Strategy for success
Strategy for success
May 01, 2005: In the first of his three part series on corporate performance management, industry expert-and co-author of 'The Strategy Gap'-Michael Coveney looked at the gap that exists in organisations between strategy and execution, and some of the 'best practices' exhibited by leading organisations when managing performance. Part two sees Coveney take a look at the role of technology and how an organisation should approach its budgeting and reporting systems to ensure strategic alignment
Performance management is not achieved by buying technology, despite what software vendors may say. To effectively manage performance, organisations must use sound business management principles, supported by systems, to develop, communicate and monitor strategy.
The role of technology is to support management but, unfortunately, it's often the other way around. Part of the reason is that the processes involved in managing performance-planning, budgeting, forecasting, reporting and analysis-are often implemented as discreet systems using different technologies maintained by different departments. The end result is manually intensive processes to 'stitch' the different technologies and data together, which give multiple views of performance, many if not all, completely disconnected from strategy.
To cross the gap between strategy and execution requires organisations to address four critical issues:
-Plan and measure the things that drive success
-Align the management processes of planning, budgeting, forecasting, management
-reporting to strategic goals and supporting activities
-Pay people to do the right things
-Use technology to automate and reinforce the above.
Let's take a look at each of these parts.
Plan and measure the right things
Too many budgeting/reporting systems are based on an accounting view of the organisation, rather than on managing activities that generate financial success. Effective performance management starts out with the strategic plan, with the budget, forecast and report processes operating in a supporting role. To do this often requires a different set of measures than those traditionally used. The right measures can be determined through the following steps:
Determine what constitutes success in both the short and long term. This may be in the form of a statement-to be the market leader-but it must be backed up with measurable values (or strategic goals) over the life of the plan. For this example the measurements may be market share, profit growth and return on capital employed with a related set of goals.
From this, determine the way in which the organisation will operate to achieve those goals. For example, to grow profitably we must improve our service to existing clients and launch a new range of products/services to attract new customers. For each of these 'strategies' determine what the measure of success will be and a set of targets that would lead to the achievement of the high-level goals they support.
For each strategy measure, determine the assumption that is being made about the business climate. A change, for example, to the growth of the overall market, may mean that the measure of success is no longer relevant or needs revising.
The above activities are typically performed by senior management. At this stage, involve operational management to determine the tactics that will be required to implement each strategy. Each tactic should be assigned a measure that would indicate the successful implementation of the tactic. For example, to 'improve customer service' may need a tactic to train our customer support staff. To monitor the implementation of this tactic we could review the number of people who pass the training program. In addition to the measure of implementation, we would need to collect high-level costs and maybe revenue impact data to help us assess whether we should implement each tactic.
For each of the above we need to assign responsibilities to ensure that they are carried out within the boundaries set.
The above is a simplistic example-in a 'real' organisation the number of levels in the plan would be far greater. One person's tactic may well become another person's objective, but this example shows the process that needs to be carried out to determine the measures required for the budget and forecast process. Once the plan is set, the budget process- the allocation of people, money and assets-can begin.
This process is collaborative and best conducted through management workshops to establish the 'cause and effect' of activities on strategic goals. It also gives management teams a forum for discussing the management of performance and to determine priorities for resources.
Aligning processes
Managing performance is a continuous process that starts out with strategy formulation which leads to determining the cause and effect of activities and then the resourcing of selected activities through a budget. Once set, the processes of forecasting and management reporting should be aligned to monitor the implementation of strategy, and if a variance occurs, what action to take place to ensure the plan stays on track. This requires a process that is driven by events rather than a date on a calendar.
The amount of information to track can be enormous, but the right use of technology can automate much of this tracking, which automatically alerts users when a decision needs to take place. It's interesting to note that while most organisations have well documented processes for turning raw materials into finished products, the processes for turning a strategic plan into a set of actions that are managed for success are rarely documented and known to those involved. Today's fast moving business environment makes annual planning and quarterly reporting inadequate for managing success. Instead, high-performing organisations treat it as a continuous process.
Managing people
Employees need to know what actions they are to perform, the constraints under which they operate, and the outcomes that are expected from their activities. To do this they need systems that inform them of their responsibilities and give immediate feedback on their actions and the forecast situation. It is highly unlikely that a set of financial numbers will convey this adequately, as financial data is usually the result of a set of actions.
As well as having the authority to manage resources to achieve personal goals, they need to be aware of any changes to the business environment or the activities of others that could impact their areas of responsibility. Users cannot operate in a vacuum - they need visibility of those they affect and in turn those they are impacted by.
Using technology
From the above, it will be seen that traditional systems based on budget vs. actual reports are woefully inadequate for managing performance. In many ways these systems act more like a rear-view mirror, as they tell you the results of what happened in the past but give little or no indication of what needs to happen to achieve strategic goals in the future.
To this end, systems based on general ledgers or accounting principles are at best going to do little to help you navigate the business road, or at worst will delude you from seeing reality until it is too late.
Today's performance management systems convey strategy as a 'cause and effect' picture based on actions. They warn when actions are not being implemented or are unlikely to help realise high-level strategic goals. Although these systems still produce an accounting based view of the world which is necessary for financial disclosure, they focus on the management of activities and resources to implement and achieve strategic success.
Next Steps
Implementing an effective performance management system doesn't take place overnight. It requires organisations to consider where they are and take small incremental steps to get them where they need to be. In the third and final article of this series, the steps necessary to implement a strategic management system will be considered.
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