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Accenture

An integrated enterprise performance management framework helps drive betterdecisions and disciplined execution.

Many businesses view performance management as a “soft science” with few obvious benefits. However, there’s clear evidence that a comprehensive enterprise performance management (EPM) approach can make a major difference in the way that companies plan, forecast, monitor and manage business performance. Benefits can include:

• EPM improves the execution of organizational strategy. By facilitating better and faster decision making, it maximizes sustainable shareholder value by consistently promoting optimal resource allocation;
• EPM consistently defines and models the key drivers of both current and future value – financial and nonfinancial, tangible and intangible – and explains how these drivers interrelate;
• EPM promotes the management and optimization of business performance across a single enterprise or business network;
• EPM enables the identification and evaluation of performance-driving strategies, and facilitates the translation of these strategies into tangible tactics and plans; and
• EPM enhances the monitoring of strategy execution across the organization through improved forecasting, reporting and analytics.

Despite these potential benefits, the vast majority of EPM systems in place do not generate great value. While a recent Harvard Business Review study reported that best-in-class companies with EPM systems achieved 2.95 percent higher returns on assets and 5.14 percent higher returns on equity, these impressive gains were realized by fewer than one in four companies (23 percent) that utilize EPM.[1]

In addition, many organizations spend significant amounts on developing point solutions that consistently fail to deliver real value. By adopting a more comprehensive EPM approach, these organizations can be more proactive in their delivery of useful management information. They can also save money by focusing their efforts on those processes that maximize financial return.

Focusing on Improved EPM Capabilities

We live in a world that seems obsessed with performance management. A recent AMR survey of 363 companies indicates that 60 percent will increase EPM budgets, 35 percent will maintain current spending levels and only 5 percent will decrease EPM spending in 2005.[2] Why all this effort to improve performance management systems, when the evidence suggests that many fail to generate significant value? Both internal and external drivers are behind these efforts to improve performance management.

Externally, legislation such as the Sarbanes-Oxley Act (SOX) in the U.S. and the U.K.’s Operating and Financial Review are forcing organizations to disclose information on a wide variety of performance issues. Even in the absence of such legislation, it is clear that investment analysts are becoming increasingly interested in nonfinancial information – especially the “intangibles” that can provide insight into an organization’s future value creation potential.

From an internal perspective, traditional accounting measures that focus on tangible and past performance indicators tell only part of the story. It’s becoming more critical for companies to look at brand equity, people satisfaction and intellectual property as well. However, when internal reporting systems are examined, many focus predominantly on financial measures of what has happened in the past. Many organizations indicate a gap in their ability to adequately manage the full range of elements that drive their business.

The Emergence of Point Solutions

Those external and internal drivers have resulted in new and improved performance management methods. Frameworks such as the balanced scorecard, activity-based management and “beyond budgeting” have been developed. Organizations have spent significant sums of money implementing nonintegrated ERP systems, data warehouses, financial reporting packages, budgeting and forecasting systems, and scorecard/dashboard tools.

Through the analysis of performance trends and causal relationships, business leaders have tried to generate value by allocating resources more strategically. While they have seen some efficiency improvement, they have realized little in the way of more effective management systems and significant value creation. Sizable gaps remain in companies’ abilities to understand the true drivers of value in their business models. As a result, many executives are frustrated and dissatisfied with their EPM systems.

Most companies continue to struggle with improving performance management due to:

• The wrong metrics;
• The cost of data quality;
• Oceans of data;
• Islands of systems;
• Current management systems ignoring and under-managing value-creating assets; and
• The wrong incentives.

How Do the Most Successful Organizations Approach EPM?

While there is no single recipe for optimizing performance management, the following seven attributes can enable many high-performance companies to deliver sustained value creation through EPM.

1. An integrated framework for quick decision making and action.
2. A firm grounding in driving value, with an external value creation perspective.
3. A deep understanding of the organization’s critical value drivers.
4. An external, market-based approach to setting targets that minimize gaming and negotiation.
5. Dynamic evaluation of initiatives, planning and resource allocation.
6. Action driven by focused performance monitoring and analytics, with improved statistical relevance over time.
7. Key people, process and technology enablers to sustain high performance over time.

Many high-performance businesses and governments adopt these leading practices in a holistic framework for EPM (see Figure 1), enabling them to create the appropriate future vision in a phased and logically organized manner.

Sustaining High Performance Over Time

Over the past 20 years, a large number of companies have tried to address their performance management problems by implementing point solutions. These solutions have produced some efficiency increases, but they cannot deliver more effective integrated management systems supported by the key people, process and technology enablers that will sustain these improvements over time.

Research into high-performance businesses and governments shows a number of common leadership and productivity-enhancing characteristics, including:

• Leadership: Implementing a best-in-class EPM capability requires strong sponsorship and leadership. Conversely, effective leadership in high-performance businesses requires robust EPM capabilities.
• Value-focused structure: Form should always follow function. The structure of the organization should not be an impediment to value creation. Enabling an effective EPM capability requires cross-functional skills organized around how the work gets done.
• Skills and capabilities/talent: To effectively and successfully change its business performance management, the company must have the appropriate training and education programs in place to support the change.
• Value mind-set and culture: People at every organizational level must understand how individual actions contribute to the achievement of overall business goals.
• Aligned incentives and rewards: An incentive plan ties total returns to shareholders directly to current and future value performance, with multiyear budget targets driven by investor expectations. This eliminates bottom-up budget negotiations and gaming. Aligned incentives at lower levels of the organization should provide “line of sight” to focus on what really matters.

From a business perspective, there are a few important process enablers for sustaining EPM over time, including:

• Common performance language: Robust and consistent definitions are used for all key metrics, assets and decision support information requirements. This performance language “dictionary” should be consistently used to eliminate or minimize endless debate about such straightforward measures as customer, headcount, returns, etc.
• Standardized management processes: EPM is fundamentally about improving decision making in a way that drives sustainable value. Therefore, it is of tremendous value to clearly specify the processes and associated governance frameworks that define how key decisions are made (e.g., prioritization of value drivers, approval of capital investment, change in strategy direction, etc.).
• Information quality and integrity: Before embarking on an expensive technology project or data warehouse implementation, it is wise to consider the quality of information needed for business decision making. Within accounting rule making, a tension has traditionally existed between relevant information and reliable numbers. For management decision making, it is more important to get relevant information quickly than perfectly accurate information late.

For most companies, performance trends must be understood and the signal-to-noise ratio must be high in order to improve the quality of decision making. The key point here is that the company should set specific thresholds for the quality and timeliness of information, based on the decisions that are to be made with this information. This is very different from the traditional accounting paradigm.

In addition to process enablers, the search for performance management solutions has been greatly aided by recent technological developments. Many believe that implementing a technology solution (e.g., data warehouse, executive dashboard, budgeting tool, etc.) will solve their problems, but it is important to recognize that technology is not a panacea; rather, it is a key enabler for a robust EPM capability.

Technology enablers include:

1. Enterprise data model: This model specifies how data will be captured, aggregated and reported. It must be cross-functional (e.g., marketing, supply chain, etc.), cover intangible as well as tangible assets and take into account the company’s priorities for nontraditional data (e.g., customer satisfaction surveys, point-of-sale transactions, etc.). An enterprise data model for today’s organization is analogous to the common chart of accounts and “one version of the truth” that companies have focused on traditionally.
2. Integrated technical architecture: Technology vendors are creating integrated capabilities, either by developing their own tools or purchasing others’. At this point, it is unclear who will emerge as the leader, but capabilities to integrate technology should be taken into account when evaluating and selecting software. The potential power of an integrated technical platform is significant, as it eliminates redundancy and provides an effective management tool that enhances decision making and value creation.
3. Information access and delivery: Using a one-stop source facilitates the delivery of information, including self-service trends, market projections, customer satisfaction, competitors, suppliers and other data. The standard approach is to deliver this information (tools, processes, standards and timelines) across the organization.
4. Controls: Regulatory requirements (e.g., Sarbanes-Oxley in the U.S. and Basel II in Europe) make it increasingly important for organizations to ensure that their business processes have adequate internal controls. Some would argue that these controls focus predominantly on financial/statutory reporting and that they do not have a significant impact on nonfinancial performance reporting. However, SOX requires reporting transparency and faster reporting of significant events (i.e., real-time reporting). It is, therefore, important to have adequate controls across the entire performance-reporting infrastructure. Companies should view these new regulatory requirements not as a compliance burden, but as a catalyst for reviewing and improving their controls and information infrastructure across the entire EPM framework.

EPM Capabilities Drive Value and Enable Strategy Execution

There is a compelling value proposition for leveraging the benefits that highly developed EPM capabilities can deliver. Over time, superior EPM resources have a major impact on both organizational effectiveness and efficiency:

Effectiveness

• Focuses and aligns management on the key drivers of value;
• Provides fact-based guidance for value-based decision making;
• Enables a consistent process and framework for the evaluation of decision trade-offs (current/future) on investments;
• Supports driver-based planning and forecasting to enable predictive and dynamic resource allocation;
• Focuses strategy/operations around key value drivers; and
• Aligns incentives and rewards more closely with shareholder value creation.

Efficiency

• Streamlines planning and reporting processes using consistent key drivers of value;
• Streamlines decision making;
• Focuses time and effort, eliminates redundant work and minimizes manual intervention and errors;
• Integrates processes and controls to improve the integrity of data and quality of outputs;
• Provides a strong, value-based foundation for infrastructure improvements; and
• Provides a dynamic learning capability and leverages resources/time more efficiently.

Most companies achieve their vision in a phased approach (see Figure 2). EPM evolves to link strategy and execution — producing strong, sustainable returns over time to achieve high performance.

This white paper is based on a chapter in CFO Insights: Delivering High Performance written by Accenture and published by John Wiley & Sons in March 2006.

Endnotes

1. Christopher D. Ittner and David F. Larcker, “Coming Up Short on Non-Financial Performance Measurement,” Harvard Business Review, November 2003.
2. Jacqueline Coolidge and Eric Klein, “EPM Spending, 2004–2005: Enterprise Performance Management Grows Up,” AMR Research, Dec. 13, 2004.