Process Management Key to Strategic Performance

Performance management is simply the discipline of aligning business activity with corporate objectives. Whilst it has taken on an HR focus over the past ten years, largely to manage individual performance and incentives, the focus is slowly moving back to the area of strategic execution.

In an interesting study by Aberdeen in November 2010, the found that large enterprises performed better that medium-sized enterprises [$50 - $500m revenue] in spite of both groups having performance management integrated into the business – so why is this? Prior studies had concluded that understanding drivers of operational performance was a top initiative for mid-sized organizations – so what difference in strategy, capability and technology might account for this mix?

The November 2010 study revealed that large businesses were more accurate in forecasting revenues and costs.

Metric	Mid-Sized	Large
Accuracy of Actual Cost to Budget	92%	102%
Accuracy of Actual Revenue to Budget	94%	100%
Operating Profit Margin	10%	13%
Customer Retention Rate	91%	92%

*Aberdeen Group Research

Did the cost under-spend sufficiently account for the under revenue? Other data showed that larger organizations were hit harder during the recession than smaller businesses, making bigger budget cuts in many parts of the organization, so we could discount this as a primary factor. With similar retention rates, what made the difference in profit when both we claiming to follow the discipline of performance management? The research found that mid-sized organizations had different specific approaches to CPM than larger organizations.

The detailed data showed a distinct difference in where decisions were made. In larger organizations, cut back decisions were made right across the organization, driven largely by business managers. Mid-sized organizations focused more on cuts to specific departments. In addition, larger businesses made relatively larger cut backs. Maybe this was because they were already running less efficiently than mid-sized businesses. The study didn’t reveal any data to account for this factor. Houser, it did demonstration that large companies focused their PM programs on improving efficiency in business processes. They also had a deeper understanding of their operations compared to mid-sized, who are still seeking to understand process management.

So it appears that CPM maturity was a driving factor in the variance in performance. The study concluded there were three main differences between large and mid-sized organizations in their approach to PM.

Business Driven rather than IT Driven – whilst I applaud IT Managers for being proactive in launching BI and/or PM initiatives, if they are not adopted by and driven by the business, they will fail to succeed in delivering to promise.
Operational Process Knowledge - knowing which processes exist within an organization is critical to the success of any performance management initiative. This knowledge helps to drive the selection of KPI – making them more aligned with the strategy and more role-specific. More larger businesses [50% to 33%] also tend to have workflow software that helps with integrating BI into processes, capturing more data and revealing more improvement opportunities. Workflow tools also support the cascading of KPI to all levels; setting up goals for managers at each level. This automation of PM greatly enhances the likelihood that each team will focus on contributing to higher level KPI. PM becomes more automated, without the need for time consuming manual data collection, aggregation and reporting.
Data Knowledge – larger businesses are more likely to have been exposed to BI tools, and as such have become more familiar with the definition and value of their data. The mere exercise of compiling a Business Glossary almost has magical powers in opening the eyes of the business to what they thought they knew – but don’t!
Data Access – the use of BI tools means that larger businesses already have better access to KPI data [66% to 47%], and with timely updates [60% to 44%]. The longer the gap between updates, the more opportunity for performance to deviate from the desired path – the greater to cost of inefficiency and the greater the lost opportunity for improvement. Finding the right latency for each KPI is a key driver of success in any PM program.
Approach to PM Implementation - large organizations approach PM using a more incremental approach, starting at individual business unit level – whereas mid-sized businesses are more likely to adopt a big-bang style, at all levels. Making PM role based at all levels is a key driver of PM success – it also helps to drive a more proactive approach to using PM to link to individual performance evaluations and incentives than the current methodologies. Only 27% mid-sized companies provide training in PM – a significant cultural factor in its adoption and engagement. This may contribute to why only 47% of these organizations update their KPI on a regular basis.

Cautionary Tale

As with most success stories, there are some elements to be cautious of:
Starting at root level can lead to disparate groups of KPI that are not directly linked to current corporate initiatives – they lack focus as to what is most important right now. Selection of metrics to track can also tend towards those where data is readily available, rather than those metrics that matter.

Not using built for purpose BI or CPM tools - using spreadsheets to track metrics manually can take a lot of time, making them less cost effective in terms of value gained
Lack of consistency of KPI definitions – different definitions lead to different values for the same KPI. KPI definitions need to be standardised across the business and managed through a central repository – the Business Glossary.

For this reason, it is recommended that whilst starting at BU level has definite advantages, however the approach taken must be an enterprise-wide perspective to ensure alignment to the right measures, defined in a consistent way. By combining a low level starting point, with a top-down structural definition the PM program drives a cultural change across the business and helps the enterprise to become more focused as multiple parts working towards a common purpose.

Reference: Performance Management – What the Mid-Market Can Learn from Large Enterprises. Aberdeen Group. November 2010.

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