Filling The Gaps In Performance Management

by Malcolm Faulkner

Why focus on strategic planning?

Strategic planning is about setting a course for where stakeholders want the organization to head and describing in detail what needs to happen to get there.  This involves some well-defined processes that happen every year in order to set and translate strategy.

Effective execution of strategy requires a strong degree of organizational alignment to ensure everyone is focused on the same goals. It also requires some agility to allow resources and funds to be quickly allocated to projects in order to take advantage of emerging opportunities and adapt to changing business conditions.

Effective strategy management includes:

• Managing the objectives (what the goals are), key performance indicators (how to measure success), and the initiatives (or actions needed to happen to achieve the objectives)
• Visual representations that help communicate the strategy more effectively (including putting them on mobile devices as a powerful and handy reminder of what to focus on).
• Easy-to-interpret score cards enables:

1. Performance tracking
2. Drill-down on key performance indicator
3. Root-cause analysis
4. Side-by-side comparisons that gauge each business unit’s contribution to overall performance
5. Benchmarking to be used so performance can be evaluated against the selected peer group
6. Side-by-side comparisons that gauge each business unit’s contribution to overall performance

Why focus on cost and profitability analysis?

To add value, the finance organization needs to provide managers with information to help them make better decisions that will improve ongoing financial performance.  A variety of modeling activities should be used to analyze performance, model costs, and optimize profitability. Ideally, this would occur on an ongoing basis, but certainly it should prior to any major review of strategy. Profitability and cost analysis:

• Helps management make better decisions, improve control of organizational costs, and increase the profitability gained from better selection of products, refinement of the customer base, and adoption of the most profitable sales channels
• Provides  insight into the levers affecting organizational costs and profitability with less effort expended over the long term
• Equips finance to identify cost and profitability drivers, perform powerful “what-if” scenarios and simulations based on data pulled from multiple sources, and better determine how to get the best results from available resources
• Can reveal the “true” cost or value of a customer through analysis of the “cost-to-serve.”  By integrating planning and profitability analysis together the same cost drivers can be used in the planning process.

Investing in solutions for Strategy Management and Cost and Profitability Analysis not only complete the Financial Performance Cycle, many people would argue that it actually adds value to Planning and Budgeting which is predominant focus of most organizations today. So at a time when most of the large vendors offer solutions for these steps that are becoming better integrated into their performance management suites with every new release, what is there stopping finance teams from rounding out the cycle?

To me, the issue seems to be largely one of the IT department and the Finance function having differing priorities – with Finance all too often losing out. While Finance might get their new planning solution – after everyone including IT know what budgeting is all about – but lose out on the other performance management solutions either because they fail to build a convincing business case to support the investment, (which is not really surprising when expertise in these areas is scarce), or because limited IT resources and budgets get diverted to other initiatives such as enterprise analytics. My SAP colleagues will not thank me for it, but I’ll point it out nonetheless; adding more business intelligence reporting tools on top of planning and budgeting doesn’t make a holistic performance management solution.

So if you find yourself with an uphill struggle in justifying investment in an integrated end-to-end performance management solution that covers off all the steps, my advice is to bring in some outside consulting expertise to start building the necessary momentum within the business – and if that still seems too big a step, then ask your software vendor what in-house skills of theirs you can call on. Where there’s a will; there’s a way, but it’s Finance that has to grasp the nettle.

To hear how companies that have implemented some of the steps that you may be less mature in your organization, can I recommend this year’s inaugural SAP EPM Conference 2013 that takes place on November 5-6 in Dallas. But hurry as registration is closing fast.