A Search for Competitive Advantage
Perhaps one of the most tangible returns for commercial organizations is the value of their stock. Stock prices are in general a reflection of performance relative to the market growth and the performance of competitors. Effectiveness requires the development and implementation of strategic plans. Some investors and analysts feel, in fact, that execution is more important than the strategy itself1 (see Figure 1). To add value for organizational stakeholders, then, enterprises must find ways to improve strategic execution.
Figure 1: The ability to execute strategy may be more important than the strategy itself.
Because the execution of strategy is so vital, the systems that support the process are equally important. In fact, a study of 113 companies located in the United States, Europe, and Asia, half of which had $5 billion or more in annual revenue, showed that companies with a formal strategic performance measurement (SPM) system performed better in the stock market than did their peers2 (see Figure 2).
Figure 2: The impact of Formal Strategic Performance Measurement Systems (SPMs)
Consider the value of systems that enable an organization to be able to beat analysts' expectations by a penny a share, that enable strategy to be implemented quickly and successfully, or that warn when current or future performance is unlikely to meet strategic goals. From a value perspective, it would seem that the "next big thing" ought to enable senior executives to confidently and knowledgeably answer questions that help them formulate (and reformulate) strategy on an ongoing and real-time basis.
Corporate performance management (CPM) is a term coined by Gartner to describe "the methodologies, metrics, processes, and systems used to monitor and manage the business performance of an enterprise."3 In this context, methodologies are management techniques and tools such as scorecards, economic value add (EVA), and activity-based management. Metrics are the specific measures used within those methodologies. Processes are the procedures that an organization follows to implement and monitor corporate performance. Gartner identifies the key processes that drive CPM as strategy formulation, planning, budgeting, forecasting, management reporting, and analysis4 (see Figure 3).
Figure 3: Key CPM Processes Identified by Gartner
CPM systems are the technology solutions that combine the methodologies, metrics, and processes into a single enterprise-wide management system. Besides consisting of a single application, a CPM system differs from other approaches to performance management in that it leverages both technology and best business practices to help executives answer the key questions around the formulation and implementation of strategy (see Figure 4).
Figure 4: CPM systems help enterprises answer questions that support the
formulation
and implementaiton of strategy.
A CPM system enables a closed-loop process that starts with understanding where the organization is today, where it wants to go to, what targets should be set, and how resources should be allocated to achieve those targets. Once plans have been set, the system then monitors the performance of those plans, highlights exceptions, and provides insight as to why they occurred. The system supports the evaluation of alternatives from which decisions can be made, which then closes the loop by leading back to deciding where the organization wants to go.
To support the formulation and implementation of strategy, a CPM application begins by integrating enterprise-wide planning, budgeting, forecasting, consolidation, reporting, and analysis. It supports methodologies for linking strategy to the allocation of assets (financial and nonfinancial) so that strategies can be transformed into action. A CPM application enables executives to communicate and drive strategy down throughout the entire organization in a way that helps people act and make decisions that support strategic goals. Gartner predicts that organizations that effectively deploy CPM solutions will outperform their industry peers and that all enterprises should understand the implications of CPM and immediately start building their strategy.5
Seven Characteristics of a CPM System
In order to gain the true benefits of CPM, a comprehensive system should:
1. Integrate completely. A CPM system encompasses planning, budgeting, forecasting, financial consolidation, reporting, and analysis and treats them as a single, continuous process. It supports senior management in the evaluation, selection, and communication of strategic initiatives. It helps budget holders assign money, people, and assets to the chosen initiatives to achieve corporate strategic goals and also enables predictive forecasting. All these functions are performed within a single application that is maintained centrally, holds common definitions on calculations, is financially intelligent, and stores a single version of the truth.
2. Extend through the enterprise and Web. A true CPM system is extensible across the enterprise and provides an infrastructure for collaborative processes to take place around the globe. It is Web-based, making it possible for users to work from anywhere at anytime. System users must not be confined to a specific machine or location. CPM systems exploit the Web and provide secure user access to any relevant information such as timetables, assumptions, comments, reports, analyses, actuals, and forecasted results.
3. Support multiple methodologies and metrics. According to a study by Bain & Company, executives use an average of 106 different "tools" to manage their businesses. These tools include a combination of methodologies and metrics, and the combination changes as time passes and as executives come and go.6 Therefore, a CPM system must be able to support a wide variety of methodologies and metrics. Because the success of strategic initiatives is not always measured in monetary units, a CPM system must be able to support nonfinancial metrics.
4. Automate the processing of data. If today's CFOs and finance departments are to become true business partners, they must be allowed to spend more time analyzing data and less time processing, verifying, correcting, and formatting it. Therefore, a comprehensive CPM system automates the calculation of ratios, currency conversions, allocations, minority interests, intercompany eliminations, audit trails, consolidation of results, reports, and more. The system should be capable of performing these functions on a real-time basis or automatically.
5. Support collaboration. A CPM system must be designed with collaboration in mind. A true CPM system supports existing collaboration facilities such as email, instant messaging, bulletin boards, and text comments. With today's technology, users can collaborate with colleagues no matter where they are in the world or what time of day it is. Emerging technologies, such as Microsoft's .NET platform and XML-based business communication formats, will make ongoing collaboration even easier both inside and outside the enterprise.
6. Provide insight. A CPM system can summarize large volumes of data and present it in a format that is easily understood (see Figure 5). Examples include the creation of financial documents (e.g., income statement, balance sheet, and cash flow statement) as well as supporting analyses in both tabular and graphical formats. A CPM system also provides strong analytical capabilities, such as trend analysis, sorting, and charting, transforming data into insight.
7. Focus attention. A true CPM system focuses users' attention on unanticipated occurrences and results rather than forcing business professionals to hunt for this information in stacks of reports or to search through a combination of applications and computer screens to draw conclusions. A CPM system can do this in a number of ways, including highlighting data using color-coding and sending automatic email alerts to users when exceptions occur.
Figure 5: CPM systems summarize and present large volumens of enterprise-wide
data in ways that are easily comprehended by system users.
Early Adopters Benefit From CPM
While corporate performance management may be a relatively new term for some, many forward-looking organizations are well on their way to implementing CPM systems. Most early adopters of this performance management framework began by identifying their biggest strategic challenge: budgeting, which takes too long to complete, doesn't keep up with changing business circumstances, has little relationship to strategic initiatives, and delivers too little value for the amount of time and effort spent to create it.
Fixing the Budget
"For years, we handled the input and review of budget information via spreadsheets," says Bob Graves, budget administrator for the San Diego Unified Port District.7 "Our staff assistant maintained a monstrous, multiple-megabyte spreadsheet that had almost everything in it, including entries for the entire chart of accounts. She'd copy one worksheet for each of the 40 departments onto individual diskettes, then mail each of them out for input and review. As departments submitted revisions, we had the perennial problem of having multiple versions of the information. Then it took two weeks to publish the budget book once all the numbers and worksheets were final."
In 2000, the port implemented the first phase of a new CPM system to help with budget preparation. The system's central database helped the port eliminate the version-control issues of traditional spreadsheets. In addition, it helped dramatically decrease cycle time, which became a factor when a major reorganization happened in the middle of the budgeting cycle that year. The reorganization affected about 40 percent of the port's departments. In addition, once the budget was re-created, the organization had to make cuts and resubmit the budget. "Management wanted new numbers the next day — and we were able to do it with the new system," reports Graves. "What used to take a week could now be done in a day."
Interestingly, Baker and Taylor, a leading supplier of books, movies, music, and information products, has found little change in the budgeting process cycle time. Instead, the company has benefited from participation, accountability, and accuracy. "Before implementation of the CPM system, finance did 50 to 60 percent of the budget. It was very complicated with spreadsheets. About 10 people worked on the budget," says Brad Lucas, VP of finance for Baker and Taylor.8 "Now, we are able to involve the business units (more than 40 people) in the process — the people who actually drive sales, expenses, and so on. The budgets are more accurate, which then leads to data that's more accurate. It snowballs. Everything keeps getting better and better. It's all about accurate data and access." Managers have a better understanding of the numbers, better communication of this information throughout the organization, and an increased focus on strategies to improve the bottom line.
Improving Strategic Execution
As early adopter systems and processes become more mature, focus shifts from simply improving budgeting to implementing and monitoring the execution of corporate strategy. Such is the case with Advantage Sales & Marketing, a member-owned sales and marketing agency that provides global sales, marketing, and retail services to the consumer packaged goods industry.
The first phase of the CPM system implementation was rolled out to financial personnel in 2000. Data was integrated into the system nightly from the organization's multiple member accounting systems. Functionality of the new system encompassed the creation of income statements, balance sheets, and cash flow statements, as well as calculation of ratios, automated allocations, and the ability to perform multidimensional analysis.
Phase two added sales management functionality to the system. Data was integrated nightly from the enterprise's order management system databases. Now, in addition to the finance staff, management and sales personnel throughout North America access the system directly and easily evaluate data that was available only in hard copy reports previously.
Today, 500 people use the system. "Our ability to easily access the system and use it to slice and dice revenue by client and by customer on any desktop in the world is a huge advantage," reports Bob Vesely, executive vice president and CFO of Advantage Sales & Marketing.9 "The Web makes it so easy and cheap to provide consistent communication and measure performance across our organization."
While early-adopter approaches to CPM have differed in content and scope to date, Gartner sees several common benefits to these organizations. They note that the personal goals and actions of employees are increasingly aligned with strategic objectives. There is an increased cross-functional alignment with corporate strategic objectives. They note that the integration of business intelligence applications with transactional data makes methodologies, such as scorecarding, more effective. And short-term goals (e.g., improved visibility of key performance data) can lead to long-term strategic benefits (e.g., improved decision-making and sharing of best practices).10
Many organizations haven't begun to implement CPM or reap these benefits. To do so, they will need to know how to evaluate and select the right system to support their vision.
Evaluating CPM Solutions
Today, a host of vendors have jumped on the CPM bandwagon, claiming to deliver comprehensive corporate performance management capabilities. However, many vendors have simply repackaged their existing, discrete applications and are selling them as an "integrated" performance management solution. In reality, these applications cannot deliver the accuracy, insight, agility, and enterprise-wide view that are characteristics of true CPM systems.
Organizations must carefully and critically evaluate CPM vendors: the resulting system will impact the entire enterprise. This is no time to make a decision on gut instinct. The evaluation process should include vendor and product research, detailed product evaluation, and a cost of ownership assessment.
Vendor and Product Research
A number of organizations provide advice and information about CPM solution vendors. These groups range from specialized finance magazines to industry analysts who review and publish findings on vendor solutions. Be aware that vendors themselves influence most free sources of information. Management consultancies will carry out evaluations on behalf of an organization for a suitable fee. Recommendations may not be as impartial as one might expect. Therefore, it is important to investigate whether the consultancy has strategic alliances with particular vendors.
Potential vendors must be committed to CPM and provide a proven, modern solution. To establish this, organizations can ask vendors the following questions:
- What is the vendor's background? Does the vendor have expertise and a proven, positive history in the area of CPM?
- Did the vendor develop the solution being sold, or is the company partnering with someone else? Partnerships can break down, so examine and assess support arrangements and commitments.
- How long has the vendor's solution been on the market? Is it an old solution that is about to be replaced? Will the product still be around five years from now?
- Does the vendor use current technologies? In other words, find out whether they use Web protocols and mainstream database technologies. What is the vendor's vision for future platform support?
- What do industry analysts say about the vendor and product? Who are the vendor's customers, and what do they say about the solution?
- Can the vendor support you? Do they operate where the users are located? Can they support you internationally in local languages and at any time of the day or week?
Detailed Product Evaluation
Once the list has been narrowed down and vendors have been invited to speak about their products, organizations should beware of any vendor that arrives armed with a canned demonstration. Naturally, such a demonstration will show the vendor's strengths but may not reveal how the solution will — or will not — address the organization's business problems. Instead of agreeing to view a canned presentation, inform the vendor about the basic business needs. Ask for a demonstration on how a given solution will meet those specific needs. A good vendor will respect an organization's time and get straight to the point. During the detailed software evaluation, the organization will want to confirm or discover:
- Whether the product has the functionality and capability to solve both the current and future requirements;
- Whether the staff supporting the project can maintain it;
- Whether the product delivers additional capabilities and features that will give the business additional advantages; and
- Whether the vendor is viable. Verify their understanding of the business issues to be resolved, their expertise in the area of CPM, and the likelihood of establishing a relationship that will work for both organizations.
Cost-of-Ownership Assessment
In addition to carefully scrutinizing the operational aspects of the product, the organization should carefully consider the true cost of ownership of a solution. The initial software purchase is unlikely to be the largest cost incurred. Take into account implementation, user training, and software maintenance costs. Find out what resources will be required to deliver a working solution and how much effort will be involved. Discover whether the vendor has a methodology that will guarantee a successful implementation. It's easier to perform a simple demonstration than it is to implement a robust, enterprise-wide CPM solution in an organization's specific IT environment.
The organization should understand exactly what each vendor is proposing. Are they simply selling software? How much consultancy time will they provide? If consultancy is involved, what is being guaranteed, the delivery of a solution or simply an estimate of time required?
Only when the organization has conducted thorough vendor and product research, detailed product evaluation, and cost-of-ownership assessment can it make an informed decision. A software vendor scorecard can help organize the comparison of vendors and their solutions.
Conclusion
With shareholders demanding better strategic execution and accountability, and with globalization making the business landscape ever more competitive, organizations have begun to recognize the value of integrating their management processes around the implementation of strategy.
Software giant Microsoft has recently entered the market, teaming with veteran corporate performance management software provider Comshare. According to John Van Decker, an analyst for Meta Group, "We're looking at a blessing of the space with Microsoft's entry. We're looking at a space that has been increasingly interesting to Global 2000 companies. They have implemented business planning solutions and are looking to close the loop."11
Because it is not a simple or quick task to implement CPM processes, methodologies, metrics, and systems, the CPM adoption rate has been slow to date. However, Gartner predicts "visionary enterprises will exploit the slow pace of CPM adoption to create competitive advantage over the next two to three years."12 Indeed, CPM is the next big thing.
