PERFORMANCE MANAGEMENT
GARY COKINS
Direction, traction, and speed. When you are driving a car or riding a bicycle, you directly control all three. You can turn the steering wheel or handle bars to change direction. You can downshift the gears to go up a steep hill to get more traction. You can step on the gas pedal or pump your legs harder to gain more speed. However, senior executives who manage organizations do not have direct control of their organization’s traction, direction, and speed to increase value from their organization. Why not? Because they can achieve improvements in these areas only through influencing people—namely, their employees. And employees can sometimes act like children: They don’t always do what they’re told, and sometimes their behavior is just the opposite! Performance management is about giving managers and employee teams of all levels the capability to improve their organization’s direction, traction, and speed—and most important, to move it in the right direction. That direction should be as clear and focused as a laser beam, pointing toward its defined strategy. The process of managing strategy begins with focus. You never have enough money or resources to chase every opportunity or market on the planet. You have to believe that you are continuously limited to scarce and precious resources and time, so focus is key and strategy yields focus. There is evidence that it is a tough time to be a chief executive. Surveys by the Chicago-based employee recruiting firm Challenger, Gray & Christmas repeatedly reveal increasing rates of job turnover at the executive level compared to a decade ago. In complex and overhead-intensive organizations where constant redirection to a changing landscape is essential, the main cause for executive job turnover is the failure to execute their strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward economic value creation and other more strategic directives? How do they regain control of the direction, traction, and speed for their enterprise? Performance management provides managers and employee teams at all levels with the capability to move directly toward their defined strategies like a laser beam.
WHAT IS PERFORMANCE MANAGEMENT? Performance management (PM) is the framework for managing the execution of an organization’s strategy. It is how plans are translated into results. Think of PM as an umbrella concept that integrates familiar business improvement methodologies with technology. In short, the methodologies no longer need to be applied in isolation—they can be orchestrated. The whole is greater than the sum of the parts. Each methodology can give good results, but when you integrate them, you get more. This makes PM a value multiplier. All organizations have been doing performance management before it was labeled with this name. So the good news is that performance management is not a new buzzword and method that everyone has to learn. Rather, it is the assemblage of existing methodologies that most everyone is already familiar with, and most organizations have already begun the journey of implementing some of them. But as just mentioned, these methodologies typically are implemented in isolation from each other. It is as if the implementation project teams live in parallel universes. PM serves as a value multiplier by integrating the methodologies. PM is sometimes confused with human resources and personnel systems, but it is much more encompassing. It comprises the methodologies, metrics, processes, software tools, and systems that manage the performance of an organization. PM is overarching, from the C-level executives cascading down through the organization and its processes. To sum up its benefit, it enhances broad cross-functional involvement in decision making and calculated risk taking by providing tremendously greater visibility with accurate, reliable, and relevant information—all aimed at executing an organization’s strategy. But why is supporting strategy so key? Being operationally good is not enough. In the long run, good organizational effectiveness will never trump a mediocre or poor strategy. There is no single PM methodology, because PM spans the complete management planning and control cycle. Performance management is not a process with recipe steps or an information system that you purchase on a disc. It is the integration of typically disconnected decision making. Think of PM as a broad, end-to-end union of solutions incorporating three major functions: collecting data, transforming and modeling the data into information, and Web-reporting it to users. Many of PM’s component methodologies have existed for decades, while others have become popular recently, such as the balanced scorecard. Some of PM’s components, such as activity-based management (ABM) described in this book, are partially or crudely implemented in many organizations, and PM refines them so that they work in better harmony with its other components. Early adopters have deployed parts of PM, but few have deployed its full vision. In the first few decades of the twenty-first century, the surviving organizations will have completed the full vision. Many organizations seem to jump from improvement program to program, hoping that each one might provide that big, elusive competitive edge. Most managers, however, would acknowledge that pulling one lever for improvement rarely results in a substantial change—particularly a long-term, sustained change. The key to improving is integrating and balancing multiple improvement methodologies. You cannot simply implement one improvement program and exclude the other programs and initiatives. It would be nice to have a management cockpit with one dial and a simple steering mechanism, but managing an organization, a process, or a function is not that easy.
CONFUSION AND AMBIGUITY WITH PERFORMANCE MANAGEMENT There is confusion about terminology. For example, there are several variants of PM including business performance management (BPM), enterprise performance management (EPM), and corporate performance management (CPM). Consider them all to mean the same thing. But a larger problem is that PM is typically defined too narrowly as being only about better strategy, budgeting, planning, and finance with an emphasis on measurement. It is much more. As mentioned, PM tightly integrates the business improvement and analytic methodologies executives, managers, and employee teams are already familiar with. These include strategy mapping, balanced scorecards, managerial accounting (including activity-based management), budgeting and forecasting, and resource capacity requirements. These methodologies fuel other core solutions such as customer relationship management (CRM), supply chain management (SCM), risk management, and human capital management (HCM) systems, as well as Six Sigma. It is quite a stew, but they all blend together. The executive team should always begin with a vision statement—and preferably not those hollow words framed in the organization’s lobby or laminated on small cards for employee purses and wallets. The vision statement answers the question “Where do we want to go?” PM relies on the strategy map and its companion scorecard to answer in a mechanical way “How will we get there?” The remainder of the PM components answer “What will power us there?” But PM also addresses trade-off decisions that will always be present because conflicts are natural conditions of any organization. For example, there will always be tension between competing customer service levels, process efficiencies, and budget or profit constraints. Managers and employee teams are constantly faced with conflicting objectives and no way to resolve them, so they tend to focus their energies on their close-in situation and their personal concerns for how they might be affected. An organization also constantly faces risk, threats, and opportunities. Problems surface when risks are not anticipated or there is minimal risk mitigation and when good opportunities are missed. PM addresses all of these issues by escalating the visibility of actual and potential quantified outputs and outcomes—in other words, results. PM provides explicit linkage between strategic, operational, and financial objectives and provides predictive what-if scenario testing of the enterprise-wide impact of decisions. In the end, organizations need top-down guidance with bottom-up execution. PM does this by converting plans into results. PM integrates operational and financial information into a single decision-support and planning framework. Simply put, PM helps an organization to understand how it works as a whole.
Performance Management for the Public Sector Performance management (PM) is not just an integrated set of decision support tools but is also a discipline intended to maintain a view of the larger picture and to understand how an organization is working as a whole. PM applies to managing any organization, whether a business, a hospital, a university, a government agency, or a military body—any entity that has employees and partners with a purpose, profit-driven or not. In short, PM is universally applicable. In the not-for-profit and public sector, including government agencies at all levels and the military, there appears to be a convergence toward many of the management practices of the commercial sector. One obvious difference, however, is the relevance of “making a profit.” That does not mean public sector agencies are given license not to use resources effectively or, in some cases, charge fees to users to achieve a full cost recovery (i.e., a zero profit) as funding. Accountability increasingly appears as a mandate for public sector organizations. If you do a word search on the words “performance-based” and “government” on the Internet, you may be surprised by the large number of references. Although PM often refers to for-profit concepts, such as measuring and managing customer value and product profits, the majority of PM principles can also apply to public sector organizations.
ALIGNING EMPLOYEE BEHAVIOR WITH STRATEGY “Alignment” is a key word frequently mentioned in PM. Alignment boils down to the classic maxim, “First do the right things, and then do the right things well.” That is, being effective is more important than being efficient. Organizations that are very, very good at doing things that are not important will never be market leaders. The concept of work alignment to the strategy, mission, and vision deals with focus and pursuing the most important priorities. The economics then fall into place. How well the executive management communicates its strategy to managers and employees, if at all, remains a challenge. Exhibit 1.1 illustrates this. Most employees and managers, if asked to describe their organization’s strategy, cannot adequately articulate it. Many employees are without a clue as to what their organization’s strategy is. They sometimes operate as helpless reactors to day-to-day problems. If asked to briefly articulate their executive team’s strategy, how many employees could do it? Probably very few—maybe none. The consequence of this is critical. If employee teams and managers do not understand their executive team’s strategy, how do we expect them to understand that what they do each week and Mission or Vision Employee Actions Communication Gap Exhibit 1.1 The Communication Challenge Source: Gary Cokins, Performance Management: Finding the Missing Pieces (To Close the Intelligence Gap) (Hoboken, NJ: John Wiley & Sons, Inc., 2004). Reprinted with permission of John Wiley & Sons, Inc. “Many leaders have personal visions that never get translated into shared visions that galvanize an organization. What is lacking is a discipline for translating individual vision into shared vision.” —Peter Senge, The Fifth Discipline. month contributes to realizing that strategy? In short, there is a communication gap between senior management’s mission or vision and employees’ daily decisions and actions. An integrated suite of methodologies and tools—the PM solutions suite—provides the mechanism to bridge the business intelligence gap between the chief executive’s vision and employees’ actions. PM can close this communication gap. Methodologies with supporting tools such as strategy mapping and PM scorecards aid in making strategy everyone’s job. PM allows executives to translate their personal visions into collective visions that galvanize managers and employee teams to move in a value-creating direction. The traditional taskmaster/commander style of executives who attempt to control employees through rigid management systems is not a formula for superior performance. PM fosters a work environment in which managers and employees are genuinely engaged and behave as if they were the business owners. Destructive beliefs and unwritten rules that are commonly known in an organization’s culture (i.e., “Always pad your first budget submission”) are displaced by guiding principles.
BUSINESS INTELLIGENCE GAP The gap between the executive team’s strategy and employee operations is more than a communication gap. It is an intelligence gap as well. Most organizations are deluged with data, and the amount keeps growing. Estimates are that amount of information doubles every 1,100 days.2 Yet the amount of time available to deal with information remains constant at 1,440 minutes per day. What complicates matters is the challenge of determining the important and relevant data to focus on versus data that are simply nice to know. Additional challenges involve collecting and moving data, transforming it from a raw reported state into meaningful information that can be leveraged, and having accurate, clean, and nonredundant data, or worse yet inconsistent data. To resolve these problems, PM is based on a common enterprise information platform (EIP) that provides a one-version-of-the-truth database rather than disparate inconsistent data that annoy both employees and customers. But those are problems that advanced information technologies, such as data warehousing, can overcome. Even organizations that are enlightened enough to recognize the potential value of their business intelligence and assets often have difficulty in actually realizing that value as economic value. Their data are often disconnected, inconsistent, and inaccessible, resulting from too many nonintegrated single-point solutions. They have valuable, untapped data hidden in the reams of transactional data they collect daily. Unlocking the intelligence trapped in mountains of data has been, until recently, a relatively difficult task to accom- plish effectively. Typically you find different departmental data warehouses built on different platforms using combinations of tools, some nonstandard, some with expired maintenance support, and some prebuilt in a tool purchased from a vendor no longer in business. This results in unintended barriers blocking systems from cleanly communicating among themselves. All organizations are reaching a point where it is important for computers to talk to other computers. Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power, heralding a new era where creating vast pools of digital data is becoming the preferred solution. Information technologies—namely data warehousing; data mining, with its powerful extraction, transform, and load (ETL) features; and business analytics (e.g., statistics, forecasting, and optimization)—all produce decision-relevant information from diverse data source platforms transparently. That is, these technologies convert raw data into intelligence—the power to know. As a result, these superior tools now offer a complete suite of analytic applications and data models that enable organizations to tap into the virtual treasure trove of information they already possess and enable effective performance management on a huge scale. Most companies are still unable to get the business intelligence they need; and the intelligence they do get is not delivered quickly enough to be actionable. PM correlates disparate information in a meaningful way and allows drill-down queries directly on hidden problem areas. It helps assess which strategies are yielding desired results without the need to wade through a mountain of raw data. Executives and employee teams need to be alerted to problems before they become “unfavorable variances” reported in financial statements and requiring explanation. PM aids employees and managers to manage change actively—and in the right direction. But make no mistake in interpretation; PM is much more social than technical. You are dealing with people who all have personal preferences, including appeal for the status quo as well as suspicion and skepticism of change. And elements of PM involve measurements and accountability, so you influence behavior because you typically “get what you measure.” In summary, PM integrates operational and financial information into a single decision support and planning framework.
ACTIVITY-BASED MANAGEMENT: FACTS FOR JUDGMENT AND DISCOVERY Methodologies like activity-based management (ABM) described in this book provide a reliable, fact-based financial view of the costs of work processes and their products, services, and customers (service recipients and citizens for public sector organizations). Having fact-based information is important. After all, in the absence of facts, anybody’s opinion is a good one. And usually the biggest opinion wins—which may be your supervisor’s opinion or your supervisor’s boss’s opinion. To the degree that they are making decisions based on intuition, gut feel, outdated beliefs, or misleading information, then your organization is at risk. A major benefit of PM is that when all people get the same facts, then they generally reach the same conclusions on how to act. Good managerial accounting is foundational for PM. What makes today’s PM systems so effective is that work activities—what people, equipment, and assets do—are foundational to PM reporting, analysis, and planning. Work activities pursue the actions and projects essential to meet the strategic objectives constructed in strategy maps and the outcomes measured in scorecards. Work activities are central to ABM systems used to measure output costs and customer profitability accurately as well as to assess future potential customer economic value. Knowing costs assists not only in judging results better but also in asking better questions. It is a great discovery tool. ABM also aids in understanding the drivers of work activities and their consumption of resource capacity (e.g., expenses). With that knowledge, organizations can test and validate future outcomes given different events (including a varying mix and volume of product/service demand). This helps managers and employee teams understand capacity constraints and see that cost behavior is rarely linear but is a complex blend of step-fixed input expenses relative to changes in outputs. Workloads are predicted in resource capacity planning systems to select the best plans. PM combines strategy maps and its companion balanced scorecard with intelligent software systems that span the enterprise to provide immediate feedback, in terms of alerts and traffic-lighting signals to unplanned deviations from plans. PM provides managers and employee teams with the ability to act proactively, before events occur or proceed so far that they demand a reaction.
BALANCED SCORECARD: MYTH OR REALITY? But cost management cannot be the focus. Cost management must operate as part of the more encompassing PM. And strategy is critical. Leadership’s role is to determine strategic direction and motivate people to go in that direction. However, senior executives are challenged and usually frustrated with cascading their strategy down through their organization. Executives and management consultants have hailed the balanced scorecard as the new religion to resolve this frustration. It serves to communicate executive strategy to employees and also to help navigate direction by shaping the alignment of people with strategy. The balanced scorecard bridges the substantial gap between the raw data spewed out from business systems, such as enterprise resource planning systems (ERP), and the organization’s strategy. Strategy maps and scorecards are two more of the key components in the PM portfolio of methodologies. They enable leadership and motivate people by serving as a guide with signposts and guardrails. Despite much publicity about the balanced scorecard, the strategy map that should ideally precede the development of the scorecard is considered to be much more important. Strategy maps explain high-level causes and effects that facilitate making choices. With strategy maps and their resultant choices of strategic objectives and the action items to attain them, managers and employee teams easily see the priorities and adjust their plans accordingly. People don’t have sufficient time to do everything everywhere, but some try to. Strategy maps and their companion scorecards rein in the use of people’s time by bringing focus. Untested pet projects that do not contribute to the strategy are discarded or postponed. Scorecards are derived from strategy maps, contrary to a misconception that scorecards are a stand-alone reporting system. Many organizations unwittingly err by beginning their reform of their performance measurement system by first defining their key performance indicators (KPIs) to monitor. They typically select the measures they already have as opposed to the measures they should have. The traditional measures they err in choosing are typically without depth. Users can view a result, but whether it is good or bad, they are unable to investigate the underlying cause. By starting with KPIs, they are skipping the critical initial steps. The executive team should first define the strategy map, then employee teams and managers should suggest the few manageable projects that can be accomplished or core processes that they must excel at. Once that is complete, then the employees and managers can properly determine the vital few, not trivial many, nonfinancial measures that indicate progress on those projects or core processes which in turn lead toward achieving the strategic objectives. These steps assure that the managers and employee teams understand the strategy—the major problem affecting failed strategy execution. If defining the KPIs is the initial step, then how does anyone know if those measures reflect the strategic intent of the executive team? Once the appropriate KPIs are selected, then the scorecard provides ongoing feedback. Imagine if everyone in the organization, from the front-line workers to the executive team, could everyday answer this single question: “How am I doing on what is important?” The organization would remain focused. Note that there are two halves to that question. The first part answers the question: “Am I performing favorably or unfavorably to a target set for me?” But it is the second part that brings the power. By going through the discipline of first defining linked strategic objectives in the strategy map, identifying the few and manageable projects or core processes to excel at with KPIs derived from them, executives have preset and baked in the critical pursuits that reflect their strategic intent. When all the employees are provided a line of sight from their measured performance up through their supervisors’ and executives’ measures, then everyone can also answer the question “How are we doing on what is important?” This aids in everyone’s understanding of how one performance measure affects another. It also involves digging deeper to see causal relationships and manage work activities across the entire enterprise so that everyone is on the same page. If employees are given visibility to the feedback scores on KPIs across the organization, they can communicate with other functions without waiting for instructions to suggest problem resolutions. A scorecard is a powerful mechanism to constantly align the workforce with the strategy. It brings that needed direction, traction, and speed. Scorecards solve the problem of excessive emphasis on financial results as the measure of success. Consider that telephone calls are still “dialed” even though there are hardly any dial phones left. A car’s glove compartment rarely stores gloves. Eventually the motion picture “film” industry will rely on digital technology, not film. Similarly, “financial” results will likely be shared with more influential nonfinancial indicators, such as measures of customer service levels. Strategy maps assure that both financial and their causal nonfinancial measures are linked with if-then relationships—which is one reason you hear the term “balanced scorecard.” Going forward, managers and employee teams will need to be much more empowered to make decisions, good ones, it is hoped, in rapidly reduced time frames. A strategy map and its companion scorecard, supported by business intelligence, improve decision making. Together, they describe an organization’s strategic health and consequently its chances for increasing prosperity. The balanced scorecard expresses the strategy in measurable terms, communicating what must be done and how everyone is progressing. Commercial software plays an important enabling role in PM by delivering an entire Web-based and closed-loop process from strategic planning to budgeting, forecasting, scorecarding, costing, financial consolidations, reporting, and analysis. Commercial software from leading vendors of statistics-supported analytics and business intelligence (BI), such as SAS (www.sas.com), provide powerful forecasting tools.
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