Mar 31, 2004 (11:03 AM EST)
Governance As Catalyst: The New Management System
Read the Original Article at InformationWeek
The Sarbanes-Oxley Act (SOX) is perhaps today's biggest management and IT imperative, pushing organizations toward significant investment in capabilities that will enable them to comply with its provisions. At the same time, there's great interest in upgrading planning, budgeting, reporting, balanced scorecard, and analytic software as a means to improve performance.
Progressive organizations are seeking ways to create higher value from these investments. Can this renewed focus on corporate governance become a catalyst for establishing more effective forms of financial and operational management? What kinds of tools and approaches will enable something greater than just narrow, albeit critical objective of compliance?
The Current State
New management tools, approaches, and technologies have been the focus of investment for a decade or more. The level of understanding about what these can provide is maturing. With this maturity come the following insights:
Budgeting. Tools have improved accuracy and efficiency, but organizations haven't seen the quality of budgets improve substantially. The budgeting process still isn't effectively integrated with strategic measurement systems, such as Balanced Scorecard.
Planning & Analytics. While new tools have improved financially based analysis, they've given little insight into potential performance and capacity issues because they aren't supported by robust business models.
Balanced Scorecard (BSC). While tools and implementation efforts improve strategic focus, they don't always improve the ability to execute strategy or drive performance improvement.
Activity-Based Costing (ABC). While providing insight into cost/profitability issues, functionally focused performance measurement systems limit the ability to capitalize on such insights. Unprofitable products, services, and customers remain.
Business Intelligence (BI) and Data Warehouse (DW). Improving access to transaction-based data doesn't necessarily improve decision-making. In fact, some believe that organizations are "drowning in data" and are unable to effectively use it to create value.
Acknowledging the need for greater integration, the search is on for how organizations can evolve beyond single, best-of-breed implementation of tools and methodology approaches. However, no universally accepted approaches or solutions exist for doing so. We do not even have an acknowledged term, such as "management systems," to define and describe what organizations seek.
What are management systems? They are the processes, frameworks, economic models, tools, and governance structures that enable organizations to define, adapt, deploy, and execute strategy. Ultimately, their purpose is to optimize value for all stakeholders by maintaining strategic alignment; that is, a state where people make the decisions and exhibit behaviors that are consistent with the organization's strategy and stated values and beliefs.
Organizations typically employ different types of management systems. Financial systems are the most dominant; these include planning, budgeting, forecasting, and reporting. Other systems address strategy, customer, performance, IT, knowledge, quality, and process management. Historically, these "traditional" management systems have never been well integrated. The typical result is fragmented and financially dominated management systems that reinforce functional silos and perpetuate parochial decision-making. Organizations can't deploy strategy into their business processes, and thereby integrate strategy and tactics. They can't execute strategy and exploit synergies across functions and business units. In sum, the current state of management systems undermines any effort to deal with complexity and maintain strategic alignment.
From a SOX perspective, the current state doesn't offer an optimal control environment. Thus, it isn't an overstatement to say that management system integration is one of the single most important challenges facing organizations today.
Overcoming this integration challenge requires a fundamentally different and holistic approach. A Process-Based Management System (PBMS) uses business processes as the structure for building an integrated management system (see Figure 1). Integration at the business process level creates two key capabilities:
"Trade-off management" is an approach for integrating BSC with ABC and budgeting. As Figure 2 shows, this provides the means to express measures in terms of "trade-off metrics." Bringing these systems together fundamentally changes the process of cascading performance targets and the role of budgeting in reaching those targets. This new "translation" process focuses on establishing the right balance between conflicting cost and service objectives, which affect virtually every aspect of an organization's performance. Why is such a balance essential? Because it provides something that most organizations lack: a formal mechanism for optimizing value. A good balance between cost and service objectives enables such key objectives as:
In achieving these objectives, trade-off management brings together strategic, financial, and operational information. Moreover, it presents the combined information from multiple dimensions, including products, customers, processes, and activities. This level of integration significantly improves transparency across organizations, which is a key SOX compliance objective.
The SOX Effect
Everyone talks about transparency, but often without a shared meaning. SOX application vendors tend to offer a narrow definition, focusing on the visibility of internal control deficiencies and risk. Others provide broader definitions, which are more closely aligned with value creation and incorporate cost and performance management activities. A PBMS supports this broader definition. As Figure 1 illustrates, it does so by integrating trade-off management with processes for:
These are examples of how a PBMS facilitates the integration of structured and unstructured data. This integration adds context to data in BI applications, thereby creating usable information and knowledge to guide and constrain how people work and make decisions. These combined capabilities also provide the means to more effectively delegate authority and empower employees, thereby promoting more of a "Business Owner Mentality."
When people make decisions and exhibit behavior that are consistent (in other words, aligned) with an organization's overall strategy, values, and beliefs, SOX-related risk falls. This is how businesses can derive superior value from SOX-related investments. The higher value is inextricably linked to establishing management systems that bring about strategic alignment.
In this context, organizations must consider how SOX applications (and underlying Content Management tools) will enable them to both comply with the act, while simultaneously creating strategic alignment and driving strategy execution, through the type of integration described earlier.
The level of integration contemplated by a PBMS is made possible through the ability to express traditional financial information in terms of activities and business processes. ABC applications, thanks to Web-based technology evolution, have offered such expressiveness for a number of years. However, key challenges remain, including the following:
Not widely recognized is that technology exists to address these challenges. First, database management systems, such as those provided by IBM, Microsoft, and Oracle provide the means to present process-based data (typically residing in relationally based ABC tools) in a multidimensional format. Some BI platforms, such as ArcPlan's dynaSight, provide simultaneous read and write access to multiple databases, whether they are relational or multidimensional in structure.
These tools are important because they provide a means for integrating applications, with PBMS goals as the motivating force. Moreover, they make best-of-breed approaches a practical alternative to more traditional ones, which often suffer from long response times, massive database replication, mushrooming database size, and resulting high ownership costs. Finally, the PBMS approach provides the foundation for integrating BI with SOX and other management system applications, typically provided by Content Management vendors.
Value Beyond SOX
A PBMS approach provides the means to significantly improve planning and execution, which can bring success with long-term goals of improving customer focus and loyalty through organizational flexibility and responsiveness. It also provides a foundation for fundamental cost reduction: a process that minimizes costs in two ways. First, it helps to avoid them with greater forward visibility. Second, it aligns cost structures with what customers are demanding and willing to pay for.Businesses can avoid costs through the better forward visibility that a PBMS approach can provide. Especially at larger organizations, the near-term cost reduction opportunities can be significant enough to fund the PBMS investment. Sources of cost reduction include the following:
While some readers may be skeptical about these opportunities, experience shows that process-based management approaches can create significant value. A PBMS is merely the glue that binds systems so that objectives can be achieved.
Management System Strategy
Senior-level commitment is critical to establishing a PBMS approach and realizing its value. That is the purpose of a management system strategy (MSS), as described Table 1. An MSS will force organizations to come to terms with the weaknesses in how they currently manage business processes. Some would argue that through TQM, ISO 9000, and implementation of ERP, CRM, and other applications, they've already addressed the process management issue. However, the evidence suggests otherwise, since many of these initiatives have not achieved their stated objectives.
An MSS is an essential first step for ensuring that management systems meet both business and regulatory objectives. From a more practical perspective, an MSS can minimize redundant software, since many of the applications shown in Figure 1 share common functionality. For example, issue and task management is a feature found in BSC, SOX, product development, risk, knowledge, strategy and portfolio management applications. Because this feature is a key capability, fragmenting it across multiple applications would significantly undermine its ability to create value for organizations.
Along the path to developing an MSS, keep four things in mind:
Technology is the enabler: but the key to launching a PBMS initiative is to prepare the organization for change. Otherwise, a PBMS will become one in a long line of great ideas that never really overcame traditional functional mindsets.
Businesses have been asking, what lies beyond budgeting, ABC, and BSC? While much has been written, few practical solutions have emerged. PBMS offers such a solution. Moreover, it can provide a foundation for an effective response to SOX that simultaneously improves business processes.
The Internet brought disruptive technology change, especially in how organizations interact with customers. A PBMS has the promise of doing something similar regarding how organizations are managed. With strong, visionary leaders, organizations can make the necessary changes that will enable them to capitalize on this opportunity for improving business competitiveness going forward.
Dean Sorensen [email@example.com] is a principal with Bywater Management Consulting. He specializes in helping organizations create alignment around executing strategies that create profitable growth.