Performance Management Links Strategy And Operations

Nov 21, 2008 (07:11 PM EST)

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Companies can't report their way to great results--though you wouldn't know it from their accumulation of underused reports and dashboards. Companies that get this critical point are moving away from IT-centric business intelligence programs and toward results-focused performance management.

True, BI does more than just generate reports. But add in query and analysis tools, and sophisticated predictive and statistical analytics, and those tools and technologies are overwhelmingly under IT's control. In contrast, performance management, or PM, is defined by business needs, providing decision makers with the data they need to make the right moves, ones that fit with company strategy.

Most often, companies incorporate performance management into their budgeting and financial processes, in what's called corporate or financial PM. The next step is operational PM, where they apply BI to practical, day-to-day decisions--in the supply chain, sales, customer service, and other areas.

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That's what's happening at United Agri Products, a unit of $5 billion-a-year chemical and fertilizer supplier Agrium, which started doing operational PM projects last year using Cognos' BI platform. "After years of IT preaching the value of BI to business, we reached a point of maturity where the roles started to reverse, and the business started coming to us with ideas," says David Wheat, UAP's director of decision-support systems.

UAP's director of operations brought one such project to IT. The CEO had asked him to cut end-of-year inventory by $25 million, a difficult task for an agricultural company given ever-changing weather conditions, crop disease, and insect infestations, all happening across a variety of regions.

The operations director sketched out exactly what he wanted on a whiteboard, Wheat says. Then he said, "If I can know at any point in time what I have in inventory and can forecast what the consumption will be through the end of the season, I'll know what dollar amount I'll have left and I can go after the high-dollar overages."

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With that context, Wheat laid out a model for a PM system: what data he needed and when he had to have it in order to make decisions. And his model came complete with a financial target.

UAP lacked a sales forecasting application, so Wheat's team developed one by integrating relevant information--current inventory levels, open purchase orders, prior-year purchase histories, and predicted overages or shortages--into a single report. Launched in March, the app includes a daily alert that notifies managers in four regions whenever a purchase order has the potential to create excess season-ending inventory.

"All that data presented in one place, with exceptions highlighted in color, made problems jump right to the top for the director and his regional managers," Wheat says. That information led managers to investigate open, unconfirmed purchase orders to see if they're justified. The result: "Within two weeks, UAP had canceled $2 million worth of POs for products that weren't needed."

Performance management, like knowledge management, melds technology with business discipline. But where knowledge management's benefits are notoriously hard to quantify, PM yields concrete bottom-line results.

BI historically has been about dashboards and scorecards developed for specific uses, says AMR Research analyst John Haggerty. But that's changing. "All of a sudden it's about integrated analytics within applications," he says. "The conversation is starting to shift to looking at information in the context of specific decisions and roles."

As UAP found, performance management is easiest when IT and business team. The technical challenges are similar to those in BI: IT is responsible for data access and integration as well as developing core analyses and reports. Less familiar to tech pros are the challenges of consolidating disparate--typically spreadsheet-based--planning activities into centralized planning, budgeting, and forecasting apps, and translating strategies defined by the business into scorecards and key performance measures. PM also requires follow-up that's not always prescribed in BI to ensure that scorecards and measures are driving the right behaviors (see story, "Promote Positive Performance Behavior").

One thing that sets performance management apart from BI is that the information collected and analyzed is tied to a model or framework for measuring performance. When PM is applied in finance departments, there's a ready-made model in the form of the budget, and management activities revolve around budgeting, planning, forecasting, and consolidation. But in many companies, performance management never moves beyond finance, because agreeing to and developing frameworks that can be applied to nonfinancial performance is such a daunting task. Vendors have responded by combining BI and PM capabilities with business apps, and by providing pre-built PM applications for particular processes and industries.

SAP recently added a Spend Analytics application to its PM portfolio aimed at controlling purchasing. Oracle this summer added a Profitability and Cost Management module for financial performance management and a Strategy-to-Success framework to help companies put strategic plans into practice. Infor last month introduced "MyDay" interfaces designed to put role-based alerts and actionable information into the hands of specific users. Production planners, for example, can see which machines, production lines, and factories are overloaded and can shift work to underutilized ones.

Not all vendors agree that intelligence is best embedded in applications. The counterargument comes mainly from Microsoft and IBM, which argue that "nobody runs on one instance of anything in their business, and you shouldn't have to lock in to a single-vendor approach," AMR's Haggerty says.

Despite this difference in approach, Microsoft and IBM are expanding their portfolios of pre-built business models and frameworks. IBM Cognos has extended its portfolio of transaction-system-independent PM applications, while Microsoft is relying mostly on partners to develop industry- and process-specific applications on top of its PerformancePoint system.

Several PM vendors were acquired last year, with Cartesis and OutlookSoft both rolled into the SAP/Business Objects portfolio. Some independents remain, including Symphony Metreo and Clarity Systems, which focus on financial performance management; Kinaxis provides an on-demand service that focuses on operational areas, including supply chain visibility, and sales and operations planning; River Logic specializes in modeling and planning, simultaneously modeling interdependencies such as between supply chain processes and related financial performance. Whitebirch Software offers pre-built financial-planning models.

These pre-built applications, frameworks, and models--whether from app vendors, infrastructure providers, or independent PM vendors--are aimed at jump-start- ing projects, saving companies the time and effort of developing everything from scratch. While these apps are described as customizable, the danger is that users won't bother going beyond the generic content and, as a result, will fail to get to breakthrough performance.

Impact Assessment: Performance Management

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For the many companies and business units that want to improve performance but lack a formal process or framework beyond financials or budgeting, the best advice is to start small. UAP's effort began in finance; it deployed Cognos Planning last year to replace a chaotic, spreadsheet-based budgeting process. The 4-1/2-month implementation integrated key data sources, including payroll, fleet management, and asset management systems, along with the ERP platform. Launched in time for last fall's 2008 budget-planning process, the approach transformed budgeting.

The process took the usual eight weeks, but the initial planning phase was completed in about a third of the usual time, says Wheat. "As a result, we were able to go into much more detailed reviews and rollups to make sure that it was a good plan."

UAP went on to create the inventory-forecasting app for the director of operations. Another operational PM app, developed last fall for the director of procurement, compares third-party data on agricultural land ownership and crop yields with the company's internal ERP data to spot prospective and existing customers buying large quantities of fertilizer and chemicals from other suppliers. IT integrated the third-party and internal data sources, developed the analytics, and created a report interface that highlights the leads. Field salespeople with local knowledge then vet the resulting territory-specific lists, and financing is preapproved for the hottest prospects. This application generated about $2 million in additional revenue within two months, Wheat says.

UAP was recently acquired by a rival, Agrium, so Wheat isn't sure what the next operational performance management initiatives might be. He's certain, though, that the company will continue to "eliminate the clutter," which means an end to excessive reporting. "We only want to send alerts that let people know what's wrong, so they can look at the outliers and exceptions," he says.

After financial performance, the second-most-popular approach to performance management is the classic balanced scorecard methodology developed by Robert Kaplan and David Norton, co-founders of research and consulting company the Palladium Group. Their approach calls for a top-down strategy--agreed to and supported by C-level executives--that provides a framework for understanding and measuring performance. The strategy is mapped and communicated to the operational levels with the aid of balanced scorecards developed for each level. The scorecards ideally balance short-term and long-term financial, business process, customer satisfaction, and employee learning or growth measures.

By most estimates, at least half of companies with more than $1 billion in revenue use some form of balanced scorecard. Southwest Airlines long ago developed its strategy to lead the industry on price by using a limited inventory of common airplanes (Boeing 737s) and focusing on turning planes around quickly when they arrive at an airport to reduce the number required and increase return on capital.

Southwest's top executives understood the strategy from the beginning, "but the problem was getting the organization aligned around it," says Norton, director of the Palladium Group. "To execute the strategy on a permanent basis, they had to take it down to their employees.

Southwest developed its "Knowing The Score" program after the Sept. 11, 2001, terrorist attacks put new financial pressure on the airline industry. To keep things simple, understandable, and even fun, the airline came up with four "magic numbers" embodied by four characters: "Nick" for net income, "Marge" for net income margin, "Cass" for the unit cost per available seat mile, and "Roy" for return on invested capital. These key performance indicators, expressed in IT-built scorecards and reinforced in newsletters and educational programs, ensured that every flight attendant, gate agent, and baggage handler understood the fast-turnaround strategy and their part in supporting it.

As powerful and popular as the balanced scorecard approach can be, not every company can develop a great strategy and then take it from the boardroom down to the day-to-day decision makers. In fact, the larger the company, the harder it is to do PM effectively, says Howard Dresner, an independent consultant and author of The Performance Management Revolution (Wiley, 2007). "Very large organizations tend to have multiple cultures, and they've typically had acquisitions over the years, so they may have multiple systems, approaches, and definitions," Dresner says. It's not impossible, he says, but it's "extraordinarily difficult" for large organizations to achieve both financial and operational performance management.

In contrast to Southwest, a relatively uncomplicated $10 billion-a-year company that has grown organically, Johnson Controls is a $34 billion giant comprising three separate businesses: its Global Workplace Solutions unit, rooted in the original thermostat business, along with automotive battery and automotive interior businesses acquired in 1978 and 1985. There's no overall performance management program, but over the last 18 months, Global Workplace, a $12.7 billion business in its own right, has implemented a scorecard aimed at continuous operational improvement.

Global Workplace provides outsourced services and staff to manage commercial properties, including heating and air-conditioning systems, construction activities, floor plans, and real estate portfolios. Customer service is gauged by key performance indicators, but until recently the company's 300-plus major corporate customers defined almost all of those measures. Two years ago, Global Workplace audited contracts with 35 to 40 U.S. customers and discovered it was reporting on 550 separate service delivery measures each month in an administrative deluge of spreadsheets and PowerPoints. That realization led IT to develop a Global Performance Scorecarding System to root out data gathering and reporting inefficiencies and respond to customer demands for standardization.

"Customers were constantly telling us they wanted to know where they fall on key measures compared to other customers," says Dave Mercier, Global Workplace's director of operational excellence. "The trouble was no two customers asked for the same measures reported in the same way, so we had to develop the ability to benchmark and compare."

The project team worked with subject-matter experts for six months to come up with standardized measures for customer service delivery as well as internal measures for human resources, safety, finance, and customer satisfaction. In service delivery alone, those 550 measures were reduced to two dozen, including facility maintenance and janitorial services.

The project team developed the complete scorecard model before selecting software in late 2006. "That gave us time to solidify our definitions and put processes in place for collecting this information around the globe," Mercier says. "It required an immense effort, but by the time we were ready to pick software, we really knew our business rules."

The group went with Actuate's PerformanceSoft Views scorecarding application after considering three other packages. With the modeling and metrics definition work completed, the technology implementation took only 90 days, and the scorecard was launched in April 2007. More than 500 managers now use it to keep track of key performance indicators. Indicators that are far below expectations show up in red, those below expectations in yellow, meeting expectations in green, and exceeding expectations in blue.

Upper management can look at top-level measures while service delivery, HR, safety, finance, and customer satisfaction managers can drill into the details. They can compare locations, regions, and vertical industry groups. The system delivers service-level reports as well as ad hoc reports and the customized metrics still required by some customers.

"Now we can see who's best at which metric down to each account," Mercier says. The system lets the Global Workplace unit see which locations are best at managing specific metrics. Executives who are delivering the best performance meet with with those who need to improve. "They can sit with peers--not somebody from corporate--and learn how to solve problems," Mercier says.

Customers typically agree to work with 65% to 70% of Global Workplace's measurements, he says, leading to higher efficiency and less time spent on one-off reports.

One of the dangers of bottom-up, operational performance management (or, for that matter, top-down PM that doesn't get to a low-enough level) is that people will continue to operate in silos. Performance management really pays off when it aligns activities.

Most missed deadlines, quality problems, and costs happen in the handoffs from one activity to the next, says Frank Buytendijk, a VP and fellow for enterprise performance management at Oracle and author of Performance Leadership (McGraw-Hill, 2008). A huge marketing campaign launched without adequate notice or coordination with call centers can overwhelm call center reps. An isolated manufacturing- or logistics-optimization project can cut costs in these areas, but increase warehousing costs, canceling out the savings.

Interdepartmental collaboration was key in a project at the Maine Medical Center. An interdisciplinary group, including nurses, physicians, and administrators, was formed two years ago to coordinate and improve treatment of specific groups of patients, including stroke, heart failure, and pneumonia. The resulting scorecard, built on the hospital's SAS BI platform and launched about a year ago, includes clinical, educational, patient satisfaction, and financial measures. The scorecards, which are accessible through an intranet-based portal, show cardiac unit managers how quickly patients are recovering on average, what percentage of staff have been through training, changes in patient satisfaction ratings, and trends in costs per discharge.

"The theory is that if we educate our staff, we're going to improve our performance, improve customer satisfaction, and lower the cost of delivering that care," says Peter Chingos, manager of data analysis at the medical center.

It's too soon to say whether all those measures are headed in the right direction, Chingos says, but a second initiative is clearly paying off. Using a framework suggested by the Joint Commission on Accreditation of Healthcare Organizations, a respected regulatory body, the hospital has set up performance objectives and scorecards for what's called "medication reconciliation." The system monitors compliance with practices for keeping track of the medications patients are on when they arrive at the hospital and all the medications prescribed throughout their stay.

Prescriptions are tracked through every phase of care, Chingos says. The medical center has increased compliance from about 50% to the 90% range, he says, and "there's frequent feedback through the scorecards that tells people how they're doing."

It's that feedback loop that makes PM really work. Even if it's initially an extension of financial performance management, as was the case at UAP, PM is most effective when it aligns strategy and operational execution, as happened at Southwest Airlines. "If you don't link strategy and operations, then you're stuck in either a bottom-up world, where you're focusing on operations and you don't really have control of whether it's impacting the strategy, or you come top down and focus only on strategy, but you can't make things happen," Palladium's Norton says.

Performance management tools are key to providing the all-important link between strategy and operations. With them, businesses can take all the data, reports, and analysis of BI and aim them at driving better decisions at all levels. Done right, PM translates business strategy into concrete goals and measures.

Photo illustration by Sek Leung

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