It has been a while since I added a new Blog. Living in Malta has got me into the Mediterranean ways, the holiday period here is full of festivals, with excessive drinking and eating, making me laid back and, perhaps, a little lazy. Now we are moving into winter, there is a motivation to get back to work.

I hope all those that have been following my blog have realised the importance I place on getting commitment from the top when engaging in a Performance Management project. There has to be someone with authority who has a vision of where the organisation plans to be within the next few years, and has the drive and motivation to execute plan successfully. Having Goals and Objectives for the organisation is a great way of setting an expectation with the Shareholders, Stakeholders and Employees. With a highly motivated community of people investing in an organisation the confidence and energy shines through giving customers and suppliers, assurance in the ability of the organisation, and let’s not forget they too are also investors in the organisation. They are betting their livelihoods as investors in our capability and reliability to manage our organisations successfully. We are all so intertwined, one fails and we all feel the pinch.

It takes a hiccup in the economy to focus all of us on the vulnerability of each of our lives, and how we depend on the stability, growth and profitability of the organisations in which we are employed. I am constantly reminded of the fragility of the situation each of us find ourselves in, and the utter dependency we have on the management of our counties and employers.  It has to be time for a major shakeup; we cannot rely on governments, politicians are notorious for wriggling their way out the mess they have created. It is time for all of us as individuals to demand a work environment where the performance of the company is monitored against a plan and strategy. That the plan is made available to all investors in the organisation, employees are investors, and ratified by those who depend on it. Ensuring all that have stake in the plan and benefit for its success are rewarded for their contribution. None of us have the right of employment; we have to earn the right and contribute what contracted to do.

Ok, off the soap box. Since coming back to work in Europe, I am finding things a little slower, and there is less innovation in the workplace, than I experienced in Asia. I am not going to comment on this, as the economies are more mature in the west and values are different. This will equalize out overtime, I was starting to see major changes in the work style of employs in Asia when left Asia a bout year ago.

One of the biggest failings in adopting a performance management initiative is the inability to assign accountability.

With ownership and accountability performance of the organisation cannot be measured. There have been many approaches to drive accountability through programmes such as Lean and Six Sigma initiatives. But going back to my earlier point this will happen we realise as employees our livelihood depends on our competitiveness and energy to perform. This is a mindset change and those organisations that drive change consistently through the bsuiness will the ones that succeed. Innovation comes through creating an open mindedness amongst those engaged in a common cause to succeed.

Strategy maps provide the means of linking an organisation’s Goals and Aspirations to their Operational Scorecards. Although strategy maps were originally developed by Kaplan and Norton to support the balanced scorecard they can be applied to any scorecard framework. The strategy map, thus, provides a roadmap linking the operation performance indicators to the strategy of the company.

Strategy maps without a destination statement, or ultimate goal, are of little use.  This important addition to the strategy map was added at a later stage giving it a purpose and set of stretch targets over a period of 2 to 3 years. As show in the diagram above for each perspective there are a set of objectives. Measures within the scorecard framework are aligned to the objectives and targets set. An action plan is linked to the objectives and along with this an associated budget.

Frameworks for linking strategy to the measures and defining actions have been around for a long time. Many eminent researchers have developed ways of grouping the processes resulting in an assortment of metrics based frameworks. Some frameworks however are operational, such as SCOR, without an obvious link to the financial process types. Others like balanced scorecard do not push down far enough into the operational processes. I personally like to mix and match, using the Balance Scorecard and industry specific Scorecards to link the operational measures to the financial measures. Because the Balanced Scorecard has a Financial and Customer perspective this provides a link from sales through the value proposition to finance driving asset utilsation and revenue.

The Strategy map provides a link between the Business Modeling and the Business Intelligence and Business Process Management activities. It establishes the objectives and their corresponding Critical Success Factors (CSFs) and Key Performance Indicators (KPIs). Knowing the performance expectations provides the means for designing optimal business processes and driving the business performance improvement programmes.

Having worked for American companies for most of my working life, I am accustomed to using the term Value Proposition. However, if I translate this into English “Statement of Direction” is probably the closest interpretation, and for those familiar with Balance Scorecard it is translates closely to “Destination Statement”.  The purpose of defining a Value Proposition is to provide a means of driving the Strategy and to give direction to the organisation and its constituents. When Kaplan and Norton introduced strategy maps to provide a means of connecting strategy and objectives to Performance Indicators it emphasised the focus on driving value, however, later it was necessary to add a Destination Statement to define a goal and purpose. You might ask why? The reason is clear, I have map of how to get there (strategy), and I have a defined set of objectives (KPI’s) but have no defined destination.  

In my previous Blog “Disruptive Business Modeling” where I discussed business modeling it highlighted the importance of establishing a Value Proposition or a “Statement of Direction”. A Value Proposition is defined as “an analysis and quantified review of the benefits, costs and value that an organization can deliver to customers and other constituent groups within and outside of the organization.” To build a Value Proposition the following points can be considered:

1.       The Value you bring as an organisation

a.       A selected set of customers

b.      Why they need your offerings

c.       How your Products and Services fulfill their needs

d.      What benefits you will bring to them

2.       How you differentiate the Value you bring to your Customers and Stakeholders

a.       How you position yourself from the competitors

b.      What differentiate you Products and Services

c.       Identify and produce proof of this differentiation

There is a strong link between the Value Proposition and the Profit Model. Customers and Suppliers  require a company or organisation to have a sustainable financial structure that ensures they will be in business for the foreseeable future. Financial strength is built on healthy sustainable growth in revenues supported by a programme focused on managing and containing costs ensuring the ability to invest in the resources required to grow the business.

There are three principle drivers when considering the development of a Business Model:

1.       Increasing Velocity - The ability to deliver products to end-users as fast or faster than competitors and to reconfigure the business strategy & operations as fast or faster than competitors in response to changes in market or supply/supplier conditions

2.       Improving Visibility - The ability to monitor, control and change the business strategy & operations from supplies acquisition to product or service delivery at end user.

3.       Controlling Variability - The ability to continuously monitor and improve planning and forecast accuracy and reduce the impact of unplanned events on business performance.

Business Processes are developed to maintain the integrity of the business model, that are built into and around applications and data stores supported by the IT Infrastructure. The design and the management of the processes impact the performance of the business and its ability to respond to change. To ensure a quick response, the performance of the business processes are monitored and analysed to assess their impact on the performance of the business. Each activity that is monitored is analysed in terms of its contribution to the overall performance of the business. This ability to roll up and drill down performance indicators are an important aspect to ensure problems are pin pointed and resolved as quickly before they, in conjunction with others, create a much bigger problem.

In conclusion the Value Proposition is not static; it is reviewed periodically to ensure it is maximising value for the business and constituents. The business processes supporting the creation of value are monitored and analysed to ensure they are still relevant and change management processes are used to manage the changes required to keep the business on track or put in place new processes delivering value for new opportunities. This is a continuous improvement programme that adjusts to the changing business environment.

To help understand the areas of coverage in this Blog I will define my perception of Business Performance Management. All too often people assume Performance Management is Business Intelligence (BI). This is not the case, BI is one of the legs on the stool and as the diagram shows there two more legs and a framework within which it is defined and implemented.

The diagram highlights the three main areas which are:

·         Corporate Performance Management

·         Business Intelligence

·         Business Process Management

The framework within which the solution is built is usually part of an Enterprise Architecture (EA). As to what EA framework is used is very much down to the preference of the EA Team. During the course of this Blog I will endeavour to cover all these areas based on my experience and preferences. There is another important factor to cover which is Programme Management since implementing Performance Management comprises of multiple complex projects. The projects have many interdependencies that need to be tied together to ensure the sequence and priorities in which deliverables are made are consistent and do not impact adversely pervious deliverables.

In the centre of the diagram there is a red box called “Assigned Accountability”. One of the most difficult parts of a Performance Management project is assigning ownership of performance metrics, especially at the operational levels within a business. This has a major impact on the existing culture within and often involves assigning performance related incentives to individuals and groups who are responsible for the management of the activities that impact the performance metrics. Since activities are part of a process and processes are affected by upstream and downstream processes difficulties can arise from poor performance that has an impact on the achievements and aspirations of dependent performance metrics owners. Managing these changes is a difficult task and needs a strong management team to mitigating the risk associated with delivering a successful Performance Management Programme.

Performance Management is a top down driven programme that becomes embedded in the culture of an organisation. It is a continuous process that enables an organisation to respond to change quickly and adjust to the changing economic and market dynamics as they occur. Technology plays a large part in the delivery of a successful programme expanding its reach and response to an ever changing business environment. Performance Management projects rely heavily on applications and tools to document and deliver a successful outcome. I will expand on this in future Blogs.

When I was lecturing at SIMM (Singapore Institute of Materials Management) I was asked to develop and deliver a course on Supply Chain Intelligence to students studying a Logistics Degree. The objective of the course was to illustrate the value of using business metrics to monitor the achievements of an organisation through the use of Business Intelligent tools.

This proved to be quite a challenge as many students were not familiar with key management ratios. Also they had no previous work experience and could not conceive of the value of business performance measures to an organisation. Whilst researching course material to explain the value of Business Intelligence, I came across an excellent document called “The Business Performance Handbook” produced by the Performance-Based Management Special Interest Group (PBM SIG) a U.S. Department of Energy (DOE) organisation.

In the document they define a performance-based management programme as a systematic approach to performance improvement through an ongoing process of establishing strategic performance objectives; measuring performance; collecting, analyzing, reviewing, and reporting performance data; and using that data to drive performance improvement.

This fit well with my understanding of Performance Management and seemed to provide a good framework for the lecture:

·         Step 1: Define organizational mission and strategic performance objectives.

·         Step 2: Establish an integrated performance measurement system.

·         Step 3: Establish accountability for performance.

·         Step 4: Establish a process/system for collecting performance data.

·         Step 5: Establish a process/system for analyzing, reviewing, and reporting performance data.

·         Step 6: Establish a process/system for using performance information to drive improvement.

One of the more interesting points, raised in Step 3, was the importance of accountability to the success of performance management. This also reinforced my belief that key Performance Indicators should be derived through a decomposition of processes and their key ratios. Through the decomposition KPI’s can then be assigned to individuals who are then accountable for ensure operation performance is met. Also by decomposing the KPIs we can analyse the impact of non-performance, and improvements made through tactical adjustment to the plan.

Using a conceptual framework stimulates thought about what should be measured. Frameworks are useful to organise ideas, identify common vocabulary, and ensure sufficient coverage of the performance measurement system. Some frameworks fit particular organisations better than others.  But rather than take a considerable time, and investment, to decide, which is the best approach I would suggest it really does not matter as any framework will help get an organisation started. Later when updating performance measures, it is useful to review other frameworks to identify new ideas and approaches that might improve your system. There are several Frameworks available and below are some of the better known ones:

The Balanced Scorecard - In 1992, Robert Kaplan and David Norton introduced the Balanced Scorecard concept as a way of motivating and measuring an organisation’s performance.

SCOR Scorecard - Has over 200 key performance metrics to monitor overall supply chain performance (level 1 metrics), as well as, many focused metrics to help a specific process to improve level 2 and 3 metrics.  This metrics are used to build performance trends for areas under improvement, or to compare against industry best practice performance.

The ”Critical Few” Performance Measures - Having too many measures—therefore generating  a large amount of routine data—could distract senior management’s focus from those measures that are the most critical to organisational success.

Performance Dashboards - A performance dashboard is an executive information system that captures financial and non-financial measures as indicators of successful strategy deployment.

The Malcolm Baldrige National Quality Award Criteria - In 1988, the Malcolm Baldrige National Quality Award (MBNQA) was instituted to promote total quality management (TQM).

Six Sigma and its derivatives - is a disciplined, data-driven approach and methodology for eliminating defects (driving towards six standard deviations between the mean and the nearest specification limit) in any process -- from manufacturing to transactional and from product to service.

Back to the lecture: Using a Business Intelligence tool with a predefined demonstration made it easier for me to help the students understand the value of Performance Management and how it fit in to the rest of their course work. As they were Logistics students I used SCOR.

This led me to believe that before embarking on a Performance Management Project it would be useful to demonstrate the power of BI to management and the stakeholders. Also to stress that acceptance of accountability is, key to the future success of the project.

To understand how KPI’s are derived it helps to be able to visualise how operational performance impacts the Business Goals and Objectives of an Organisation. There are three primary objectives in an organisation:

1. Profitability
2. Growth
3. Stability

These three objectives are financial conditions that reflect the Performance of a Company and its management team. All other objectives support the “HOW” do we achieve these primary goals. When setting goals and objectives they should be SMART (Specific, Measurable, Achievable, Relevant and Time Bound). Too many organisations define objectives with no clear idea as how they are going to be achieved and whether they support the Vision and Goals of the Management Team.

Before considering frameworks for achieving an organisations goals there two approaches that are helpful in understanding how to build performance metrics and define operational ownership. The first is to understand the concept of Ratio Analysis based on DuPont Pyramid Analysis and second is the understand Business Entity Relationships.

Ratio Analysis

Pyramid Ratio Analysis is a way of decomposing Management Ratios. It provides a means of assigning ownership and operational responsibility to the departments and individuals. One of the Key Management Ratios used to measure Operational Performance is Return on Assets (ROA) which is used to measure and analyse the Assets utilised to generate the Profits within an Organisation. The top level ratio is defined as EBIT (Earnings before Interest and Tax)/ Total Assets (TA) or EBIT/TA which is decomposed into the second level ratios by taking into account Sales i.e. (EBIT/Sales) x (Sales/TA). The ratio can be broken down further into lower level ratios which allowing assigning ratios at the departmental and individual levels.

Entity Business Model

The entity-level business model is used to describe the inter-linking activities carried out within a business organisation, the external business drivers and stakeholders that bear upon the entity and the business relationships with persons outside the entity. The items included in the entity-level business model include the following components:

The Business Entity Model is specific to different Industries and Organisations. It provides a common view of an Organisation and enables Processes to structure in a consistent manner providing a framework for comparative analysis. Ratio Analysis provides the means of decomposing Metrics (KPI’s) to allow Management to analyse the impact of Operational Management on the Goals and Aspirations of an Organisation.

In future Blogs I will expand both of these topics.

Many of the Business Intelligent projects I have worked on have been exceedingly challenging. The challenge is not the technology; it is often determining what should be measured that proves to be the problem.  Many managers do not seem to have a clue, when it comes to determining the key metrics that can be used to establish the performance of their organisations operational units. There is also the other side of the coin, where management focuses at a too detailed a level, and cannot link operation performance back to the higher key performance indicators of the business.

There is no need to re-invent the “wheel”. Several frameworks are available that can be used to accelerate a Business Intelligence project. I have used a Balanced Scorecard approach and the Supply Chain Councils SCOR framework on some of the projects I have worked on. These can be used at a more detailed level in conjunction with Six Sigma and Lean principles. Most frameworks are similar in their approach and rely on the decomposition of organisational goals and objectives into more detailed activities and tasks. This approach provides a framework for assigning responsibility and ownership of the performance metrics. As an example of process decomposition we consider the cash-to –cash cycle time which is made up of three other key processes:

1.       Days Payable Outstanding (Accounts Payable)

2.       Inventory Days of Supply (Inventory Management)

3.       Days Sales  Outstanding (Accounts Receivable)

The three sub-processes can be further decomposed to involve other parts of the organisation i.e. Planning, Procurement, Manufacturing, logistics and Sales etc. Which when applied tightly integrates the organisation breaking down barriers of communication.

Using pre-defined performance frameworks accelerate the successful implementation of Performance Management Projects. They also provide a means of benchmarking an organisations performance against others in similar industries.