. Due to the power and flexibility of Excel, it or other similar products will always play a role in FP&A and PM.
Oversight of Performance Management
Who should be responsible for designing, implementing, and overseeing performance management? The answer to this question varies from one organization to another depending on several factors, including the skill set and experience of key managers and functions within the organization.
Many organizations that have successful performance management initiatives develop a steering committee or PM council to oversee the implementation and ongoing execution of PM. The council should include representation from all critical functions, including strategy, operations, finance, information technology (IT), and sales and marketing. This broad representation will ensure that PM will consider diverse perspectives and will encourage buy‐in and acceptance across the organization.
The responsibility for the implementation and direction of PM on a day‐to‐day basis is usually assigned to a working group or related function. Two obvious functions to lead the working group are the IT and FP&A departments. I have generally found that the director of FP&A or equivalent is usually best suited to lead the working group. PM and FP&A must be fully integrated to be successful. An effective FP&A group is already aware of and analyzing critical areas of performance and understands drivers of financial performance and shareholder value. In addition, their role typically exposes them to all critical functions, strategic issues, and initiatives across the organization.
INTEGRATING BUSINESS PERFORMANCE MANAGEMENT WITH OTHER MANAGEMENT PROCESSES
To be effective, the performance measurement framework must be integrated with other key management processes and activities, including planning, management meetings, performance reviews, project management, and evaluating and compensating human resources (see Figure 9.2).
FIGURE 9.2 Integrating PM with Other Management Processes
Strategic and Operational Planning. Most companies develop strategic and annual operating plans each year. Planning activities will be greatly improved by incorporating the key elements of performance management. What level of shareholder value is likely if the planned results are achieved? The financials included in the plan should not be a spreadsheet exercise; rather, they must be grounded by execution plans and projected levels of performance on key operating measures. For example, if a company plans to achieve improved inventory turnover in the future, this goal should be supported by a detailed plan and targets for key performance indicators that impact inventory levels, such as revenue linearity, production cycle times, past‐due deliveries, and forecasting accuracy. Each plan or alternative should be valued; that is, the team should estimate what the likely market value of the company will be if the plan is achieved. Is this an acceptable return to shareholders? Can we identify other actions that will enhance value? Finally, the planning process should identify the measures that will be monitored to track and evaluate assumptions and performance in executing the plan.
Forecasting and Business Outlook. Most companies spend a great deal of time forecasting business performance. In a successful performance management framework, companies will place more emphasis on forecasting and tracking key performance drivers and measures that will result in achieving the financial projections. These managers recognize that it is easier to track progress and drive improvement to performance measures that will impact financial results rather than attempt to drive improvement directly to financial results.
Project Management. At any one point in time, most organizations will have hundreds of projects under way. These will include projects in information technology, product development, process improvement, developing plans, and many others that have a direct and significant effect on performance. Project management can be improved by incorporating PM, including execution planning, monitoring, and visibility.
Product Development. As the pipeline for new product and revenue growth, product development is a very important process for value creation. Product development activity includes the evaluation of potential new programs and products and the management of several development projects. Both project evaluation and management lend themselves to PM, and their importance mandates the attention.
Monthly and Quarterly Business, Project, and Operational Reviews. Executive teams typically review the performance of operations of business units on a monthly or quarterly basis. These sessions often represent the most important exchange of information and also the best opportunity to focus on execution and hold managers accountable for performance. Discussions at monthly and quarterly management meetings should center on key objectives, important issues, progress toward goals and targets, KPI, and the performance dashboards. All too often, these meetings drift away from critical performance objectives aided by long discussions around lengthy slide show presentations. If the team has implemented the performance framework by developing context and linking to strategic initiatives and value drivers, then the dashboards will provide visibility into performance in critical areas and programs. Meetings will stay focused on key issues, and managers can be easily held accountable to the performance tracked by these objective measures.
It's hard to hide from the information on the slide shown in Figure 9.3. When required to be presented, it prevents long‐winded, diversionary presentations that mask or fail to address the important elements of performance.
FIGURE 9.3 Business Unit Accountability Dashboard 
Talent Acquisition, Evaluation, Development, and Compensation (Human Capital Management). It is very unlikely that any performance management system will be completely successful unless it is integrated into the talent acquisition, evaluation, development, and compensation processes. Performance objectives should be established for each manager that are consistent with achieving the company's goals for value creation and strategic and operational objectives. Too often, individual and functional objectives are set independently, without adequate linkage to overall corporate objectives. Incorporating the principles from the PM into the evaluation of managers' performance will increase the effectiveness of the performance reviews and underscore the organization's commitment to performance management. Of course, aligning compensation and incentive practices with PM ensures ultimate connectivity.
Performance management can also be directed to human capital management (HCM). Since an organization's team of associates may be considered its greatest asset, performance management can be used to analyze the workforce and critical HCM processes. The use of KPI and analytics in HCM is explored in Chapter 10.
Management Reporting. Monthly financial and management reports should be modified to include the key performance indicators and drivers selected in developing the PM. Typical monthly reports include traditional financial statements, supporting schedules, and spreadsheets that are easily understood by accountants but are difficult for most nonfinancial managers and employees to understand and digest. Key trends or exceptions may be buried in the statements and are extremely difficult to identify or act on. More visual content (graphs) should replace pages of financial tables and reports. Focus should shift away from lagging financial results toward providing crisp, predictive (leading) indicators of future performance. The reports should also focus more attention on revenue drivers and analysis of external factors rather than the traditional measures of internal financial performance.
Board and Investor Communication. For both publicly traded and privately owned firms, communication with investors is a very important activity. Many investors are intensely focused on company performance and the future potential to create shareholder value. Investors will appreciate managers who recognize that a broad set of performance drivers factors into long‐term value creation. They fully understand that successful execution on key strategic initiatives and improvement on value drivers will lead to long‐term shareholder returns. Shareholders applaud managers who are focused on execution, accountability, and performance management, since they know that these are precursors to value creation.
Executives running publicly traded companies should communicate the performance on key business and value drivers and related performance measures, and not just focus on sales or earnings per share (EPS). Investors that use economic valuation methods such as discounted cash flow (DCF) need inputs for sales and earnings growth as well as capital requirements and cost of capital. Even those investors using multiples of revenue or earnings must consider these factors in selecting an appropriate price‐earnings (P/E) or revenue multiple to value the company. Presenting and emphasizing the long‐term value drivers also encourages investors to focus less attention on short‐term quarterly financial results.
Corporate Development. The corporate development function is typically responsible for mergers and acquisitions (M&A) activity within most companies. The M&A process and resultant deals are important contributors or detractors to performance and value in many companies. For companies that are active in mergers and acquisitions, it is important that M&A activity be viewed as a process and that the key elements of the PM be incorporated into the identification, evaluation, valuation, and integration of acquisitions. The analysis of M&A is fully explored in Chapter 23.
Periodic Review and Revision
The selection of KPIs and the creation of dashboards will be based on numerous factors, including many that relate to specific issues and opportunities, events, and projects. The KPI and dashboards should be reviewed periodically to evaluate the ongoing utility of each measure and dashboard. For example, some measures can be eliminated because the underlying issue or project has been addressed or completed. New priorities and challenges arise that may warrant inclusion in the measurement system going forward. An excellent time to review measures and dashboards is in the later stages of the annual and/or strategic process, when new objectives, initiatives, and targets are established. Of course, measures that are no longer useful can be replaced at any point.
AVOIDING COMMON MISTAKES
Don't Drive the Car by Staring at the Dashboard
You won't keep the car on the road if you stare at the dashboard. Look out the front window, and check the rearview mirror. Pay attention to road conditions, traffic patterns, and aggressive drivers, as well as the dashboard. Similarly, pilots seldom fly by staring at the instrument panel. They utilize this visual input, but also rely on their intuition, feel, conditions, and other input. Get out of the office. Talk to employees, customers, and suppliers. Combine this input with your intuition and the objective information from the dashboards.
Don't Make It a Finance or Information Technology Project
Many projects fail because they are driven exclusively by the finance or information technology function. In order to be successful, PM must be driven from the top and integrated into the fabric of the management systems. Functions such as finance and IT are critical in the development, implementation, and support of PM, but all disciplines must buy into and support this activity to be successful.
Don't Measure Everything
Organizations that follow the process outlined in Chapter 7 to define objectives and develop context for PM will develop a framework that focuses the organization's attention on important value and performance drivers. Failure to do so will result in selecting too many measures and some measures that are not consistent with priorities and important performance drivers.
Don't Measure Only What Is Easy and Available
There is a tendency to select KPIs and build dashboards based on the information that is readily available. Examples include financial ratios and trends or operational metrics. In many cases, the most important information on key businesses processes, threats and opportunities, intangibles, and other important drivers is not readily available. While it may be challenging to measure things like innovation or human capital, their importance to success justifies attempts at measuring and evaluation. Even if the measures are imperfect, they will focus attention and provide insight into these critical areas. We explore measuring and driving what's important in Chapter 10.
Don't Attempt to Replace Judgment or Intuition
Some executives resist performance management initiatives because they argue that PM is an attempt to replace or limit their management judgment and intuition. While analysis and performance management can significantly improve decision making and management, many important decisions must incorporate the experience and judgment of the executive. PM can facilitate and bring full information, leading to better decisions.
Don't Measure Too Frequently
New information availability may encourage managers to “take the pulse” of the business and key activities too often. This will lead to frustration for managers and team members alike and may also result in decisions or actions based on small sample size, cycles, or minor perturbations.
Software Is Not a Silver Bullet
Many organizations look to a software product as the silver bullet in measuring and improving performance. While software can be an important element of performance management, it is at least as important, if not more so, to develop context, select measures, train, and integrate with other management processes.
SUMMARY
Performance management cannot succeed as a separate and distinct management process. To be successful, it must be integrated into key management processes, including strategic and operational planning, monthly or quarterly business and operational reviews, and talent evaluation and compensation. PM must also be driven from the top to be successful. The CEO and CFO must demand utilization of performance management throughout critical management processes. In order to remain relevant and vital, PM must be evaluated and adjusted periodically to ensure that it remains focused on the critical drivers of performance and value.