Enterprise Performance Management: How can I ensure that my organisation gets it right?

Enterprise Performance Management (EPM) refers to an integrated management approach that links strategic goals directly to the operational and financial activities necessary to reach those objectives. From an application perspective, EPM encompasses a suite of solutions that are targeted at an organization’s decision makers, including those that coordinate the budgeting, reporting and consolidation activity. EPM solutions provide insight into budgets and seek information from the actuals in order to facilitate variance analysis through various reporting tools. In general, an EPM suite offers tools for effective budgeting, financial consolidation and reporting, profitability management, strategy management, and decision support. EPM solutions are an extension to Business Intelligence (BI) and leverage OLAP (On Line Analytical Processing) technologies. They key differentiator between BI and EPM is that whilst BI may provide the analytics to assist an organisation in setting its goals and monitoring progress towards them, EPM goes further and leverages that information in order to guide the organisation to its goals. As performance management systems have been around for many years, one might believe that by now most organisations have figured out how to get this right. Why is it then that I still often come across executives that are unhappy with their existing systems? This begs questions such as “What makes a truly effective enterprise performance management system?” and “How can I ensure that my organisation gets it right?”

Getting it right

There are a few basic concepts that are at the heart of successful enterprise performance management.

• Leading organisations adopt a well-defined and clearly communicated organisational strategy.
• Leading organisations align all activities from top to bottom within an organisation. If any activity is found not to add value, this activity should be outsourced or eliminated.
• Leading organisations effectively close the gap between organisation, processes and technology. Closely aligning these elements greatly enhances overall organisational performance.
• Leading organisations adopt a specific set of key performance measures (ideally more than 10, but should be less than 30) covering a diverse set of performance categories (e.g. trailing, leading, financial performance, productivity, growth and innovation, customer/employee satisfaction, efficiency, and so on).

A clear business strategy is essential if you want your organisation to excel. Extraordinary financial results flow from a clear strategy supported by a detailed plan on how to implement it. Having performance measures that are closely aligned to organisational mission and strategy is very important. A disconnect between these tend to not only cloud an organisation’s mission, but also makes it much harder to effectively mobilise and lead an organisation towards the achievement of its key strategic goals. There needs to be a perfect alignment between all activities of an organisation that bear a direct relationship to the business strategy. The glue that sticks this all together is found in a performance measurement system that ties and aligns every aspect of the organisation – from the boardroom right down to the factory floor – to the overall strategy.

Whilst ensuring that performance measures are closely linked to strategy is critical, having the right mix of performance measures is just as important. Performance measures adopted should be representative and inclusive of all key performance categories that could have an impact on the achievement of overall organisational strategy. Not only is the right mix between financial and non-financial measures required, but there should also be a good balance between leading, lagging and current measures. Without a balanced approach to measures, an organisation will degrade over time.

Lagging indicators, such as most financial KPIs, measure the output of past activity (such as last quarter’s revenue). With such lags, the problem arises as to what action might be appropriate to alter the direction of the organisation’s performance. A correction might be inappropriate where current performance has already significantly altered from that measured in the past, and may result in overcorrection. Lag indicators are probably the least useful as key performance measures, as the purpose of performance measures is to allow for the adjustment of processes and behaviour in order to get better performance. Organisations that focus only on financial performance measures constantly look over their shoulder, examining past performance which is over and done.

Current performance measures are much more useful. An example would be today’s sales or production output – if production levels are less than expected, then corrective action can immediately be taken to ensure that the problem is diagnosed and corrected.

Leading indicators measure activities that have a significant effect on future performance, and are predictive of desired results or outcomes. Leading measures can be manipulated to affect financial results, and are particularly useful measures when it comes to assessing whether the organisation is on track to achieve long-term financial goals. Leading performance measures could include customer satisfaction measures, growth and innovation measures, and productivity, to name just a few. By their very nature, leading performance measures are sometimes difficult to define, but they are powerful measures and their use is indispensable in steering an organisation towards its overall strategic goals.

Avoiding some common pitfalls

• Resist the temptation to have too many performance measures. Many organisations tend to have just too many performance measures, and in many cases some of these measures may even be conflicting when viewed in the context of what would achieve the best result for the organisation. Take for instance, an organisation that simultaneously focuses on measures such as cash flow, earnings per share, operating and net profit. Earnings per share can be increased by buying back shares, even if profit remains the same, but is this achieving the best result for the organisation? Operating profit can be increased by the automation of manufacturing processes, however cash flow will be decreased by the purchase of the new equipment, so is this achieving the best result for the organisation?
  Where there are too many measures, executives and middle managers often find it hard to focus their attention. Thus the results of organisations with too many performance measures are often nowhere near their apex. Having too many performance measures can be counter-productive and are nowhere near as effective as having a specific, balanced set of measures which cover a diverse set of performance categories and are properly synchronised to optimise overall results for the organisation.
• Another common failure is that performance measures are often not properly communicated throughout the organisation, or are communicated in isolation. This leads to the achievement of performance measures in isolation, which once again fails to achieve the best overall result for the organisation.
• It is very important that performance measures are accurately aligned with and support organisational strategy. Having performance measures that are not properly aligned with overall organisational strategy is self-defeating at best. Such measures tend to confuse employees, often lead to inefficiencies, and tend to dilute overall focus across the organisation. This in turn makes it much harder for senior management to successfully navigate the organisation towards its strategic goals.
• Guard against performance measurement systems that mainly emphasise short-term financial measures, as these often create long-term problems for organisations. For example, short-term profitability can be improved by cutting back on R&D activities. However, down the track this short-term focus is sure to impact negatively on the organisation’s position as an innovator in the market, leading to loss of market share and eroding long-term financial success.

The benefits of having an effective enterprise performance management system in place are enormous. A successful enterprise performance management system effectively closes the loop between business strategies, performance measures, and business actions, allowing the organisation to be more accurately steered towards both its strategic as well as operational goals. Decision makers enjoy immediate access to mission-critical information, allowing them to quickly capitalize on the changing dynamic of today’s competitive global marketplace. By synchronising the communication of goals, strategies and measures, collaborative management is enabled allowing individuals to collaborate information prior to action and coordinate decisions at strategic, tactical and operational levels to ensure opportunities are capitalized and resource utilisation is optimized. These are just some of the benefits that flow from an effective enterprise performance management solution, there are countless more. I guess the obvious question at this time is just how satisfied are you that your organisation is ‘getting it right’ – unless you are currently enjoying significant benefits such as these and more it may well be time for a review of your current enterprise performance management solution.