Originally published August 14, 2006
At this point in time, a sizeable number of companies have moved forward with a core business performance management (BPM) initiative. Most of them have had a reasonable degree of success, as determined by the BPM Pulse survey and anecdotal evidence. That success is breeding further adoption of core performance management, and we are seeing the next round of companies (both big and small) looking to get started. Those that have completed the core are now embarking on the path to “What’s next.”
With business performance management having proven itself by providing vendors, consultants and, most importantly, end users with significant benefits and rewards, it is logical that all concerned would like to build upon that success. Performance Management 2.0 is the next phase in business performance management.
To understand what’s coming next, we need to first review what’s gone before. ”Core” performance management consists of budgeting, planning, forecasting, consolidation and reporting, as well as scorecards/dashboards and analytics. These core processes have mostly been focused on financial data. In many companies, business performance management has replaced antiquated Excel-based budgeting processes, a tangle of disparate source systems and user-unfriendly interfaces with an end user-driven system that provides a single set of consistent, accurate, actionable information company-wide. This is a huge accomplishment. In the glow of that success, many of these companies are considering the next phase.
Performance Management 2.0, a logical outgrowth of the core, consists of several important components: a focus on operational analysis and performance measurement, a deeper dive into critical areas of financial management, an attempt to be able to better anticipate future results and more vertical breadth. Let’s examine each of these.
The area with the greatest potential payback is operational analytics. This really brings performance management to all areas of the company and makes it meaningful and relevant to each of those areas. This functional analysis utilizes the same basic performance management structure as the core: planning, consolidation and reporting, and scorecards of key measures. One of the first areas to receive attention in many companies is sales. Improving sales performance can have a huge impact on the bottom line. While helping companies better understand the relative sales performance by product, by region and/or by rep, many of these systems also improve the compensation process by tying pay to results, and reducing labor costs and errors. Other areas receiving focused performance management attention include: product development, product marketing, services and IT itself.
One of the most key areas, almost in a class by itself, is employee performance management. This is where Performance Management 2.0 can really magnify the benefits obtained from the initial core performance system implementation at a company. Employee performance management takes the high level corporate or departmental goals and measures and brings them down to the individual contributor level. It spells out how each employee can specifically contribute to the company’s performance goals and defines the measure of success for that employee. It often follows that compensation is then tied to that employee’s performance as part of the corporate performance management initiative. This, in turn, impacts behavior, which is key in transforming an organization into a performance-focused culture.
Focused Financial Analysis
Financial analysis is not neglected in 2.0, it’s just more focused. The two specific areas of focus are cash and profitability. While core performance management addresses both of these areas, in the 2.0 world there are entire applications built around them. Working capital/cash flow is analyzed, forecasted and measured on dashboards with a level of detail that is just not there in a core performance management system. The other area of focus is profitability. The overall goal is profitability optimization, and this is usually accomplished by gaining a better understanding of individual customer and product profitability. With that information in hand, an organization can better determine the customers and products on which to focus the bulk of its efforts.
Predictive analytics have been around for some time now, but in 2.0 they are becoming more mainstream. No one likes surprises, and any analysis that can more accurately “predict the future” is desirable. For most vendors, this is a specific set of functionality and algorithms that work with core performance management capabilities. Other vendors have taken an exclusive focus on this area and provide additional depth. The main idea is to both analyze trends and project their future trajectories while also trying to understand the root causes of certain results to enable a company to, in effect, change its destiny.
Vertical Breadth and Depth
Vertical breadth and depth is also part of Performance Management 2.0. This enables organizations to obtain specific modules and functionality to address unique characteristics of their industry that generic performance products and services cannot. For example, financial institutions spend a good deal of time analyzing risk-related aspects of their business. Most out-of-the box performance solutions do not specifically address this. Vertically focused offerings for financial services firms include this functionality as a matter of course. Professional services firms live and die by their billing hours and rates. Performance solutions specifically for their industry would include entire modules dedicated to tracking and analyzing billing hours.
A Natural Outgrowth
As you can see, Performance Management 2.0 is not a radical departure from what has gone before, but a natural outgrowth that builds upon and leverages what is already in place. Organizations that have completed their implementation of the core business performance management capabilities now have a choice of next steps to further enhance the benefits they are already receiving. Organizations that have not yet started a basic performance initiative need to look at moving sooner rather than later because it’s possible their peers are already on to the next phase.
Author's Note: For more information about Performance Management 2.0, BPM Partners has been invited to participate in a Web cast on this topic, sponsored by Applix.
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