Business Intelligence Network - The Vision for BI and Beyond

Danger – BPM Ahead, Part 2

Published: May 14, 2008

This article, the second in a two-part series, covers the third problem that can cause significant issues for the companies implementing business performance management solutions.

Part 1 of this series looked at two of the three most common problems encountered when implementing performance management. The first one was about technology – selecting the wrong solution. The second major challenge focused more on process – having an underutilized system because of the approach taken when selecting and deploying the system. The third problem is really the most strategic and probably the most common – measuring the wrong things. Even if you get everything else right, this issue can greatly reduce the payback potential of the entire performance management initiative.

Problem #3: Measuring the Wrong Things

If you followed our recommendations for avoiding problems 1 and 2, you probably now have a great technology solution with everyone onboard and excited. However, many of the hoped for benefits of performance management may not be materializing. There is no noticeable improvement in strategic alignment and collaboration. Individual employee behavior is unchanged. The bottom line has not been impacted at all. There are no signs of a “performance culture.” How could this be?

Unfortunately, it is very easy to end up in that situation. While the new technology on its own can speed up the closing and reporting processes, reduce errors and the manual labor required in the budgeting process, and even make information more widely available, it will not become a true performance management system without significant efforts on the part of IT, finance and senior management. These efforts revolve around determining the key performance indicators that tie back to the corporate strategy. Ideally, the design of the entire system should be focused on these measures, which, in turn, will focus the employees on them.

In the typical scenario, the performance management project team looks to existing reports to populate the reporting and dashboard areas of the new system. Most companies have a “key ratios and statistics report (operating margin, productivity per employee, cash on hand, net income, day’s sales outstanding, etc.) that often morphs into the new performance dashboard. It seems logical. After all, the management team and the board have been using these reports to run the company for years. The problem is that while these measures are important, particularly to the financial analysts, they are not really measuring the successful execution of the company’s strategy. Perhaps the net income number looks good, but the bulk of the revenue is coming from products about to be retired as opposed to newly launched ones the company is counting on. In addition, very few (if any) are forward-looking, which might allow you to address a problem while it’s still manageable. These measures are also very high level, very corporate. They are not directly relevant to most business areas, and they are not actionable.

So, what should you do? In addition to implementing a new technology platform for performance management, you also need to develop the company’s key performance indicators. This is by no means a simple task, nor is it one that IT or even finance can do on its own. It is also a task that is greatly aided by an independent facilitator. I recall talking to an IT team at a major financial institution that was about to roll out a performance dashboard populated with measures that had been appearing on company reports forever. After our conversation, they understood why that was the wrong approach and were excited to now go off and do it the right way, but without assistance. They asked me to check back in three months when they expected to be ready to move on to the next phase in their performance project. Needless to say, when I checked back in three months, and even at the six month mark, they were not done figuring out what to measure. By the time a year had passed, they had lost enthusiasm for the task and were focused on other projects.

The best way to avoid the problem of measuring the wrong things is to do the following: Whether you are in IT or finance, you need to convene a meeting of the leaders of the major business areas and include representation from senior corporate management. The purpose of the meeting is to have senior management convey to the assembled team the current corporate strategic goals and then develop measures tied to those goals. Of course, the most senior members of the group won’t have much time to devote to this exercise, but they need to be there at the beginning when the strategy is discussed and at the end when the key performance indicators (KPIs) are being proposed. From those corporate goals, the team should then work on deriving the key business drivers that will enable the company to achieve those goals. Out of these will come the key measures of success or key performance indicators. There should only be 12 to 25 of these since any more than that will make it hard for people to focus on what’s most important. You can have many supporting metrics tied back to these KPIs, but the KPIs themselves should be highly focused and, as their name implies, key. They also should be actionable. In other words, you should be measuring things you can do something about.

Another consideration, and this is sometimes hard for many companies to grasp, is that you need to have a mix of financial and nonfinancial measures. Financial measures tend to be historical – how we performed last month, last quarter, last year. Nonfinancial measures are often more forward-looking and are good leading indicators. For example, if product quality, customer satisfaction, sales win rates are going down, then you know you will probably have problems achieving your financial goals in the months ahead. The balanced scorecard methodology enforces this approach, but for some companies it is too onerous to fully embrace and implement.

There are a couple of other factors to consider. For each KPI, you need to define an owner – the person who will take action if there is a problem. This needs to be done upfront because it will be very difficult to find an owner after a problem arises. You also need to have a basic framework for action for each measure so you are not trying to figure out what to do when you are in crisis mode. For each KPI, you need to have a target range so the system will know when to alert you to a potential problem. Ideally, the targets can come from the budgeting and planning component of the performance system. It is also useful to review your KPIs against external benchmarks when available. Lastly, it needs to be determined and agreed upon how these KPIs are calculated and where the trusted data source is for them. Coming back to the independent facilitator discussed earlier – an independent facilitator can streamline these sessions, make sure all the key points are addressed and minimize the time required of the senior executives. In addition, without independent guidance, many of these sessions become political and territorial. People want to include measures that make them look good, even if they are not strategically important. Of course, they also want to avoid inclusion of measures where they anticipate it will be difficult to achieve the target. Also, most companies have difficulty whittling down their KPIs to 25 or less without independent guidance.

Once you are happy with your corporate performance dashboard, the leaders of each business area should lead their own teams in the development of departmental dashboards. This will create greater relevancy, accountability and ownership. These departmental dashboards need to tie back to the corporate one to eventually lead to a series of cascading dashboards throughout the organization. Properly done, this process will lead to a strong performance culture that will impact employee behavior and ultimately improve the bottom line.

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