PrinciplesBasedApprochtoCPM
- 1. Corporate Performance Management (CPM) based on best principles March 2005 “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination” - Jimmy Dean – Joseph J. Alenchery Globalization and the technology revolution herald an era of intense competition. At the same time, increased regulatory and investor pressures reemphasize the need for predictable corporate performance. The need for improved decision making and for quicker reaction to external stimuli has never been more critical. In this context, global corporations are making incremental improvements to their management processes. However, isolated and siloed implementations of management methods and processes lead to failure in strategy execution. The need of the hour is to make integrated improvements across the performance management cycle based on best principles. Infosys has used this concept very effectively within the company to achieve significant results. Perhaps, leveraging the CPM approach may unearth a host of new efficiencies for global corporations.
- 2. Global pressures are driving the need for CPM Increasing regulatory pressures and demanding investors drive the need to demonstrate significant control over every aspect that impacts corporate performance. The Sarbanes-Oxley Act in the US and the new International Accounting Standards (IAS) in Europe demand greater accountability at all levels. ‘CXO certification’, part of the new regulatory mandate, requires senior executives to have reasonable assurance regarding the reliability of financial reporting. For this, they need transparency into financial results; the processes that produce these results; and the operational data that drives these results. The need for real-time disclosure of material changes in operations calls for speed and capability of adapting forecasts and plans in the face of such change. However, increasing organizational complexity in terms of size and structure often masks the linkage between a business decision and its operational consequences. At the same time, globalization and the technology revolution herald an era of intense competition and declining entry barriers. Global business cycles have become compressed and unpredictable. Economic uncertainty is the norm rather than the exception. This is compounded by a proliferation of products, customers and channels, and frequent changes to the corporate structure. Consequently, organizations seek constant readjustments to strategy based on causal inputs. The need for improved decision making and for quicker reaction to external stimuli has never been more critical. Organizational agility has become an imperative to compete effectively. Agility, as management guru C. K. Prahlad has said, is about improving the cycle time for managerial action. In this context, global corporations are forced to re-look at their management processes. In fact, according to a recent study, over 70%1 of global corporations intend to make significant changes to their budgeting and planning systems and processes. Incremental improvements are being made to critical processes which are part of the performance management cycle. Performance Management Cycle The performance management cycle refers to the whole set of management processes that starts with strategy formulation and is followed by alignment of corporate objectives and measures Continuous Optimization Continuous Optimization The Performance Management Cycle Measure & Analyze Align & Execute Review & Refine Define & Plan Competitive Advantage Strategy Formulation Strategy Formulation Understand stakeholder needs Understand stakeholder needs Analyze Market dynamics Analyze Market dynamics Define Strategic Objectives & Measures Define Strategic Objectives & Measures Develop Operational Plans Develop Operational Plans Formulate strategies to achieve Corporate Vision Strategy Execution Strategy Execution Communicate Strategy & Plan Communicate Strategy & Plan Align Objectives & Measures across levels Allocate Resources Allocate Resources Manage Organizational Change Manage Organizational Change Align entire organization along key strategic objectives Review performance Review performance Collaborate with other Decision Makers Collaborate with other Decision Makers Refine Strategy & Execution Plan Refine Strategy & Execution Plan Collaborative Planning for Holistic Improvements Performance Analysis Performance Analysis Model Business Information Architecture Model Business Information Architecture Track Progress along KPIs Track Progress along KPIs Forecast Performance Forecast Performance Analyze “What-If“ Scenarios Analyze “What-If“ Scenarios Measure organization performance & track strategic initiatives Generate Integrated Insights Generate Integrated Insights
- 3. across levels. Robust performance analysis is the next step. Finally, disciplined review and strategy refinement based on business insights complete the cycle. Define & Plan A typical management cycle starts with strategy formulation based on the corporate vision. Ideally, this first stage in strategic planning starts with identifying value drivers relevant to the organization based on market insights, competitive intelligence and on feedback from implementation of current strategy. It takes into account technology and business trends. After achieving consensus on overall strategic objectives, measures are defined for each objective and appropriate targets are set. Scenario planning, simulation and business modeling can be used to evaluate various business scenarios. The business model reflects the drivers for revenue, cost and profitability. It helps understand the risk factors associated with each decision. Consequently, the company can plan for mitigation measures and define the risk management framework. Align and execute Communicating and cascading the corporate strategy to various levels are the next steps. Business managers in collaboration with the corporate define targets and measures, and develop operational plans for various business units. A business manager is most effective when focused on the few things that really matter in each industry vertical. The corporate management can collaboratively identify those few things, and tie compensation specifically to their accomplishment. Thus, an important part of the performance cycle is organizational alignment to corporate strategy. Identifying key strategic initiatives to achieve objectives and allocating resources appropriately lay the basis for effective execution. Measure & Analyze Measuring and continuous monitoring of performance against operational targets constitute an integral part of the performance management cycle. Progress is tracked along KPIs defined earlier and performance gaps are analyzed. The business information architecture that consists of appropriate systems and processes to deliver timely, accurate, relevant and accessible information forms the backbone of performance analysis. The ability to see the entire organization regardless of geographic or divisional boundaries through a single global view of information enables accurate forecasting. Such forecasting takes into account more than just the needs of one division. Managers can review sales forecasts by opportunity, geography, or product. Planning and analysis capabilities, with sophisticated data modeling and multi-dimensional analysis, are tailored to existing business processes and business users’ needs. Sales forecasts based on sales opportunities as well as operations forecasts and product forecasts based on actual versus targets data at the business level are all “rolled-up” to enable accurate corporate-level forecasts. 9 Review & Refine A strategic learning feedback loop is one of the most important elements of the performance management cycle. “By far the most serious indictment of conventional strategy is that it is static,” says William Pietersen of Columbia Business school. Strategic learning enables a dynamic cycle of renewal and change. It consists of reviewing performance, generating business insights and feeding this back into the strategy formulation exercise. Business insight is derived out of the capability of analyzing information – financial, operational and market – that enables decision- makers to understand and act, before their competitors, to create sustainable shareholder value.
- 4. Thus, the ideal performance management cycle consists of a set of integrated activities that reinforce each other. Though its effectiveness might be questionable, most companies have had deeply entrenched management processes across the performance cycle. Consequent to the increasing global pressures of recent years, they have made attempts to revamp some of the key functions in this cycle. Global corporations are revamping their management processes Today, many leading companies have sharpened their focus on strategic planning. After all, as Seneca has said: “When a man does not know what harbor he is making for, no wind is the right wind.” In fact, according to a Harvard study, for every $1 billion in revenue, global companies today spent more than 25,000 man-days on planning. Typically, however, the planning cycle is so long and convoluted that it has little relevance or impact on actions taken downstream. For instance, while a growing consensus of senior finance executives regards a rolling quarters method as best practices, 60% of all companies are on an annual budgeting cycle 1 . In addition, lack of structured market information flowing into the strategic planning process has led to ineffective response to market changes. Many have failed to break down corporate strategy across the organization so that it is directly relevant at each level (corporate, business-unit, team, and individual). As a result of all this, less than 10% of strategies formulated are effectively executed 2 . No wonder then, that in a survey by Ernst and Young, investors and analysts opine that execution is often more important than the strategy itself. Competitive advantage is predicated on ensuring efficiency of strategy execution, while at the same time improving its effectiveness. Towards this, corporations have spent ample time in making incremental improvements to their execution framework. For instance, more than 50% of the Global 2000 are deploying the Balanced Scorecard (BSC) to some extent for strategy management and execution 3 . Unfortunately, companies continue to work towards different solutions for each element of the corporate management framework – strategic planning and evaluation, budgeting and forecasting, performance analysis and review, just to name a few processes. Today, they realize that isolated and siloed implementations of management methods and processes lead to failure in strategy execution. In fact, only 12% of companies think that their planning process is completely reliable 4 . 60% of organizations don’t link resource allocation to strategy. According to a study 5 , only one-sixth of the organizations have a formal process for reviewing performance; Strategy formulation Macro-economic environment Market analysis Regulatory environment Technology trends Organizational value drivers Strategic choice Plans and budgets Risk factors & mitigation measures Scenario Planning & Business Modeling Business insights from operations
- 5. and more than two-thirds of organizations don’t align their IT activities with corporate strategy – not surprising, once we learn that only one-third use formal management processes to create alignment and integration. The need of the hour is to make integrated improvements across the performance management cycle based on best principles. Principles-based CPM approach Corporate Performance Management (CPM) is an approach to bring in systematic and integrated improvements across the performance management cycle. The objective is to increase the effectiveness of strategy through alignment and efficiency of its execution. It covers the entire set of processes right from understanding stakeholders’ needs to translating them into organizational goals and achieving them. It is supported by a metrics-based strategic planning and execution framework that helps businesses align plans (long, medium and short term) with execution and ensure linkage with review mechanisms. Typical approaches to CPM have been characterized by excessive reliance on popular management frameworks such as the BSC, Six Sigma or Activity Based Management (ABM). While these frameworks do help implement change, empirical evidence of success hardly justify the faith consulting organizations seem to repose on them. The effectiveness of many of these frameworks is predicated on the fit with the organizational culture, with its value system and with the specific processes being worked upon. Gartner’s alarming statistic that “80% of enterprises that fail to integrate the BSC into their planning and performance management cycles will drop it and return to a less-organized set of metrics” 6 only proves that point solutions based on indiscriminate implementation of management methods seldom deliver sustained results. Infosys’ CPM approach focuses on incorporating the best principles of CPM rather than on a blind implementation of popular frameworks. These best principles are derived out of first hand Nimble Management Architecture Best principles of CPM Information -based Decision Making Integrated Management Processes Disciplined Execution & Review Comprehensive & Structured Planning
- 6. experience at Infosys in managing the underlying processes across the performance management cycle for many years. The guiding principles of this approach are: • Comprehensive & structured planning • Disciplined execution & review • Information-based decision making • Integrated management processes • Nimble management architecture Frameworks such as the BSC, Value Based Management and ABM are judiciously used depending on the organizational context, to incorporate the best principles, for achieving better corporate performance. The sequence of activities from assessing environmental inputs and assimilating stakeholder needs, to continuously reviewing operational needs and performance issues, is an important aspect of a comprehensive & structured approach to planning. For instance, research proves that companies should avoid combining strategy reviews with discussions of budgets and financial targets. When the two are considered together, short-term financial issues dominate at the expense of long-term strategic ones 7 . A disciplined approach to execution avoids an overload of operational metrics that will cloud the view of performance vis-à-vis strategy. It also ensures that performance accountability to a task and level-of-influence over the outcome goes hand-in-hand. This leads to increased effectiveness in achieving goals. Setting up reward and recognition commensurate to execution challenges and creating clear traceable execution paths for all plans generated during the planning phase are other important aspects. Disciplined review ensures that the organization isn’t just measuring results, but also assessing results against strategy and adjusting the course – including changes in budgets and forecasts – if needed. Unfortunately, as Eric Beinhocker and Sarah Kaplan of Mckinsey 7 say: “The annual Clearly established forums to cover all aspects Appropriate participation to ensure right influence Avoid information overload to top management Define information flows into reviews and plan outputs Adequacy of review Appropriate authority Hierarchical structure Information based and action oriented Adequacy of review Adequacy of review Appropriate authority Appropriate authority Hierarchical structure Hierarchical structure Information based and action oriented Information based and action oriented Disciplined Review
- 7. strategy review frequently amounts to little more than a stage on which business unit leaders present warmed-over updates of last year’s presentations, take few risks in broaching new ideas, and strive above all to avoid embarrassment.” Ensuring: appropriate ‘hierarchical structure’ for review forums that avoids information overload to top management; ‘adequacy of review’ by establishing forums to cover all aspects of strategy execution; and ‘appropriate authority’ of review by having the right people manage review forums, ensure a disciplined approach. In fact, exception-based reviews that focus on actionable information are found to result in as much as 30% reduction in review time. Effective strategy formulation and execution are enabled by information-based decision-making across all functions of the performance management cycle. The CPM approach helps identify appropriate technology changes needed to generate actionable business insights from operations. Interestingly, according to a recent study 8 on global corporations, finance personnel spent only 20% of their time on analyzing data. They spent 70-80% time on collecting and integrating data, as well as on attending meetings trying to reconcile or agree on the data. Needless to say, Global 2000 corporations have spent billions of dollars on “Business Intelligence” – a term used to denote the technology and the method of extracting useful information through reporting and analytics. However, what many executives fail to understand is how BI integrates with performance management methodologies (such as the BSC) and management processes (such as budgeting, planning and forecasting). Without such integration, BI, unfortunately, remains a reporting exercise under-utilized by business users. Integration across the management cycle is the bedrock of the CPM approach. Various ‘integration stubs’ include integrating: planning with performance analysis and business insight generation; business portfolio management strategy with capability building; capacity planning with growth planning; resource allocation process with strategy; planning with review; and, strategic goal setting and alignment with planning, forecasting, and modeling capabilities. This integrated approach enables strategy, planning, execution, and measurement to function as collaborative, rather than separate disciplines. Finally, nimbleness in managerial action through reduced cycle time is a core principle that runs across all functions throughout the performance management cycle. The CPM approach offers dramatic improvement in process cycle time and review frequency. Faster deployment of plans; review frequency aligned to industry cycle times; and a shift in the thinking from ‘big-bang approach’ to an iterative mode are corner stones of the principle of nimbleness. This ensures that plans are in tune with market realities and that strategic initiatives do not lose their relevance, among other benefits. Principles-based CPM approach provides competitive advantage The principles-based CPM approach impacts performance management processes from organizational planning (strategic planning, risk management, budgeting & forecasting, business unit planning, and operational planning) to decision support processes (performance analysis and predictive business modeling) to review processes aimed at creating a closed loop of performance improvements. This provides the organization with a unique combination of flexibility and control. Companies may measure business performance on a calendar basis, but business events happen at random times. The ability to respond to changes or opportunities as they occur, to re-plan business activities, and to begin execution quickly gives firms advantage. By creating a circular connection among forecasting and planning, corporate strategies, and operational data, this approach gives users a more realistic view of the entire organization. It helps identify those areas that may adversely affect forecasts for growth. By forecasting more accurately and strategically aligning goals and execution, you gain credibility in the marketplace and greater agility to respond in more turbulent environments.
- 8. Infosys has used this approach Infosys has used this concept very effectively within the company to achieve significant results. The company has streamlined bottom-up information flow to senior management (moved from 400 metrics to 30 metrics directly linked to strategic objectives). It has achieved over 65% reduction in cycle time for budgeting, thus allowing for frequent reviews. This has meant that budgets remain relevant throughout the year. Further, there has been a 40% reduction in planning cycle time. Re-engineering of the review processes has freed up 20% of senior management time which was spent on review meetings. In addition, this has improved the effectiveness of these reviews. Most importantly, Infosys achieved a dramatic 30% improvement in forecast efficiency. The company has met financial forecasts for the last 48 quarters in a row, since it went public in India. Perhaps, this bears testimony to the effectiveness of the multi- generational improvement program that it embarked upon through the CPM approach. About the Author: Joseph Alenchery is a Senior Consultant with the Corporate Performance Management (CPM) solution at Infosys Technologies Ltd. He has experience in corporate management processes and business development in the IT and Telecom industries. At Infosys, Joseph was part of the Corporate Planning group. He also provided executive support to the Chairman of the Board before taking on his current role. He may be reached at: joseph_alenchery@infosys.com 1 Ventana Research 2 Fortune Magazine Survey 3 Gartner Research 4 CFO Magazine Survey 5 Society for Human Resource Management (SHRM) 6 “CPM: A Strategic Deployment of BI Applications” Gartner 7 “Tired of strategic planning?” Eric Beinhocker and Sarah Kaplan: Mckinsey & Co. 8 Accenture survey 9 For more information on the technology architecture that underpins the performance management cycle, refer to the white paper titled “Information Architecture for CPM” by Anoop Nambiar.
- 9. © 2005 Infosys Technologies Limited ALL RIGHTS RESERVED Copyright in the whole and part of this Corporate Performance Management (CPM) based on best principles belongs to Infosys Technologies Limited. This work may not be used, sold, transferred, adapted, abridged, copied or reproduced in whole or in part in any manner or form or in any media without the prior written consent of Infosys Technologies Limited.