17

A CALL TO ACTION-BUILDING A BUSINESS CASE

In this book you have probably detected a common theme—start integrating now, and don’t postpone it. Most enterprise performance management (EPM) advocates are growing tired of nagging organisations to adopt EPM and are now wagging our finger at them to get them going. Why are we so passionate about this topic? One explanation is because advocates have observed organisations that have integrated EPM components enjoy tangible and sizeable benefits. On the flip side, we have witnessed organisations who continue to defer integrating suffer adverse consequences.

THE OBSESSION WITH ROI JUSTIFICATIONS

Of course, many of you are insisting, ‘Name names who have failed. Tell me the return on investment (ROI) on EPM.’ To introduce my answers, let’s start with pondering the question ‘How many of the original Standard and Poors (S&P) 500 list originally created in 1957 are on that list today?’ The answer is 74, which is just 15%. Of those 74, only 12 have outperformed the S&P index average.¹ My belief is when it comes to considering whether to implement and integrate the various component methodologies that constitute the EPM framework, there actually are two choices. Do it or don’t do it. Many organisations neglect the fact that the choice to not act, which means to continue with the status quo and perpetuate making decisions the way they currently are, is also a decision.

What about this need to prove that it is worth it to act by calculating an ROI for EPM? Consider how you would measure the impact of having better performance measures from a strategy map and balanced scorecard system to drive employee behaviour. Or consider how you would measure the impact of better decisions resulting from having more accurate and explanative information from an activity-based cost management (ABC/M) system. You will eventually conclude that the many parallel improvement and change initiatives that organisations pursue (eg, total quality management, business process engineering) are simultaneously occurring. As a result, it is nearly impossible to trace benefits, such as cost savings or future cost avoidance, directly back to any individual change program. This is like trying to make a broken egg whole again.

One step removed from this ROI measurement challenge is to measure the effect that better information, such as from using an ABC/M methodology, serves as an enabler to boost the effect of all these improvement programs. This further complicates quantifying the financial returns from the contribution of each change initiative program.

I am not big on making decisions based on faith, but some managerial concepts just seem to be correct, and completing the full vision of the EPM framework is one of them. Take action or don’t take action. Both choices have an ROI, and with EPM, my belief is that the former is positive, and the latter is negative.

MANAGEMENT AND THE IT FUNCTION CAN BE OBSTACLES

Most organisations make the mistake of believing that implementing analytics-based EPM methodologies is 90% math and 10% organisational change management with employee behaviour alteration. In reality, it is the other way around—probably 10% math and 90% about people.

A problem all organisations suffer from is their imbalance from how much emphasis they should place on being smart rather than being healthy. What is needed to correct this imbalance? Right from the start, you have to think like a sociologist and, arguably, you need to be a psychologist too. People matter—a lot. Never underestimate the magnitude of resistance to change. It is natural for people to love the status quo.

When organisations begin applying one of the many methodologies that constitute the full suite of analytics-based EPM, I believe they need two plans: an implementation plan and a communication plan. The second plan is arguably much more important than the first. There are always advocates for a new project, but there are also naysayers. Knowing in advance who the naysayers are is critical to either winning them over or avoiding them.

A command-and-control style of management that tries to mandate change through force went out years ago. Today’s employee is a knowledge worker. When the executive team proclaims, ‘We are now going to shift direction and go this new way,’ most managers fold their arms in resistance and silently say to themselves, ‘Convince me.’

The trick to general management is integrating and balancing the quantitative and behavioural managerial approaches and styles. Today command-and-control style executives who prefer to leverage their workers’ muscles, but not their brains, run into trouble. Ultimately, people get things done, not computers or machines, which are simply conduits for arriving at results. Most employees do not enjoy being micro-managed. The good performers are people and teams who manage themselves, given some direction and timely feedback. Management creates value and produces results by leveraging people. Analytics-based EPM is much more than dials and levers. It is about people.

An obstacle to organisational improvement and strategy implementation is that employees have not been granted sufficient decision rights to act on the conclusions they have derived from business analytics and fact-based explorations. Decision rights remain hoarded at the top of the organisation. Empowering employees with decision rights and analytical tools with which to reach those decisions is the key to organisational improvement.

Studies have shown that the two major barriers to effective strategy implementation are (1) not distributing decision rights downward into the layers of the organisation chart, and (2) poor cross-functional information flows. Contrary to common belief, removing these two barriers trumps reshaping the boxes and lines in the organisation chart and incentive systems. An iron law of economics states that the better the decisions, the better the results, hence, continuous organisational improvement will follow, financial or otherwise.

However, another obstacle exists. IT often acts as a wall between the data and its users. They first speculate that two or more things are related or that some underlying behaviour is driving a pattern to be seen in various data. They want a set of capabilities for investigation and discovery. They apply business intelligence and analytics as confirmation more than as a somewhat random exploration. This requires users to have easy and flexible access to data, the ability to manipulate the data and the software to support their processes.

There will need to be a shift from this face-to-face adversarial confrontation to a side-by-side collaborative relationship to remove this wall. Part of the problem is how IT and analysts view each other.

Analysts view IT as an obstructive and uncooperative gatekeeper of data. They view IT as not possessing the skills to convert that data into useful information. Experienced analysts view IT as typically trying to prevent robust analysis. Analysts view IT as bureaucrats, who manage a set of technologies and whose main goal is to keep the lights on.

In contrast, IT increasingly views users as competitors, who may solve problems, but don’t have to operate the solutions—they just make it harder to better manage capacity costs by using too many IT resources. IT sees users as a risky group that has low regard for data governance and security.

Analysts need speed and agility to be reactive and proactive, which requires them to be closer to the data for analysis and better decision making. Both IT and its users will need to remove the wall and collaborate and compromise by better understanding and appreciating each other’s changing roles.

IS EPM ART, CRAFT OR SCIENCE?

During a business trip to Rome, I had some weekend time to be a tourist. How can anyone not admire the incredible structural achievements of Italian sculptors, artists and architects? There are so many wonderful structures to appreciate, including the Pantheon, the Coliseum, the Spanish steps and all the wonderful piazzas. There are also many beautiful churches, including St. Peter’s Basilica in the Vatican. The structure of these churches, including their tall columns and ornate decorations, is breathtaking. Inside each church I visited, as I gazed at the high ceilings, I asked myself this question: ‘How much of this beauty built by people centuries before us was the result of art, craft or science?’ Similarly, for today’s organisations implementing the various component methodologies of the analytics-based EPM framework, how much is art, craft or science? Let’s further discuss this question.

Balancing a Smart, as Well as a Healthy, Organisation

In Chapter 7 I described the Newtonian versus the Darwinian view of managing. Despite my Newtonian view (which is probably shared by a vast majority in business and IT) that an organisation is a big machine that simply needs more gears, pulleys and dials to better operate it, behavioural change management is also substantially important. As mentioned, that is why one has to be a psychologist and sociologist to successfully implement EPM. I realise there is also a Darwinian view, which believes that an organisation is like an organism, and we must acknowledge its sense-and-respond behaviour.

A Newtonian organisation relies on fact-based information to make it smarter. A Darwinian organisation relies on employee-centric programmes and policies for improving morale to make it healthier. A balance of the Newtonian and Darwinian management styles is needed to be both smart and healthy.

For the next few paragraphs, let’s explore how science, in the form of business analytics, can be inserted into EPM methodologies to make it smarter.

The Power of Business Analytics

• If you are a retail merchandiser with many stores and consumer items, you can use predictive analytics to continuously replenish a dynamically optimal level of inventory without having too many items languishing on the shelves or any stock-out items.

• If you are a hardware manufacturer and your suppliers are late in delivering component parts creating a shortage, your customer service representatives can influence customers to change their order at the same time the order is being placed by offering them slightly different product configurations, with a small discount, that includes the parts you have in stock.

• If you are a consumer packaged-goods producer, you can run short-duration marketing campaigns, target and predict the desired sales mix volume and instantly harmonise your production levels to optimise costs.

• If you are a business-to-consumer service, such as a bank or telecommunications firm, you can analyse the purchase history and preferences of your customer micro-segments (and even of each customer). That information, combined with individual customer profitability information, can help you tailor service offerings to up-sell and cross-sell to customers to optimise future sales and profits.

• If you are a human resources manager seeking to increase employee retention, you could analyse the characteristics and traits of employees who have left your organisation. The variables might include their ages, the frequency and amount of their salary increases, their lengths of employment and dozens of others. You could then apply these patterns to your existing work force to predict and order a list of the next most likely employees to resign (plus their reasons) and potentially intervene to prevent their departures (for those valuable employees you wish to retain).

• If you are a CEO desiring to better select and align your most influential balanced scorecard’s key performance indicators (KPIs), you could continuously test the degree of statistical correlation between the cause and effect leading to lagging KPIs. This way you can keep improving those KPIs and, accordingly, apply weights to influence and align your employees’ behaviour with the strategic objectives.

THE FUTURE OF ANALYTICS-BASED EPM

In the 1890s Frederick Winslow Taylor, a luminary of industrial engineers, pioneered scientific management methods to systematically organise work. His techniques helped make Henry Ford wealthy when Ford’s automobile company applied these methods to divide labour into specialised skill sets in a sequential production line and set stopwatch-measured time standards as target goals to monitor employee production rates. Production at rates faster than the standard was good, and slower was bad. During the same period, Alexander Hamilton Church, an English accountant, designed a method of measuring cost accounting variances to measure the favourable and unfavourable cost impact of faster or slower production speeds compared to the expected standard cost.

Since then, as outlined in Chapter 13, ‘What Will Be the Next New Management Breakthrough,’ management science has gradually continued to support better decision making and improve an enterprise’s performance. However the time has come to escalate the application of management science by leveraging business analytics.

An organisation should be viewed as a broad series of ongoing laboratory experiments in order to refine its decision making. Managers at all levels should be formulating ideas and theories about what will best improve the organisation’s performance. Based on these theories, the organisation should constantly test the effects of its actions for validation. Scientists, like biologists and astronomers, live by experimentation and test analysis. An organisation should, too, whether it is a commercial business or public sector government agency or ministry.

People are what it’s all about, so I honour and respect the importance of applying the principles of behavioural change management. However my love for quantitative analysis influences me to conclude with a short narration by the great Princeton University mathematician and Nobel Prize winner, John Nash. Nash introduced a theory describing how rational human beings should behave if there is a conflict of interests. In the Academy Award winning movie about Nash’s life, A Beautiful Mind, he said ‘I like numbers because with numbers, truth and beauty are the same thing. You know you are getting somewhere when the equations start looking beautiful. And you know that the numbers are taking you closer to the secret of how things are.’

The executive management teams with the courage, will, caring attitude and leadership traits to take calculated risks and be decisive will likely be the initial adopters of fully integrated, analytics-based EPM systems and will achieve its full vision. Other executive management teams will follow them.

Endnotes

1 Presentation at the CFO Connections Conference by Professor Gary Biddle, University of Hong King; September 11, 2007, Beijing, China.