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.

 

When considering where to start on a business process project I like to investigate the Cash-to-Cash process. I think of the Cash-to-Cash process as the “Cash Supply Chain” managing the key business resource of money. This is an essential ingredient to the survival of the business and the achievement of its Strategy.

There are many KPI’s (Key Performance Indicators) derived from the Cash-to-Cash process. All focused on managing the “Cash Tank” that fuels the company’s progress through its lifelong business journey. The diagram shows a financial perspective which is essential when dealing with investors and organisations that supports the business through its growth and stability objectives. The diagram illustrates clearly how a business maintains sufficient cash resources to meet their resourcing needs, or risk serious financial consequences.

A key measure on a business is whether it has sufficient cash available to meet its short term responsibilities (short term liabilities). There are a number of key ratios used by investors to gauge the liquidity of a business i.e. Current Ratio, Quick Ratio and Working Capital to Sales which are some of their favourites. However, when considering the internal operations of a business, the focus should be more on Working Capital Days.

 

The illustration shows the funding requirements for a business and highlights the points of measure which can be applied to control this process and reduce the organisation exposure. We are all very conscious of the recent economic events and the impact this has had on business. This very simple diagram illustrates the importance of time gap between cash-out and cash-in and the impact that product quality and effective resource management can have on this process. This can be taken further when investigate the impact of the cash-to-cash process on the supply chain and how this affects the relationships between the business and its customers and suppliers.

The importance of the external factors and how they can impact they have on the business is shown in the above diagram. All businesses should have similar internal measures in place to ensure external relationships with Investors, Customers and Suppliers are well maintained and focused on meeting the goals and objectives of the business. It is ideal if the relationships within the supply chain are transparent from a planning perspective to ensure there are no surprises and that the satisfaction level is of the highest standard.

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.

When I was working for the Burroughs Corporation in the early 80’s, I came a across a paper on the DuPont Ratio Analysis. I was intrigued by this method of analysing key ratios and started to use it as a sales tool for justifying the investment in large software products. When targeting a company we would use Dunn and Bradstreet to obtain the Industry Sector Key Ratio averages and also collect copies of the annual reports of the prospects and their competitors. Using this information we built a DuPont Ratio Analysis model in a spreadsheet to compare the prospective companies key management ratios with the industry average and their competitors. Using the spreadsheet model we attempted to demonstrate to the prospect how by improving selected key ratios by the use of our software we could improve their competitive position and justify the investment in the software.

This method of Ratio Analysis is very effective when using Business Process Management combined with Business Intelligence to monitor and analyse the performance of an organisation. When considering a key ratio it is important that it is determined from an end-to-end process that it can be de-composed through lower level processes and their corresponding Key Performance Indicators (KPI’s). This provides a mechanism to assign responsibility and analyse the impact of the ratios changes on the overall performance of the organisation.

The Level 1 key ratio that reflects a measure of operational performance to an organisation is Return on Total Assets (ROTA). The Operating Profit is selected as this is under the direct control of Operational Management within an Organisation. ROTA is an indicator of how effectively a company is using its assets to generate earnings.

ROTA equals Operating Profit (or EBIT) / Total Assets (TA).

Using the DuPont Pyramid Model ROTA can be decomposed to Level 2 ratios by multiplying it by Sales/Sales which is expressed as  EBIT / Sales (or Operating Margin) multiplied by  Sales / TA (or Return on Assets - ROA). The operating profit margin indicates how effective a company is at controlling the costs and expenses of its operations whereas Return on Assets indicates how effectively a business has been making its assets work.

The spreadsheet model below shows how the ratios can be further decomposed into operational ratios that can be assigned to departments or individuals. This concept is important when considering the creation of a new, or updating an existing, Profit Formula in Business Modeling.  By generating a spreadsheet, or using a planning tool, what if scenarios can be created to assist in the modeling of possible outcomes.

 

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.

The Economic Cycles are shortening and increasing the pace at which Businesses have to adapt in order to survive. There is evidence though that Management does not have the skills or ability in some cases to acclimatise to the new business order. They often go into denial, and then adopt a blame culture, before having to admit they misread the situation.

During my last year in Singapore presenting and lecturing to Senior Industry Management, I was constantly surprised by the lack of their knowledge of the tools that could help them better manage their Business. In one of my presentations at a Microsoft Seminar to CIO’s I used an example of an end-to-end process, “Cash-to-Cash”; and how the process could be decomposed into lower level processes allowing performance metrics to be applied to better manage their Working Capital. But I could see from the look on their faces that they did not understand and would not be able to communicate this approach to their Companies Management Team. I repeated this presentation at a CIO Magazine event, where I was a keynote speaker, and once again could see a lot of blank looks on the audiences faces.

I have been in the Enterprise Software business for many years. One of the complaints from senior management, that was consistently voiced, was that the software was great for operational staff.  But it did not present the information in a form that they could use to manage their businesses. This mantra seems to have died, and I am beginning to be concerned that the new generations of managers do not have the intuitive skills required to run a successful business.

Attached to this blog is a Newsletter I produced on this subject which was published in CIO Asia Magazine. It was my first attempt to try and create and awareness of a potential problem looming on the business horizon.

 With the concerns over the environment, the erratic economic cycles, and the modern managers inability to respond quickly to change it is essential we apply the available technology too continually improve our work environment.

BIZIntelligence_JANUARY_2009_ISSUE_200109.pdf (139.98 kb)