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Originally published August 23, 2012
As with most corporate initiatives, the intended goal of performance management and what it actually ends up achieving are quite different. Many companies aren't even aware of the real purpose of performance management. But it doesn’t have to be that way.
To understand what kind of performance a performance management system is meant to manage and how to implement an effective performance management program, it’s helpful to start with a definition: Business performance management is a set of integrated, closed-loop management and analytics processes that address financial as well as operational activities. Done properly, it enables business to define strategic goals and then measure and manage performance against those goals.
Ultimately, what is being managed is a company’s performance in achieving its goals. That’s the intent, at least – but far too often not the reality. Let’s look at why this is often the case:
Reality No. 1: Just Fixing an Isolated Problem
The core performance management processes include financial and operational planning, consolidation and reporting, modeling, analysis, and monitoring of key performance indicators (KPIs) linked to organizational strategy. Ideally, those pieces work together to help a company achieve its strategic objectives. But in practice, very few companies are addressing all of them.Reality #2: Living in the Past
Most are putting out fires – fixing a painful budgeting process, shortening a lengthy monthly close and reporting cycle, or providing greater access to information through enhanced management reporting capabilities and dashboards. Such steps can provide tremendous business value, but on their own they do little to improve execution of a company's primary goals. The true value of performance management comes into play when all key elements are implemented and integrated.
Let's suppose an organization is implementing a full suite of performance management software. Is there an increased likelihood that it will in fact improve its execution against strategic objectives? Yes, somewhat. But there is a major stumbling block: Many organizations are so focused on the technological aspects of this major undertaking that they overlook the business side of the equation.Reality #3: Getting Caught in a Metrics Minefield
More specifically, they simply automate (or upgrade) what they have been doing for years either manually or in another system. They do not revisit what accounts and cost centers they are tracking. They do not change the content of reports, which may be based on the needs of an executive team that has long since left the company or a business climate that hasn’t existed in decades. They do not even think in terms of key performance indicators (KPIs), but in terms of key ratios that are straight out of an accounting textbook from the 1950s.
The point is that the information going into a performance management system and how it is going to be packaged and presented must be based on an organization’s current needs. The data needs to be tied back to strategic objectives. If that is not done, companies will just end up with more efficient, but not more effective, systems.
When you’ve addressed those two issues, it might seem like you’re on the verge of success. If a company rolls out and integrates all key elements of performance management and revises its data and reports to align with the corporate objectives, executives should be able to better track and manage performance as it relates to those goals – right? Unfortunately, this is easier said than done.So, are we there yet? Actually, we are. If the all-too-common realities described above are corrected or avoided, a performance management system will effectively measure the right metrics and KPIs and help executives and business managers achieve corporate objectives.
Translating the strategic objectives into a series of KPIs that will be the focus of a performance management system is arduous and highly charged. It is political, territorial, and often driven by individual egos. Simply stated, people will want the system to measure what they do well, which is not necessarily what the company needs them to do well. The process of creating performance management KPIs linked to strategic objectives needs to be driven from the top down by a strong leader with little patience for gaming the system.
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