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Business Performance Management in 2010, Part 3

Originally published February 11, 2010

For the last two months, we have been looking at the growth of the benefits and uses of business performance management (BPM), as well as the continuation of long-term challenges (see: Business Performance Management in 2010, Part 1 and Part 2). This month, we are going to continue to examine the challenges.

What Will the System Measure?

After the challenge we looked at last month, getting your company to move forward with performance management at all, this is the next biggest issue: What are the key performance indicators? In many companies, this topic does not even come up in planning discussions. Usually there is a process that's broken, let's say budgeting and planning, and performance management is identified as a way to fix it. From there, the project often proceeds straight down a technology path. This is often the case for projects that are led by IT; but even with finance in charge, this happens all too frequently.

If you step back and think about it, the real purpose of performance management is to get the company aligned and focused on its strategic objectives. While the system automates and therefore improves many processes along the way, that is just a means to an end. The real goal is to bring together all of the pieces so a company can execute on its strategy. If all you do is automate a process or two, you will see some benefit, but you will fall far short of the potential of performance management.

In most organizations, the team focuses on finding the right technology (another challenge we will examine later). Requirements are developed, vendors are identified and evaluated, and a solution is selected and implemented. The implementation team typically looks at how things are done today in spreadsheets or an older system and looks to replicate that in the performance management system. In terms of what the system is going to measure, it is logically assumed that was figured out a long time ago. Usually the company will have an existing key ratios or even a key measures report, and that will become the performance measurement component of the new system. It will either be coded as a report using the new technology, or actually set up in a dashboard so it feels like a real performance management system.

The problem is that these ratios are almost entirely financial in nature and often are not in the least bit strategic. Even if by chance they were the right measures at some point in time, it is highly unlikely that is still true today. So what should you do? Well, in addition to the group examining technologies, you will also need a senior, cross-functional team looking at strategy and measures. While this team can operate in parallel for the most part, some of the things they come up with may become requirements for the technology team to consider. Therefore, their work really needs to be mostly done before a product is selected.

In some companies, performance measures are never thought about in the first place. In others, they know they need them, but it is just too hard to do so they move on without them. For true performance management, though, you do need a set of key performance measures/indicators tied to the corporate strategy that will populate your performance dashboard. As a matter of fact, the whole system – what is included in planning and forecasting, what data is brought over from the transactional systems, etc. – really revolves around these measures. They are fundamental to any good performance management system. How these measures are developed is a topic in and of itself that we have examined before and will examine again in a future article.

There are a few simple rules, though. You need to start with a current version of the corporate strategy. From there, key performance indicators are developed that tie back to that strategy. At the top level, you should not have more than 12 to 25 measures. They should be a mix of financial and non-financial measures. This is because financial measures tend to look back at what just happened (last month's sales, for example), while non-financial measures such as customer satisfaction, product quality, etc. can be good leading indicators of what might happen down the road. Lastly, there really is a need for multiple, cascading performance dashboards throughout the company that are tied together, but relevant to each key area of the business.

There is one more issue in this area: What are the targets to determine acceptable performance? In most companies, once the right measures are defined, they then analyze actual results versus budget. Usually some tolerance range is set and if the variance from budget is within that range, they assume all is well. Is it really, though?

Let's look at a company where a strategic objective is to improve operating margins. Suppose they set a target this year of going from a 10% margin to a 12% margin. If the actual data turns out to be in line with their plan numbers, everything will look rosy on their dashboard. Suppose, however, that everyone else in their industry averages around a 15% margin. Should they really be excited with their accomplishment? Maybe they set the bar too low. The answer is they should be pleased with their progress, but they must be mindful of the fact that they are not where they need to be. This illustrates the importance of external benchmarking. That is, don't just measure yourself against your own targets, but look at how you are performing in terms of your peers as well.

Next month we will continue to examine some of the remaining business performance management challenges.
  • Craig SchiffCraig Schiff

    Craig, President and CEO of BPM Partners, is a pioneer in business performance management (BPM). Craig helped create and define the field as it evolved from business intelligence and analytic applications into BPM. He has worked with BPM and related technologies for more than 20 years, first as a founding member at IMRS/Hyperion Software (now Hyperion Solutions) and later cofounded OutlookSoft where he was President and CEO.

    Craig is a frequent author on BPM topics and monthly columnist for the BeyeNETWORK. He has led several jointly produced webcasts with Business Finance Magazine including "Beyond the Hype: The Truth about BPM Vendors," the three-part vendor review entitled "BPM Xpo" and "BPM 101: Navigating the Treacherous Waters of Business Performance Management." He is a recipient of the prestigious Ernst & Young Entrepreneur of the Year award. BPM Partners is a vendor-independent professional services firm focused exclusively on BPM, providing expertise that helps companies successfully evaluate and deploy BPM systems. Craig can be reached at cschiff@bpmpartners.com.

    Editor's Note: More articles and resources are available in Craig's BeyeNETWORK Expert Channel. Be sure to visit today!

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