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Collecting more data but gaining less insight.

How to improve performance measures to make better decisions faster - without the guesswork

The way you gain advantage today is not necessarily through enhancing your product quality, pricing or marketing, because all of your competitors will simply follow suit. You own the winning hand if you can make better decisions more rapidly.

But how do you shorten the mean time to make a decision? Your alternatives center around your people and the information they have to work with that is, how you make decisions. That's why leading-edge companies are betting on a more effective performance-measurement and planning process designed to help managers make decisions quicker and better.

For example, Sprint Corporation uses data from its call record systems to identify very quickly whether a promotion is generating increased call volume from the desired sources. If it's not, the company can pull the promotion and redirect the dollars elsewhere. If it is, Sprint can increase the intensity of the promotion.

Unfortunately, today many companies couldn't answer such a question in a timely manner - or tell you which of their products make money, how many customers buy more than one of their products or why customers leave them and go to competitors. Sadly, for all of its sizable investments in technology, management simply has more data, not necessarily better information. What's lacking is a focus on what information is important to make various types of decisions.

To get the information you require to make quicker and better decisions, you must have a more effective performance-measurement and planning process. Sprint is nimble in its decision-making because its finance organization led the design and development of a new decision-support capability that explicitly matches the right analytical tools to each business decision.

Sprint and other companies that are leading the way in this new endeavor are embracing a framework that has three elements: defining a focused set of performance measures, linking measures and decision-making, and delivering the right information to decision-makers at the right time.

Why You Make Money

To pave the way to better and faster decisions, companies are defining performance measures in their business, and these measures have several key characteristics: They are few in number, and they focus directly on achieving the company's strategy, whether that be growing revenue, increasing profitability, satisfying customers, being innovative or keeping employees happy.

But these performance measures may not be what you'd expect. While the traditional view is to measure the results of the business - revenue earned, profit made, expenses incurred - these clear-thinking companies are striving to understand what drives revenue, profit and expenses. They study leading indicators and predictive measures as well as lagging indicators and traditional metrics, seeking to understand the financial results of operational actions.

The first step in determining appropriate performance measures is to understand what causes you to make money or causes your customer to buy your products or services. You don't start by looking at the current balance sheet, P&L statement or financial reports. You do start by asking what makes your product superior to your competitors'. Is it better price or quality? Your distribution, service or another factor? This permits you to understand the drivers of success for your company. Then you determine how to measure those drivers, selecting the best leading and lagging indicators.

JD Edwards & Company, a leading publisher of enterprise resource planning software, recently developed a new process for establishing performance measures and is rolling it out over the next two years along with a new tactical planning effort. Determining performance measures starts with JD Edwards' corporatewide vision document, which sets the strategic objectives for the company and is reviewed and updated every year for a five-year rolling period. A team of representatives from the field and the corporate level "decomposes" the plan each year at the start of an eight-week planning cycle, agreeing on the key driving measures that relate to the initiatives on which the company will focus. The pan-company team then sets the performance targets for each measure and communicates them throughout the organization, which builds its tactical plans around the targets. The company envisions the new process will condense the planning cycle by 80 percent.

In another case example, Nationwide Financial Services dispatched 45 senior managers off site for 90 days to develop a new business plan, the need for which was triggered by a new president and an upcoming initial public offering of the company's securities. Other outcomes were a clear strategy and tactics to fulfill the business plan and an organization with a galvanized commitment to the new vision, drivers, performance measures and tactics.

For better and faster decision-making, JD Edwards, Sprint and other leading-edge companies are realizing that information that is predictive of what may happen to your business is far more important than information that is reportive of what happened. Relying solely on historical reportive information for decision-making is a bit like counting the empty seats on an airplane after it lands. Yet most management reporting is focused on the past month's financial results. Much more useful would be information showing that if a certain trend continues, you'll need to secure additional production capacity in the next 90 days to maintain market share.

Understanding the drivers of your business is key to ferreting out what will be predictive information for your company. The predictors of financial results usually are operational events. Assume you're a financial services company specializing in insurance products. Once you've sold a policy, retaining the customer is key, as profits typically come in later years. Creating performance measures around customer satisfaction and relative product performance are good leading indicators of policy lapse rates and, hence, lost profits. Having such information permits you to mitigate the impact of negative events - make a quicker, better decision.

Part of the Plan

Just having information about the operational drivers of your business, such as the number of customer contacts or the number of leads won, isn't enough. You also need to understand what to do with the information. For example, your close ratio on sales has gone down. What do you do with that fact? How do you make decisions to mitigate the effect? Thus, the second step in the framework is to link your performance measures to the way decisions get made.

With a definitive linkage between performance measurement and decision support, you understand what your targets are, develop tactical plans to meet or exceed those targets, measure your performance against them and are rewarded on the results.

There are essentially two frameworks within which management makes decisions - a proactive framework and a reactive one. The proactive framework derives from the. strategic, tactical and financial plans and the reactive from events that occur in the marketplace.

Considered in the proactive framework are the major tactical programs and resource allocations required to achieve your strategic objectives. For example, to enter the Asian market, you must either identify a local distributor or establish an internal logistics capability to get your product to that market. You'll also develop a marketing and brand management presence so potential customers have heard of you and conduct research to understand who your competitors are and how they price and promote their products. These are examples of tactics that would be triggered by your strategy of entering Asian markets. The performance-measurement framework should be measuring your ability to complete the tactics successfully.

In the reactive framework, when events occur in the marketplace such as a competitor cuts prices or a supplier goes on strike and can't deliver material - how do you react and respond? You should be determining that answer in your planning process. You may not be able to predict when certain events will happen, but you'll have a contingency plan: If A happens, you'll do B. Or if B happens, you'll consider options C and D and the way you will choose between the options will be based upon criteria E, F and G.

For example, you may factor into your planning process the result of a 20-percent devaluation in the currency of one of your major markets. How would you respond? How would you change the balance of locally sourced product versus imported product to take advantage of or to mitigate the negative impact of such a significant event? Again, no company can predict with accuracy when such events will take place or where they're going to take place. But you can look back over the past 10 or 15 years, and there has been a substantial currency devaluation occurring almost every year. One year, it's Mexico, the next year it's Asia, the next year it's Latin America. But because you know the situation is likely to repeat itself, you should perhaps put in place a plan that allows you to limit the amount of reaction time you need to determine how to respond.

All Your Measures on a Tablet

Okay, you've established performance measures, meaning you're capturing the right information on the drivers of your business. You've put in place a planning and decision support process that tells you how to use the information and educates your staff on the relationship between the measures and the company's results. Now you must ensure you have a smooth information delivery process, to convey the right information to the right people.

The focus here must be on delivering the right information at the right time, not just more information all of the time. Clear-thinking companies are questioning the headlong rush into data mining, data warehousing and decision-support systems. These technology tools, if not focused and applied correctly, simply provide you with bad data faster and more attractively packaged. You don't actually need on-line, real-time delivery of information for faster and better decisions; rather, you need timely delivery of selected information based upon the decisions you're making.

If your key performance measures are fewer than 20, you don't need to spend millions of dollars building a data warehouse to hold billions of bytes of information. A single page of legal-size paper defining the performance indicators for management is probably sufficient.

At Nationwide Financial Services, the executive scorecard includes measures that track each of the company's six major goals. The project team decided not to wait for new information systems to be developed to deliver the valuable new measures to management, moving forward with paper-based delivery while the electronic tools were being finalized.

Even more important than the technology solution is consistency in definition. Only about half of companies have a common internal definition for customer and product. Without common definitions for these terms, getting consistent measures of customer and product profitability are difficult. If you implement a technology solution without establishing definition standards, and two of your business units have different definitions of customer, rolling up customer profits comparably will be impossible. This slows down decision-making.

About three years ago, Texaco; Inc., determined that the lack of a common "language" was a major impediment to making faster, better decisions. The company developed common definitions globally for all key data elements, ensuring consistency and speeding up information delivery as translations no longer slow the process.

Technology can actually provide you with excuses not to make a decision, because you can ask for just one more analysis or cut of information. Some companies take the viewpoint that having their senior executives accessing management information on personal computers may not be the most effective way to promote good decision-making. They're going back to an old-fashioned approach, with analysts supporting senior management, selectively adding to information that precious commodity called insight. The often-stated goal of direct delivery of information to the desktop may not be the right answer for every company. Perhaps the direct delivery of information should be to the desktop of the analyst, who can review the information and prepare a list of options and choices to help the executive make the right decision more quickly.

What's more, information delivery should be selective to be of most value. Executives should have information focused on their spheres of influence and accountability. Leading-edge companies are designing a different set of measures for each senior executive based upon that person's ability to influence them. Manufacturing knows that when marketing is forecasting an increase in demand, adequate capacity is available to support it. If manufacturing capacity is lacking, marketing is informed so it can mitigate selling activity.

Large or Small Fries?

Today's practice is to over-focus on the level of detail. Companies have sacrificed information value for detail, and while it may make them (and their accountants) comfortable, it doesn't help decision-making. For example, most companies develop budgets to such a low level of detail that it's an exercise in variance creation. It's a bit like doing your household budget and determining how many times you'll have large-sized fries versus small fries with your burger. The odds of getting this right are pretty remote, so when you report actual versus plan, you'll have a variance, because you bought large fries three times, and you were supposed to buy them only two times. If, on the other hand, you simply estimate the amount you'll spend on food, your ability to accurately estimate that you're going to outlay about $500 this month is much greater than if you try to break the $500 down into the component parts.

Likewise, if you're budgeting 200 line items of expense detail today, and you continue to budget 200 line items of expense detail tomorrow, you'll be spending substantial time analyzing variances rather than making better business decisions. Leading companies today are keeping budgets down to 40 line items, or not doing budgeting at all.

The new planning and performance measurement process at JD Edwards, for example, calls for abandonment of the budget. The company's newly re-engineered process will monitor financial and nonfinancial performance with a rolling six-quarter forecast. Performance and decisions will be based on activities and actions, not budget variances.

The key variables are whether information is material and volatile in your business. Most companies are good at budgeting and reporting big numbers; much more important are numbers that swing wildly. Volatility represents opportunity and creates risk. For example, if you're in the oil industry, your fixed costs of oil refineries and production platforms are very large numbers, but they don't change very quickly. However, the price of a barrel of oil changes by the second, and a marginal change can have a dramatic impact on the profitability of your company. If the price of a barrel of oil is, say, $10, you may mothball production capacity or you may switch off pipeline capacity. If the price goes up to $30 a barrel, you may start buying additional capacity. You should be able to understand what types of decisions you'll make under each scenario.

In addition to too much detail, companies also aren't providing enough internal education. Take, for example, companies that have implemented the balanced scorecard. In many, the scorecard has been incremental to the existing reporting mechanism, not replacing or substituting for previously reported information. Companies beginning to internalize the balanced scorecard effectively are recognizing that a key element must be in place: training staff on how to use the information and make better decisions based on it. Just doing the balanced scorecard isn't enough. That's like giving you a motorcycle without training you how to ride it. It's not an awful lot of fun and can be dangerous.

If performance measures are important enough to be on your scorecard or executive management report, the measures are items around which you should set targets. They're also the factors around which you should develop tactical plans. For example, if one of your key performance measures is customer retention, your business plan for 1999 should explicitly address tactics to help you improve customer retention. There should also be a target for improving customer retention against which you'll be compensated and rewarded.

Finally, the whole process isn't static. Business isn't always respectful of the calendar, so annual plans and budgets are becoming obsolete. Leading companies are moving toward a more continuous review process of what's going on. They don't wait until its strategic planning time to sit down and determine whether they need to alter their tactics.

The Axioms of planning and performance measurement

1. If you don't plan around your key performance measures, don't expect to get the right result.

2. More information means more excuses not to make a decision.

3. The more detail you budget, the more variances you create.

4. You may not know when certain events are going to happen, but you know they will happen. Shorten your reaction time by being prepared.

5. Automating current reporting just results in getting bad data faster.

6. Computers can't think; people can. Don't eliminate thinking from your decision-support processes.

Mr. Axson is managing director of AnswerThink Consulting Group, based in Hudson, Ohio. You can reach him at (330) 656-3110. All statistics [C] 1998 The Hackett Group, Inc., a subsidiary of AnswerThink Consulting Group.
COPYRIGHT 1998 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:business information in decision-making
Author:Axson, David A.J.
Publication:Financial Executive
Date:May 1, 1998
Previous Article:No shades of gray.
Next Article:Metrics mania.

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