By Gary Cokins, CPIM at Executive Education, Inc.
Quite naturally, many organizations over-rate the quality of their enterprise and corporate performance management (EPM/CPM) practices and systems. In reality they lack comprehensiveness and integration. For example, when you ask executives how well they measure and report either costs or non-financial performance measures, most proudly boast they are very good. This conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.”
Every organization cannot be above average!
What Makes Exceptionally Good EPM/CPM Systems Exceptional?
Let’s not attempt to be a sociologist or psychologist and explain the incongruities between executives boasting superiority while anonymously answered surveys reveal inferiority. Rather let’s simply describe the full vision of an effective EPM/CPM system that organizations should aspire to possess.
First, we need to clarify some terminology and related confusion. EPM/CPM is not solely a system or a process. It is, instead, the integration of multiple managerial methods. Most of them have been around for decades, arguably even before there were computers. EPM/CPM is also not just a CFO initiative with a bunch of scorecard and dashboard dials. It is much broader and its purpose is not about monitoring the dials but rather moving the dials.
What makes for exceptionally good EPM/CPM is that its multiple managerial methods are not only individually effective, but they also are seamlessly integrated and embedded with analytics of all types. Examples of analytics are segmentation, clustering, regression, and correlation analysis.
EPM/CPM is Like Musical Instruments in an Orchestra
I like to think of the various EPM/CPM methods as musical instruments in an orchestra. An orchestra’s conductor does not raise their baton to the strings, woodwinds, percussion, and brass and say, “Now everyone play loud.” They seek balance to guide the composer’s fluctuations in harmony, rhythm and tone.
Here are my six main groupings of the EPM/CPM methods – its musical instrument sections:
- Strategic Planning and Execution – This is where a strategy map and its associated balanced scorecard fits in. Together they serve to translate the executive team’s strategy into navigation aids necessary for the organization to fulfill its vision and mission. The executives’ role is to set the strategic direction to answer the question “Where do we want to go?” Through use of correctly defined key performance indicators (KPIs) with targets, then align the employees’ priorities, actions, projects, and processes with the executives’ formulated strategy.
- Cost Visibility and Driver Behavior – Activity-based costing (ABC) principles model cause-and-effect relationships based on cost drivers. ABC goes beyond broadly averaged cost factors and attempts to understand what causes overhead. For commercial companies this is where profitability analysis fits in for products, standard services, channels, and customers. For governments, this is how we understand how processes consume resources in delivering services and how much those services cost per unit.
- Customer Management Performance – This is where powerful marketing and sales methods are applied to retain, grow, win-back, and acquire profitable, not unprofitable, customers. The tools are often referenced as customer relationship management (CRM) software applications. But the CRM data is merely a foundation. Analytical tools, supported by software, that leverage CRM data can further identify actions that will create incremental profit from customers. These actions simultaneously shift customers from being just satisfied to being loyal supporters.
- Forecasting, Planning, and Predictive Analytics – Data mining typically examines historical data “through the rear-view mirror.” This EPM/CPM group directs attention forward to look at the road through the windshield. The benefit of more accurate forecasts is to reduce uncertainty. Forecasts for the future volume and mix quantities of customer purchases are core independent variables. When we understand the relationships underlying the forecasts, we can better manage our resources. CFOs increasingly look to driver-based budgeting and rolling financial forecasts grounded in ABC principles to make planning decisions.
- Enterprise Risk Management (ERM) – We cannot omit Enterprise Risk Management from the main group of EPM/CPM. ERM serves as a brake to the potentially unbridled gas pedal that EPM/CPM methods are designed to step hard on. Risk mitigation projects require spending which can reduce profits that will likely reduce performance compensation bonuses. But it is prudent mitigate risks. It takes discipline to ensure the organization places adequate attention on appropriate risk management.
- Process improvement – This is where lean management and Six Sigma quality initiatives fit in. Their purpose is to remove waste and streamline processes to accelerate and reduce cycle-times. They create productivity and efficiency improvements.
EPM/CPM as Integrated Suite of Improvement Methods
CFOs often view financial planning and analysis (FP&A) as synonymous with EPM/CPM. It is better to view FP&A as a subset. Although better cost management and process improvements are noble goals, an organization cannot reduce its costs forever to achieve long term prosperity. Any cost reduction effort must focus on identifying and eliminating non-valued added activities.
The important message here is that EPM/CPM is not just about the CFO’s organization; it is also the integration of all the often silo-ed functions like marketing, operations, sales, and strategy. Look again at the six main EPM/CPM groups listed above. Imagine if the information produced and analyzed in each of them were seamlessly integrated. Imagine if they are each embedded with analytics – especially predictive analytics. Then powerful decision support is available for insight, foresight, and actions. That is the full vision of EPM/CPM to which we should aspire in order to achieve the best possible performance.
Today exceptional EPM/CPM systems are an exception despite what many executives proclaim. If we all work hard and smart enough, in the future they will be standard practices.
By Gary Cokins, CPIM at Executive Education, Inc.
Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com. Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA with honors from Northwestern University’s Kellogg School of Management in 1974.