Presentation Business Performance Management.ppt

Business Performance
Management

BUSINESS PERFORMANCE
MANAGEMENT (BPM) OVERVIEW
• BPM is used rather than the other terms, because the term
was originally coined by the BPM Standards Group and is still used by the BPM Forum. The
term business performance management (BPM) refers to the business processes,
methodologies, metrics, and technologies used by enterprises to measure, monitor, and
manage business performance. It encompasses three key components (Colbert, 2009):
1. A set of integrated, closed-loop management and analytic processes, supported by
technology, that addresses financial as well as operational activities
2. Tools for businesses to define strategic goals and then measure and manage performance
against those goals
3. A core set of processes, including financial and operational planning, consolidation
and reporting, modeling, analysis, and monitoring of key performance indicators
(KPis), linked to organizational strategy

BPM and Bl Compared
• BPM is an outgrowth of BI and incorporates many of its technologies, applications,
and techniques. When BPM was first introduced as a separate concept, there was
confusion about the differences between BPM and BI. Was it simply a new term for
the same concept?
• Was BPM the next generation of BI, or were there substantial differences between
the two?
The confusion persists even today for the following reasons:
• BPM is promoted and sold by the same companies that market and sell the BI
tools and suites.
• BI has evolved so that many of the original differences between the two no longer
exist (e.g., BI used to be focused on departmental rather than on enterprise-wide
projects).
• BI is a crucial element of BPM.
The term BI now describes the technology used to access, analyze, and report on
data relevant to an enterprise. It encompasses a wide spectrum of software,
including ad hoc querying, reporting, online analytical processing (OLAP),
dashboards, scorecards, search, visualization, and more. These software products
started as stand-alone tools, but BI software vendors have incorporated them into
their BI suites. BPM has been characterized as "BI + Planning," meaning that BPM
is the convergence

BPM has been characterized as "BI + Planning," meaning
that BPM is the convergence of BI and planning on a
unified platform-the cycle of plan, monitor, and analyze
(Calumo Group, 2009). The processes that BPM
encompasses are not new. Virtually
• every medium and large organization has processes in
place that feed back to the overall strategic plan, as well
as the operational plans. What BPM adds is a
framework for integrating these processes,
methodologies, metrics, and systems into a unified
solution.

• The prima1y distinction is that a BPM system is strategy driven. It
encompasses a closed-loop set of processes that link strategy to execution
in order to optimize business performance (see Figure 3.1). The loop
implies that optimum performance is achieved by setting goals and
objectives (i.e., strategize), establishing initiatives and plans to achieve
those goals (i.e., plan), monitoring actual performance against the goals
and objectives (i.e ., monitor), and taking corrective action (i.e., act and
adjust).

• 3.2 STRATEGIZE: WHERE DO WE WANT TO GO?
• for the moment, imagine that you are a distance runner and are in the process of
training for an upcoming event. In preparation, suppose your coach said to you, "I
haven't thought much about the race. I'm not even sure what the distance is, but I
think you should just go out and run for 8 hours a clay until race clay. Things will
work out in the encl." If a coach said this, you would think your coach was nuts.
Obviously, for your training plan to make sense, you would need to know what race
you were running (e.g., is it a marathon, a half marathon, or 10 miler) and what sort
of time you were shooting for (e.g., a top-5 finish with a time of 2 hours, 10
minutes). You would also need to know what your strengths and weaknesses were
in order to determine whether the goal was realistic and what sorts of things you
would need to work on to achieve your goal (e.g., trouble with finishing speed over
the last few miles of a race).

• Strategic Planning
• The term strategy has many definitions. To acid to the
confusion, it is also often used in combination with a
variety of other terms such as strategic vision and
strategic focus.
• Regardless of the differences in meaning, they all
address the question "Where do we want to go in the
future?" For most companies, the answer to this
question is provided in a strategic plan. You can think
of a strategic plan as a map, detailing a course of action
for moving an organization from its current state to its
future vision.

• The following tasks are quite common to the strategic planning process,
regardless of the level at which the planning is clone--enterprise-wide,
business unit, or functional unit:
• 1. Conduct a current situation analysis. This analysis reviews the
company's
• current situation ("Where are we?") and establishes a baseline, as well as
key trends, for financial performance and operational performance.
• 2. Determine the planning horizon. Traditionally, organizations produce
plans on a yearly basis, with the planning horizon running 3 to 5 years. In
large part, the time horizon is determined by the volatility and predictability
of the market, product life cycles, the size of the organization, the rate of
technological innovation, and the capital intensity of the indust1y. The
more volatile, the less predictable; the shorter the life cycles, the smaller
the organization; the faster the rate of innovation, and the less the capital
intensity, the shorter the planning horizon.
• 3. Co11duct an environment scan. An environment scan is a standard
strengths, weaknesses, opportunities, and threats assessment of the
company. It identifies and prioritizes the key customer, market, competitor,
governn1ent, demographic, stakeholder, and indust1y factors potentially or
actually affecting the company.

• 4. Identify critical success factors. Critical success factors (CSFs) delineate those
• things that an organization must excel at to be successful in its market space. For a
• product-focused company, product quality and product innovation are examples of
• CSF. For a low-cost provider such as Wal-Mart, distribution capabilities are the
CSF.
• 5. Complete a gap analysis. Like the environment scan, a gap analysis is used to
• identify and prioritize the internal strengths and weaknesses in an organization's
• processes, structures, and technologies and applications. The gaps reflect what the
• strategy actually requires and what the organization actually provides.
• 6. Create a strategic vision. An organization's strategic vision provides a picture
• or mental image of what the organization should look like in the future-the shift in
• its products and markets. Generally, the vision is couched in terms of its strategy
• focus and identifies the as-is state and the desired state.
• 7. Develop a business strategy. The challenge in this step is to produce a strategy
• that is based on the data and information from the previous steps and is consistent
• with the strategic vision. Common sense tells us that the strategy needs to exploit
the
• organization's strengths, take advantage of its opportunities, address weaknesses,
• and respond to threats. The company needs to ensure that the strategy is internally
• consistent, that the organizational culture is aligned with the strategy, and that

7. Develop a business strategy. The challenge in this step is to produce a strategy
that is based on the data and information from the previous steps and is consistent
with the strategic vision. Common sense tells us that the strategy needs to exploit the
organi.zation's strengths, take advantage of its opportunities, address weaknesses,
and respond to threats. The company needs to ensure that the strategy is internally
consistent, that the organizational culture is aligned with the strategy, and that
sufficient resources and capital are available to implement the strategy.
• 8. Identify strategic objectives and goals. A strategic plan that fails to provide
clear directions for the operational and financial planning process is incomplete.
Before an operational or financial plan can be established, strategic objectives
must be established and refined into well-defined goals or targets. A strategic
objective is a broad statement or general course of action that prescribes
targeted directions for an organization. Before a strategic objective can be linked to
an operational plan or a financial plan, it should be converted into a well-defined
goal or target. A strategic goal is a quantification of an objective for a
designated period of time. For example, if an organization has an objective of
improving return on assets (ROA) or increasing overall profitability, these
objectives need to be turned into quantified targets (e.g., an increase of ROA from
10 to 15 percent or an increase in profit margin from 5 to 7 percent) before the
organization can begin to detail the operational plans needed to achieve these
targets. Strategic goals and targets guide operation

• The Strategy Gap
• It's one thing to create a long-term strategy and another to execute it. Over the past
couple of decades, a number of surveys have highlighted the gap that routinely
exists in many organizations between their strategic plans and the execution of
those plans. Recent surveys of senior executives by the Monitor Group (Kaplan and
Norton, 2008) and the Chapter 3 • Business Performance Management 89
• conference Board (2008) pinpointed "strategy execution" as the executive's number
one priority. Similarly, statistics from the Palladium Group (Norton, 2007) suggest
that 90 percent of organizations fail to execute their strategies successfully. The
reasons for the "strategy gap“ are varied, although many studies pinpoint one of the
following four reasons:
• 1. Communication. In many organizations, a ve1y small percentage of the
employees
• understand the organization's strategy. The Palladium Group (Norton, 2007) put
• the figure at less than 10 percent. On the one hand, it is difficult, if not impossible,
• for employees to make decisions and act in accordance with the strategic plan if
• they have never seen nor heard the plan. On the other hand, even when the plan is
• communicated, the strategy often lacks clarity so that no one is quite sure whether
• their actions are in line or at variance with the plan.

2. Alignmeut of rewards and incentives. Linking pay to performance is important
for successful execution. However, incentive plans are often linked to shortterm
financial results, not to the strategic plan or even to the strategic initiatives
articulated in the operational plan. Maximizing short-term gains leads to less than
rational decision making. Again, the Palladium Group (Norton, 2007) indicated
that 70 percent of organizations failed to link middle management incentives to
their strategy.
3. Focus. Management often spends time on the periphery of issues rather than
concentrating on the core elements. Hours can be spent debating line items on a
budget, with little attention given to the strategy, the linkage of the financial plan
to the strategy, or the assumptions underlying the linkage. The Palladium Group
(Norton, 2007) suggested that in many organizations 85 percent of managers spend
less than 1 hour per month discussing strategy.
4. Resources. Unless strategic initiatives are properly funded and resourced, their
failure is virtually assured. The Palladium Group (Norton, 2007) found that less than
40 percent of organizations tied their budgets to their strategic plans.

3.3 PLAN: HOW DO WE GET THERE?
When operational managers know and understand
the what (i.e ., the organizational objectives and
goals), they will be able to come up with the how
(i. e., detailed operational and financial plans).
Operational and financial plans answer two
questions: What tactics and initiatives will be
pursued to meet the performance targets
established by the strategic plan? What are the
expected financial results of executing the
tactics?

• Operational Planning
• An operational plan translates an organization's strategic objectives and goals into a
set of well-defined tactics and initiatives, resource requirements, and expected
results for some future time period, usually, but not always, a year. In essence, an
operational plan is like a project plan that is designed to ensure that an
organization's strategy is realized. Most operational plans encompass a portfolio of
tactics and initiatives. The key to successful operational planning is integration.
Strategy drives tactics, and tactics drive results. Basically, the tactics and initiatives
defined in an operational plan need to be directly linked to key objectives and
targets in the strategic plan. If there is no linkage between an individual tactic and
one or more strategic objectives or targets, management should question whether
the tactic and its associated initiatives are really needed at all. The BPM
methodologies discussed in Section 3.8 are designed to ensure
that these linkages exist.

• Financial Planning and Budgeting
• In most organizations, resources tend to be scarce. If they were not, organizations
• could simply throw people and money at their opportunities and problems and
overwhelm the competition. Given the scarcity of resources, an organization needs
to put its money and people where its strategies and linked tactics are. 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. While
continuing operations clearly need support, key resources should be assigned to the
most important strategic programs and priorities. Most organizations use their
budgets and compensation programs to allocate resources. By implication, both of
these need to be carefully aligned with the organization's strategic objectives and
tactics in order to achieve strategic success.

• The best way for an organization to achieve this alignment is to base
its financial plan on its operational plan or, more directly, to allocate
and budget its resources against specific tactics and initiatives. For
example, if one of the tactics is to develop a new sales channel,
budgeted revenues and costs need to be assigned to the channel
rather than simply having costs assigned to particular functional
units such as marketing and research and development. Without this
type of tactical resource planning, there is no way to measure the
success of those tactics and hence the strategy. This type of linkage
helps organizations avoid the problem of "random" budget cuts that
inadvertently affect associated strategies. Tactic-based budgeting
ensures that the link between particular budget-line items and
particular tactics or initiatives is well established and well known.

• 3.4 MONITOR: HOW ARE WE DOING?
• When the operational and financial plans are under way, it is imperative that the
performance of the organization be monitored. A comprehensive framework for
monitoring performance should address two key issues: what to monitor and how to
monitor.
• Because it is impossible to look at everything, an organization needs to focus on
monitoring specific issues. After the organization has identified the indicators or
measures to look at, it needs to develop a strategy for monitoring those factors and
responding effectively

• Diagnostic Control Systems
• Most companies use what is known as a diagnostic control system to monitor
organizational performance and correct deviations from present performance
standards. This is true even for those organizations that do not have formal BPM
processes or systems.
• A diagnostic control system is a cybernetic system, meaning that it 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. Virtually any information system can be used as a diagnostic control system
if it is possible to (1) set a goal in advance, (2) measure outputs, (3) compute or
calculate absolute or relative performance variances, and (4) use the variance
information as feedback to alter inputs and/ or processes to bring performance back
in line with present goals and standards. The key elements of a diagnostic control
system are depicted in Figure 3.2. Balanced scorecards, performance dashboards,
project monitoring systems, human resources systems, and financial reporting
systems are all examples of systems that can be used diagnostically.
• .

• An effective diagnostic control system encourages
management by exception.
• Instead of constantly monitoring a variety of internal
processes and target values and
• comparing actual results with planned results, managers
regularly receive schedule
• exception reports. Measures that are aligned with
expectations receive little attention. If,
• however, a significant variation is identified, then-and only
then- managers need to
• invest time and attention to investigate the cause of the
deviation and initiate appropriate
• remedial action

• ACT AND ADJUST: WHAT DO WE NEED TO DO
DIFFERENTLY?
• Whether a company is interested in growing its
business or simply improving its operations,
• virtually all strategies depend on new projects---
creating new products, entering new markets,
• acquiring new customers or businesses, or
streamlining some processes.

1. The loop begins by defining quantifiable
objectives of a marketing campaign or
test procedure in the form of expected values
or outcomes for customers who are
in the experimental test group versus those in
the control groups.

2. Next, the campaign or test is executed. The campaign is designed to provide
the right offer and message at the right time. The selection of particular customers
and the treatments they receive are based on their prior experiences with Harrah's.
3. Each customer's response to the campaign is tracked. Not only are response rates
measured, but other metrics are as well, such as revenues generated by the incentive
and whether the incentive induced a positive change in behavior (e.g., increased
frequency of visit, profitability of the visit, or cross-play among the various
casinos).
4. The effectiveness of a campaign is evaluated by determining the net value of the
campaign and its profitability relative to other campaigns.
5. Harrah's learns which incentives have the most effective influence on
customer behavior or provide the best profitability improvement. This knowledge is
used to continuously refine its marketing approaches

• 3.6 PERFORMANCE MEASUREMENT
• Underlying BPM is a performance measurement
system. According to Simons (2002), performance
measurement systems:
• Assist managers in tracking the implementations of
business strategy by comparing actual results against
strategic goals and objectives. A performance
measurement system typically comprises systematic
methods of setting business goals together with
periodic feedback reports that indicate progress
against goals.

• KPls and Operational Metrics
• There is a difference between a "run of the mill" metric and a "strategically aligned"
metric.
• The term key performance indicator (KPI) is often used to denote the latter. A
KPI represents a strategic objective and measures performance against a goal.
According to Business Performance Management Eckerson (2009), KPis are
multidimensional. Loosely translated, this means that KPis have a variety of
distinguishing features, including:
• Strategy. KPis embody a strategic objective.
• Targets. KPis measure performance against specific targets. Targets are defined
in strategy, planning, or budget sessions and can take different forms (e.g.,
achievement targets, reduction targets, absolute targets) .
• Ranges. Targets have performance ranges (e.g., above, on, or below target).
Ranges are encoded in software, enabling the visual display of performance
(e .g., green, yellow, red). Encodings can be based on percentages or
more complex rules.

• Time frames. Targets are assigned time frames by
which they must be accomplished.
A time frame is often divided into smaller
inte1vals to provide performance
mileposts.
• Benchmarks. Targets are measured against a
baseline or benchmark. The previous
• year's results often serve as a benchmark, but
arbitra1y numbers or external benchmarks may
also be used.

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