Chapter 5 Business Performance Management Learning Objectives Understand

Chapter 5 Business Performance Management

Learning Objectives Ø Understand the all-encompassing nature of business performance management (BPM) Ø Understand the closed-loop processes linking strategy to execution Ø Describe some of the best practices in planning and management reporting Ø Describe the difference between performance management and measurement

Learning Objectives Understand the role of methodologies in BPM Ø Describe the basic elements of the balanced scorecard and Six Sigma methodologies Ø Describe the differences between scorecards and dashboards Ø Understand some of the basics of dashboard design Ø Understand the potential uses of business activity monitoring (BAM) Ø

Business Performance Management (BPM) Overview Ø BPM Defined l Business performance management (BPM) A real-time system that alert managers to potential opportunities, impending problems, and threats, and then empowers them to react through models and collaboration

Business Performance Management (BPM) Overview Ø BPM and BI Compared l l l BPM is an outgrowth of BI and incorporates many of its technologies, applications, and techniques BPM is an enterprisewide strategy that seeks to prevent organizations from optimizing local business at the expense of overall corporate performance BPM is part of the daily work of managers

Business Performance Management (BPM) Overview Ø Summary of BPM processes l BPM encompasses a closed-loop set of processes that link strategy to execution in order to optimize business performance, which is achieved by: • Setting goals and objectives • Establishing initiatives and plans to achieve those goals • Monitoring actual performance against the goals and objectives • Taking corrective action

Business Performance Management (BPM) Overview

Strategize: Where Do We Want to Go? Strategic planning Ø l Tasks common to the strategic planning process: 1. 2. 3. 4. 5. 6. 7. 8. Conduct a current situation analysis Determine the planning horizon Conduct an environment scan Identify critical success factors Complete a gap analysis Create a strategic vision Develop a business strategy Identify strategic objectives and goals

Strategize: Where Do We Want to Go? Ø Strategic planning l l Critical success factors (CSF) Key factors that delineate things that an organization must excel at to be successful in its market space Strategic vision A picture or mental image of what the organization should look like in the future

Strategize: Where Do We Want to Go? Ø Strategic planning l l Strategic objective A broad statement or general course of action prescribing targeted directions for an organization Strategic goal A quantified objective with a designated time period

Strategize: Where Do We Want to Go? The strategy gap Ø l Four sources for the gap between strategy and execution: 1. 2. 3. 4. Vision People Management Resources

Plan: How Do We Get There? Ø Operational planning l Operational plan Plan that translates an organization’s strategic objectives and goals into a set of well-defined tactics and initiatives, resources requirements, and expected results

Plan: How Do We Get There? Ø Operational planning l l Tactic-centric plan—tactics are established to meet the objectives and targets established in the strategic plan (used by best practices organizations Budget-centric plan—a financial plan or budget is established that sums to the targeted financial values

Plan: How Do We Get There? Ø Financial planning and budgeting l l An organization’s strategic objectives and key metrics should serve as top-down drivers for the allocation of an organization’s tangible and intangible assets Resource allocations should be carefully aligned with the organization’s strategic objectives and tactics in order to achieve strategic success

Monitor: How Are We Doing? Ø A comprehensive framework for monitoring performance should address two key issues: l l What to monitor How to monitor

Monitor: How Are We Doing? Ø Diagnostic control system A cybernetic system that has inputs, a process for transforming the inputs into outputs, a standard or benchmark against which to compare the outputs, and a feedback channel to allow information on variances between the outputs and the standard to be communicated and acted upon

Monitor: How Are We Doing?

Monitor: How Are We Doing? Ø Pitfalls of variance analysis l l The vast majority of the exception analysis focuses on negative variances when functional groups or departments fail to meet their targets Rarely are positive variances reviewed for potential opportunities, and rarely does the analysis focus on assumptions underlying the variance patterns

Monitor: How Are We Doing?

Act and Adjust: What Do We Need to Do Differently? Ø Hackett Group’s benchmarking process divides planning and management reporting into four subprocesses: 1. 2. 3. 4. Strategic planning Operational and financial planning Reporting Forecasting

Act and Adjust: What Do We Need to Do Differently? l Each subprocess is evaluated in terms of five dimensions of efficiency and effectiveness: 1. 2. 3. 4. 5. Strategic alignment Partnering Process Technology People and organizations

Act and Adjust: What Do We Need to Do Differently? Ø The Hackett Group’s benchmarking results indicate that world class companies: l l l Are significantly more efficient than their peers at managing costs Focus on operational excellence and experience significantly reduced rates of voluntary employee turnover Have hybrid sourcing strategies that combine shared services and outsourcing

Act and Adjust: What Do We Need to Do Differently? Ø The Hackett Group’s benchmarking results indicate that world class companies: l l Provide management with the tools and training to leverage corporate information and to guide strategic planning, budgeting, and forecasting Closely align strategic and tactical plans, enabling functional areas to contribute more effectively to overall business goals

Act and Adjust: What Do We Need to Do Differently? Ø Paucity of analysis l The overall impact of the planning and reporting practices of the average company is that management has little time to review results from a strategic perspective, decide what should be done differently, and act on the revised plans

Performance Measurement Ø Performance measurement system A system that assists managers in tracking the implementations of business strategy by comparing actual results against strategic goals and objectives

Performance Measurement Ø Problems with existing performance measurement systems l l The most popular system in use is some variant of the balanced scorecard (BSC) BSC methodology is a holistic vision of a measurement system tied to the strategic direction of the organization and based on a four-perspective view of the world: • Financial measures supported by customer, internal, and learning and growth metrics

Performance Measurement l The drawbacks of using financial data as the core of a performance measurement: • Financial measures are usually reported by organizational structures and not by the processes that produced them • Financial measures are lagging indicators, telling us what happened, not why it happened or what is likely to happen in the future • Financial measures are often the product of allocations that are not related to the underlying processes that generated them • Financial measures are focused on the short term and provide little information about the longer term

Performance Measurement Ø Effective performance measurement l Basic ingredients of a good collection of performance measures • • • Measures should focus on key factors Measures should be a mix of past, present, and future Measures should balance the needs of shareholders, employees, partners, suppliers, and other stakeholders. • Measures should start at the top and flow down to the bottom • Measures need to have targets that are based on research and reality rather than be arbitrary

BPM Methodologies Ø An effective performance measurement system should help: l l Align top-level strategic objectives and bottomlevel initiatives Identify opportunities and problems in a timely fashion Determine priorities and allocate resources based on those priorities. Change measurements when the underlying processes and strategies change

BPM Methodologies Ø An effective performance measurement system should help: l l l Delineate responsibilities, understand actual performance relative to responsibilities, and reward and recognize accomplishments. Take action to improve processes and procedures when the data warrant it. Plan and forecast in a more reliable and timely fashion

BPM Methodologies Ø Balanced scorecard (BSC) A performance measurement and management methodology that helps translate an organization’s financial, customer, internal process, and learning and growth objectives and targets into a set of actionable initiatives

BPM Methodologies The meaning of balance Ø l l BSC is designed to overcome the limitations of systems that are financially focused Nonfinancial objectives fall into one of three perspectives: 1. Customer 2. Internal business process 3. Learning and growth

BPM Methodologies

BPM Methodologies l The meaning of balance • • BSC is designed to overcome the limitations of systems that are financially focused Nonfinancial objectives fall into one of three perspectives: 1. 2. 3. Customer Internal business process Learning and growth

BPM Methodologies l In BSC, the term balance arises because the combined set of measures are supposed to encompass indicators that are: • • • Financial and nonfinancial Leading and lagging Internal and external Quantitative and qualitative Short term and long term

BPM Methodologies l Aligning strategies and actions • BSC enables an organization to align its actions with its overall strategies through a series of interrelated steps: 1. 2. 3. 4. 5. Identify strategic objectives for each of the perspectives (about 15 to 25 in all). Associate measures with each of the strategic objectives; a mix of quantitative and qualitative should be used. Assign targets to the measures. List strategic initiatives to accomplish each of the objectives (i. e. , responsibilities). Link the various strategic objectives through a cause-andeffect diagram called a strategy map

BPM Methodologies l Strategy map A visual display that delineates the relationships among the key organizational objectives for all four BSC perspectives

BPM Methodologies

BPM Methodologies l BSC certification • • BSC Collaborative offers software vendors the opportunity to have their applications certified against a well-defined set of criteria The application must offer an end user the ability to view: 1. 2. 3. Strategic objectives from the four perspectives The measures, targets, and initiatives associated with each objective The cause-and-effect relationships among the objectives

BPM Methodologies Ø Six Sigma A performance management methodology aimed at reducing the number of defects in a business process to as close to zero defects per million opportunities (DPMO) as possible

BPM Methodologies Six Sigma Ø l The DMAIC performance model A closed-loop business improvement model that encompasses the steps of defining, measuring, analyzing, improving, and controlling a process

BPM Methodologies Six Sigma Ø l Limitations of Six Sigma • • The lack of integration among the various Six Sigma projects across the enterprise The failure to institute the roles required to support the methodology

BPM Architecture and Applications

BPM Architecture and Applications BPM architecture Ø l l System architecture The logical and physical design of a system A BPM system needs three components in order to contribute to the successful implementation of strategy: 1. 2. 3. Database tier Application tier Client or user interface

BPM Architecture and Applications BPM architecture Ø l Database tier designs include: • • • Transactional data stores Application data marts Centralized data warehouse

BPM Architecture and Applications BPM architecture Ø l BPM applications: 1. 2. 3. 4. 5. Budgeting, planning, and forecasting Profitability modeling and optimization Scorecard applications Financial consolidation Statutory and financial reporting

BPM Architecture and Applications BPM architecture Ø l BPM user interface • • The user interface is the bridge between the BPM applications and the end user The Web browser is currently the primary tool for accessing information in a BPM system Spreadsheets are a popular alternative when a rich user interface is needed to support the analytical and computation needs of the user BPM interfaces should provide is guidance to the end user

BPM Architecture and Applications

Performance Dashboards Ø Dashboards and scorecards both provide visual displays of important information that is consolidated and arranged on a single screen so that information can be digested at a single glance and easily explored

Performance Dashboards

Performance Dashboards Ø Dashboards versus scorecards l l Performance dashboards Visual display used to monitor operational performance Performance scorecards Visual display used to chart progress against strategic and tactical goals and targets

Performance Dashboards Ø Dashboards versus scorecards l Performance dashboard is a multilayered application built on a business intelligence and data integration infrastructure that enables organizations to measure, monitor, and manage business performance more effectively (Eckerson)

Performance Dashboards versus scorecards Ø l Three types of performance dashboards: 1. 2. 3. Operational dashboards Tactical dashboards Strategic dashboards

Performance Dashboards Ø Dashboard design l “The fundamental challenge of dashboard design is to display all the required information on a single screen, clearly and without distraction, in a manner that can be assimilated quickly" (Few, 2005)

Performance Dashboards l What to look for in a dashboard • Use of visual components (e. g. , charts, performance bars, sparklines, gauges, meters, stoplights) to highlight, at a glance, the data and exceptions that require action. • Transparent to the user, meaning that they require minimal training and are extremely easy to use • Combine data from a variety of systems into a single, summarized, unified view of the business

Performance Dashboards l What to look for in a dashboard • Enable drill-down or drill-through to underlying data sources or reports • Present a dynamic, real-world view with timely data refreshes, enabling the end user to stay up-to-date with any recent changes in the business. • Require little, if any, customized coding to implement, deploy, and maintain

Business Activity Monitoring (BAM) Ø Business activity monitoring (BAM) A real-time system that alert managers to potential opportunities, impending problems, and threats, and then empowers them to react through models and collaboration

Business Activity Monitoring (BAM) Ø BAM depends on a wide range of technologies working in concert including: l l l ETL technology Process modeling technology Rules engines Messaging servers E-mail in-boxes, portals, dashboards, and Web services

Business Activity Monitoring (BAM) Ø Benefits of BAM l l Real-time data access in a usable format Access to tools to collaborate and model the problem, leading to a quick solution

Business Activity Monitoring (BAM) Ø BAM Issues l l Executives fail to consider the readiness of technology or of the business processes they want to monitor Change management issues are paramount Effective BAM requires working closely with the business units to identify the key indicators (CSF) and analytical techniques that provide reliable early warnings of impending issues Executives must let the responsible managers on the frontlines deal with their problems and issues in a timely manner before reacting