Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics

By Gary Cokins

Praise for Praise for Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics

"A highly accessible collection of essays on contemporary thinking in performance management. Readers will get excellent overviews on the Balanced Scorecard, strategy maps, incentives, management accounting, activity-based costing, customer lifetime value, and sustainable shareholder value creation."
—Robert S. Kaplan, Harvard Business School; coauthor of The Balanced Scorecard: Translating Strategy into Action, The Execution Premium, and many other books

"Gary Cokins demonstrates in this book that performance management is not a mysterious black art, but a structured, process-oriented discipline. If you want your performance management system to be a smoothly running analytical machine, read and apply the ideas in this book—it's all you need."
—Thomas H. Davenport, President's Distinguished Professor of Information Technology and Management, Babson College; coauthor of Competing on Analytics: The New Science of Winning

"Drawing on a deep reservoir of knowledge and experience gained from hundreds of customer engagements around the world, Gary Cokins offers an authoritative examination of the major dimensions of performance management. Cokins not only paints a rich and textured view of the major principles and concepts driving performance management implementations, he offers a nuanced look at the important subtleties that can spell the difference between success and failure. This is an informative and enjoyable text to read!"
—Wayne Eckerson, Director of Research, The Data Warehouse Institute (TDWI); author of Performance Dashboards: Measuring, Monitoring, and Managing Your Business

"[In this] very insightful book, the view of an integrated performance management framework with a goal to link various operational activities with business strategy is an excellent approach to manage and improve business. Gary's explanation of risk-based performance management, for providing the capability to achieve long-term objectives with reliably calculated risks, is definitely thought provoking."
—Srini Pallia, Global Head and Vice President of Business Technology Services, Wipro Technologies, Bangalore, India

"Gary Cokins is clearly one of the world's thought leaders in the area of performance management, and the need for integrated performance management, improvement and execution is clearly at a premium in these challenging economic times. This book is a must read for CEOs, CFOs, and management accountants around the globe seeking higher levels of sustainable business performance for their stakeholders."
—Jeffrey C. Thomson, President and CEO, Institute of Management Accountants

• Language: English
• Publisher: Wiley
• Release date: Mar 17, 2009
• ISBN: 9780470471197

Book preview

Preface

In the preface of my book Activity-Based Cost Management: An Executive Guide (John Wiley & Sons, 2001), I stated:

Sometimes luck beats planning. I have been fortunate in my professional career—a career that began in 1973 as an accountant and continued into line operations management and management consulting. Without realizing it—through this series of different jobs and management consulting assignments—I somehow earned a reputation as an internationally recognized expert in activity-based cost management (ABC/M). In truth, I am always learning new things about how to build and use managerial systems. I’m not sure that any expert in ABC/M exists. I’m just fortunate to have been formally working with ABC/M since 1988 when I was introduced to ABC/M.

Since 2001, I have expanded my understanding of how management works. I learned that cost management must be done in a much broader context—enterprise risk-based performance management. This is because one must consider time, quality, cost, risk, service level, resource capacity planning, innovation, customers, and suppliers as an integrated framework.

My university education in the late 1960s was in industrial engineering and operations research, and I attribute to that foundation my thinking during my work career about how organizations work as a set of intermeshed systems—like linked drive-gear teeth in a machine. In some ways, I am glad that, for a while after I graduated from my university, operations research was not broadly practiced and computers were not yet sufficiently powerful to process and store data. Otherwise, my career might have been narrowly focused on solving interesting problems appreciated only by mathematically trained specialists. Instead, as I was exposed to the deficiencies of traditional managerial accounting and performance measurement practices, I realized that these were challenges that were important to all managers around the world and that I could potentially contribute in a way to make a difference.

As a management consultant in the 1990s, my work assignments began to weave in strategy and nonfinancial performance measures. That initially led me to realize that cost management must occur in a broader context—that being performance management. My 2004 book on this topic reflected my observations from my work experiences and from some exceptional people I have been fortunate to interact with.

Since 2004, I have annually averaged visiting roughly 30 international cities, presenting seminars on enterprise performance management, meeting with commercial and public sector executives, and dialoging with management consultants. I have been so fortunate. I am a careful observer of what I see, and somehow I developed a knack for explaining complicated things in a way that people can understand them.

HOW THIS BOOK DIFFERS FROM MY 2004 BOOK ON PERFORMANCE MANAGEMENT

This book is different from my 2004 book on performance management. In that book, I explained with a serious tone the basic concepts of the various methodologies that, when integrated, comprise the performance management framework, such as strategy maps, balanced scorecards, and activity-based cost management. This book is more light-hearted but hopefully more insightful in explaining what it will take to successfully implement the full vision of the performance management framework. Here, I expand performance management to include the dimension of risk management.

This book is a compilation of media articles and blogs that I have authored since publishing my 2004 book. I have grouped the 35 chapters into 10 parts. Several of the articles, edited for this book, were posted in my monthly column that I write for the Web portal InformationManagement.com. I am grateful to the editors at InformationManagement.com (previously DMReview.com) for having provided me the platform to write about enterprise risk-based performance management, which I refer to in this book simply as performance management. My writing style for media articles is that of conversing with the reader; I hope that becomes apparent as you read this book.

LINKING STRATEGY TO OPERATIONS WITH THE ABILITY TO RESPOND

I have some concerns with misperceptions about what performance management is. One misperception, in which performance management is viewed far too narrowly, is that it is just a bunch of dashboard measurement dials plus better financial reporting. It is much broader than that and includes robust integration of typically disconnected information technology (IT) systems. A Forbes.com article described this as The old model of the enterprise was purely financial, focused on costs. . . . The modern practice of performance management has replaced this outmoded process with the equivalent of a corporate nervous system that shows what is happening right now in a company and can avert problems in the future. (By Dan Woods, 8/25/08, available at http://www.forbes.com/2008/08/22/cio-performance-management-tech-ciocx_dw_0825performance_print.html)

Another concern is performance management’s name—it is really about performance improvement; this implies the need for analytical support for better decisions—another distinction of performance management. Finally, although performance management’s scope is broad, my belief is that its main purpose is strategy execution rather than strategy formulation. Executives are quite competent with the latter, strategy formulation, and they often engage consultants like McKinsey to assist or validate their strategy. Executives’ frustration and challenge comes in successfully implementing and managing their strategy. This requires greater linkage of strategy to operations in the top-to-bottom direction and the alignment of the work and priorities of the workforce in the reverse, bottom-to-top direction.

There is no need to list here all the external commercial market or public sector government pressures and forces that are placing stress and demands on leadership teams. Almost every conference PowerPoint presentation begins with that almost-obligatory slide of a circle with arrows pointing into the circle—each arrow representing a pressure. Performance management is about helping executives to understand how to react to these pressures and then to select and take necessary actions. Selecting the right actions and then completing them is the tough part of management.

To complicate matters, transforming an organization is somewhat like having heart surgery while running a marathon (except there is no finish line). The goal of sustained long-term improved performance is a balancing act of many dimensions. One aspect is balancing pursuit of the short-term goals demanded by external bodies, such as capital market investors, with long-term strategic objectives.

External forces are producing unprecedented uncertainty and volatility. The speed of change makes calendar-based planning and long-cycle-time planning with multiyear horizons unsuitable for managing. Pursuits in both time frame horizons involve change:

• Short-term goals require agility to maintain linkage of a constantly adjusting strategy with operational execution while complying with and meeting aggressive performance level expectations of stakeholders (e.g., quarterly financial earnings reports). Stakeholders can include customers, taxpaying citizens, investors, and government regulators.

• Long-term strategic objectives require continuous innovation, foresight of risk and opportunity, relentless process improvement, an eye on recruiting and retaining a motivated workforce, and leveraging partnerships and alliances of all kinds for interdependent mutual benefits.

Executives are gradually shifting their perception from a common acceptance that their reengineered processes should be sturdy and resilient to a new view that they must be flexible and agile. Along with this change in perception comes one involving an economic structural shift wherein their view of their organization’s cost structure, including its employees, as being highly fixed relative to volume is changing to a view that its capacity is variable—that capacity is adjustable in the short term. With uncertainty and volatility rising, there is little choice to think otherwise.

FIVE CRITICAL MANAGERIAL AREAS

I believe advances in five managerial areas will help organizations concurrently pursue both time frame horizon goals:

1. The rising role of analytics, particularly predictive analytics. An educated workforce with analytical skills and supported by powerful information technologies is converging with increasingly complex problems. In addition, all decisions involve trade-offs that result from natural conflict and tension, such as customer service level objectives and budgeted cost (i.e., profit) objectives. It is essential to balance the overall enterprise’s performance with better trade-off decision making, rather than allow political self-interests of individual departments to preside.

2. A chief performance officer. Progressive organizations are realizing that strategy execution is too important to be a part-time job of the chief operating officer. New job titles like chief performance officer (CPO) or departments such as the office of strategy management are evolving to ensure that the executive team’s formulated strategy is executed and that the various performance management methodologies are phased in and integrated. Measurements drive behavior, and the CPO’s role is tasked to assure alignment of many dimensions, including capacity, the work of employees, and the fiscal budget to achieve the enterprise’s strategy. A strategy is never static—it is dynamic. It is adjusted as external factors change and new things are learned. A CPO is needed to ensure that executives are continuously modifying the strategy and that its adjustments are quickly linked and cascaded to those who execute the strategy.

3. Enterprise governance, risk, and compliance management. The observation If you cannot measure it, then you cannot manage it can be applied to risk. Techniques to recognize and measure risk are emerging, which positions risk for the subsequent step—the need to control risk through risk mitigation. Governance is the executive team’s ability to formulate and execute its strategy. Compliance is abiding by the law with tracking capabilities to know who touched a transaction, what was changed, and why a change was