WHY THE NEED FOR PERFORMANCE MANAGEMENT AS A ...

1 1 WHY THE NEEDFOR PERFORMANCEMANAGEMENT AS A SYSTEM? A man s mind stretched by a new idea can never go back toits original dimensions. Oliver Wendell Holmes, Supreme Court Justice, 18971 PERFORMANCE MANAGEMENT (PM) is the process of managing the execution of anorganization s strategy. It is how plans are translated into results. Think of PM asan umbrella concept that integrates familiar business improvement methodolo-gies with technology. In short, the methodologies no longer need to be applied inisolation they can be is sometimes confused with human resources and personnel systems,but it is much more encompassing. PM comprises the methodologies, metrics,processes, software tools, and systems that manage the PERFORMANCE of an or-ganization. PM is overarching, from the C-level executives cascading downthrough the organization and its processes. To sum up its benefit, it enhancesbroad cross-functional involvement in decision making and calculated risk tak-ing by providing tremendously greater visibility with accurate, reliable, andrelevant information all aimed at executing an organization s strategy.

2 Butwhy is supporting strategy so key? Being operationally good is not enough. Inthe long run, good organizational effectiveness will never trump a mediocre orpoor there is no single PM methodology, because PM spans the complete man-agement planning and control cycle. Think of it as a broad, end-to-end union ofsolutions incorporating three major functions: collecting data, transforming and1modeling the data into information, and Web-reporting it to users. Many of PM scomponent methodologies have existed for decades, while others have becomerecently popular, such as the balanced scorecard. Some of PM s components,such as activity-based MANAGEMENT (ABM), are partially or crudely imple-mented in many organizations, and PM refines them so that they work in betterharmony with its other components. Early adopters have deployed parts of PM,but few have deployed its full vision. This book describes the full term knowledge MANAGEMENT is frequently mentioned in business arti-cles.

3 It sounds like something an organization needs, but the term is somewhatvague and does not offer any direction for improving decisions. In contrast, themain thrust of PM is to make better decisions that will be evidenced, and ulti-mately measured, by outputs and organizations seem to jump from improvement program to program,hoping that each one might provide that big, elusive competitive edge. Mostmanagers, however, would acknowledge that pulling one lever for improvementrarely results in a substantial change particularly a long-term, sustainedchange. The key to improving is integrating and balancing multiple improve-ment methodologies. You cannot simply implement one improvement programand exclude the other programs and initiatives. It would be nice to have a man-agement cockpit with one dial and a simple steering mechanism, but managingan organization, a process, or a function is not that believe that implementing a balanced scorecard (described in Part Twoas blending nonfinancial and financial measures for balanced emphasis) is the ul-timate solution.

4 However, evidence demonstrates that a balanced scorecard willfail unless it is linked with other MANAGEMENT processes. Balanced scorecardimplementations often fail to deliver anticipated benefits because they are not in-tegrated with PM processes, particularly those used at an operational level, saysFrank Buytendijk, research vice president of Stamford, Connecticut based Gart-ner, Inc. We believe that 80 percent of enterprises that fail to integrate the bal-anced scorecard into PM methods and tools will drop the balanced scorecard andreturn to a less organized and less effective set of metrics. 2 SPOTLIGHT ON OBJECTIVES, OUTCOMES,CONFLICTS, CONSTRAINTS, AND TRADE-OFFSEven with a clearly defined strategy, conflicts are a natural condition in organiza-tions. For example, there will always be tension between competing customerservice levels, process efficiencies, and budget or profit constraints.

5 Managersand employee teams are constantly faced with conflicting objectives and no way2 WHY THE NEED FOR PERFORMANCE MANAGEMENT AS A SYSTEM?to resolve them, so they tend to focus their energies on their close-in situationand their personal concerns for how they might be affected. PM escalates the vis-ibility of quantified outputs and outcomes in other words, results. PM providesexplicit linkage between strategic, operational, and financial objectives. It com-municates these linkages to managers and employee teams in a way they cancomprehend, thereby empowering employees to act rather than cautiously hesi-tate or wait for instructions from their managers. PM also quantitatively mea-sures the impact of planned spending, using key PERFORMANCE indicators bornfrom the strategy map and balanced these strategic objectives and their relative importance, managersand employee teams then use tools from the PM suite, such as activity-basedcosting data and customer relationship MANAGEMENT information, to objectivelyevaluate the trade-offs.

6 Everyone recognizes that employee teams are veryknowledgeable in their own space. When MANAGEMENT communicates to themwhat is wanted, employees can reply with an understanding of what initiatives itwill take and how much it will cost. Internal politics and gaming are replaced bythe preferable behavior of employees taking responsibility like independentbusiness problems constantly surface, the context for making trade-off decisions isframed. This applies to the ultimate value creators, the executive managementteam, who struggle with short-term versus long-term trade-offs. The CEO andCFO also wrestle with those conflicting cost and customer service objectivesgoverning financial earnings that investors and hand-wringing stock analystsanxiously anticipate each quarter. Differentiating customer value from share-holder value is a tricky exercise, and PM brings objectivity and balance to theprocess of making spending and investment decisions.

7 Budgeting becomes aprofit-fostering funding mechanism rather than an accounting police controlweapon. Prioritizing and coordinating begin to displace appeal of PM is that it realizes there is no sun around which lesser im-provement programs, MANAGEMENT methodologies, or core processes orbit. PMis about sense-and-respond balancing, always striving for better organizationaldirection, traction, and speed. PM involves constructing powerful combinationslinking software, such as business intelligence analytics, with core processes en-hanced by improvement initiatives ( , lean and/or six sigma) to prioritize ef-forts and align an organization s work activities with its corporate strategy. If PMis properly implemented, it can produce an epidemic of common sense within anorganization and also probably with the trading partners ( , suppliers andcustomers) with whom it interacts. Maximizing everywhere is not equivalent tooptimizing it is suboptimizing.

8 Optimizing acknowledges constraints. PM fa-cilitates balancing THE NEED FOR PERFORMANCE MANAGEMENT AS A SYSTEM?3 What issues and circumstances have created the need for PM now? Let s ex-plore them next. There are several, some involving pain and others opportunity,and their combination is compelling organizations to pursue TURNOVER AT THE TOP: WHY?Surveys by the Chicago-based employee recruitment firm Challenger, Gray &Christmas, Inc., repeatedly reveal increasing rates of job turnover at the execu-tive level compared to a decade is almost as if when you accept a C-leveljob you also sign your undated resignation letter what is omitted is your forcedresignation primary cause for the executives revolving door involves failed strate-gies. In my opinion, defining and adjusting strategy is the number one purpose ofthe CEO. However, despite their best formulated plans, when executives adjusttheir strategies, their major frustration is they cannot get their employees to exe-cute the revised strategy.

9 This is due in part to the fact that while new strategiesmay be planned, the PERFORMANCE measurement system is typically not changedto reflect the new emphasis on what is newly important or the reduced emphasison what is less important. You get what you measure, so without changes in mea-surements, the organization s inertia keeps it plowing straight ahead in the samedirection it had been going. In short, there is a big difference between formulat-ing a strategy and executing balanced scorecard has been hailed by executives and MANAGEMENT con-sultants as the new religion to resolve this frustration. It serves to communicatethe executive strategy to employees and also to navigate direction by shapingalignment of people with strategy. The balanced scorecard resolves a naggingproblem. There is a substantial gap between the raw data spewed out from busi-ness systems and the organization s strategy.

10 Figure illustrates an upside-down pyramid-shaped diagram with strategylocated at the top and operationaland transaction-based systems and dataat the bottom. The systems at the bot-tom, such as enterprise resource planning (ERP) and general ledger accountingsystems, are like plumbing you need to have them, but they do not tell youwhat to do strategically or what risk-adjusted choices to make. The business in-telligence of PM in the figure adds value on top of these operational systems thatorganizations have invested huge sums of money in. Ideally, daily operationsshould align with the strategy but do they? That is, do the transactional sys-tems consuming resources and spending at the bottom convert to value at thetop? Not without a business and analytical intelligence layer. This is a seniormanagement THE NEED FOR PERFORMANCE MANAGEMENT AS A SYSTEM?It is a tough time to be a chief executive.