Performance Management

HOW

Strategic Performance Management

IS HELPING COMPANIES CREATE

Business Value

THE ENTIRE ORGANIZATION MUST BE ALIGNED BEHIND THE GOAL OF TURNING THE STRATEGIC PLAN INTO EFFECTIVE ACTION.

B Y O MAR A GUILAR

t most companies the business strategy is no sooner developed than Ait begins to lose steam. There’s no mechanism to cascade and instill the strategy down through the organization and to ensure that it is actu- ally implemented. This leaves divisions, business units, departments, and individuals to set their own priorities as best they can, whether or not these priorities are in alignment with overall strategic objectives. To maximize their resources, managers need to know the game plan and their role in it. They also need frequent and accurate feedback telling them how they are doing, where they are falling short, and what they need to do to get back on track. Performance management is supposed to address these challenges, but in most companies it is pursuing its own goals—assessing performance in isolation without asking if that perfor- mance is actually helping the company achieve its strategies.

1 1 STRATEGIC FINANCE I January 2003 Six Obstacles to Good Planning When asked what factors are causing their planning process To achieve the results promised by their business strate- to lack validity, CFOs cited these top six culprits: gy,a number of business leaders are demanding that per- Listed by percentage of CFOs citing that factor as a cause; formance management bring the entire company into multiple answers permitted. alignment behind that strategy. More important, they are Lack of a well-defined strategy 57% defining a way to institutionalize business value creation. Lack of a link between strategy and operational plan 53% There are five critical dimensions of performance manage- Lack of individual accountability for results 45% ment that together can help companies maximize value. Lack of meaningful performance measures 34% 1. Strategic Planning: Create a strategic business plan Lack of pay for performance 21% that can be cascaded down through the organization. Lack of appropriate data 21% 2. Performance Measurement: Establish key measures Source: The Conference Board that tell management whether the objectives of the plan are being realized and, if not, where and by what degree start with a thorough analysis of their industry, markets, they are falling short. customers, products and services, competitors, and inter- 3. Integrated Business Planning: Design and integrate nal strengths and weaknesses. Most use a top-down processes—operational planning, budgeting, and process, but some combine this with a bottom-up forecasting—that create value and align efforts rather approach that enables middle management to bring their than simply police and keep score. local knowledge into the process. Such a flexible approach 4. Management Reporting: Provide concise, timely helps build middle-manager ownership and motivation. information that helps management see what needs to be Once the planning team has developed actionable done and how to do it. goals, they “cascade” these goals down through the com- 5. Organizational Culture and Reward Systems: Create pany. At each level, the planning team works with opera- a culture that energizes employees and inspires them to tional management to determine specific actions and work together to achieve the company’s strategic goals. priorities. By bringing operational management into the The final and most important element isn’t to plan, planning process, the company’s leadership gains buy-in budget, forecast, report, or reward, but to act—to manu- and ensures that staff at all levels knows what must be facture products, perform services, or serve customers; to done. Operational management gains a clear understand- create income; and to earn profits. All other functions ing of what success looks like and how it will be mea- and processes should exist to ensure that employees are sured. Ultimately, everyone knows his or her goals and is carrying out the right activities and have the resources accountable for achieving them. they need to succeed. To create a clear link between employee activities and the goals of the organization, Georgia-Pacific restruc- STRATEGIC PLANNING tured its personnel management process and tied it much In many companies the strategic plan is more of a mis- more closely to the strategic planning process. Now the sion statement than a road map. The real planning, as company’s strategic planning process generates goals and often as not, is driven by the budget process, which deter- measures that are set in January and are cascaded to all mines where resources will be allocated. Those alloca- levels of the organization. Performance management then tions, in turn, shape the operational plan. The final links these corporate goals to individual performance tar- operational plan often reflects how well executives com- gets, establishing a clear link between corporate objectives pete for budget rather than what senior management and daily employee activities. actually hopes to accomplish. To change this ineffective planning process, senior PERFORMANCE MEASUREMENT management must lead the change process and demand To effectively implement the strategic plan, management that the operational plans and budgets fully support the must know if the plan’s goals are being achieved on time implementation of the strategic plan. In short, manage- and with the allocated resources. Getting the right ment must establish clear strategic goals that can be answers means having the right performance measure- translated into specific actions. ment framework. You can’t begin to manage performance Companies pursuing a workable strategic plan usually until you can accurately measure it. assign small teams of top executives to set their goals At most companies, the problem isn’t a lack of using a rigorous planning process. Typically these teams measures—most have too many—but a lack of focused

2 2 STRATEGIC FINANCE I January 2003 and effective measures.The challenges in selecting for greater detail. Agreed-upon measures the right measures include choosing the right lead- help managers take actions that are ing and lagging indicators, benchmarking against directly related to achieving the compa- competitors, balancing financial and nonfinancial ny’s strategies. Such measures also show measures, and using an appropriate number of measures. senior management where the best results are coming Performance measures at best-practice companies tend from so that success can be recognized and rewarded. to be few and focused and have clearly defined targets. Best-practice companies typically use eight to 12 INTEGRATED BUSINESS PLANNING measures companywide. Integrated business planning comprises three elements: Many companies focus almost entirely on financial operational planning, budgeting, and forecasting. measures, but that approach results in a one-dimensional Operational planning takes the company’s strategies and view of performance. To gain a more complete picture, translates them into specific tactical steps, or actions, start- best-practice companies use a variety of measures, ing with broad, general actions and then breaking them including people measures (How do we motivate and down into increasingly specific ones. Much of this happens retain people?), customer measures (How do we build cus- as the strategic and operational plans are cascaded down tomer satisfaction and loyalty?), and operations measures through the organization. By bringing all levels of manage- (In which processes must we excel?). ment into the operational planning process and giving Once appropriate measures are in place, managers can individuals a chance to help shape the plan, the company receive the specific information they need in electronic wins management alignment and buy-in. Having bought form in a concise format. If they want more information into the plan, individual managers become accountable for about a particular measure, they can simply drill down achieving its goals. They are also energized by the realiza- tion that their compensation and other rewards will be governed by their success at achieving their goals. Are Rolling Forecasts a Panacea? At many companies, budgeting drives operational planning when the process should actually operate in MYTH OR REALITY? reverse. When companies try to use the budget process to ◆ Fewer than 20% of multinationals use them in some form drive and control operations, budgeting typically ◆ Although about 65% of CFOs view rolling forecasts as very becomes enormously time-consuming, with managers valuable, less than 15% use them extensively competing for the largest allocations irrespective of actual ◆ Of companies using rolling forecasts, five- or six-quarter fore- need. In best-practice companies, budgeting is a relatively casts are more prevalent than four-quarter ones simple process that translates operational goals into the resources needed to accomplish them. WHAT’S NEEDED TO MAKE IT WORK? The focus of integrated business planning at Texas ◆ A focus on fewer data elements and less information Instruments is on improving the bottom line while mini- ◆ Cascading of firm top-down targets mizing iterations and processing time. The result is a ◆ Effective and timely management reporting—typically, deeper understanding of key mileposts that show where technology enabled each business is headed and what it needs to get there. ◆ Philosophical change on how to manage, view, and Detail is reduced; overall strategy is encouraged. The first compensate performance year of this long-range planning provides a baseline for the annual budgeting process. Budget iterations are mini- IS IT RIGHT FOR YOUR COMPANY? mized because the operating units are encouraged to get ◆ Unless planning, budgeting, and forecasting are already “smarter” during the budget process. integrated, rolling forecasts may be more difficult to imple- Similarly, Hewlett-Packard emphasizes analysis and ment than a traditional process strategic reviews rather than “numbers” while at the same ◆ If a culture demands more information and is slow to react, time focusing on process excellence. Although Hewlett- rolling forecasts may not work Packard uses performance-based compensation and a ◆ A company faced with a highly dynamic external modified Economic Value Added (EVA) model, the suc- environment may be well suited for rolling forecasts cess of its planning and budgeting rests largely on the Source: Gunn Partners excellence of its processes. Strategic guidelines drive

January 2003 I STRATEGIC FINANCE 3 3 Best Practices of the Building Blocks of an Integrated Business Planning Process

PLANNING BUDGETING FORECASTING REPORTING ◆ Focused on analysis ◆ Plans and budgets linked ◆ Use of ranges to account for ◆ Timely ◆ External focus ◆ One- to two-month cycle time input accuracy ◆ Integrated ◆ Small teams making ◆ Firm financial targets ◆ Linked to operational plans ◆ Accurate and relevant decisions ◆ Reduce detail (fewer than to close performance gaps ◆ Qualitative and quantitative ◆ Top-down 100 lines) ◆ Use of quantitative and ◆ Focused ◆ Results clearly ◆ Reduce iterations (no more qualitative methodologies ◆ Drill-down capability communicated than two) ◆ Process in place to track ◆ Results in balanced ◆ Simplify and reduce accuracy scorecard allocations

strategic plans that, in turn, drive annual plans with peri- where that performance is coming from. odic annual updates. Moreover, the company continuous- To create an effective management reporting system, a ly strives to improve planning effectiveness by focusing company must first establish its strategic and operational on cycle time, relevance, systems and technology, predic- goals, measures, targets, budgets, and forecasts. Once tive accuracy, process accountability, and linkage to prod- these are in place, it can accurately determine what infor- uct cycle life. mation must be reported, in what detail, and how often. Because managers at different levels require different FORECASTING ACCURATELY information, the company must ensure that managers get Poor planning and budgeting make it almost impossible for the specific information they need to guide them in plan- companies to accurately forecast their quarterly earnings. ning actions, with top management getting primarily Industry analysts would have you think that investors strategic reports and operational management getting should applaud positive earnings surprises and deplore tactical data. In short, good management reports are negative ones. Yet all earnings surprises, positive or nega- concise and provide information that can be acted upon. tive, are signs that a company’s planning and budgeting They are also consistent throughout the company in the processes are malfunctioning. Of course, there are times sense that they offer one version of the truth. when a company’s earnings are pushed up or down by At NationsBank, now integrated with Bank of America, unanticipated economic events, but those should be the performance measures and reporting requirements were exceptions. defined first; then the appropriate recipients for different The real goals of forecasting are to predict revenues levels and types of information were determined. Now and expenses over a period of time, update plans, and the performance measurement process gathers relevant provide management with a vision of the future. So, information from throughout the organization and trans- accuracy is crucial. A company whose earnings are on tar- mits it electronically to managers in concise reports, typi- get quarter after quarter may not be as exciting as one cally two or three pages. For more detail about a whose earnings yo-yo, but common sense tells us that particular measure, managers can drill down by double- companies that can forecast their earnings accurately are clicking on that measure’s line in the electronic report. As likely very well managed. Such companies typically keep a a result, managers at every level can readily see if targeted close watch on their forecasts; if results start to deviate objectives are being met, can tell where the best perfor- beyond a specified threshold, they take prompt action. mance is coming from, and reward those responsible. In best-practice companies, technology plays a major MANAGEMENT REPORTING role in management reporting by integrating the report- In many companies, managers are inundated with volu- ing process into other systems so that managers can minous reports that fail to give them the precise informa- access useful information online and then drill down for tion they need to assess what’s happening and take additional details. For example, at Knight Ridder the appropriate action. In addition, it’s almost impossible for reporting system also enables senior management to ask management to reward good performance if it can’t “see” what-if questions and investigate alternative scenarios.

4 4 STRATEGIC FINANCE I January 2003 ORGANIZATIONAL CULTURE AND REWARD SYSTEMS objectives and reward employees accordingly. Managers In most companies, the energy level is high at the top and can clearly see what is expected of their staff, how to fades as it moves down through the organization. One of measure those activities, and how to tie them to the com- the goals of performance management is to energize pany’s objectives. This kind of empowerment and employees, first by making performance more visible and accountability motivates people not just to do their best then by recognizing and rewarding good performance. but also to focus their energies on doing what is best for Design of an effective reward system parallels the inte- the company. grated planning cycle. General reward objectives are identified—during the creation of performance mea- TAKING ACTION sures—and performance is rewarded during results The final step in developing an integrated performance reporting and assessment. Implementing a new reward management plan—taking action—sounds like an anti- system, especially one that alters the performance culture, climax, but it isn’t. It is the organization’s ultimate goal, usually takes several review cycles to have its and all of the organization’s other functions full impact on individual behavior. In most and processes exist to ensure that employees companies this means that the entire journey are performing the right activities and have may take several years. the necessary resources. These activities— With their superior planning, measuring, manufacturing products, performing ser- and forecasting, best-practice companies can vices, serving customers—are the core of the readily identify the divisions, units, depart- company. They are why it exists. ments, and individuals that are getting the A key purpose of performance manage- best results and reward them accordingly. In such compa- ment is to align the entire organization behind the goal of nies, individuals know their goals and priorities. They are turning the strategic plan into effective action. Most com- empowered to achieve these goals and are held account- panies have processes in place for planning, budgeting, able for the results. and other critical management activities, but all too often Three years ago, Georgia-Pacific recognized that its these processes are not linked together or integrated processes for reviewing and managing performance were throughout the organization. To a great extent, develop- cumbersome and, more important, did not always pro- ing more effective performance management means iden- vide a clear link between employee activities and the goals tifying the disconnects and then creating linkages to of the organization. To restructure its performance man- bring the processes—and the organization—together. agement systems, the company designed a database, Throughout this change process, it is critical that accessible to salaried management online and in real senior management lead the effort and make it clear that time, that defines a standard competency set applicable to the changes will be implemented and that obstacles to all employees. The Georgia-Pacific strategic planning change will be removed. It is also critical that manage- process generates company goals and measures that are ment communicate its determination down through the set in January and then cascaded to all levels of the orga- entire organization. Communications should serve to nization. The new performance management process inform employees, to involve them in the process, and then links these organizational objectives to individual ultimately to empower them to implement change—and performance targets, establishing a clear link between to keep implementing change on an ongoing basis. ■ objectives and daily employee activities. IBM, with some 300,000 employees worldwide, uses its Omar Aguilar is the finance and cost-management practice Personal Business Commitment (PBC) performance leader at Gunn Partners (www.gunnpartners.com), a man- management system to clearly link employee activities to agement consulting firm focused solely on improving the corporate objectives. The idea is to first gain alignment relevance and value of administrative and staff functions of throughout the organization and then to align the com- Global 1,000 companies and supporting change initiatives pany’s objectives with the activities of individual employ- championed by key staff executives. You can reach him at ees. By providing access to a competency database that [email protected]. reflects and then ties compensation targets to perfor- Author’s note: Corporate experiences cited in this article are derived mance, PBC helps the organization understand each indi- from Gunn Partners Performance Management Process Forums and vidual’s unique contribution to achieving the corporate Gunn Partners Best Practice Forums.

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