In a typical organisation, business units act independently of each other and make decisions based on information that is relevant to them. For example, the sales and marketing department might collect data on the effectiveness of the various special promotions that the company employs. It would then repeat promotions that substantially increased sales, and abandon those that had little impact. Meanwhile, the operations director might independently implement an IT solution enabling warehouse managers to reduce stockpiles and respond more efficiently to fluctuations in demand. This approach might work at a departmental level, but how does an organisation obtain a high-level view of the business as a single, organic entity? Performance management (sometimes also called corporate or business performance management) aims to bring these individual business units together and ensure that they are working towards a single corporate strategy. This means that decisions taken at board level can be used to inform performance measures, which can then be adopted by individual business units. It is a combination of two disciplines: business intelligence, which looks at historical data (such as how many units of a particular product were sold last week) and enterprise planning, which aims to steer the organisation’s future. Recently its capabilities have been boosted by technological developments that make it possible to extract and analyse data from different sources and report on them on a daily, rather than a weekly or monthly, basis. Traditionally, senior managers who wanted to see detailed reports about performance would have had to request the information from the IT department; now, they can have a dashboard on their desktop displaying up-to-date reports tailored to their specifications. Central to performance management is performance measurement, and the question of how an organisation can determine, and then measure, the indicators that are key to its success. Many organisations choose to use a formalised methodology, such as the balanced scorecard or Six Sigma, while others prefer to use a system customised to their specific requirements. A recent report from Cranfield School of Management, entitled ‘Business Performance Management: Current State of the Art’, which surveyed 780 US corporates, found that 46 per cent of those that took part were using formalised performance measurement systems; of those, 75 per cent were using the balanced scorecard technique. First expounded by Harvard professor Robert Kaplan and consultant David Norton in the early 1990s, the balanced scorecard proposed the measurement of performance from four different perspectives: financial performance; information about customers; internal business processes; and learning and growth. They believed that this combination would enable companies not just to evaluate current performance, but also to understand how well they were likely to perform in the future. As a formalised technique, it has proved enormously popular for businesses needing to make sense of the mass of data gathered from internal and external sources. For example, knowing from the learning and growth perspective that a high rate of employee churn has a negative impact on profitability makes it possible to put in place strategies to retain staff. It would be a mistake, however, to focus too closely on whether the balanced scorecard, say, is better than Six Sigma or any other system. ‘It doesn’t matter which methodology you pick’, says Frank Buytendijk, research vice-president of corporate performance measurement at Gartner. ‘What explains success is the fact that the managers have a shared view of looking at the business.’ Bernard Marr, author of the Cranfield report, agrees, arguing that an essential part of a performance management project is to think through corporate strategy and devise appropriate metrics, even if data on those measures will be harder to collect initially. Yet, he says, many organisations fail to do this, making the elementary mistake of measuring what is easy to measure rather than what is useful to measure: ‘Companies measure how many hours people spend on training courses each month and other useless metrics.’ He suggests that the balanced scorecard, although useful, is limited by considering
the perspectives of only two stakeholders 3 the shareholder and the customer. Instead, he suggests, organisations should consider a technique known as the ‘performance prism’, which takes in the perspectives of other stakeholders, such as employees, suppliers and pressure groups. ‘Another aspect of the prism’, explains Mr Marr, ‘is to ask what I as a company can get from my key stakeholders. There is a difference between what I want from my customers and what they want from me. You can satisfy all your customers 100 per cent but this might not be the most profitable option.’ Equally, says Chris Knighton, chief executive of Aspiren, a consultancy firm, many organisations become bogged down in the detail of the performance management framework. This leads to a ‘scattergun approach’, in which too much time and money is spent on attempting to create a perfect system. ‘Ultimately’, he explains, ‘they’re adopting the same approach in every area of the business without necessarily thinking about which areas are going to contribute most significantly to the delivery of the strategy.’ Successful performance management also depends on getting the cultural change right and ensuring that new sets of indicators are accepted throughout the organisation. There is no easy way of doing this, particularly in an organisation where different business units have been using their own spreadsheets or business intelligence systems for years. A performance measurement framework can only work if the indicators are cascaded down through the organisation. ‘If you have a strategic scorecard for how you deliver projects across the organisation, it is fundamental to drive that scorecard down, so that every project manager and every person within every project is absolutely clear about the actions they must undertake to impact the strategic success of the organisation’, says Mr Knighton. If necessary, the indicators can be tied to rewards and remuneration, so that there is a clear incentive to adopt the new indicators. In the US, Brigham & Women’s Hospital of Boston claims that the success of a balanced scorecard methodology has been dependent on cascading the indicators to employees. The hospital uses technology from SAS, a business analytics vendor, to draw data from 29 sources relating to 50,000 patient encounters a year. The information is analysed and then filtered down to 650 employees in the form of a scorecard containing 30 metrics linked to reports on finance, productivity and workload. The scorecards are used to improve performance and cut costs 3 doctors, for example, can spot anomalies in patients’ length of stay or assess the cost of introducing certain tests. The biggest technical challenge for implementing performance management lies in drawing data from many different sources; a report from Butler Group, published in June 2004, entitled ‘Corporate Performance Management: A New Approach to Business Control and Planning’, suggests that ‘a significant percentage of organisations are infested with inconsistent or erroneous data’. Estimates of how much existing corporate data is inaccurate vary; Gartner puts it as high as 25 per cent in Fortune 1000 companies. Cleaning up data and putting processes in place to eliminate mistakes in initial data entry is, therefore, essential. ‘Performance management is a way to steer the organisation, and to control fundamentally strategy and execution. If you’re going to do that, you’d better be pretty sure that the data you’re relying on to build metrics is 100 per cent accurate’, says Ian Charlesworth, a senior research analyst at Butler Group, and co-author of the report. Having put a performance management framework in place, a surprising number of organisations then fail to act on its findings. This is a phenomenon described by the Cranfield report as ‘drowning in data’ or ‘paralysis without analysis’. To remedy this, believes Mr Charlesworth, it is necessary to decide how particular parameters will be used within the organisation: ‘If customer activity drops down to a particular level, then we have to create an alert and have an agreed and documented process in place to decide what action we take. So, you’re proactively considering what the reaction to that information should be, rather than waiting for the alarm bells to go off and saying, “Gosh, customer activity has dropped to nearly zero, what on earth are we going to do about it?”’ Perhaps the greatest threat to the success of performance management is what the Butler Group report refers to as the ‘strategy gap’ 3 the fact that, over time, indicators slip out of phase with corporate strategy. Performance management has to be dynamic: key individuals need to take responsibility for their own portfolio of KPIs, amending them in line with the wider issues.
QUESTIONS
1. Discuss ways that IT can help performance management.
2. What are the difficulties and challenges in developing and implementing a successful performance management system?
3. Taking into consideration your understanding of the balanced scorecard, the Cranfield prism, and other such systems, develop your own version of a performance management system for innovation. Evaluate its relative strengths and weaknesses relative to previous approaches.