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ENTERPRISE PERFORMANCE MANAGEMENT: MYTH OR REALITY?

Confusion exists in the marketplace about the term performance management. If you research the term, you will see what I mean.

The confusion begins with which type of performance management we are referring to. This confusion, in part, is due to semantics and language. We often see in the press the acronyms BPM for business performance management, CPM for corporate performance management and EPM for enterprise performance management. Just like the foreign language words merci, gracias, danke shön and thank you all mean the same thing, so do these acronyms. For this book, I choose to use enterprise performance management and its acronym EPM. I will also use analytics-based enterprise performance management when there is emphasis on analytics imbedded in the various EPM methodologies.

Additional confusion is that EPM is perceived by many as far too narrow. It is often referenced as a CFO initiative with a bunch of measurement dashboards for feedback. It is much, much more. More recent confusion comes from the term being narrowly applied to a single function or department, such as marketing performance management or information technology performance management.

The term performance management historically referred to individual employees and was used by personnel for employee appraisals. Today, it is widely accepted as enterprise performance management of an organisation as a whole, whether it is a commercial, not-for-profit or government organisation. The performance of employees is an important element to improve an organisation’s performance, but in the broad framework of EPM, human capital management is just one component.

Most new improvement methodologies typically begin with misunderstandings about what they are and are not. Perhaps that is why the famous business management author, Peter Drucker, observed that it can take decades before a new and reliable management technique becomes widely adopted. Misunderstandings typically are not a result of ignorance but, rather, inexperience. So EPM is predictably laden with misconceptions due to the lack of experience with it. That is now changing.

A purpose of this book is to remove the confusion and clarify about what EPM really is, what it does and how to make it work. Let’s begin with discussing a major reason why there is such high interest in EPM.

EXECUTIVE PAIN—A MAJOR FORCE CREATING INTEREST IN PERFORMANCE MANAGEMENT

It is a tough time for senior managers. Customers increasingly view products and service lines as commodities and place pressure on prices as a result. Business mergers and employee layoffs are continuing and, inevitably, there is a limit, which is forcing management to deal with truly managing their resources for maximum yield and internal organic sales growth. A company cannot forever cut costs to increase its prosperity. Evidence shows that it is also a tough time to be a chief executive. Surveys by the Chicago-based employee recruiting firm, Challenger, Gray & Christmas, Inc., repeatedly reveal increasing rates of involuntary job turnover at the executive level compared to a decade ago.¹ Boards of directors, no longer a ceremonial role, have become activists. Their impatience with CEOs failing to meet shareholder expectations of financial results is leading to job firings of CEOs, CFOs and executive team members.

In complex and overhead-intensive organisations in which constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure to implement their strategy. There is a big difference between formulating a strategy and implementing it. What is the answer for executives who need to expand their focus beyond cost control and toward sustained economic value creation for shareholders and other, more long-term strategic directives? EPM provides managers and employee teams at all levels with the capability to directly move toward their defined strategies.

One cause for failures in strategy implementation is that managers and employee teams typically have no clue about what their organisation’s strategy is. Most employees, if asked, cannot articulate their executive team’s organisation strategy. The implication of this is significant. If managers and employee teams do not understand their organisation’s strategic objectives, then how can the executives expect employees to know how what they do each week or month contributes to the achievement of the executive’s strategy? That is, employees effectively can implement a strategy only when they clearly understand the strategy and how they contribute to its achievement. The balanced scorecard has been heralded as an effective tool for the executive team to communicate and cascade their strategy down through their managers and employees to improve strategy attainment.

A balanced scorecard is designed to align the work and priorities of employees with the strategic objectives that comprise an organisation’s defined mission. However there is confusion with this methodology. Many organisations claim to have a balanced scorecard, but there is little consensus about what it is. Worse yet, very few have designed a strategy map for which the scorecard and its key performance indicators (KPIs) are intended to be derived from as its companion. The strategy map is orders of magnitude more important than the scorecard itself—the latter of which should be viewed more as merely a feedback mechanism.

Even with the presence of a strategy map and its balanced scorecard with visual at-a-glance dashboards that display KPIs, are they enough? Or do they only provide one component of delivering economic value creation through achieving the strategy?

An organisation’s interest ultimately is not just to monitor scorecard and dashboard dials of measures but, more importantly, to move those dials. That is, reporting historical performance information is a minimum requirement for managing performance. Scorecards and dashboards generate questions. But beyond answering ‘what happened?’ organisations need to know ‘why did it happen?’ and going forward ‘what could happen?’ and ultimately ‘what is the best choice of my options?’

WHAT IS EPM?

EPM is all about improvement—synchronising improvement to create value for and from customers with the result of economic value creation to shareholders and owners. The scope of EPM obviously is very broad, which is why EPM must be viewed at an enterprise-wide level.

A simple definition of EPM² is ‘the translation of plans into results—execution.’ It is the process of managing an organisation’s strategy. For commercial companies, strategy can be reduced to three major choices:³

• What products or service lines should we offer?

• What markets and types of customers should we serve?

• How are we going to win—and keep winning?

Although EPM provides insights to improve all three choices, its power is in achieving choice number three—winning by continuously adjusting and successfully implementing strategies. EPM does this by helping managers to sense earlier and more quickly and effectively respond to uncertain changes.

Why is responding to changes so critical? External forces are producing unprecedented uncertainty and volatility. Examples include changes in consumer preferences, foreign currency exchange rates and commodity prices. The Internet, global communications, social networks, relaxation of international trade barriers and political upheavals have also introduced vibrations and turbulence. The speed of change makes calendar-based planning and long cycle-time planning with multi-year horizons unsuitable for managing. As a result, strategies are never static but, rather, they are dynamic. Executives constantly must adjust them based on external forces and new opportunities. Strategies and operational plans are never perfect. Imagine if employees at all levels—from the executives to front-line workers—could answer these questions every day:

• What if my plan or decision is wrong?

• What are the consequences if I am wrong?

• If I’m wrong, what can I do about it?

EPM helps answer those questions. EPM can be summed up by stating that it gives an organisation the capability to quickly anticipate, react and respond. If executives were given the choice between two scenarios, one with relatively more precise information for the next three months with relatively less precision and more uncertainty for the next two years, and the other choice the opposite, I believe most executives would select the first one. EPM helps anticipate problems earlier in the time-cycle.

IS EPM A NEW METHODOLOGY?

Some good news is that EPM is not a new methodology that everyone now has to learn but, rather, EPM tightly integrates business improvement and analytic methodologies that executives and employee teams are already familiar with. Think of EPM as an umbrella concept. EPM integrates operational and financial information into a single decision-support and planning framework. These include strategy mapping, balanced scorecards, costing (including activity-based cost management), budgeting, forecasting and resource capacity requirements planning. These methodologies fuel other core solutions, such as customer relationship management (CRM), supply chain management, risk management, and human capital management systems, as well as lean management and other initiatives such as the Six Sigma business management strategy. It is quite a stew, but they all blend together.

EPM increases in power the greater these managerial methodologies are integrated and unified with all types of analytics—particularly predictive analytics. Predictive analytics are important because organisations are shifting from managing by control and reacting to after-the-fact data toward managing with anticipatory planning so they can be proactive and make adjustments before problems occur. Unfortunately, at most organisations, EPM’s portfolio of methodologies typically are implemented or operated in a silo-like sequence and in isolation of each other. It is as if the project teams and managers responsible for each methodology live in parallel universes. We all know there are linkages and interdependencies, so we know they should all somehow be integrated. However, these components are like pieces of a jigsaw puzzle that everyone knows somehow fits together, but the picture on the puzzle’s box cover is missing.

EPM both technologically and socially provides that picture of integration. EPM makes implementing the strategy everyone’s top job—it makes employees behave like they are the business owners. It is the integration of the methodologies paired with analytics that is the key to completing the full vision of the EPM framework.

CLARIFYING WHAT EPM IS NOT

As earlier mentioned, EPM is sometimes confused as a personnel system for individual employees. It is much more encompassing. EPM embraces the methodologies, measurements, processes, software tools and systems that manage the performance of an organisation as a whole. Also, EPM should not be confused with the more mechanical business process management tools that automate the creating, revising, and operating of workflow processes, such as for a customer order entry and its accounts receivable system. Also, EPM is not just performance measurement. Measurements and indicators simply are a piece of the broad EPM framework.

To minimise confusion, there is no single EPM methodology because EPM spans the complete management planning and control cycle. Hence, EPM is not a process or a system. Substantial interdependencies exist among multiple improvement methodologies and systems. In a sense, everything is connected, and changes in one area can affect performance elsewhere. For example, you cannot separate cost management from performance because increases or decreases in expense funding generally affects performance results. For EPM to be accepted as the overarching integrator of methodologies, it must answer the question will EPM prove to be a value multiplier?

Think of EPM as a broad, end-to-end union of integrated methodologies and solutions with four major purposes: collecting data, transforming and modelling the data into information, analysing the information and Web-reporting it to users and decision makers. EPM is also not software, but software is an essential enabling technology for any organisation to achieve the full vision of the EPM framework. I view EPM as overarching from the C-level executives cascading down through the organisation and the processes it performs. EPM is all the way from the top desk to the desk top.

Primitive forms of EPM existed decades ago. These forms were present before EPM was given a formal label by the IT research firms and software vendors. EPM arguably existed before there were computers. In the past, organisations made decisions based on knowledge, experience, or intuition. As time passed, the margin for error grew slimmer. Computers reversed this problem by creating lots of data storage memory, but this led organisations to complain they were drowning in data but starving for information—thus, distinguishing the word information as the transformation of raw data, usually transactional data, into a more useful form. In the 1990s, with the speed up of integration with computer technology, both at a technical level of data base management and at a business level of user-friendly software applications for all employees, the term EPM took root.

WHAT HAS CAUSED INTEREST IN EPM?

As earlier mentioned, ambiguity and confusion exists about what EPM really is. Regardless of how one defines or describes it, what is arguably more useful is to understand what EPM does and what business forces have created executive’s interest in having it.

There have been, in my opinion, eight major forces that have caused interest in performance management because it resolves these seven problems:

1. Failure to implement the strategy. Although executive teams typically can formulate a good strategy, their major frustration has been failure to implement it. The increasing rate of involuntary job turnover of CEOs is evidence of this problem. A major reason for this failure is that most managers and employees cannot explain their organisation’s strategy, so they really do not know how their weekly or monthly duties contribute to their executives’ tactical intent. Strategy maps, balanced scorecards, key performance indicators (KPIs) and dashboards are some of the components of EPM’s suite of solutions that address this.

2. Unfulfilled return on investment (ROI) promises from transactional systems. Few, if any, organisations believe they actually realised the expected ROI promised by their software vendor that initially justified their large-scale IT investment in major systems (eg, CRM, enterprise resource planning [ERP]). The CIO has been increasingly criticised for expensive technology investments that, although probably necessary to pursue, have fallen short of their planned results and ROI. The executive management team is growing impatient with information technology investments. EPM is a value multiplier that unleashes the power and ROI payback from the raw data produced by these operating systems. EPM’s analytics increase the leverage of CRM, ERP and other core transactional systems.

3. Escalation in accountability for results with consequences. Accelerating change that requires quick decisions at all levels is resulting in a shift from a command-and-control managerial style to one in which managers and employees are empowered. A major trend is for executives to communicate their strategy to their workforce, be assured the workforce understands it and is funded to take actions and to then hold those managers and employee teams accountable. Unlike our parents, who stayed at their workplaces for decades until they retired, today, there is no place to hide in an organisation anymore. Accountability is escalating, but it has no authority without having consequences. EPM adds authority and traction by integrating KPIs from the strategy map-derived scorecard with employee compensation reward and motivation systems.

4. The need for quick trade-off decision analysis. Decisions must now be made much more rapidly. Unlike in the past when organisations could test and learn or have endless briefing meetings with their upper management, today, an employee often must quickly make a decision. This means employees must understand their executive team’s strategy. In addition, internal tension and conflict are natural in all organisations. Most managers know that decisions they make that help their own function may adversely affect others. They just don’t know who is negatively affected or by how much. A predictive impact of decision outcomes using analytics is essential. EPM provides analytical tools, including regression and correlation analysis. Insights gained range from marginal cost analysis to what-if scenario simulations that support resource capacity analysis and future profit margin estimates.

5. Mistrust of the managerial accounting system. Managers and employees are aware that the accountants’ arcane ‘cost allocation’ practices using non-causal, broad-brushed averaging factors (eg, input labour hours, % of sales) to allocate non-product-related, indirect and shared expenses result in flawed and misleading profit and cost reporting. Some cynically refer to them as the ‘mis-allocation’ system. Consequently, they do not know where money is made or lost or what drives their costs. EPM embraces techniques like activity-based costing to increase cost accuracy and reveal and explain what drives the so-called ‘hidden costs of overhead’—the indirect and shared expenses. It provides cost transparency and visibility that organisations desire but often cannot get from their accountants’ traditional internal management accounting system.

6. Poor customer value management. Everyone now accepts how critical it is to satisfy customers to grow a business. However it is more costly to acquire a new customer than to retain an existing one. In addition, products and standard service lines in all industries have become commodity-like. Mass selling and advertising are obsolete concepts. This shifts the focus to require a much better understanding of channel and customer behaviour and costs to serve. This type of understanding is needed to know which types of existing customers and new sales prospects to grow, retain, acquire or win back using differentiated service levels—and how much to optimally spend on each type of customer that is worth pursuing. It requires working backwards by knowing each customer’s unique preferences. EPM includes sales and marketing analytics for various types of customer segmentations to better understand where to focus the sales and marketing budget for maximum yield and financial payback. Return on customer is an emerging term.

7. Dysfunctional supply chain management. Most organisations now realise it is no longer sufficient for their own organisation to be agile, lean and efficient. They are now co-dependent on their trading partners, both upstream and downstream, to also be agile, lean and efficient. To the degree their partners are not, then waste and extra unnecessary costs enters the end-to-end value chain. These costs ultimately pass along the chain, resulting in higher prices to the end consumer, which can reduce sales for all of the trading partners. Sadly, there have been centuries of adversarial relationships between buyers and sellers. EPM addresses these issues with powerful forecasting tools, increasing real-time decisions and financial transparency across the value chain. It allows trading partners to collaborate to join in mutually beneficial projects and joint process improvements.

THE EPM FRAMEWORK FOR VALUE CREATION

One of the most ambiguous terms in discussions about business and government is value. Everybody wants value in return for whatever they exchanged to get value. Whose value is more important, and who is entitled to claiming it? Customers conclude that they receive value if the benefits they received from a product or service meets or exceeds what they paid for it (including time, investment, cost, etc). However shareholders and stakeholders believe if their investment return is less than the economic return they could have received from equally or less risky investments (eg, a UK gilt or US Treasury bill), then they are disappointed. Value to employees is another issue altogether, usually tied to compensation and job satisfaction.

Three groups believe they are entitled to value: customers, shareholders and stakeholders and employees. Are they rivals? What are the trade-offs? Is there an invisible hand controlling checks and balances to maintain an economic equilibrium so that each group gets its fair share? Are some groups more entitled to receiving value than others?

Figure 2-1 illustrates the interdependent methodologies that comprise EPM for a commercial organisation. Before I describe how the figure represents EPM, first just look at this figure and ask yourself what box in the figure has the most important words? What box has the answer? It depends on who you are in the organisation.

Figure 2-1: EPM is Circulatory and Simultaneous

Shareholder wealth creation is not a goal. It is a result.

Source: Copyright Gary Cokins. Used with permission.

If you are the CEO and executive team, the answer must be the ‘Mission and Strategy’ box. That is the CEO’s primary job: to define and constantly adjust organisational strategy as the environment changes. (Their secondary job is to grow employee competencies and hire exceptional talent.) Strategy formulation is why CEOs are paid high salaries and reside in large, corner offices. However, after the strategy definition is complete and maintained through adjustments to be current, then the core business processes take over, with competent process owners held accountable to manage and improve each process.

You, as a reader, might probably have answered that ‘Customer Satisfaction’ is the most important box in the figure. With businesses’ increasing focus on customer, many will agree with you. Customer satisfaction and loyalty encompasses four customer-facing trends:

1. Customer retention. Recognising that it is relatively more expensive to acquire a new customer than to retain an existing one.

2. Source of competitive advantage. Gaining an edge by shifting from commodity-like product differentiation to value-adding service differentiation apart from products or standard service lines.

3. Micro-segmenting of customers. With a focus on customers’ unique preferences rather than mass selling. Mass marketing days are nearing an end.

4. The Internet. The Internet is shifting power irreversibly from suppliers to customers and buyers.

It’s easy to conclude that a customer focus is critical.

To explain Figure 2-1, first focus on the three counter-clockwise arrows at the centre of the figure, starting and ending with the ‘Customer Satisfaction’ box. The two thick arrows represent the primary universal core business processes possessed by any organisation, regardless of whether they are in the commercial or public sector: Take an order or assignment and fulfil that order or assignment. These two processes apply to any organisation. Orders, assignments or tasks are received, and then organisations attempt to implement them. Order fulfilment is the most primary and universal core process of any organisation. An example in health care is a hospital admitting patients and then treating them. The IT support systems needed to fulfil these two core processes, represented by the two thick arrows, are typically called front office and back office systems. This is the realm of ‘better, faster and cheaper.’

The customer-facing, front office systems include customer intelligence and CRM systems. This is also where targeting customers, marketing campaigns, sales processes and work order management systems reside. The back office systems are where the fulfilment of customer or work orders and sales process planning and operations reside—the world of ERP and lean management and Six Sigma quality initiatives. The output from this process planning and implementation box is the delivered product or service intended to meet the customer needs. To the degree that customer turnover exceeds all of an organisation’s expenses, including the cost of capital, then profit (and positive free cash flow) eventually accumulates into the shareholder’s box in the figure’s lower right.

THE EPM AS A CONTINUOUS FLOW

Figure 2-1 should be viewed as a circulatory flow of information and resource consumption similar to your body’s heart and blood vessel system. As earlier mentioned, an organisation’s EPM practices have been around for decades, even before computers. Think of how speeding the flow and widening constrictions will increase throughput velocity and the yield from the organisation’s resources. More with less. Value for money. These are the terms associated with EPM.

Figure 2-1 is dynamic. The starting point of the diagram begins with the ‘Customer Satisfaction’ box. The need to satisfy customers and make them more loyal is the major input into senior management’s box in the figure’s upper left: ‘Mission and Strategy.’ As the executive team adjusts their organisation’s formulated strategy, they continuously communicate it to employees with their strategy map and its companion balanced scorecard. With strategic objective adjustments, they may abandon some KPIs intended to align work behaviour with the outdated strategy. In those cases, KPIs associated with outdated plans are not unimportant but, rather, now less important. The abandoned KPIs become performance indicators in operational dashboards. The team may also add new KPIs or adjust the KPI weightings for various employee teams. As the feedback is received from the scorecards and dashboards, all employees can answer the key question ‘How am I doing on what is important?’ The power of that question is in its second half, what is most important. The selection of good KPIs is critical. With analysis for causality, corrective actions can then occur. Note in the figure that the output from scorecards and dashboards does not stop at the organisation’s boundary, but it penetrates all the way through to influence the employee behaviour—the increasingly important intangible assets. This, in turn, leads to better implementation.

Enterprise risk management (ERM) is included in the ‘Mission and Strategy’ box. Risks are assessed, and key risk indicators are identified and monitored.

Continuing on, the organisation’s marketing and sales can better target which existing and potentially new customers to retain, grow, acquire and win back—and the optimal amount to spend on each one with differentiated service levels, deals, discounts or offers.

Finally, there is the order fulfilment loop. Take customer orders and efficiently fulfil the orders.

As this circulatory system is streamlined and digitised with better information, decisions and more focused and aligned employee work, the result is a faster and higher yield of shareholder wealth creation. Remember, shareholder wealth creation is not a goal—it is a result. It is the result of addressing all the methodologies in the flow. In the end, when EPM is integrated with ERM, then the figure is more broadly about ‘better, faster cheaper ... and smarter and safer.’ The ‘smarter’ comes not only from process improvements but from facilitating the executive team’s strategic objectives. The ‘safer’ comes from ERM.

Where is the box for innovation in Figure 2-1? It is not there because it arguably must be inside every box and arrow in the diagram. Innovation is as mission-critical today as achieving quality was in the 1980s. It is assumed to be a given—an entry ticket to even compete. I do not dwell on innovation in this book because I believe it, and its associated breakthrough thinking, is so critical that I leave it to other authors to devote entire books on this most important topic.

The best executive teams do not consider any of the components in this figure as optional—they are all essential. The best executive teams, however, not only know the priorities of where in the flow to place emphasis to widen constrictions but also where to improve all the other methodologies in the flow. Improvements may come from rapid prototyping and iterative re-modelling to learn things previously unknown and that will evolve into permanent and repeatable production reporting and decision support systems. The key is to integrate the EPM methodologies because much can be learned from addressing the lower priorities, such as by implementing a higher level activity-based costing model for customer segment profitability reporting. These quick-start approaches reveal findings that can contribute to altering strategic objectives formulated in the beginning of the circulatory flow.

A CAR ANALOGY FOR EPM

As mentioned, all organisations have been performing EPM well before it was labelled as such. It can be argued that on the date all organisations were first created, they immediately were managing (or attempting to manage) their enterprise performance by offering products or services and fulfilling sales orders with some sort of strategy.

Imagine Figure 2-1 as an organisation being a poorly tuned car. Include in your imagination cogs in the engine, where some of the gear teeth are broken, some of the gears have moved apart and are disengaged, some of the gears are made of wood and are crumbling, and where someone threw sand in the gears. Further, imagine unbalanced tires, severe shimmy in the steering wheel, poor timing of engine pistons, thick power steering fluid and mucky oil in the crankcase. These collectively represent unstable, imbalanced and poorly operating methodologies of the EPM framework. Take that mental picture and conclude that any physical system of moving parts with tremendous vibration and part-wearing friction dissipates energy, wasting fuel and power. The car’s fuel efficiency in miles per gallon or kilometres per litre would be low.

Now substitute the analogy of fuel efficiency with the rate of profits and shareholder wealth creation. At an organisational level, the energy dissipation from vibration and friction with lower fuel efficiency translates into wasted expenses where the greater the waste, then the lower the rate of shareholder wealth creation, and possibly wealth destruction. In a different case, you may find a car that seems perfect in every way in the mind of the customer, but it is not priced to make a profit, making the shareholders unhappy. In another case, the focus may be on producing a car at the lowest cost to the point of undermining customer satisfaction.

Now, replace that vision and imagine that same car with an engine with finely cut high-grade titanium cogs spinning at faster revolutions per minute. Imagine its tires finely balanced and its moving parts are well-lubricated and digitised with internal communications. The EPM framework (ie, the car) remains unchanged, but shareholders’ wealth is more rapidly created because there is balance in quality, price and value to all. No vibration or friction. The higher fuel efficiency translates into a higher rate of shareholder wealth creation. That is how good EPM integrates the multiple methodologies of the EPM portfolio of components and provides better analysis and decision making that aligns work behaviour and priorities with the strategy. Strategic objectives are attained, and the consequence is relatively greater shareholder wealth creation.

One can take this analogy further with the strategy map and its derived target measures serving as the car’s risk-mitigating global positioning system or GPS. When you are driving with a GPS instrument and you make a wrong turn, the GPS chimes in to tell you that you are off track, and it then provides you with a corrective action instruction. However, with most organisations’ calendar-based and long cycle-time reporting, there is delayed reaction. The EPM framework includes a GPS.

WHERE DOES MANAGERIAL ACCOUNTING FIT IN?

Note that managerial accounting does not appear in Figure 2-1. That is because the output of a managerial accounting system is always the input to some place where decisions are made. The primary purpose of managerial accounting is for discovery—to ask better questions. In the figure, it supports every box and arrow in the diagram.

Managerial accounting (including activity-based cost management [ABC/M] data) is a key component in EPM. Its information permeates every single element in this scenario to help re-balance these sometimes competing values. By including managerial accounting as a foundational component to the EPM framework, we involve the language of money to support decision making and build better business cases.

Managerial accounting itself is not an improvement programme or execution system, like several other systems in the figure. Information from managerial accounting, such as from ABC/M, serves as an enabler for these systems. It supports better decision making. For example, ABC/M links customer value management (as determined by CRM systems) to shareholder value creation, which is heralded as essential for economic value management. The tug-of-war between CRM and shareholder wealth creation is the trade-off of excessively adding more value for customers at the risk of reducing wealth to shareholders.

Businesses ultimately will discover that customer value management, accomplished by targeting the marketing spend to different customer micro-segments, is the independent variable in the economic value equation. This equation then solves for the dependent variable for which the executive team is accountable to the governing board: shareholder wealth creation. EPM provides the framework to model this all-important relationship.

Is my figure the best diagram to represent the EPM framework? I do not know. Professional societies, management consultants and software vendors have their own diagrams. The key point is that EPM is not the narrow definition of being dashboards with better budgeting and financial reporting. EPM clearly is much broader and balances competing values.

EPM UNLEASHES THE ROI FROM INFORMATION

There is a shift in the source when organisations realise their financial ROI from tangible assets to the intangible assets of employee knowledge and information. That is, the shift is from spending on equipment, computer hardware and the like to knowledgeable workers applying information for decision making.

Figure 2-2 displays across the horizontal axis the stages that raw, transactional data passes through to become the knowledge, wisdom and intelligence to make better decisions that successful organisations will eventually experience. The vertical axis measures the power and ROI from transforming that data and leveraging it for realised results. The ROI exponentially increases from left to right.

Figure 2-2: The Intelligence Hierachy

Source: Copyright Gary Cokins. Used with permission.

The three bubbles on the left side are the location of transactional data for daily operations and reporting. The three bubbles to the right are where the EPM framework of methodologies lifts the ROI. EPM included business intelligence (BI) and analytical software of all types.

Most organisations are mired in the lower left corner’s first two bubbles, hostage to raw data and standard reports. When the feared year 2000 Y2K meltdown approached, many organisations replaced their homegrown software applications with commercial transactional ERP and CRM software. In some organisations, the CIO and IT staff allowed some managers to use basic query and reporting, online analytical processing tools to drill down to examine some of that data. However, this data restricts and confines workers to only know what happened in the past.

The power of BI, EPM and business analytics begins with the fourth bubble—descriptive modelling with analytics. As an example, ABC/M models the conversion of expense spending into the calculated costs of processes, work activities and the types of outputs, products, service lines, channels and customers that consumes an organisation’s capacity. Costing is modelling. As another example, a strategy map and its associated scorecard and dashboard performance indicators is a model of how an organisation defines its linked strategic objectives and plans to achieve them. Data has been transformed into information. At this stage, employees can now know not just what happened but also why did it happen.

The fifth bubble passes from historical information, from which organisations are reactive, to predictive information, such as what-if scenarios and rolling financial forecasts, from which organisations are proactive. As earlier mentioned, organisations are shifting their management style from after-the-fact control based on examining variance deviations from plans, budgets and expectations to an anticipatory management style in which they can adjust spending and capacity levels as well as projects and initiative before changes in work demands arrive. Information is used for knowledge. At this stage, employees can now know not just what happened and why did it happen but also what can happen next.

The sixth and final bubble in the upper right corner is the highest stage—optimisation. At this point, organisations can select from all its decision options examined in the prior stage and answer which is the best decision and action to take.

IT transactional systems may be good at reporting past outcomes, but they fall short on being predictive for effective planning. Given a sound strategy, how does the organisation know if its strategy is achievable? What if pursuing the strategy and its required new programmes will cause negative cash flow or financial losses? Will resource requirements exceed the existing capacity?

Figure 2-2 is not intended to imply that the transactional software vendors of ERP or CRM are not with value. In fact, it is just the opposite. These vendors are excellent—at what their computer code is architected and designed to do. The real ROI lift comes from applying information in the context of gaining insights, solving problems and driving the implementation of strategy.

To simplify an understanding of computer software, it comes in two broad types—transactional and decision support. The latter type includes business intelligence, business analytics and EPM. These two types can be thought of similar to two broad components of the human brain. In the back of one’s head, above the backbone spine, is the reptilian brain stem, evolved from early stages of life. It controls the most basic elements of life such as breathing, eye blinking, digesting food and sleeping. In the front of one’s brain is the cerebral cortex, from which thinking, learning and decision making occurs.

The transactional software represented on in the left side of Figure 2-2 is essential. One must have it operating well. The better its condition, the better the BI, EPM and analytical software can leverage it. The real power and lift of ROI comes from the right side of Figure 2-2. The ROI lift from the analytics-based EPM framework illustrated in the figure demonstrates that the upside potential is enormous. Its purpose is to robustly analyse and understand one’s own organisation, its customers, suppliers, markets, competitors and other external factors, from government regulators to the weather.

MANAGEMENT’S QUEST FOR A COMPLETE SOLUTION

Many organisations jump from improvement programme to programme, hoping that each new one may provide that big, yet elusive competitive edge, like a magic pill. However, most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change—particularly a long-term, sustained change. The key for improving is integrating and balancing multiple improvement methodologies and integrating them with analytics of all types—particularly predictive analytics. In the end, organisations need top-down guidance with bottom-up execution.

Operating managers and employee teams toil daily, making choices involving natural tension, conflicts and trade-offs within their organisation. An example is how to improve customer service levels and cost-saving process efficiencies while restricted to fixed, contract-like budget constraints and profit targets. For example, a classic conflict in physical, product-based companies is that the sales force wants a lot of inventories to prevent missed sales opportunities from stock-out shortages. In contrast, the production folks want low, in-process and finished goods inventories so that they can apply the more proven, just-in-time production methods, rather than continue with the less effective batch-and-queue production methods of the 1980s.

Organisations that are enlightened enough to recognise the importance and value of their data often have difficulty in actually realising that value. Their data is often disconnected, inconsistent and inaccessible, resulting from too many non-integrated, single-point solutions. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily. It is the syndrome of drowning in data, but starving for information.

How does EPM create more value lift? One fundamental thing EPM does is transforms transactional data into decision-support information. For example, employee teams struggle with questions like ‘How do we increase customer service levels without increasing our budget?’ or, ‘Should we increase our field distribution warehouse space by 25% or instead have our trucks ship direct from our central warehouse?’ How can employees answer these questions from examining transaction data from a payroll, procurement, general ledger accounting or ERP system? They cannot. Those systems were designed for a different purpose—short-term operating and control with historical reporting of what happened.

Unlocking the intelligence trapped in mountains of data has been, until recently, a relatively difficult task to effectively accomplish. EPM is a value multiplier to the substantial investment organisations have made in their transactional ERP and CRM software systems and technology but are often viewed as falling short of their expected ROI.

Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing, power-heralding a new era in which creating vast pools of digital data is becoming the preferred solution. As a result, there are now superior software tools that offer a complete suite of analytic applications and data models that enable organisations to tap into the virtual treasure trove of information they already possess and enable effective EPM on a huge scale that is enterprise-wide in scope. EPM is the integration of these technologies and methodologies. The EPM solutions suite provides the mechanism to bridge the business intelligence gap between the CEO’s vision and employees’ actions.

Endnotes

1 Webber, Alan; ‘CEO bashing has gone too far;’ USA Today, June 3, 2003, p. 15A.

2 There are several variants of enterprise performance management (EPM), including business performance management (BPM) and corporate performance management (CPM). Consider these other terms synonymous with EPM.

3 Brache, Alan. How Organizations Work. John Wiley & Sons, 2002; page 10.