Gary Cokins – Strategy Essential

Enterprise Performance Management and Strategy Execution

By Gary Cokins, Founder, Analytics-Based Performance Management LLC; www.garycokins.com

 

There is confusion in the marketplace about the term, Performance Management. Just Google the term and you will see what I mean.

The confusion begins with which phrase should we call Performance Management? This confusion in part is due to semantics and language. We often see in the press and media the acronyms BPM for Business Performance Management, CPM for Corporate Performance Management and EPM for Enterprise Performance Management. But just like the foreign language words merci, gracias, dunke schein, and thank you all mean the same thing, so do these acronyms. For this article, 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 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

Historically the term performance management referred to individual employees and was used by the personnel and human resources function for employee appraisals. But today, it is widely accepted as enterprise performance management of an organization as a whole whether it is a commercial, not-for-profit, or government organization. Clearly the performance of employees is an important element to improve an organization’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 are typically 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 article is to remove the confusion and clarify 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 ongoing, and inevitably there is a limit which is forcing management to come to grip with truly managing their resources for maximum yield and internal organic sales growth. A company cannot forever cut costs to increase its prosperity. There is evidence 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; and 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 organizations where constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure to execute their strategy. There is a big difference between formulating a strategy and executing 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 move directly toward their defined strategies.

One cause for failures in strategy execution is managers and employee teams typically have no clue as to what their organization’s strategy is. Most employees if asked cannot articulate their executive team’s organization strategy. The implication of this is significant. If managers and employee teams do not understand their organization’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 can effectively 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 organization’s defined mission. But there is confusion with this methodology. Many organizations claim to have a balanced scorecard, but there is little consensus as to what it is. But 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 which should be viewed more as merely a feedback mechanism.

But 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?

Ultimately, an organization’s interest 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?” organizations 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 Enterprise Performance Management?

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

A simple definition of EPM[2] is “the translation of plans into results – execution.” It is the process of managing an organization’s strategy. For commercial companies, strategy can be reduced to three major choices[3]:

1)      What products or service-lines should we offer or not?

2)      What markets and types of customers should we serve or not?

3)      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 executing strategies. EPM does this by helping managers to sense earlier and respond more quickly and effectively 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 has 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 must constantly adjust them based on external forces and new opportunities. Strategies and the operational plans and decisions to execute them 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 it gives an organization 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 the time-cycle.

Is Enterprise Performance Management a new methodology?

Some good news is 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 (SCM), risk management, and human capital management systems, as well as lean management and Six Sigma initiatives. It is quite a stew, but they all blend together.

EPM increases in power the greater these managerial methodologies are integrated, unified and spiced with all flavors of analytics – and particularly predictive analytics. Predictive analytics are important because organizations are shifting from managing by control and reacting to after-the-fact data toward managing with anticipatory planning so they can be pro-active and make adjustments before problems occur. Unfortunately at most organizations EPM’s portfolio of methodologies are typically 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. But 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 tabletop jigsaw puzzle that everyone knows somehow fits together; but the picture on the puzzle’s box cover is missing!

EPM provides that picture of integration both technologically and socially. EPM makes executing the strategy everyone’s job #1 – it makes employees behave like they are the business owners. It is the integration of the methodologies spiced with analytics that is the key to complete the full vision of the EPM framework.

 

Clarifying what Enterprise Performance Management is not

As earlier mentioned, EPM is sometimes confused as a human resources and personnel system for individual employees. It is much more encompassing. EPM embraces the methodologies, metrics, processes, software tools, and systems that manage the performance of an organization 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. Metrics and indicators are simply a piece of the broad EPM framework.

To minimize anyone’s 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. There are substantial interdependencies 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 as increases or decreases in expense funding generally impacts performance results. For EPM to be accepted as the over-arching integrator of methodologies, it must meet this test: 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 modeling the data into information, analyzing 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 organization to achieve the full vision of the EPM framework. I view EPM as overarching from the C-level executives cascading down through the organization 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 information technology research firms and software vendors. Arguably EPM existed before there were computers!  In the past, organizations made decisions based on knowledge, experience or intuition; but as time passed, the margin for error grew slimmer. Computers reversed this problem by creating lots of data storage memory, but this led organizations 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 Enterprise Performance Management?

As earlier mentioned, there is ambiguity and confusion about what EPM really is. Regardless 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 problems:

1)      Failure to execute the strategy – I have already mentioned this. 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 most managers and employees cannot explain their organization’s strategy, so they really do not know how what they do – each week or month – contributes to their executives’ strategic 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 organizations believe they actually realized the expected ROI promised by their software vendor that initially justified their huge large-scale IT investment in major systems (e.g., customer relationship management [CRM], enterprise resource planning [ERP]). The CIO has been increasingly criticized for expensive technology investments that, although probably necessary to pursue, have fallen short of their planned results and return on investment (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 where 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’ workplaces where they retired after decades with their employer, today there is no place to hide in an organization anymore. Accountability is escalating, but it has no teeth without having consequences. EPM adds teeth 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 where organizations could test-and-learn or have endless briefing meetings with their upper management, today an employee often must make a decision on-the-fly. “Yes or no?” “Go or no-go?” This means employees must understand their executive team’s strategy. In addition, internal tension and conflict are natural in all organizations. 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 (e.g., input labor hours, percent 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 organizations 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 spray-and-prey advertising are obsolete concepts. This shifts the focus to require a much better understanding of channel and customer behavior 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 organizations now realize it is no longer sufficient for their own organization to be agile, lean and efficient. They are now co-dependent on their trading partners, both upstream and downstream, to also be agile, lean 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 Enterprise Performance Management 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. But 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.). But shareholders and stakeholders believe if their investment return is less than the economic return they could have received from equally or less risky investments (e.g., a 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/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?
figure1

Figure 1 illustrates the interdependent methodologies that comprise EPM for a commercial organization. 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? The answer? It depends on who you are in the organization.

Figure  1 … Performance Management is Circulatory and Simultaneous

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 organizational 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 takeover, 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 – a recognition 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. Spray-and-pray 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 1, first focus on the three counter-clockwise arrows at the center 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 organization, regardless if they are in the commercial or public sector: take an order or assignment, and fulfill that order or assignment. These two processes apply to any organization: orders, assignments or tasks are received, and then organizations attempt to execute them. Order fulfillment is the most primary and universal core process of any organization. An example in healthcare is a hospital admits patients and then treats and heals them. The IT support systems needed to fulfill 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 (CI) and customer relationship management (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 fulfillment of customer or work orders and sales process planning and operations reside – the world of ERP and lean/Six Sigma quality initiatives. The output from this process planning and execution box is the delivered product or service intended to meet the customer needs. To the degree that customer revenues exceed all of an organization’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 Enterprise Performance Management as a continuous flow

Figure 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 organization’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 organization’s resources. More with less. Value for money. These are the terms associated with EPM.

Figure 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 organization’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 key performance indicators (KPIs) intended to align work behavior with the outdated strategy. In those cases, KPIs associated with outdated strategies are not unimportant but rather now less important. The abandoned KPIs become performance indicators (PIs) 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 a key question: “How am I doing on what is important?” The power of that question is in its second half: to focus everyone on what is most important. The selection of good KPIs is critical. With analysis for causality, corrective actions can then occur. And note in the figure that the output from scorecards and dashboards does not stop at the organization’s boundary, but it penetrates all the way through to influence the employee behavior – the increasingly important intangible assets. This in turn leads to better execution.

Enterprise risk management (ERM) is included in the mission and strategy box. Risks are assessed, and key risk indicators (KRIs) are identified and monitored.

Continuing on, the organization’s marketing and sales can better target which existing and potentially new customers to target 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 comes the order fulfillment loop. Take customer orders and efficiently fulfill the orders.

As this circulatory system is streamlined and digitized 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 a result of addressing all of 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 a box for innovation in figure? It is not there because it arguably must be inside every box and arrow in the diagram. Innovation today 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 article 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 to improve all of the other methodologies in the flow. Improvements may come from quick rapid prototyping and iterative re-modeling 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.

 

An automobile analogy for Enterprise Performance Management

As mentioned, all organizations have been doing EPM well before it was labeled as such. It can be argued that on the date all organizations 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 1 as an organization being a poorly tuned automobile. Include in your imagination cog gears 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 kilometers per litre would be low.

Now substitute the analogy of fuel efficiency with the rate of profits and shareholder wealth creation. At an organizational 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 the mind of the customer in every way, but it is not priced to make a profit, making the shareholders unhappy. In another case, the focus may be on producing an automobile at the lowest cost to the point of undermining customer satisfaction.

Now replace that vision and imagine that same automobile with an engine with finely cut high-grade titanium cog gears spinning at faster revolutions per minute. Imagine its tires finely balanced and its moving parts are well lubricated and digitized with internal communications. The EPM framework (i.e., the automobile) 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 behavior 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 automobile’s risk-mitigating global positioning system or GPS. When you are driving with a GPS instrument and you make a wrong turn, the GPS’ voice chimes in to tell you that you are off track – and it then provides you with a corrective action instruction. However, with most organization’s 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 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 program or execution system like several other systems in the figure. Information from managerial accounting, such as from ABC/M, serve as enablers 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 adding excessively more value for customers at the risk of reducing wealth to shareholders.

Ultimately, businesses 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 of the EPM framework? I do not know. It is my diagram. Professional societies, management consultants, and software vendors have their own diagrams. Perhaps a business magazine or web portal can have a contest where diagrams are submitted and voted on by readers. But the key point is that EPM is not the narrow definition of being dashboards with better budgeting and financial reporting. Clearly, EPM is much broader and balances competing values.

 

Enterprise Performance Management Unleashes the Return on Investment from Information

There is a shift in the source where organizations realize their financial return on investments 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 knowledge workers applying information for decision making.

 

figure2Figure 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 which successful organizations will eventually experience. The vertical axis measures the power and ROI from transforming that data and leveraging it for realized results. The ROI increases exponentially from left to right.

Figure 2 … The Intelligence Hierarchy

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 flavors

Most organizations 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 organizations replaced their home-grown software applications with commercial transactional ERP and CRM software. In some organizations the CIO and IT staff allowed some managers to use basic query and reporting on-line analytical processing (OLAP) tools to drill down to examine some of that data. But 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 modeling with analytics. As an example, activity-based cost management 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 organization’s capacity. Costing is modeling. As another example a strategy map and its associated scorecard and dashboard performance indicators is a model of how an organization 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 organizations are reactive to predictive information, such as what-if scenarios and rolling financial forecasts, from which organizations are proactive. As earlier mentioned organizations 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 where 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 highest stage – optimization. At this point organizations can select from all of 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 organization know if its strategy is achievable? What if pursuing the strategy and its required new programs will cause negative cash flow or financial losses? Will resource requirements exceed the existing capacity?

 

Two types of computer software – transactional and decision support

Figure 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. But the real ROI lift comes from applying information in the context of gaining insights, solving problems and driving the execution 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. But 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 is essential. One must have it operating well. The better its condition, the better the BI, EPM and analytical software can leverage it. But the real power and lift of ROI comes from the right side of Figure 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 analyze and understand one’s own organization, its customers, suppliers, markets, competitors, and other external factors, from government regulators to the weather.

 

Management’s Quest for a Complete Solution

Many organizations jump from improvement program to program 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 spicing them with analytics of all flavors – particularly predictive analytics. In the end, organizations 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 organization.  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 this: the sales force wants lots 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.

Organizations that are enlightened enough to recognize the importance and value of their data often have difficulty in actually realizing 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 it transforms transactional data into decision-support information. For example, employee teams struggle with questions like, “How do we increase customer service levels, but without increasing our budget?” Or, “Should we increase our field distribution warehouse space 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 accomplish effectively. EPM is a value multiplier to the substantial investment organizations have made in their transactional ERP and CRM software systems and technology but are often viewed as falling short of their expected returns on their investment.

Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power heralding a new era where 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 organizations 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.

 Gary Cokins

www.garycokins.com



[1] Webber, Alan; “CEO Bashing has gone too far;” USA Today; June 3, 2003; p. 15A

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

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

  • Amra Gadžo

    The expertise of a person in a particular area is a reflection of its ability to explain a complex topic with a simple words. Here we have an obvious example of this. This article, I will use as a case study for my students. Thank you very much Gary Cokins.