Many organizations use intuition, rather than fact-based data, to make decisions. Thus, they end up far from where they want to be, and should be, in relation to corporate performance. Is this how it is in your organization as well?
Corporate Performance Management (CPM) can be understood as the integration of management methods to promote better overall performance, among which we can list: Balanced Scorecard (with key performance indicators – KPIs), enterprise risk management (ERM), budgeting and financial forecasting, profitability analysis (using activity-based costing – ABC’s), customer lifetime value (CLV), lean and Six Sigma, and resource capacity planning.
In fact, there is a lot of misunderstanding with respect to what the acronym CPM actually means in practice. But regardless of how it is defined or described, the most important thing is to understand what these methods achieve and what the motivations are that lead organizations to adopt these methods.
I would like to cite here eight problems that organizations commonly face, and which can be solved with proper performance management.
1. Failure to execute the strategy
Although executive teams typically can formulate a good strategy, their major frustration has been failure to implement it. A major reason for this failure is most managers and employees cannot explain their organization’s strategy, so they really do not know how what they do – each week or month – contributes to their executives’ strategic intent. Strategy maps, balanced scorecards, KPIs, and dashboards are the elements of CPM’s suite of methods that address this.
2. Unfulfilled return on investment (ROI) promises from transactional systems
Few if any organizations believe they actually realized the expected ROI promised by their software vendor that initially justified their huge large-scale IT investment in major systems (e.g., CRM, enterprise resource planning [ERP] systems). The chief information officer (CIO) has been increasingly criticized for expensive technology investments that, although probably necessary to pursue, have fallen short of their planned results. CPM is a value multiplier that unleashes the power and financial payback from the raw data produced by these operating systems. CPM’s analytics increase the leverage of CRM, ERP, and other core transactional systems.
3. Escalation in accountability for results with consequences
Accelerating change that requires quick decisions at all levels is resulting in a shift from a command-and-control managerial style to one where managers and employees are increasingly empowered.
A major trend is for executives to communicate their strategy to their workforce, be assured the workforce understands it and is financially funded to take actions, and to then hold those managers and employee teams accountable for results. Unlike our parents’ workplaces where they retired after decades with their employer, today there is no place to hide in an organization anymore. Accountability is escalating, but it has no teeth without having consequences.
CPM adds teeth and traction by integrating KPIs from the strategy map’s balanced scorecard with employee recognition, including with compensation reward systems.
4. Need for quick trade-off decision analysis
Decisions must now be made much more rapidly. Unlike in the past where organizations could test-and-learn or have endless briefing meetings with their upper management, today an employee often must make a decision on-the-fly. “Go or no go?” This means that managers and employees must understand their executive team’s strategy. In addition, internal tension and conflict are natural in all organizations. Most managers know that decisions they make that help their own function may adversely affect others. They just don’t know who is negatively affected or by how much. A predictive impact of decision outcomes using analytics is essential.
CPM methods are increasingly imbedded with analytical tools, ranging from marginal cost analysis to what-if scenario simulations that support resource capacity analysis and planning and calculate future profit margin estimates.
5. Mistrust of the management accounting system
Managers and employees are aware that the accountants’ arcane “cost allocation” practices using non-causal broad-brushed averaging factors (e.g., input labor hours, sales volume) to allocate non-direct product-related expenses result in flawed and misleading profit and cost reporting. Consequently, they do not know where money is made or lost or what drives their costs.
CPM embraces techniques like activity-based costing (ABC) and lean accounting (which can be co-existing methods) to increase cost accuracy and reveal and explain what drives the so-called hidden costs of overhead. It provides cost transparency and visibility that organizations desire but often cannot get from their accountants’ traditional internal management accounting system.
6. Dysfunctional budgeting
The annual budget is often perceived as a fiscal exercise done by the accountants that is: (1) disconnected from the executive team’s strategy, and (2) does not adequately reflect future volume and mix drivers. To complicate matters, traditional budgets are typically incremented or decremented by a small percent change from each cost center’s prior year’s spending level. This “use it or lose it” behavior by managers in the last few months of the fiscal year unnecessarily pumps up their prior year’s costs and consequently confuses analysis of who really needs how much budget in the coming year. Today organizations are shifting to rolling financial forecasts, but these projections may include similarly flawed assumptions that produce the same sarcasm about the annual budgeting process.
7. Poor customer value management
TEveryone now accepts how critical it is to satisfy customers to grow a business. However, it is more costly to acquire a new customer than to retain an existing one. In addition, products and standard service lines in all industries have become commodity-like. Mass selling and spray-and-pray advertising are obsolete concepts. This shifts the focus to require a much better understanding of channel and customer behavior and costs. This type of understanding is needed to know which types of existing customers and new sales prospects to grow, retain, win back or acquire using differentiated service levels
CPM includes sales and marketing analytics for various types of customer segments to better understand where to focus the sales and marketing budget for maximum yield and financial payback. The return on customer (ROC) is an emerging term.
8. Dysfunctional supply chain management
Most organizations now realize it is no longer sufficient for their own organization to be agile, lean, and efficient. They are now co-dependent on their trading partners, both upstream and downstream, to also be agile, lean, and efficient. These costs ultimately are cumulatively passed along the value chain resulting in higher prices to the end consumer which can reduce sales for all of the trading partners.
CPM addresses these issues with powerful forecasting tools, increasing real-time decision making, and financial transparency across the value chain. It allows value chain trading partners to collaborate to join in cost savings from mutually beneficial projects and joint process improvements.
Does your organization have any of these problems? These 8 points are just a small part of a very interesting article on CPM by expert Gary Cokins. You can access it here. Read the full article and learn how CPM and these methods can make a difference in your management processes.