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The Tipping Point for Analytics-based Performance Management

by Gary Cokins, Consultant, www.sas.comWednesday, September 22, 2010

How does an organization decide to implement analytics-based performance management system methodologies? To answer this we can learn a lesson from the Malcolm Gladwell, a social scientist and author of best-selling book The Tipping Point, who describes how changes in mindset and perception can attain a critical mass and then quickly create an entirely different position of opinion. Let’s apply Gladwell’s thinking to the question of whether the widespread adoption of analytics-based performance management is near its tipping point or whether we will only know this in retrospect after it has happened.

Gladwell observed that to determine whether something is approaching the verge of its tipping point, such as an event or catalyst, it should cause people to reframe an issue. For example, just-in-time production control reframed manufacturing operations from classical batch-and-queue economic order quantity (EOQ) thinking to the method based on customer demand-pull product throughput acceleration. So, is analytics-based performance management reframing issues and nearing its tipping point? To answer this, we should first acknowledge that business analytics and performance management methodologies are not something new that everyone has to learn, but rather it is the assemblage and integration of existing quantitative techniques and methodologies that most managers are already familiar with. Collectively, these methodologies manage the execution of an organization’s strategy.


Multiple tipping points of analytics-based performance management components

Since analytics-based performance management is comprised of multiple methodologies, all interdependent and interacting, what is profound is that we’re now actually experiencing multiple and concurrent sub-tipping points all at once. Ultimately their collective weight is resulting in an overall tipping point for adopting performance management. These tipping points are:

  • The Balanced Scorecard (BSC) – Thanks to successes on how to properly implement the combined strategy map and balanced scorecard framework (and there are plenty of improper implementations), executives are now viewing BSC differently. Rather than BSC being a rush to put the massive number of collected measures (the so-called key performance indicators, or KPIs) on a diet to distill them down to the more relevant few, executives now understand the strategy map and BSC framework as a mechanism to better execute their strategy by communicating it to employee teams in a way they can understand it, and then aligning the employees’ work behavior, priorities, and resources with the strategy. By embedding KPI correlation analysis into its strategy map, organizations can rationalize the best vital few KPIs based on their explanatory contribution to the resulting financial KPIs.
  • Decision-Based Managerial Accounting – Reforms to managerial accounting, led by activity-based costing (ABC), may have once been viewed as just a more rational way to trace and assign the increasing indirect and shared overhead expenses to products and standard service-lines (in contrast to misleading and flawed cost allocations based on cost distorting broad averages). Today, reforms such as ABC are now being reframed as essential managerial information for understanding which products, services, types of channels, and types of customers are more profitable or not – and why. There is a shift away from cost control to cost planning and shaping because most spending cannot be quickly changed. This means better capacity and resource planning and less historical cost variance analysis. Executives recognize that cost management is an oxymoron, like “jumbo shrimp” in the supermarket. You don’t directly manage your costs but rather you manage the quantity, frequency, and intensity of what drives your process workloads. ABC places focus on cost drivers with optical fiber-like visibility and transparency to view all the currently hidden costs with their causes.
  • Customer Value Management – Customer relationship management systems (CRM) have been narrowly viewed as a way to communicate one-to-one with customers. However, executives have learned that it is more expensive to acquire new customers than to retain existing ones, and that their products and service-lines have become commodities from which there is little competitive advantage. As a result, organizations are reframing CRM more broadly as a way to analyze and identify characteristics of existing customers that are more profitable and valuable, and then apply these traits to formulate differentiated and tiered treatments (such as marketing campaigns, deals, offers, and service levels) to existing customers as well as to target attracting new customers who will possess relatively higher future potential value (which, incidentally, requires ABC data to calculate customer lifetime value scores to differentiate prospects). This reframing places much more emphasis on micro-segmenting customers and post-sale value-adding services with cross-selling and up-selling. Mass selling that snares unprofitable customers is out, and it is being replaced by the new recognition that one must not just grow sales but rather grow sales profitably.
  • Shareholder and Business Owner Wealth Creation and Destruction – The strong force of the financial capital markets to assign financial value to organizations has caused the executive teams and governing boards to realize that old, traditional methods of placing value on a company are obsolete. The balance sheet assets now only account for a small fraction of a company’s market-share price capitalization. A company’s future value is linked to its intangible assets such as its employee skills and innovation. As a result, executives are reframing its understanding as to how to increase its positive “free cash flow,” the financial capital market’s metric of choice, to convert potential value (ideas and innovation) into realized value (financial ROIs). They have reframed the path to continuous shareholder wealth creation as governed by customer value management – viewing customers as investments (like in a stock portfolio) rather than things you spend money on hoping they earn you a profit.

Synergy from the integrating analytics-based performance management components

It is not a coincidence that each of the four tipping points above mentioned interdependencies amongst them. Transaction-based information systems, like enterprise resource planning (ERP) systems, although good for their designed purposes, do not display the relevant information to apply business analytics to and that are required for decision analysis and ultimately for decision making. Transactional systems may provide some of the raw source data, but it is only through transforming that raw data into decision-based information that the potential ROI trapped in that raw data can be unleashed and realized financially. This in part explains the growing demand for analytics-based performance management systems as value-multipliers.

ABOUT THE WRITER

Gary Cokins, CPIM

http://blogs.sas.com/content/cokins

Gary Cokins is an internationally recognized expert, speaker, and author in advanced cost management and performance management systems. He is a Manager of worldwide performance management solutions, with SAS, a leading provider of business analytics software headquartered in Cary, North Carolina. Gary received a BS degree in Industrial Engineering / Operations Research from Cornell University in 1971and an MBA from Northwestern University's Kellogg School of Management in 1974.

Gary began his career as a financial controller and operations manager for FMC Corporation and he has been a management consultant with Deloitte, KPMG Peat Marwick, and Electronic Data Systems (EDS). Gary’s third book, Activity Based Cost Management: An Executive’s Guide has ranked #1 in its topic on Amazon.com. His two most recent books are Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (ISBN 0-471-57690-5) and Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (ISBN 978-0-470-44998-1)

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