We spend a good deal of time discussing how to do performance management right and which vendors to consider. It isn’t often that we review why companies are doing business performance management (BPM) in the first place. In our annual BPM Pulse survey, we always find that about 20-25% of companies do not currently have any plans to pursue performance management. This month’s article is for them, to let them see what they may be missing. It is also for the majority of the remaining 75-80% that are only focusing on a narrow slice of performance management.

Business performance management can be grouped into four distinct, but interconnected segments: budgeting and planning, financial consolidation and reporting, performance dashboards and scorecards, and operational optimization. Let’s look at the business challenges addressed in each area.

Budgeting and Planning

This is the area that often drives companies to proceed with performance management in the first place. Many organizations simply do not find their budgeting process to be all that useful. They are unwilling or unable to drop it altogether, so they still need to go through the process. However, many believe that it is just too much effort for too little return. The creation of the budget is a labor-intensive and error-prone process. In the end, the results produced are usually out of date the moment they come out. In addition, it is often difficult to easily track actual performance against the plan. Due to the complexity of the budgeting process, the actual number of participants in the budget creation and review process is typically very limited. The result tends to be lack of buy-in from people who are expected to live by the results, but had little involvement in its creation.

When it comes to forecasting, although the level of detail is less than in the budget, many of the same challenges exist. In addition, in a rapidly changing market, companies would like to forecast more frequently but can’t easily accomplish this task. Forecast accuracy has always been an issue, but in today’s environment, the margin of error you can get away with is smaller than ever.

The methods and technologies of business performance management are used to streamline these processes. When properly implemented, companies end up with a more straightforward budgeting process that enables them to involve more users and accelerate the entire cycle. Forecasting builds off of these new budgeting capabilities, utilizing the same interface, account and entity tables, and workflow process. Recently added performance management functionality such as predictive analytics helps to ensure greater accuracy when forecasting.

Financial Consolidation and Reporting

Early results from this year’s Pulse survey indicate that reporting is one of the top challenges companies are still trying to address. This may seem surprising after all these years of business intelligence (BI) reporting solutions. The problem, though, really revolves around a single consistent data set and end user self-sufficiency. Companies just don’t feel they have that “one version of the truth” that allows everyone to produce their own reports and analysis. In addition, ad hoc report production, even with BI tools, is not something most business users are comfortable managing independently. They still rely on technical experts for help. In some companies, the monthly close process that produces the actual data to be reported on still takes too long. Let’s not forget that with increased government oversight, all of this data needs to be auditable, transparent and in compliance with company and regulatory standards.

This year, preparation for International Financial Reporting Standards (IFRS) has been added to the mix. How are companies going to quickly and easily change their accounting procedures, calculations and reports? More importantly, how are they going to report on and reconcile both the old and new accounting methods for the required period?

Performance management financial consolidation and reporting systems address all of these challenges. By pulling together data from multiple disparate sources, applying a standard chart of accounts and eliminating redundancies, these systems produce that one consistent set of data, that one version of the truth that companies seek. While doing this, they also automate the number crunching, currency conversions and intercompany eliminations of the monthly close – saving much time in the process, not to mention reducing errors. The entire process is transparent with a detailed audit trail. Once the data is ready, these systems offer reporting capabilities that are designed for business end users. To create reports, they use familiar account names, time periods and data types such as budget, actual or last year. The reporting systems have financial intelligence built in. That is, they understand, for example, that the month and year-to-date values for cash are the same, but for sales are different. Adding income and expense items into an income total produces the desired results without the user having to spell out the mathematical details. If the company has used BPM for both budgeting and actual consolidation, it is a breeze to produce variance reports reflecting performance against plan.

As you can see, while addressing either of these areas is beneficial for companies, addressing both together can magnify the benefits.

Next month we will examine the two remaining areas – performance dashboards and operational optimization.

Recent articles by Craig Schiff

• Business Performance Management in 2010, Part 2
• Business Performance Management in 2010, Part 1
• How Executive Information Systems Evolved Into Performance Dashboards
• The Emerging Leaders in Performance Management, Part 2