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Strategic performance management helps companies to articulate, communicate, drive, and measure achievement of organizational strategy.

As investment analysts grow more concerned about an organization’s ability to deliver on its corporate objectives, companies must ensure that their performance is aligned with strategy. Too often a company’s share price takes a hit as a result of not fully executing strategy. Or even worse, a well-executed strategic initiative didn’t deliver the value expected. More organizations are looking closely at initiatives to help avoid these types of problems. Examples of such initiatives are integrated collaborative business planning, multidimensional profitability analysis, and the focus of this article: strategic performance management, or SPM.

SPM is based on the adage “you get what you measure.” It’s a management technique that translates business strategies into tangible results. Applying SPM, practitioners use a combination of financial, strategic, and operational measures to assess how well a company is achieving its objectives. SPM isn’t just about measuring financial performance, it’s about a framework designed to articulate, communicate, drive, and measure achievement of organizational strategy. An SPM system allows all levels of the organization to:

• Ensure operational plans are aligned to strategy;
• Measure achievement using balanced and relevant metrics;
• Articulate the organization’s shared vision and strategy;
• Set goals and objectives for all levels in the organization;
• Effectively allocate resources;
• Identify and prioritize critical initiatives;
• Make management decisions that are aligned to the strategic objectives of the organization; and
• Create clear accountabilities across the organization for results.

The Need for SPM

Has your organization identified its value-creating opportunities? Are these opportunities being leveraged? An organization needs to understand its key value drivers if it wants to improve shareholder value. By understanding the total performance picture and what can be considered an organization’s strengths and weaknesses, the highest value improvement opportunities can be pursued. SPM is about supporting the framework for developing value drivers relevant to an organization’s strategy and determining metrics, supportive of those value drivers, which will enable an organization to measure and manage its strategic execution.

Ask yourself the following questions. If you cannot answer these questions positively or readily then your performance management system may be deficient:

• Are the right metrics and drivers in place to support the execution of our strategy and deliver the desired financial results?
• Are our employees focused on our organization’s strategy?
• Are we leveraging the information in our systems to enhance decision-making?
• Do we provide our employees with clear direction to guide their decision-making?
• Do we have tools that are easy for our people to use and understand? and
• Do we have access to real-time information?

SPM assists an organization in achieving its strategic aims by aligning the whole organization to the corporate strategy. SPM does not just communicate corporate strategy down through the organization but it links strategic objectives and performance measures at all levels of the organization. Every employee becomes not only aware of the organization’s strategy, but also aware of how he or she can create value in the organization, and they are incentivized to achieve this.

The SPM Framework

Many organizations still focus their performance management purely on financial measures (value-based management), such as economic value added (EVA), total shareholder return (TSR), and return on capital employed (ROCE). Over the last decade, there has been a move toward more balanced measurement, principally driven by Kaplan and Norton’s balanced scorecard (BSC). This provides a more qualitative approach to determining indicators, but many organizations still over-emphasize the financial quadrant (as they are often still the key corporate-level indicators), or they simply populate the other BSC quadrants with metrics relevant to the organization but not strategically focused or aligned. SPM isn’t about specifying any particular performance measurement methodology; it’s about developing an overall framework that communicates strategy, supports alignment to this strategy throughout the organization, measures achievement of strategy, and provides information for personnel to act upon.

The first stage in developing an SPM system is to identify value drivers relevant to your organization and appropriate metrics to measure achievement of those drivers. Some form of value targeting analysis is usually conducted (see Figure 1). Then the drivers are ranked by which have the biggest influence on value. When determining the metrics to support the key value drivers, often a series of metrics are determined and are cascaded down through the organization. This ensures alignment through the organization against the value driver.

Figure 1: Shareholder Value Drivers

An important aspect of the cascade of objectives and metrics is to understand and focus on alignment across the organization. Most organizations are functionally organized, which can see the organization being pulled in different directions rather than working as one. Cause-and-effect relationship studies explain how different activities and functions affect each other.

Once the right metrics are identified, the organization can determine an appropriate target for each metric. Best-practice organizations set targets based on what the competition can achieve, or by international benchmark standards, rather than by historical views of an increment over prior performance. This practice is particularly appropriate in the current difficult economic climate. Targets such as a company’s ROCE benchmarked against its competitors current performance is much more meaningful than comparing it to last year’s ROCE.

The overall result of the above steps is not just communicating corporate strategy throughout the organization, but truly cascading the strategy down throughout the organization:

• Team and individuals know how their operational roles can impact the overall strategy; and
• Operational and strategic plans are aligned.

The organization can then measure achievement of targets (plans) and, more importantly, learn from the outcomes to facilitate better and stronger performance.

A strategic learning feedback loop is one of the most important parts of the SPM system. It ensures that the organization isn’t just measuring results, but also assessing results against strategy. This ensures the organization is not only achieving its financial and operational targets, but also that it isn’t too focused on one area to the detriment of other areas. It also allows the organization to adjust course if needed. Figure 2 illustrates this distillation of performance metrics and the linkage of day-to-day operations to the organization’s vision and strategy.

Figure 2: SPM Feedback Loop

An important part of the SPM system is to ensure that the actions of personnel are aligned with organizational strategy. This can be achieved by linking the targets identified at an individual level (or relevant functional level) to remuneration and ensuring that personnel have the right competencies and tools to allow them to do the job. An employee, who has a clear understanding of what they need to achieve to support value creation in the organization, who has the right skills, knowledge, and responsibility, and who is compensated accordingly, will drive to achieve strategic goals (see Figure 3).

Figure 3: Behavioral Alignment

You may think it’s strange that technology hasn’t been mentioned as a solution. Technology often is seen as the performance management solution: “Implement XYZ package and all your problems will be answered.” The reality is that technology only enables the SPM process. Technology, such as data warehouses and analytical reporting applications, allow organizations to access broad performance data locked away in business transactional systems (ERP — finance, supply chain, human resources; customer relationship management, e-commerce applications). This reduces the burden on the organization to manually capture and report this information.

Saturn Communications

Saturn is a full-service telecommunications provider (telephony, Internet, mobile, and cable TV) operating in a totally deregulated telecommunications market building out its own hybrid fiber coax (HFC) network. Value Driver The cost of building its own network that includes the last mile (actually installing to a customer’s home) had a strong influence on Saturn’s value analysis. Customer churn quite obviously had a strong negative effect on realizing a return on the network investment to the customer’s house. Acknowledged research highlights that it is 10 times cheaper to retain a customer than acquire a new customer, this is obviously exacerbated in Saturn’s case. Customer retention was thus identified as one of Saturn’s key business value drivers. Cascade and Organization Alignment While customer retention, along with customer satisfaction and dissatisfaction, were monitored at a corporate level, more specific metrics were monitored in individual departments. For example, in the call center, metrics such as call answer time and number of calls resolved without pass-offs were monitored, as these were specific to how the call center could influence customer retention and satisfaction. To ensure that the call center did not achieve these customer-service objectives at the cost of productivity and overall cost, the metrics were balanced by also monitoring metrics such as average call duration and number of customer service representatives per 1,000 customers. Behavioral Alignment Saturn recognized the importance of the influence that its installation crews could have on a customer’s experience. This was reinforced with the installers being given responsibility to walk customers through a welcome pack and the installers having to remove their boots before working inside the customer’s house. The installers quickly learned that leaving a positive impression on the customer could have a positive influence for Saturn in the future. Customers often quoted the no-boots-inside rule to their friends. This often had the effect of making a salesperson’s job that much easier when they were to call on the customer’s friend at some future date.

 

This technology is thus facilitating the provision of broad relevant metrics in a timely manner ensuring that personnel are equipped with solid fact-based information for making quick and smart decisions. Web technology is allowing organizations to deliver individually focused performance metrics directly to users via whatever Web-enabled channel they prefer — desktop, PDA device, or mobile phone. Open architecture standards are allowing easy sharing of information across platforms. Both of these technologies facilitate the deployment of performance information to large numbers of users, supporting the alignment of strategy and its execution throughout the organization.

 

FIgure 4: Cause-and-Effect Relationship Map

SPM Success

The ultimate goal of SPM is to develop a performance culture in the organization focused on value creation. This means that all employees understand the organization’s strategy, the organization’s key drivers and priorities, and their role in achieving these. In this culture every person is empowered, encouraged, and motivated to use this information to act to achieve the agreed goals.

If you are going to implement an SPM solution, note these success factors:

• A solid understanding of the key value drivers throughout the organization;
• Performance measures indelibly linked to strategy;
• Measures that drive actions in the organization;
• Clear performance targets, appropriately linked to compensation;
• Flexibility to change value drivers as business conditions change; and
• Efficient mechanisms for reporting metrics.

European Mobile Carrier

A European mobile carrier had identified churn as one of its key metrics to monitor. As part of the process of reviewing its existing scorecard to drive greater alignment across the organization, it was recognized that different functional activities impacted this metric in different ways: • Sales and service would focus on inbound call handling, call answer time, and service response time to drive customer satisfaction and thus reduce churn; • Network operations would focus on network call quality and network coverage as key customer value requirements to ensure satisfied customers; and • Credit and collections was instead focused on cash collections and reducing bad debt. This had the effect of driving up disconnections of low-quality, nonpay customers, which in turn increased churn. As part of analyzing its cause-and-effect relationships, the carrier broke churn down into what they defined as voluntary churn (the customer’s choice to move to a new service provider) and involuntary churn (the company has terminated the relationship with the customer). This has several advantages for the organization (see Figure 4): • Senior management at a corporate level could focus on strategic actions to reduce overall churn, such as credit management policy – targeting the right quality customers; • Line functions can focus and be held accountable against metrics that they can influence; and • Opportunities are provided to generate greater cross-functional alignment and overall value for the organization. For example, to improve involuntary churn the mobile carrier could decide to measure account managers (of large or corporate accounts) on their customers’ collections to focus them on obtaining payment and not just leaving it to the finance collections department.

Conclusion

For performance management to add value to your organization, it is not just about measuring results. Your performance management system needs to be supportive in:

• Determining your organization’s value drivers;
• Breaking down corporate strategy across the organization so it is directly relevant at each level (corporate, department, team, and individual); and
• Identifying metrics related to the value drivers and cascading these so they are appropriate at each organization level.

Measurement of these metrics should then provide information for the organization to act on to ensure it is achieving its strategic vision and creating value. An organization with a strategic performance management system that drives a value creation performance culture will succeed against less focused competitors.

About the Author

Title: 

Manager

Accenture

Tim Kerr is a manager in the Accenture Finance & Performance Management service line. He has particular expertise in performance management, planning and budgeting, value management, and credit and collections, with an emphasis on the telecommunications industry.