The Banking Performance Management Process
JSCS Appraisal Solution
http://www.graincon.com/HumanResources.htmlwww.graincon.com
By Frank Buytendijk
A Gartner review of the practices of successful companies in a variety of industries reveals five characteristics that are key to success. Emulating these organizations requires a focus on performance management.
Some organizations do well at nearly every task. Almost all of their initiatives succeed, and even when something fails, it has only a temporary impact. These high-performance organizations (HPOs) seem to understand the market earlier and more thoroughly than other businesses, retain the best staff members, and have less trouble responding to external pressures. We recently undertook a study and identified case studies in an effort to understand what high-performance organizations do that is different from their competitors and to identify traits they have in common -- in particular, we focused on characteristics of HPOs from the perspective of corporate performance management (CPM).
What we found is that HPOs share five characteristics. They set ambitious targets and consistently and continuously achieve those objectives. They display a strong sense of purpose through shared values both inside (among employees) and outside the organization (among customers, suppliers, and other stakeholders). They have a strategic focus and alignment so that employees know how they are contributing to the results of the organization. They have the agility to adapt to changing circumstances quickly. And, finally, they have a common and shared business model throughout the organization. Exhibit 1, below, shows how these five characteristics interact to improve corporate performance.
The Mission: Set Ambitious Targets
Many organizations claim that the primary function of a strategy is to describe how to maximize shareholder value. We feel that this is not fundamental enough. Strategies come and go over time. In high-performance organizations, the fundamental performance drivers are described by the mission statement. Corporate strategy is what links the mission statement with the personal objectives followed by employees.
Unfortunately, many companies struggle to create a mission statement that helps them focus on what they are trying to achieve. In an analysis of the mission statements of about 50 companies, we found that many specifically address the company and its customers as deserving corporate attention but ignore other important stakeholder groups. The average number of stakeholders mentioned was three, but the number most frequently addressed was one. Bad mission statements state the obvious. Good mission statements identify an organization's stakeholders. Great mission statements go a step further still and identify the performance drivers of an organization and establish ambitious goals for the organization.
Of course, developing a great mission statement is not the end of the process. Most mission statements are not really implemented in the business. They should be embedded within CPM initiatives so that they provide clear guidance in determining performance drivers and targets. Likewise, the company's CPM program should bring the mission statement to life by putting in place solid measurement practices that help discover which objectives and strategies have succeeded in bringing the business closer to achieving its goals.
Pinpoint Shared Values
Every organization has values, whether they're spelled out or implicit. "Values" are not soft. New employees that join an organization and do not fit into its value system usually depart soon afterward. If the employees and management of an organization do not share the same values, every change proposed within the organization will be heavily debated and implementation will require significant effort. Even when values are agreed upon internally, if those values (i.e., what binds the organization together) do not align with customers' values (i.e., what attracts customers to the company), the organization will struggle to innovate successfully. In HPOs, managers and employees agree on the company's internal values, and those internal values match customers' values. Exhibit 3 below shows three auto manufacturers, as an example of values that are closely aligned.
Focusing on values provides clear guidance regarding which business initiatives will succeed. An orientation on values should be prominent throughout decision-making processes within the organization. For example, when completing a business case for a prospective project, managers should apply three questions:
Are the objectives of the initiative in line with the values of the organization? Implementing a new CRM system is bound to be less effective in a company that is passionate about product design than in a company whose values place high priority on getting to know customers.
Are the objectives of the initiative in line with customer values? If customers perceive the organization as trustworthy, might a process redesign that speeds up output damage customer relationships by reducing the level of quality? Or should a consulting firm that is known for its objectivity have a software implementation practice? If a company pays close attention to its social impact, what are the pros and cons of outsourcing manufacturing to a low-income country?
Will the initiative strengthen the link between organizational and customer values? Can the organization turn its profitability analysis process in the back office into a sales tool to make more competitive offers to its customers? Can the organization link its research and development skills into a program to provide water purifiers to third-world countries? Or can the organization turn its passion for on-time delivery into a selling point for new investors?
Furniture manufacturer IKEA is an excellent example of an organization that has aligned its values inside and out. IKEA is the largest and one of the best-known furniture brands in the world. It has 84,000 employees and operates 179 stores in 23 countries. The value proposition that draws customers to IKEA -- its ability to offer low-priced, functional furniture with a distinctive design -- is consistently communicated and carried out. Customers assemble the furniture and accessories themselves in order to keep down manufacturing costs. Customers generally pick up their items from the warehouse themselves (a system that was originally born out of capacity problems). And customers take their items home themselves. Delivery is a separate service that's marketed as being reasonably priced. This self-service atmosphere helps the company keep prices down, which is critical to customers' values.
Aligned with the customer self-service processes is a strong internal focus on cost control. Executives fly only economy class, and they don't have personal assistants, extravagant offices, or access to limousine services. One of the largest cost items is staff, but IKEA is not aiming to minimize employee costs across the board; instead, the company looks for ways to cut its staffing needs by making processes more self-service-oriented. In fact, employees are hired not primarily for their specific skills but because they share the same values as the company.
IKEA's customer and internal values are identical, and they're so rooted in the company that the strategy and value proposition are nearly impossible for IKEA competitors to copy. Having such clear internal and customer values greatly affects performance management. IKEA uses many of the same measures of success as other businesses, but it sometimes approaches performance from an entirely different angle. For example, one obvious performance indicator for a retailer is revenue growth. IKEA tracks revenue growth closely, but not as a measure of increasing shareholder value; rather, revenue growth serves as an indicator of customer satisfaction.
In successful companies, the customer value proposition and internal values are aligned. If they are not aligned, decisions always require a trade-off between customers and the company. IKEA's example shows that the old adage "what gets measured gets done" is not enough. The story behind the metrics is much more important than the metrics themselves. When a company's set of values is well-known, getting the metrics right and relating the story behind the metrics becomes much more of a derivative process.
How To Execute
The execution of a good strategy is at least as important as having that strategy in the first place. A company with no strategy but excellent execution may, in fact, be better off than a company with a good strategy that is badly implemented. Therefore, the first step in developing alignment is to put in place a measurement system to provide feedback on whether a strategy is working. There are many types of measurement systems; each has advantages and challenges. Regardless of which a company chooses, implementing it at the executive level and collecting feedback is not, by itself, enough to create focus and alignment. The measurement system has to be cascaded deep into the organization.
Every company has two management loops. The first (the inner loop in exhibit 4, below) deals with operational, day-to-day, short-term management issues. Its performance indicators are known; typically they involve the speed, cost, and quality of processes. These metrics are monitored consistently. The second loop of management (the outer loop in exhibit 4) is more hands-off. New targets are determined, and different performance indicators may emerge as the environment changes or as ways to further optimize processes from the first loop become clearer. The problem within many companies is that the two loops of management are often disconnected. Each has its own set of performance indicators, and those metrics are only implicitly linked. Operational management, which is responsible for the first loop, may be unaware of the issues in the second loop, and vice versa.
In high-performance organizations, however, the two loops are aligned. Corporate strategy is not only translated into high-level plans, but also linked to first-loop indicators. And these monitoring indicators are, in turn, explicitly linked to the feedback process. HPOs also have trigger-based processes that invoke the loops. If the organization's strategy changes, new targets and process optimizations are communicated to the people responsible for the first loop of management so that they can update their management methods. If changes in the environment are picked up by the first loop, these immediately invoke the second loop of management to respond quickly. The different people responsible for the two loops communicate, and executives can see developments registered by the operational first loop in the context of the slower-moving -- but further-reaching -- second management loop. This whole process is part of an emerging trend called "business activity monitoring."
A great example of an organization that has undertaken a major alignment effort is Ter Beke Group, a Belgian company that produces processed meats and frozen meals sold throughout Europe. The strategic objectives of the company are clear. Ter Beke wants to become a preferred partner of its customers. It does not compromise on customer service or product quality. Profit and growth are necessary, but they're a means for continuity, not goals in themselves. Ter Beke's mission statement includes several stakeholders; it specifies that the company wants to be socially responsible, provide fair returns to shareholders, ensure safe products for consumers, take care of its staff, and pay attention to the communities around its six manufacturing plants.
The company has achieved remarkable focus on this mission among employees. Each factory has its own balanced scorecard, as do all the commercial units (per country and channel). Supporting departments -- such as logistics, finance, customer service, and HR -- also have scorecards. All of these scorecards are linked to the corporate scorecard, and they serve as both measurement tools and as a fully integrated part of the budgeting process. Incentive pay is linked to the corporate balanced scorecard, so strategy, management processes, and personal goals are tied together. A manufacturing plant in which one performance indicator was off track installed a traffic light that shone green, yellow, or red depending on that metric's performance each day. In addition, every plant holds a daily five-minute-long meeting at 9 a.m. The quality manager, the controller, and various team leaders discuss the previous and current days and provide feedback to senior management. These activities have increased interaction among Ter Beke's entire staff and aligned performance goals throughout the organization.
Data and Process Standardization
For organizations that seek to become HPOs, it's not enough to introduce an aligned strategy, define the mission statement of the organization, and identify the company's values. Processes must also be efficient. Limited resources must be leveraged to maximize their value. At the very least, the organization must strive to become more efficient structurally than the competition. This is possible only if best practices, processes, and systems are recognized throughout the organization and if every part of the company follows a common business model. Very few companies realize this ideal.
Management processes and systems can be standardized only if they share data and performance indicators. Most organizations are stymied in their standardization efforts because they have trouble agreeing on definitions for the data that underlies the performance indicators. For instance, the term "employees" can be defined in several ways (e.g., only people who have full-time contracts, temporary workers, part-timers, etc.), and the term "revenue" can be interpreted in many ways. Thus, even a seemingly straightforward metric such as revenue per employee may be difficult to establish. Such a lack of standardization in data makes internal benchmarking impossible.
Obviously, another data-management requirement is that the information stored in operational systems must be correct to begin with. Gartner research has shown that the quality of 25 percent of all data used for management information is poor enough to cause problems. It is incomplete, contains factual errors, or is just unfit for the purpose for which it's being used. After the initial -- often painful -- data-cleanup phase of installing a CPM data warehouse, continuous training and monitoring are required to keep corporate information error-free and usable. High-performance organizations have an excellent grasp on information management. Organizations seeking to emulate them should concentrate on three activities: metadata and master data management, data integration, and data quality.
Agility Is Key
An abundance of research suggests that most organizations fail at executing strategies designed to improve their position in the market because the external environment changes faster than strategies can be devised. High-performance organizations achieve a high level of agility so that they can identify change and respond optimally -- or, even better, set the pace for change within their industry.
There are four primary ways to create agility in an organization. One is by centralizing processes, data, and systems companywide. This approach is usually highly IT-centric, but it ensures that changes need to be executed only once. This speeds up change processes and eliminates the chances for error. A second method for improving agility is through smart sourcing. Standardizing as many product components as possible and using subcontractors to produce and deliver those components can lead to a dramatic decrease in new-product-development time, so companies can respond quickly to market trends. A third model for improving agility is mastering the channel, as Wal-Mart is well-known for doing. The concept of "just-in-time inventory" is crucial here. If the organization monitors the complete value chain, it can react instantly to changing buying patterns. Products that sell faster than others can be restocked immediately. This approach also reduces waste of resources on excess capacity. Finally, project-based management can improve an organization's agility. If corporate functions such as HR can be fluidly deployed as needed by strategic initiatives, rather than being housed within rigid departmental structures, teams can be formed and dissolved more rapidly to pounce on opportunities or respond to threats.
Which of these agility strategies works best for a given company depends on that organization's business model. Over the past 30 years, Oracle has successfully navigated several major transformations. CEO Larry Ellison is responsible for the creation and execution of the company's strategy, and his strong personal leadership sets the direction for the company. Oracle can respond quickly to change because its processes and systems are extremely standardized. Once a change is put in place, it is active worldwide. Yet although Oracle is an agile company, not every agility strategy fits its culture. Centralization is the model that works for Oracle because of its structure and leadership
In other organizations, centralization leads to inertia, as the centralized functions become a bottleneck, building up a backlog of changes that are never implemented. Business units relying on centralized systems sometimes have to compromise in terms of functionality, so no one in the organization has the functionality they need for specific processes. And in other enterprises, centralized processes require so many exceptions that the supporting systems' complexity hinders, rather than helps, the organization's ability to change.
Bringing It All Together
Every organization has values. Every organization has stakeholders. Most already have a mission statement -- addressing the stakeholders -- although it may not be well-integrated into the day-to-day business. Some companies can boost performance by just unearthing their old mission statement and linking their values with their CPM practices. However, an organization that wants to become high-performance should take a methodical approach to performance management. It should start by creating a gap analysis that identifies the areas in its reporting, business cases, dashboards, and scorecards that closely correlate to the organization's different stakeholder groups -- and identifies where these correlations are missing. The company then should determine what its internal values are, as well as the values of its customers. If it discovers misalignment between the two, it should focus on fixing the problem before moving on.
Companies that want to become high-performing should determine which agility strategy fits them best and assess how their management cycles reflect the characteristics of that agility model. In addition, they must evaluate their current plans for new products, reorganizations, IT systems, and project requirements to see whether they are adaptable to change. Making systems and processes agile may not always be the cheapest option, but the effort will pay for itself many times over in the future.
A prospective HPO also needs to clean up its organization. It must eliminate siloed processes and systems, and replace them with shared systems. Managers could start by harmonizing reporting systems, cleaning up and consolidating datamarts, and purging masses of spreadsheets. They could also begin by instituting planning systems that cross multiple business domains, or by introducing a scorecard with performance indicators on which other reporting systems can focus. An aggressive one-version-of-the-truth initiative is crucial to becoming high-performance, as well. This should result in a data warehouse with a high-quality data set, including the business's metadata and standardized tables for key business entities such as suppliers, customers, products, and materials.
When a company has accomplished each of these steps, it will have the correct context in which to make decisions to move forward. Yet organizations must remember that execution is not a single step. It is a continuous process that never stops. The journey toward becoming a high-performance organization is never-ending, and it's full of pitfalls and detours. Still, every step along the way is worthwhile because it improves the company in some manner. For the HPO, the journey is the destination.
Originally printed in the February 2006 issue of Business Performance Management
www.graincon.com
