Chapter 5

Business Performance Management

Learning Objectives
Understand

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

Learning Objectives

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

Business Performance Management (BPM) Overview

BPM

Defined

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

BPM

and BI Compared

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

Summary

of BPM processes

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
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?

Strategic

planning

Critical success factors (CSF) Key factors that delineate the 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?

Strategic

planning

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

Four sources for the gap between strategy and execution:
1. 2. 3. 4. Vision People Management Resources

Plan: How Do We Get There?

Operational

planning

Operational plan Plan that translates an organizations strategic objectives and goals into a set of well-defined tactics and initiatives, resources requirements, and expected results

Plan: How Do We Get There?

Operational

planning

Tactic-centric plantactics are established to meet the objectives and targets established in the strategic plan (used by best practices organizations Budget-centric plana financial plan or budget is established that sums to the targeted financial values

Plan: How Do We Get There?

Financial

planning and budgeting

An organizations strategic objectives and key metrics should serve as top-down drivers for the allocation of an organizations tangible and intangible assets Resource allocations should be carefully aligned with the organizations strategic objectives and tactics in order to achieve strategic success

Monitor: How Are We Doing?

A

comprehensive framework for monitoring performance should address two key issues:

What to monitor How to monitor

Monitor: How Are We Doing?

Monitor: How Are We Doing?

Pitfalls

of variance analysis

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?

Hackett Groups benchmarking process divides planning and management reporting into four sub-processes:
1. 2. 3. 4.

Strategic planning Operational and financial planning Reporting Forecasting

Act and Adjust: What Do We Need to Do Differently?

Each sub-process 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?

The

Hackett Groups benchmarking results indicate that world class companies:

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?

The

Hackett Groups benchmarking results indicate that world class companies:

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?

Paucity

of analysis

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
Performance

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

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

Drawbacks of solely using Financial Data

Effective Performance Measurement

Basic ingredients include:

Measures should focus on key CSFs Measures should be a mix of past, present, and future Measures should balance the needs of all stakeholders (shareholders, employees, partners, suppliers, etc). Measures should start at the top and flow down. Targets must be based on facts and reality; arbitrary measures do not work in the long run.

BPM Methodologies
An

effective performance measurement system should help:

Align top-level strategic objectives and bottomlevel initiatives (goal congruence) Identify opportunities and problems in a timely fashion Determine priorities and allocate resources based on those priorities. Be flexible to adjust measurements as the underlying processes and strategies change

BPM Methodologies
An

effective performance measurement system should:

Delineate responsibilities, understand actual performance relative to responsibilities, and reward and recognize accomplishments. Identify opportunities to take action to improve processes and procedures based on data. Plan and forecast in a reliable and timely fashion

BPM Methodologies
Balanced

scorecard (BSC) A performance measurement and management methodology that helps translate an organizations financial, customer, internal process, and learning and growth objectives and targets into a set of actionable initiatives

BPM Methodologies

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. Customer 2. Internal business process 3. Learning and growth

BPM Methodologies

BPM Methodologies

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

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 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

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

BPM Methodologies

BPM Methodologies

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

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
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
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
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. Database tier 2. Application tier 3. Client or user interface

BPM Architecture and Applications

BPM architecture
Database tier designs include:
Transactional data stores Application data marts Centralized data warehouse

BPM Architecture and Applications

BPM architecture
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
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
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
Dashboards

versus scorecards

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
Dashboards

versus scorecards

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

Dashboards versus scorecards

Three types of performance dashboards:
1. Operational dashboards 2. Tactical dashboards 3. Strategic dashboards

Performance Dashboards
Dashboard

design

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

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

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 upto-date with any recent changes in the business. Require little, if any, customized coding to implement, deploy, and maintain

Business Activity Monitoring (BAM)

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)

BAM

depends on a wide range of technologies working in concert including:

ETL technology Process modeling technology Rules engines Messaging servers E-mail in-boxes, portals, dashboards, and Web services

Business Activity Monitoring (BAM)

Benefits

of BAM

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)

BAM

Issues

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