Direction, traction, and speed. When you are driving a car, you directly control all three. You can turn the steering wheel to change direction. You can downshift the gears to go up a steep hill to get more traction. You can step on the gas pedal to gain more speed. However, for senior executives who manage supply chains, they do not have direct control. Why not? Because they can only achieve improvements by influencing other people - namely, their employees. And employees can sometimes act like children. They do not always do what you tell them to do, and sometimes they do the opposite of what they are told.

It is a tough time for senior managers. Customers increasingly view products and service-lines as commodities and place pressure on prices as a result. Business mergers and employee layoffs are ongoing, and inevitably there is a limit that is forcing management to come to grip with truly managing their resources, not just monitoring them. There is evidence that it is also a tough time to be a chief executive. Surveys by the Chicago-based employee-recruiting firm, Challenger, Gray & Christmas, Inc., repeatedly reveal increasing rates of job turnover at the executive level compared to a decade ago. In complex and overhead-intensive organizations where constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure to execute their strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward economic value creation and other more strategic directives? How do they re-gain control of the direction, traction and speed for their enterprise? Performance management (PM) provides managers and employee teams at all levels with the capability to move directly toward their defined strategies like a laser beam.

Value Chain Analytics

A supply chain simply moves products across multiple trading partners whereas a value chain generates a profit accomplishing this. Measuring true performance, not just hundreds of metrics destined for little use in briefing books, is a major challenge for supply chain managers. Increasingly measures must widen their horizon beyond the four walls of a company to encompass trading relations with upstream suppliers and downstream customers. This is because today it is no longer sufficient to be the most agile, lean, and efficient firm. You are co-dependent on all of your trading partners to also be agile, lean, and efficient.

In the 1990s business embraced supply chain management to automate trading relationships and increase efficiencies. However, while these practices eliminated costs (or in some cases only shifted them), they didn't fully address the key challenges facing supply chain managers:

• Adversarial relationships - While each trading partner knows there are mutual profits to be gained, decades of arms-length and "win-lose" adversarial behavior has precluded further efficiency gains.
• A sub-optimal internal focus - Organizations naturally look internally to improve their financial performance. However, the potentially larger profit opportunities exist in the buyer-seller interface where redundancies and unjustified requirements lie. An internal focus neglects the positive impact from identifying and realizing the cost savings and service level improvements from joint mutually beneficial initiatives.
• A procurement focus - Too often cost reduction reverts to placing immense pressure on suppliers for price reductions or containment without regard to effects on service levels.

These are fostering the need for collaboration among trading partners, but most companies do not know how to get started. With improved measurement and displaying of shared cost data, and the root cause cost driver data, cost transparency across the supply chain is made visible. Collaboration can be stimulated. Performance management is a catalyst for improvement.

What is Performance Management?

A simple definition of performance management is "the translation of plans into results - execution." It is the process of managing an organization's strategy. For commercial companies, strategy can be reduced to three major choices:

1. What products or service lines should we offer or not?
2. What markets and types of customers should we serve or not?
3. How are we going to win?

Although PM provides insights to improve all three choices, its power is in achieving number three - winning by adjusting and executing strategies. PM does this by helping managers to sense earlier and respond more quickly and effectively to uncertain changes.

Think of PM as an umbrella concept that integrates the business improvement methodologies you are already familiar with (or likely have heard the terms) with technology. In short, the methodologies no longer need to be applied in isolation - they can be orchestrated.

PM is sometimes confused as a human resources and personnel system. It is much more encompassing. PM describes the methodologies, metrics, processes, software tools, and systems that and manage the performance of an organization. PM is overarching from the C-level executives cascading down through the organization and its processes. From the top desk to the desk top. To sum up its benefit, it enhances broad cross-functional involvement in decision making by providing tremendously greater visibility with accurate, reliable, and relevant information - all aimed at executing an organization's strategy.

To minimize anyone's confusion, there is no single PM methodology because PM spans the complete management planning and control cycle. Think of it as a broad end-to-end union of solutions including three major purposes: collecting data, transforming and modeling the data into information, and web-reporting it to users and decision makers. Many of PM's component methodologies have existed for decades or have become recently popular, such as the balanced scorecard and collaborative forecasting, forecasting, planning, and replenishment (CPFR). Some of PM's components, such as activity-based cost management, are partially or crudely implemented in many organizations, and PM refines them so that they work in better harmony with PM's other components. Early adopters have deployed parts of PM, but few have deployed its full vision.

The term "knowledge management" is frequently mentioned in business articles. It sounds like something an organization needs, but the term is somewhat vague and does not offer any direction for improving decisions. In contrast, the main thrust of PM is to make better decisions that will be evidenced, and ultimately measured, by outputs and outcomes.

That Elusive Magic Pill

Executive management's greatest challenge is in communicating its strategy. If asked to describe their organization's strategy, most employees and managers cannot adequately articulate it. Employees can effectively implement a strategy only when they clearly understand the strategy and how they contribute to its achievement. An integrated suite of methodologies and tools - the PM solutions suite - provides the mechanism to bridge the business intelligence gap between the CEO's vision and employees' actions.

Many organizations, however, jump from improvement program to program hoping that each new one may provide that big yet elusive competitive edge. However, most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change - particularly a long-term sustained change. The key for improving is integrating and balancing multiple improvement methodologies.

PM tightly integrates the business improvement and analytic methodologies executives are already familiar with. These include strategy mapping, balanced scorecards, costing (including activity based cost management), budgeting, and forecasting, and resource capacity requirements. These methodologies fuel other core solutions such as customer relationship management (CRM), supply chain management (SCM), risk management, and human capital management (HCM) systems, as well as Six Sigma. It is quite a stew, but they all blend together.

In the end, organizations need top-down guidance with bottom-up execution. PM does this by converting plans into results. PM integrates operational and financial information into a single decision-support and planning framework. And based on a common database platform, it provides "one version of the truth" rather than disparate inconsistent data that annoys both employees and customers. Simply put, PM helps an organization to understand how it works as a whole.

Strategy Maps and the Balanced Scorecard

Leadership's role is to determine strategic direction and motivate people to go in that direction. However, senior executives are challenged and usually frustrated with cascading their strategy down through their organization. Executives and management consultants have hailed the balanced scorecard as the new religion to resolve this frustration. It serves to communicate executive strategy to employees and also to help navigate direction by shaping the alignment of people with strategy. The balanced scorecard bridges the substantial gap between the raw data spewed out from business systems, such as enterprise resource planning systems (ERP) and the organization's strategy. In addition, it provides immediate and visual feedback through graphical meters displaying differences between actual performance and the targets set by management.

Despite much publicity about the balanced scorecard, the strategy map that precedes the development of the scorecard is considered to be much more important. Strategy maps enable leadership to motivate people by serving as a guide with signposts and guardrails. Strategy maps explain high-level causes and effects with if-then logic, helping executives choose the best strategic objectives and the supporting projects and action items that will help the company attain them.

One can think of strategy maps and scorecards similar to how financial analysts rely on balance sheets and income statements to describe an organization's financial health. Strategy maps and the feedback from its companion scorecard describe an organization's strategic health and consequently its chances for increasing prosperity. The Scorecard expresses the strategy in measurable terms communicating what must be done and how everyone is progressing.

An Iterative Process

Similar to the popular 'plan-do-check-act (PDCA)' iterative cycle made popular by W. Edwards Deming, the famous quality improvement expert, performance management also has an iterative cycle. As Figure A illustrates, imagine performance management as a wheel with three elements or arcs: focus, communicate, and collaborate. The figure also shows how fact-based managerial accounting data and operational data provide input to the performance management wheel.

1. Focus - The process of managing strategy begins with focus. You never have enough money or resources to chase every opportunity or market on the planet. You have to think in terms of that you are continuously limited to scarce and precious resources and time, so focus is key and strategy yields focus. In this important initial step senior management defines and continuously adjusts its strategy. And next, by mapping cause and effect relationships with its strategy map, it defines strategic objectives and higher impact action steps and projects that will achieve those objectives. Companies can ideally turn big goals into small, manageable projects that can actually be accomplished. The first step in this translation is to create a set of strategic themes that will bridge the gap between the existing state of operations and the desired state. These themes then organize the work of the company. By focusing on critical areas, everyone can identify the true sources of business failure, as well as the best practices that lead to future success.
2. Communicate - The process of managing strategy continues with communication. The key is for senior management to articulate its strategy to employees in a way they understand it. Along with articulating strategy comes the all-important feedback to employee teams. "How am I doing on what is important?" The balanced scorecard is the key tool for communicating the strategy. Think of scorecards as the drive gears of the strategy map. Think of a scorecard as having carefully selected and defined indicators and measures, each weighted to reflect their relative level of importance. Think of a scorecard as a set of chain-links of the strategy map's strategic objectives where each chain-link uses "if-then" relationships with leading and lagging measures to drive work efforts to align with organization's mission and vision. If properly implemented, a scorecard enables all employees and managers should be able to quickly answer a powerful question: "How am I doing on what is important?" By integrating, distributing and analyzing enterprise-wide information an organization gains the power to act on this information - ahead of its competitors.
3. Collaborate - The process of managing strategy ends with collaboration. By aligning various strategies among business units, the organization taps into the collective knowledge of its employees and unleashes each person's potential. From the "top desk" to the "desk top," e-mail discussion threads can be created for faster consensus and truly make executing strategy everyone's job. Employees do not need to wait for their managers to direct them but rather they can actively make decisions. Collaboration in this sense is all about collective dialog.

Ultimately, executives can move beyond the traditional practice of focusing on backward-looking financial results by using scorecards and strategy maps to focus on their organizations' strategic objectives in the areas of learning, growth, innovation and process. They can focus on non-financial leading indicators, measured during the period, and that ultimately result in the organization's financial performance. By doing so, organizations can achieve their customer-facing objectives and subsequently meet their financial objectives.

Fact-based Data

In the absence of facts, anyone's opinion is a good one. And usually the biggest opinion wins. A major benefit of PM is that when everyone gets the same facts, then they generally reach the same conclusions on how to act.

What makes today's PM systems so effective is that work activities - what people, equipment and assets do - are the foundations of PM reporting, analysis and planning. These work activities are the keys in defining the actions and projects essential for meeting the strategic objectives constructed in strategy maps and measuring the outcomes highlighted in scorecards. Activity-based cost management (ABC/M) systems can be used to accurately measure work activities such as process costs, output costs and customer profitability. As illustrated in Figure B, ABC/M then applies its data for both top line revenue growth and operational cost management - with a subset of ABC/M's measures serving as key performance indicators (KPIs) used in the balanced scorecard.

Old Wine, New Bottle?

Some view the successful coordination and integration of PM methods and tools as simply "old wine in a new bottle" - meaning PM is just a repackaging of existing methods and software already available and not a radically new solution. In contrast, others view performance management as "new wine in an old bottle." That is, PM systems provide us - executives, managers and employees - with visible, relevant, accurate and timely intelligence from existing data not previously available.

Regardless of which view is correct, the term "performance management" is now widely accepted by the IT research analyst firms, who proclaim that combining the components of PM in a unified approach makes more sense than treating individual methods in isolation.

Many organizations report measures, but they are without depth. Users can view a result, but whether it is good or bad, they are unable to investigate the underlying cause. A strategy-focused organization enables targeted feedback on strategic performance to specific employee teams in order to effect continual strategy and implementation improvements. An organization must be vigilant and look for potholes on even the best roads. Performance management involves people knowing that all members of their organization are focusing, communicating and collaborating on strategy from a single vantage point. It aids in everyone's understanding of how one performance measure affects another. It also involves digging deeper to see causal relationships and manage work activities across your entire enterprise so that everyone is on the same page.

The appeal of PM is that it realizes that there is no sun around which lesser improvement programs, management methodologies or core processes orbit. PM helps to orchestrate all these efforts to improve an organization's alignment with its strategic objectives, resulting in better direction, traction and speed - and most importantly sustaining improved performance longer term. PM provides managers and employees with the power to know how to act proactively, before events occur or proceed so far that they demand a reaction.

Using Business Intelligence

Organizations that are enlightened enough to recognize the importance and value of their data often have difficulty in actually realizing that value. Their data is often disconnected, inconsistent, and inaccessible resulting from too many non-integrated single-point solutions. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily. Unlocking the intelligence trapped in mountains of data has been, until recently, a relatively difficult task to accomplish effectively. Typically one finds different departmental data warehouses built on different platforms using combinations of tools, some non-standard, some with expired maintenance support, and some pre-built in a tool purchased from a vendor no longer in business. This results in unintended barriers blocking systems from cleanly communicating amongst themselves. All organizations are reaching a point where it is important for computers to talk to other computers.

Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power heralding a new era where creating vast pools of digital data is becoming the preferred solution. As a result, there are now superior tools that offer a complete suite of analytic applications and data models that enable organizations to tap into the virtual treasure trove of information they already possess, and enable effective performance management on a huge scale.

These advanced software vendors' offerings are timely to solve today's problems in commerce and government. The market has been evolving from wanting just business intelligence tools to wanting complete solutions. This includes customizable horizontal solutions that apply across all markets (e.g., human capital management and scorecards), as well as vertical solutions for specific industries such as retail, banking, health care, or manufacturing. Figure C illustrates the location of key components of a performance management information system. The figure also reveals how data from disparate sources can be extracted and stored for later retrieval for analysis.

Making It Work

Rising specialization, complexity, and value-adding services cause the need for more, not less, PM. Despite the impact that technology and more flexible work practices and policies have on continuously changing organizational structures, without ongoing adaptation the correct work at acceptable service levels will not get done. All employees must have some grasp of managing for results. Somehow their collective performance must be coordinated. A united and sustained performance is a challenging part of management. PM aids in accomplishing this goal.