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The Tipping Point for Performance Management
Implementing a performance management system

by Gary Cokins, Consultant, www.sas.comTuesday, June 26, 2007

How does an organization decide to implement a performance management system? To answer this we can learn a lesson from the Malcolm Gladwell, a social scientist and author of the The Tipping Point, who describes how changes in mind-set 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 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 performance management reframing issues and nearing its tipping point? To answer this, we should first acknowledge that performance management is not a new methodology that everyone has to learn, but rather it is the assemblage and integration of existing methodologies that most managers are already familiar with. Collectively, these methodologies manage the execution of an organization's strategy.

Multiple Tipping Points of Performance Management Components

Since performance management is comprised of multiple methodologies, all interdependent and interacting, what is profound is that we are 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.

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 upselling. 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.

Synergy from the Links Among Performance Management Components

It is not a coincidence that each of the four tipping points just mentioned have interdependencies. Transaction-based information systems, such as enterprise resource planning (ERP) systems, although good for their designed purposes do not display the relevant information required for decision analysis and, ultimately, for decision making. Transactional systems may provide some of the raw 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 performance management systems as value multipliers.   

This article originally appeared in the DM Review

About the Author

Gary Cokins is a strategist for SAS, a market leader in data management, business intelligence and analytical software. He is an internationally recognized expert, speaker and author on advanced cost management and performance improvement systems. He is the author of five books, An ABC Manager's Primer, Activity-Based Cost Management: Making It Work, Activity-Based Cost Management: An Executive's Guide (Wiley), Activity-Based Cost Management in Government and his latest work, Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (Wiley). You can contact him at gary.cokins@sas.com

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