Performance management: enabling smarter business; BPM solutions involve a closed-loop planning process that synchronizes modeling, measurement, adaptation and results-driven re-modeling. While understanding this concept is easy, its effective application can be more challenging.

A powerful combination of forces--including global competition, investor scrutiny and new regulations--is forcing executives to rethink how they systematically monitor and manage business performance. As the executive chair becomes a hot seat, performance management is gaining increasing attention.

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Littered with its fair share of acronyms--CPM, BPM, EPM (for corporate, business and enterprise performance management, respectively)--a variety of software solutions have emerged, all striving to exemplify the benefits of an effective planning process, improved visibility, more accurate information and better, faster decision-making.

To effectively adopt a performance management strategy, an organization must understand what performance management is, why it is important and how to make it work in the real world. In short, BPM can automate the collection of data and preparation of standard reports, saving tremendous time and enabling business managers to analyze variances and pinpoint specific issues.

Having a structured approach to managing financial and operational performance is especially challenging in large or growing companies, as the demands of a competitive marketplace, investor expectations and new regulations all vie for management's limited time and attention.

The most difficult hurdles include: a) efficient collection, analysis and distillation of the "right" information within the organization; b) managing the inherent complexity of the planning process to involve engaging more people--dozens or hundreds--in a collaborative planning process; c) enforcing accountability once line-of-sight management becomes difficult, if not impossible; d) enabling efficient and effective two-way communication so top-down and bottom-up planning can co-exist; and e) maintaining control over both the information and the process surrounding data collection and analysis.

Where Do You Begin?

To realize the benefits of performance management, an organization must synchronize long-term planning, short-term planning and management reporting. At a minimum, these processes include defining and communicating corporate strategy, quantifying top-down expectations for business unit managers, gathering detailed operational and financial information and measuring and analyzing actual versus planned results. Successful performance of each of these processes is necessary, but not sufficient. Optimizing one of these functions without improving the others is simply not good enough.

To benefit most from a performance management program, your organization must focus on facilitating communication and collaboration between senior executives and line business managers. In practice, most organizations do not programmatically incorporate two-way communication into the planning process, yet this is where many organizations find the greatest benefit in improving business performance and the most difficulty in making the internal change without help.

While every company's path to adopting a successful performance management strategy is different, there are some common characteristics that can identify where organizations either succeed or fail. Let's look at fictitious ACME Corp. as an example of the prototypical planning process.

Illustrative Planning Process

ACME Corp. is a billion-dollar conglomerate with a top-to-bottom planning process. Every September, a dozen senior executives have a multi-day strategic planning session at which they review the current year's results, discuss the competitive landscape, revisit major initiatives and formulate the strategic goals for the next 12 to 24 months.

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Sometimes a formal plan is created for distribution, but the consistent output is senior management's expectations for the company's financial and operational performance for the coming year. These sessions rarely involve any line managers, and the group reviews a standard set of information, which includes detailed historical financial information, summary business unit forecasts, external market data and recent sales pipeline data.

At this stage, there is nothing particularly wrong with this approach. This early in the planning process, the goals are to have the company's senior managers discuss the future strategy of the business and enable these managers to build personal relationships away from the office. These two goals are simple to meet. The breakdown in the planning process usually occurs during the next 12 months, when the output of the strategy session or other valuable input from within the company is not properly leveraged.

ACME Corp. has an effective team of managers and quality products and has been the market leader in most of its product categories. But what does the company still need to learn about managing performance? First, the company's performance is relative; its market share fell from 50 percent to 30 percent over the past three years, while a smaller competitor has grown from 10 percent to almost 25 percent.

Second, market share leadership does not equate to financial or operational leadership. The company saw obsolete inventory grow by 30 percent and average selling prices fall 15 percent, while manufacturing costs have remained constant as its competitors have made reductions. From these anecdotal facts, it appears ACME has a dire need for an improved performance management process.

So what might we recommend for ACME? A customized recommendation would require substantially more information, but there are some common characteristics found in the most effective planning-driven organizations that ACME could benefit from.

First, strategic goals must be effectively communicated and reinforced throughout the organization. Communicating the strategy to those responsible for the results is the first step in getting buy-in and enforcing accountability. Effective goal communication can take many forms, but regularly reinforcing the message, having employees internalize it and possibly changing behavior are the most important, yet complex objectives.

Second, senior management should identify specific key performance indicators (KPIs) related to the strategic, financial and operational goals set forth. The KPIs should be meaningful, measurable and preferably leading indicators of important business points (such as sales call activity, product quality, employee productivity, production capacity, customer churn rates, revenue per unit and cost per unit). Selecting appropriate metrics and putting a process in place to track them on an ongoing basis is critical for proactive problem-solving.

Third, high-level strategic objectives need to be translated into quantifiable targets for use by the entire organization, including each individual business unit. This process involves taking high-level objectives and developing a set of top-down financial projections. The projections should quantify the revenues and the resources required to achieve each goal.

The final step is determining the appropriate methodology for allocating revenue and cost estimates to each of the business units, thereby establishing senior management's performance expectations. A variety of methods are used for these allocations; however, the allocation needs to be logically applied and the sum of the parts needs to equal the total forecast.

Fourth, the forecast for each business unit needs to be evaluated by the appropriate line manager to determine if the allocation and the assumptions set forth are reasonable. This requires either a significant time commitment or an innovative approach to automating collaboration. This is collaborative planning, where the top-down process meets the bottom-up process.

This practice enables an organization to effectively leverage local knowledge within the organization and test the validity of the planning assumptions. If performed effectively, this additional source of information is very valuable and a key step in maximizing the full potential of performance management. Considering and accepting a business unit manager's input also establishes the grounds to enforce accountability as business unit managers assume ownership of their targets.

Finally, once the strategic goals and budgets are quantified, allocated and agreed upon between financial management and business unit management, performance measurement begins. Measuring actual versus planned results is the scoreboard of business and answers the ultimate question: "How are we doing?"

The value of powerful reporting and data analysis is well known. Regrettably, the lengthy effort involved in collecting and scrubbing data often leaves little time for analysis. Fortunately, by utilizing performance management software to automate the collection of data and preparation of standard reports, organizations can save tremendous time, enabling business managers to analyze variances and pinpoint specific issues.

The value of this reallocation of resources from collecting to analyzing should not be underestimated. It's commonly understood among business performance strategists that the typical company spends three times more effort collecting information than analyzing it--in the process missing a vital opportunity for improved business performance.

Expectations: The Bottom Line

Assuming an organization performed all the necessary planning functions to the best of its abilities, what real benefits should be expected? Will performance management lead to better, faster decision-making? A combination of benefits makes an organization more confident in its actions and ready to adapt to changing conditions.

First, improved confidence is the result of managing a controlled process for data collection and consolidation that leverages the collective insight of business managers. Not only does this make the process easier, but by leveraging the power of performance management software to enable data collection and preparation automation, it also greatly reduces errors.

Second, true accountability is possible when business unit managers are collaboratively involved in setting their targets (operational and financial) and an organization measures actual versus planned results on an ongoing basis. The real benefit is the true ownership line managers assume when they buy in to their own targets.

Third, the time savings that can be realized by automating many of these processes is phenomenal. In addition to its collection and preparation abilities, performance management software can automate the preparation and distribution of standard reports. More importantly, performance management software can often make the impractical possible, such as efficiently involving hundreds of business unit managers in the planning process on an annual or quarterly basis.

If a company has more time to analyze information, there is a high probability that it will make better decisions, adapting quickly to shifting business conditions. Organizations that adopt effective performance management processes have the flexibility to spend less time reacting and more time making proactive, informed decisions.

Ultimately, CEOs and CFOs want plans that they can trust; plans that are thoughtfully, strategically and completely designed before the fiscal period that they are intended to guide. They want plans that are embraced so completely by employees that successful execution of strategic initiatives becomes the norm and not the exception, leading to ongoing organizational and personal successes.

Thomas R. Malone is CEO of SRC Software (www.srcsoftware.com), a business performance management software provider based in Portland, Ore., specializing in the financial, healthcare and government markets. SRC agreed in July to be acquired by Business Objects.

RELATED ARTICLE: Executives Report Gains from BPM

Business Performance Management (BPM) systems are a relatively new management tool, but according to a recent survey, once implemented, BPM can be very effective and can yield a substantial return on investment.

Only 28 percent of FEI members responding to the seventh annual Survey of Technology Issues for Financial Executives, conducted by the Financial Executives Research Foundation (FERF), said they had either implemented BPM or had been involved in BPM decision-making. Another 14 percent said that they have not yet implemented BPM, but plan to do so within the next 12 months. The survey was taken in this year's first quarter.

Most respondents said these BPM implementations have been relatively recent. Of those who have implemented BPM, only 15 percent said they had done so more than three years ago. However, 64 percent of executives at the implementing companies reported that their BPM initiative was either very or somewhat effective.

Before implementing BPM, companies must first evaluate and make changes to their existing key performance indicators (KPIs) and processes. For example, of those respondents who had implemented BPM, almost half said that they made either sweeping (15 percent) or significant (31 percent) changes to existing KPIs.

This evaluation of KPIs can be time-consuming: The average KPI evaluation took 11 months to complete, and the time allotted to complete these evaluations ranged from one month to 24 months.

Nearly half of the respondents implemented a BPM solution for strategic reasons, to better align financial reporting with business strategy. For example, 49 percent implemented BPM to better understand and measure the true drivers of the business, and 48 percent implemented BPM to better align financial reporting with day-to-day activities.

The success of a BPM implementation is often directly related to the level of the project's executive sponsor. In most cases, either the CEO or the CFO is the executive sponsor. Of those respondents who have implemented BPM, only a third said the CEO was the sponsor, and about half (51 percent) said the CFO was the sponsor. The rest (16 percent) named another executive--either the COO, the CIO, a business unit head or president, or other--as the sponsor.

Respondents were asked how they measured the return on investment (ROI) of their BPM tools. The most popular methods included measurements of employee time savings and improvements in operational and financial KPIs.

Slightly more than half (52 percent) of all financial executives who had implemented BPM reported seeing a positive return on investment. Companies can usually see this ROI on their BPM investment within a year. For those executives who did see a positive ROI, it was achieved within 11 months on average, though the term ranged from one month to 36 months.

This ROI can be substantial, averaging 49 percent; and it ranged from 3 percent to a whopping 500 percent. In fact, 15 percent of those who had seen an ROI on their BPM installation achieved an ROI of over 50 percent.

--William M. Sinnett

RELATED ARTICLE: takeaways

* A variety of software solutions, using different acronyms, continue to grow in popularity, especially in larger corporations intent on better linking information to strategy.

* To realize the benefits of performance management, an organization must synchronize long-term planning, short-term planning and management reporting.

* Implemented effectively, BPM promotes improved visibility, more accurate information and better, faster decision-making that is more collaborative and insightful.

* BPM can automate the collection of data and preparation of standard reports, saving tremendous time and enabling managers to analyze variances and pinpoint specific issues.