By Gary Cokins, Founder of Analytics-Based Performance Management LLC
In my first blog of this series I talked about a Tipping Point in EPM. I’ll be expanding on this theme a little more when I present at the SAP Conference for EPM in Chicago on 13/14 October. But before that I’d like to invite you to join me as I continue this blog series with an examination of EPM and its constituent business processes from a number of perspectives.
Enterprise performance management (EPM) can be described as the integration of various methods that translate plans into results – execution. It is a framework for managing your strategy. Strategy is of paramount importance and is senior management’s number one responsibility. For commercial companies, strategy usually answers three key questions:
- What products or service lines should we offer or not offer?
- What markets and types of customers should we serve or not serve?
- How are we going to win?
EPM provides insights to improve all performance in the above three choices. But, its main power is in achieving number three – winning – through adjusting and executing strategies. EPM does this by aiding managers to sense earlier and respond more quickly to uncertainty. It does this by pushing accountability for results to the lowest possible organization levels.
In contrast to the popular 1990s business process reengineering (BPR) approaches, where after radical redesign every single step and task were explicitly mapped, EPM instead relies on the power of focusing on the pertinent and relevant information. After determining the organization’s strategic objectives, measures (i.e., key performance indicators, KPIs) and their supporting projects, the rest will follow naturally. That is, employee work activities align to pursue strategy, often intensely customer-focused, as job number one.
So what then is it that EPM is comprised of- if it offers companies so much potential? EPM is an umbrella-like concept covering tightly integrated and universally applicable methods: strategic planning, scorecard measurements, budgeting, rolling financial forecasts, costing (including activity-based costing [ABC]), forecasting resource requirements, and also financial consolidations. EPM also includes the important adjacent neighboring methods that are independent of any industry: business intelligence tools, customer relationship management [CRM], specifically sales performance management; supplier performance management; shareholder valuation (e.g., cost of capital, economic profit and value); human capital management (HCM); and six sigma and lean operations.
Key elements to EPM
There are three primary elements for EPM:
- Focus. The task of managing strategy begins with making choices and focus. There is never enough money or resources to chase every opportunity or market on the planet. We are continually limited by scarce and precious resources and time, so focus is key – and strategy yields focus.
- Communicatation and Feedback. The task of managing strategy continues with communication. This context is reserved for senior management articulating its strategy to employees, typically with a strategy map. Along with articulating strategy comes the all-important feedback to managers and employee teams. It allows everyone to answer the question, “How am I doing on what is important?” A balanced scorecard is the key tool for reinforcing communication of the strategy. Think of a balance scorecard as the drive gears of the strategy map. Think of the strategy map’s strategic objectives as a set of chain links, where each chain link uses if-then relationships. The leading and lagging measures steer work efforts to align with the organization’s mission and vision. By integrating, distributing, and analyzing enterprise-wide information, an organization gains the power to act on this information – ahead of its competitors.
- Collaboration. The task of managing strategy ends with collaboration. (It is essentially a never ending iterative loop.) By aligning the strategic objectives among the various departments and functions, the organization taps into the collective knowledge of its employees and unleashes each person’s potential. The EPM framework truly makes executing strategy everyone’s job. Collaboration in this sense is all about collective dialogue. Management is not equivalent to control – management is coaching people for continuous improvements.
A simple way to think about EPM is that it embraces both planning and executing. However, EPM is greatly aided when managers and employee teams have good visibility into the drivers of performance in particular fact-based intelligence on product, channel, and customer profitability reporting. With fact-based intelligence, better strategic objectives are more likely to be formulated, and employee teams can analyze what is happening and what might happen (e.g., what-if planning scenarios) in order to make better decisions.
People and culture matter
Business schools tend to divide their curriculums between hard quantitative oriented courses, such as operations management and finance, and soft behavioral courses, such as change management, ethics, and leadership. The former relies on a run-by-the-numbers management approach. The latter recognizes that people matter most.
The quantitative approach applies Newtonian mechanical thinking as if the world and everything in it is a big machine. This approach speaks in terms of production, power, efficiency, and control, where employees are hired to be used and periodically replaced, somewhat as if they were robots. In contrast, the behavioral approach views an organization as a living organism that is ever changing and responding to its environment. This Darwinian way of thinking speaks in terms of evolution, continuous learning, natural responding, and adapting to changing conditions.
The trick to general management is integrating and balancing the quantitative and behavioral approaches. In today’s knowledge-worker dominated world where customization and personalization are increasingly the ‘norm’, old-school, command-and-control style executives who prefer to leverage their workers’ muscles but not their brains run into trouble.
Increasingly, the strategy must reflect customer preferences and needs, while also satisfying shareholders (i.e., owners) entitlement to wealth creation. Translated, this means top-down guidance with bottom- up execution. From the shop floor to the top floor – and back again, EPM bi-directionally converts plans into results.
EPM provides robust and practical insights. EPM informs an organization about its current position, which direction it is going, which direction it should be headed, and what it will require to get there.
Performance Management is Based on Business Modeling
With new advances in software modeling tools, data warehousing and mining, technology is no longer the obstacle – but our thinking is! Modeling is best done using a combination of principles and tools. Business modeling is central to the performance management suite. Senior managers can verify the feasibility of their proposed initiatives using computerized business models to predict results rather than through experience gained in the school of hard knocks.
These tools provide every manager with the needed ability to:
- Identify business problems and
- Uncover opportunities to improve, and then to size their impact if successfully improved.
Executives can rely on these same systems to foster communications among managers and employee teams. Employees can actively manage with an increased confidence that what they choose to work on aligns with the organization’s strategy and goals.
In my next blog I’ll invite you to walk with me through a discussion about performance management with a CFO, and set the challenge for you to ask the hard questions in your own organization.
About the Author: Gary Cokins, CPIM
Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.
email@example.com; phone +919 720 2718
Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014