Sie sind auf Seite 1von 34

PIECING TOGETHER

THE PERFORMANCE PUZZLE

MAKING
S T R AT E G Y H A P P E N
CONTENTS

SECTION PA G E

1 Seeing the Big Picture Is Not Enough. 2

2 No Process Is an Island. 3

3 Connect the Dots. 4

4 Building Strategy? Involve Those Who Are in the Know. 6

5 Don’t Just Communicate the Strategy. Literally Drive It Home. 7

6 Make the Strategy Wag the Budget. 8

7 Find and Focus on the Leading Indicators. 9

8 Tie Your Metrics to the Market. 11

9 Target the Model You Want to Be. 12

10 It Doesn’t Have to Be Annual. 14

11 Be Careful What Compensation Buys. 15

12 Cash Isn’t Always King. 16

13 Motivate Beyond the Four Walls. 17

14 Learn to Prioritize Among Great Options. 18

15 One Size Doesn’t Fit All. 19

16 Less May Be More. 20

17 Reporting Is Dead! Welcome to Enterprise Dashboards. 21

18 Use Information to Prompt Action. 22

19 Information Ubiquity Creates New Challenges. 23

20 Leveraging Emerging Technology. 24

21 Fire Up the Feedback Loop. 26

22 Build a Winning Team. 27

23 Think Big, Start Smart, Deliver Quickly. 28

About the Authors 30

PIECING TOGETHER THE PERFORMANCE PUZZLE 1


1 SEEING THE BIG PICTURE IS NOT ENOUGH.

We can all think of organizations whose fortunes have rocketed because they were able
to see the really “Big Picture” ahead of their competition—and realize their visions.

FedEx®, for example, adapted a simple approach to a business nearly as old as time to
become a global delivery giant. Microsoft’s® focus on software rather than hardware
created a powerhouse company.

But as much as we like to credit such fabulous successes to vision, winning companies are
distinguished by more than their ability to see the Big Picture. Companies that truly excel
can execute against their visions, getting their organizations—from top to bottom—to
Companies that truly excel commit to a desired level of performance.
know how to get their
No matter how big the Big Picture is for FedEx, Microsoft, or your company, it means
organizations—from top to
nothing if the ability to implement strategy is lacking. Vision needs to be matched by
bottom—to commit to a execution. No matter how good your strategy is, performance against it has to be truly
outstanding or competitors will defeat you in the marketplace. Recognizing the crucial
desired level of performance.
importance of a well-orchestrated execution strategy, we developed the Performance
Commitment framework.

The framework encompasses three elements of commitment that demand attention—


strategic, operational, and organizational commitment. A few organizations, public and
private, address some aspect of Performance Commitment well. Others go through the
motions but never quite derive true value. Few organizations, if any, are getting all of it
right. The power of Performance Commitment stems from the linkage of these three
components and their ability to motivate performance through a shared commitment.

Effective Performance Commitment processes can help you convert those Big Picture
ideas into reality. They can help you spot and execute on the next Big Idea ahead of
the competition.

2 K P M G C O N S U LT I N G
2 NO PROCESS IS AN ISLAND.

In many organizations, the performance management systems and processes are


fragmented and misaligned.

Is it any wonder, for example, that many executives are critical of their annual budgeting
process when it is fairly common for the budget to be created by one department while
the strategic plan is created by an entirely different department?

Think about your own organization, and ask yourself these questions:

• When your strategy shifts, are team and individual goals and incentive compensation
revisited and revised?

• Are your training programs going beyond compliance-driven objectives to really


developing employee skill sets that are consistent with your strategy?

• In the next hour, can you get useful and relevant information about progress toward
your strategy, performance against your metrics (and against your competition),
progress against individual employee goals, and the status of your budget against
compensation bogeys?

• Do you finish your budgeting process in less than 30 days, and are the results
consistent with your strategic imperatives?

If you answered yes to each of these questions, your organization is probably well on its
way to developing a truly integrated Performance Commitment approach to managing
the business. If not, however, yours is like many organizations, and there’s probably room
for improvement.

And that improvement comes from enhancing the individual elements of your
Performance Commitment processes and linking the “islands” so that they work in concert.

PIECING TOGETHER THE PERFORMANCE PUZZLE 3


3 CONNECT THE DOTS.

Perhaps the reason many organizations have not connected their “islands” is because
they view each process in isolation. We advocate the holistic, linked approach of the
Performance Commitment framework.

S T R AT E G I C C O M M I T M E N T

The Performance Commitment


framework links crucial
S T R AT E G I C A S S E S S M E N T elements of the
S T R AT E G I C F E E D B A C K management environment.
BALANCED SCORECARD

O P E R AT I O N A L C O M M I T M E N T O R G A N I Z AT I O N A L C O M M I T M E N T

EMPLOYEE
DEVELOPMENT
BUDGETING &
FORECASTING
INDIVIDUAL
MODELING & ACTION INDIVIDUAL
PERFORMANCE
P L A N I N I T I AT I V E S GOAL SETTING
APPRAISAL
WEB-ENABLED
PERFORMANCE
REPORTING
REWARD
SYSTEMS

The underlying principle of this framework is that it’s all about the execution of strategy.
You win competitively by executing on your strategy, so your overall organizational focus
must harness and direct all elements of performance toward successful strategic execution.

Can you imagine an environment where your budget is complete and you align individual
employee goals on the same day? Or where your management information reflects how you
stack up against the competition?

We view the elements of Performance Commitment as a process of commitment—


commitment of resources, naturally, but also commitment to outcomes and performance
goals. The alignment and effectiveness of the organization in its entire planning activity
will depend on:

• The quality of the individual plans that make up the corporate whole

• The linkages that make up the different kinds of plans—strategic and operating plans,
financial plans, and operational forecasts

4 K P M G C O N S U LT I N G
CONNECT THE DOTS. [CONTINUED]

We encourage organizations to view all their planning activities in the context of the
Performance Commitment framework, rather than as isolated processes.

As mentioned earlier, the Performance Commitment framework has three primary


elements that are linked:

• Strategic commitment is intended to provide both a point of focus for the


organization as well as the metrics to ensure that it’s on track every step of the
way. Useful tools to align strategy and metrics include balanced scorecards and
target models.

• Operational commitment provides the pathway to “operationalize” strategy. Budget


and performance reporting are typical tools used here.

• Organizational commitment is concerned with individual goal setting, performance


appraisal, and reward systems and is intended to mobilize and motivate the individuals
responsible for executing the plan.

So often in making substantive changes to how a company plans for and manages its
business, top executives fail to manage these three components in an integrated fashion.
If you sense a fundamental disconnect in your organization, do something about it now.
Successful integration provides the discipline, the measures, and the feedback loop
necessary to achieve desired results.

PIECING TOGETHER THE PERFORMANCE PUZZLE 5


4 B U I L D I N G S T R AT E G Y ? I N V O LV E T H O S E W H O A R E I N T H E K N O W.

A first step toward improving your organization’s Performance Commitment is to start


with a specific element—strategic, operational, or organizational commitment. Consider
both how to improve it and how to link it with the others.

In the strategic part, for example, we often advise companies to start with a simple change:
Open up the strategy-forming process to as many people as is practical.

Think about it. As a leader you rely on information provided by a variety of sources,
including direct reports, analysts, industry peers, and partners. Now consider this:

If the best strategies were • The salespeople pounding the pavement daily have a distinctive perspective
on the competition, pricing, and the customer’s mindset.
solely the domain of the
• The manufacturing staff understands what factors lead to plant downtime
corner office, there wouldn’t
and material waste.
be so many exciting
• Programmers know how to employ emerging Internet technologies.
new start-ups around.
• Financial analysts develop new insights about profitability that can be meaningful
in guiding future strategy.

Consider your organization. Does everyone, regardless of rank, have the opportunity to
surface ideas and provide feedback? Ideally, strategy should not be level conscious—it
should be idea conscious. The best strategies come from thought leaders throughout your
organization and are not solely the domain of the corner office. If they were, there wouldn’t
be so many exciting new start-ups around.

So, as you kick off your next strategic planning or forecasting cycle, take a hard look at
who is at the table. Regardless of their levels, include staff members with direct customer
contact, hands-on product development, and manufacturing experience. Include thinkers
from all disciplines. Challenge them to propose strategic options, goals, and metrics that
will keep your business ahead of the competition.

6 K P M G C O N S U LT I N G
5 D O N ’ T J U S T C O M M U N I C AT E T H E S T R AT E G Y.
L I T E R A L LY D R I V E I T H O M E .

It is said that only the CEO and the front line of the organization know what’s going on.
Everyone else is only shuffling information.

To ensure that everyone in an organization is contributing to the execution of the


company’s strategy—and to build on the strategic commitment we spoke about earlier—
the next step is to “operationalize” the strategy. One effective way to do this is to reengineer
the strategy into a balanced scorecard, a tool first proposed by KPMG Consulting’s business
and IT strategy practice, Nolan, Norton & Co.®, in the early 1990s. A balanced scorecard
helps to enable the execution of strategies by identifying manageable metrics that guide the
day-to-day activities of each business functional area and individual in the organization. Employees often have a

great sense of what precise


For example, if an Internet sale saves a company half of what it costs to make a traditional
actions can drive a
sale, the company’s strategy might involve driving its existing customers to order products
via the Web. To enable the strategy, salespeople may have metrics related to changing their desired outcome...and
customers’ ordering habits. And customer service representatives may need metrics tied to
Ameritech’s drivers proved
training in new technologies, such as co-browsing software, to better help customers find
the products they seek. it with a 25 percent

increase in productivity.
In developing a balanced scorecard, we again recommend that you seek input from others
besides management. Employees often have a great sense of what precise actions can drive
a desired outcome. One example is Ameritech®, which, in a quest to improve operations,
set about educating its staff on the importance of their chosen metrics. One Ameritech
garage manager saw that the company could become more cost efficient through optimal
use of its assets (the trucks in his garage). He asked his drivers for incremental ideas to get
that done. The combined ideas completely changed the way the garage dispatched trucks.
Drivers took them home at night and were dispatched to their calls via phone each
morning. This eliminated unnecessary trips to the garage and effectively added almost
two hours to the productive workday of each installer.1

The lesson is threefold. First, figure out what kind of company you want to be. Second,
determine the right metrics. Third, drive focus and commitment by educating and
involving all levels of staff.

1
Noel M. Tichy, Eli Cohen, “The Leadership Engine,” HarperBusiness, 1997, pages 84-85.

PIECING TOGETHER THE PERFORMANCE PUZZLE 7


6 M A K E T H E S T R AT E G Y WA G T H E B U D G E T.

Whether in the workplace or in their private lives, most people wince at the word budget.
Nobody really wants to be limited by a budget, so maybe it’s natural that the budgeting
process isn’t viewed favorably. Yet, correctly positioned, it can be a critical component of
the Performance Commitment framework.

The value of budgeting is often compromised because pure politics or superfluous rules
encumber the process. A typical example is the familiar across-the-board reduction in
departmental budgets based on false principles of “equal tension” rather than on the
reality that different lines of business face very different market opportunities and risks.

Where constraints or market A better approach is to recognize that when constraints or market changes demand
changes demand cutbacks, cutbacks, often it is better to kill one program than to slowly starve all programs. Using
such a strategy-based approach, you might fully fund certain programs so that they stand
often it is better to kill one
the best chance of being effective and therefore enabling the company’s overall strategy
program than to slowly and performance.

starve all programs.


The lesson is simple: An effective budget is not an entitlement. It is one benchmark
through which progress may be measured. And that benchmark must be tightly
connected to the organization’s strategic goals.

8 K P M G C O N S U LT I N G
7 F I N D A N D F O C U S O N T H E L E A D I N G I N D I C AT O R S .

Do your management reports comprise predominantly profit and loss statements,


balance sheets, and other financial measures? Historically, the way to measure business
performance was through ROI, ROE, EPS, EVM, gross margins, EBITDA, and several other
well-known financial metrics. While the universal familiarity of such measures allows us
to more easily communicate performance, unfortunately they don’t tell the whole story.
Because financial metrics are typically after-the-fact indicators, telling employees that they
must improve EPS doesn’t ensure that EPS will grow.

Instead of focusing on measuring outcomes, the most successful companies have shifted
their focus to causal measures with key performance indicators (KPIs). Most financial
indicators are lagging indicators—measures of water under the bridge. Sample leading Focus on leading indicators
KPIs might include yield and capacity variables, investment in R&D, customer or employee that drive performance
retention, or new-product time to market. Such metrics reflect the fundamental core of
and the odds are that you’ll
business operations. Improve on these and the odds are that you’ll also improve your
financial performance as measured by ROI, ROE, EPS, EVM, or any of the other financially improve your financial
oriented outcome metrics.
performance as measured

by ROI, ROE, EPS, EVM, or

any of the other financially


Critical success factors and
oriented outcome metrics.
key performance indicators
Where is the organization going?
are derived from strategy.
VISION

How do we get there? S T R AT E G Y T O


S T R AT E G I C T H R U S T S

What do we need to
do well to achieve
the strategy? CRITICAL SUCCESS FACTORS

How do we K E Y P E R F O R M A N C E I N D I C AT O R S
measure how
well we Organization
Financial Customer Business Corporate
are doing? Learning
Perspective Perspective Process Citizenship
Perspective

BALANCED BUSINESS SCORECARD

PIECING TOGETHER THE PERFORMANCE PUZZLE 9


F I N D A N D F O C U S O N T H E L E A D I N G I N D I C AT O R S . [ C O N T I N U E D ]

For example, in the early 1990s, a direct-response, multiline insurance company


consistently missed its revenue growth expectations. Since every metric used by the
company was financial in nature, it sought greater insight by establishing a set of
nonfinancial indicators, one of which tracked the ratio of accepted paid policies to
applications received. As a result, the company discovered that an alarming number of
applications were never accounted for throughout the process. The insurer put in place
corrective actions that led to the discovery and partial recovery of almost $32 million,
contributing nearly $.02 toward EPS growth.

The lesson learned: Identify and measure the right things. When you compare actual
results to expected performance and when deviations invoke alternative actions—then
your metrics have greater potential to add value. This is not to suggest that you eliminate
financial metrics—not by a long shot. It is of great value to have financial expectations
clearly articulated and understood for individual business units and the enterprise at large.
The accomplishment of these financial expectations is greatly advanced by using a balanced
set of metrics as guideposts—striking a balance between leading and lagging indicators
and a balance between financial and nonfinancial metrics.

Take a fresh look at your organization by stepping back from your metrics to determine
whether they are balanced enough to guide everyday actions and drive long-term performance.

10 K P M G C O N S U LT I N G
8 T I E Y O U R M E T R I C S T O T H E M A R K E T.

We’ve heard it all. Organizations that barely have time to do anything but put together
their annual financial plan. Line executives who claim they know how to run the business,
so “corporate” has no need to worry about the operating metrics. CEOs afraid of adopting
rolling forecasts because that might mean renegotiating performance with line execs more
than once a year.

How many times do people within your organization manipulate the system, sandbag
results, or “save” for a rainy day?

Your best safeguard against this sort of value-destroying behavior is to tie your strategy
and metrics to the external environment. If cost analysis indicates that it’s ten times Recognizing that it couldn’t
cheaper to sell to existing customers than find new ones, your goal may be to excel win on price alone, Intel
at managing customer retention. Obviously, you’ll need metrics that drive customer
eventually used a piece of
retention. But the metrics can’t stop there; only competitive or benchmarking data can
ascertain whether you’re making the desired progress against your goal. market-based information

to refocus its strategy.


In a real-world example, in the early 1980s Intel® was consistently beaten on memory
chip pricing by its Japanese competitors. Intel tried to respond in several ways before
discovering that a specific Japanese competitor’s sale strategy was to have its people always
“quote 10% below their (Intel’s) price.” Recognizing that it couldn’t win on price alone,
Intel eventually used this piece of market-based information to refocus its strategy. The
solution Intel ultimately reached was to abandon its biggest business. Memory chips had
become a commodity to which it could add little value, so it decided to start out almost
entirely anew, designing and building the best microprocessors in the world.2 The lesson
learned is that even in a large, entrenched business, management needs to tie together
both its strategic plans and all the metrics designed to enable those strategic plans to the
market. And because the market is always changing, you need to revisit and revise your
organization’s goals and metrics throughout the year.

2
Grove, Andy, Only the Paranoid Survive, Bantam Books, 1999, pages 87, 88, 95.

PIECING TOGETHER THE PERFORMANCE PUZZLE 11


9 TA R G E T T H E M O D E L Y O U WA N T T O B E .

We’ve all heard declarations that this or that company’s strategy is to grow revenue by 20
percent, 30 percent, or even 40 percent. No matter how galvanizing such messages can be,
however, they are not by themselves “strategy,” particularly if employees have no idea how
to meet such targets. Instead, strategy comes from using implicitly intuitive or external
market analysis to determine the most desirable course of action from among a variety of
options. After the strategy is determined, it needs to be converted into the right financial
and nonfinancial key performance indicators.

S T R AT E G Y
A target model translates

your intended strategic CUSTOMERS &


FINANCIAL
MARKETS

actions into a set


INTERNAL BUSINESS LEARNING &
of pro forma financials. C A PA B I L I T Y KNOWLEDGE R e v e nue
U ni t S hi pm e nt s
R & D E x pe ns e s

DISTRIBUTION CHANNEL
GEOGRAPHY/TERRITORY
Sales

MARKET/CUSTOMER
PRODUCT LINE
M a r k e t i ng
S T R AT E G I C " P R O F O R M A "

SEGMENT
A dm i ni s t r a t i on
O pe r a t i ng Pr of i t

BUDGET I nt e r e s t E x pe ns e
YEAR Q1 Q2 Yr1 Yr2 Yr3 Ta x
N e t I nc om e
B u s in e s s U ni t K PI
Ta r g e t A l l oc a t i on % % % % % E a r ni ngs pe r S ha r e
A s s e t s E m pl oy e d
Revenue $ $ $ $ $
ROA

G r o s s M a r gi n $ $ $ $ $

" D I M E N S I O N S " O F TA R G E T
N e t In c o m e $ $ $ $ $

The target model links strategy


to budgets or forecasts.

In our experience, a powerful mechanism to clarify the end goals of a strategy is some-
thing we call target models. A target model helps you translate desired key performance
indicators into actions (or drivers) that force you to understand the pro forma financial
implications of those intended actions. If you like the pro forma, keep going. If you don’t,
stop and rethink the actions or maybe even the strategy. Target models are most effectively
built top-down. Done properly, target models pave the way for constructing meaningful
budgets, force the organization to think through the actions required to achieve the goal,
and eliminate much of the “horse trading” that probably takes place in your existing,
bottom-up budgeting process.

12 K P M G C O N S U LT I N G
TA R G E T T H E M O D E L Y O U WA N T T O B E . [ C O N T I N U E D ]

Wal-Mart® got it. Back in January 1996, it used an earnings disappointment as a cue
to make significant changes and take the organization to the next level. Wal-Mart’s CFO
and his colleagues determined that the key was to develop a planning process that would
enable the company to understand where it needed to go, how to get there, and what key
drivers it should focus on along the way. In Wal-Mart’s case, there was no problem
attracting customers to its stores, but it needed to target “wallet share”—a fancy way
of saying customers should spend more when they are in the store. Better planning could
make that happen, but only if it provided a road map for the operating divisions to use
in determining the key initiatives they needed to focus on to rev up growth.3 The resulting
stretch targets and related action initiatives yielded the positive results. Use your target
model to validate and communicate the strategic direction and commensurate actions
for your organization.

3
“The Finest in Finance,” CFO magazine, October 1999, page 72.

PIECING TOGETHER THE PERFORMANCE PUZZLE 13


10 I T D O E S N ’ T H AV E T O B E A N N U A L .

Perhaps one of the places where companies often go wrong is that they think exclusively
in terms of “annual” plans and metrics. Annual strategic plans. Annual budgets. Annual
bonuses. But just because we commonly look at things on an annual basis, it doesn’t mean
that’s the optimal time frame for your plans. In a digital economy, it better not be!

When it comes to launching new products, for example, pharmaceutical companies have
become a lot more like consumer products companies. The typical drug company is going
to place great emphasis on the 90-day period between which it launches a new over-the-
counter product and attains projected market share. During those 90 days, it closely
scrutinizes and compares daily sales activity with its forecasts. It also needs to create the
A better antidote might be right short-term incentives and be quick to respond to management reports. But the same
to think, and plan, in terms company additionally needs to have effective ways to plan and measure progress toward
developing blockbuster drugs that typically do not get to market for 15 years and require
of the enterprise operating
hundreds of millions of dollars in investment.
through a perpetual
Clearly, a company’s strategic plans, incentive compensation budgets, and forecast should
continuum of shorter periods.
not be oriented purely by “annual” guideposts. Nor are we saying that it should have a
single 15-year plan because of the long-term development of a drug. The frequency of
planning, the length of the planning horizon, and the level of detail attempted in the plan
should reflect the company’s market environment—and strategic ambitions should drive
all. Often, in a dynamic environment, it would be appropriate to plan through a perpetual
continuum of shorter periods.

At the end of every 90 days, for example, refresh your plan, communicate it, and
continuously refocus your organization.

14 K P M G C O N S U LT I N G
11 B E C A R E F U L W H AT C O M P E N S AT I O N B U Y S .

Like great ideas, strategic plans without execution are useless. Even after you’ve created
a strategy and established the key metrics essential to converting the strategic plan into
reality, you need to have organizational commitment, or people alignment, to ensure
that employees are actively furthering the plan. That’s where compensation comes in.

Unfortunately, our experience has shown that many compensation systems create
less-than-optimal results. For example, many executives receive bonuses based on their
performance against budget expectations. In many cases that leads to “sandbagging” or
parochial behavior, with executives setting targets that they know can easily be achieved.
The consequence of this behavior is that organizations may be robbed of maximum
performance by virtue of the very reward systems they create. In many cases budget-

based bonuses lead


We recommend linking compensation to a balanced set of strategic objectives and tying
to sandbagging, with
compensation to the market. What does that mean? Forget about bonuses based purely on
budgets. Instead, tie your bonuses to the accomplishment of individual and team goals as executives setting targets
defined by key performance metrics established in relation to the market and competition.
that they know can

Rewarding someone for beating the budget by 10 percent in a market growing by more easily be achieved.
than 30 percent won’t win market leadership. It will simply guarantee the same kind of
sandbagging and underperformance in the future.

PIECING TOGETHER THE PERFORMANCE PUZZLE 15


12 C A S H I S N ’ T A LWAY S K I N G .

After you’ve taken the time to properly link compensation to the market and adopted the
right metrics, don’t stop there. Consider that you may achieve even more organizational
commitment by rethinking what your compensation plan comprises.

For one thing, money doesn’t motivate everyone equally. While some employees will be
motivated by money only, others will be motivated by nonmonetary incentives such as title,
community prestige, or authority. Still others will respond to lifestyle incentives like more
time off, the ability to work from home, shorter workweeks, or on-site day care.

In August 1999, The Wall Street Journal reported an example of a Midwestern company
Using “time off” as an that polled its employees and concluded that what they valued most was more time off to
employee incentive, spend with family. Shrewdly, the company implemented a plan allowing salespeople who
achieved their monthly goals to leave the office by 2:00 p.m. each day for the remainder
one company eclipsed
of the month.
every previous sales record.
The result? The sales force broke every record set in the previous 52 years.

• Could an employee receive incentive compensation without genuinely helping


to execute the strategic plan?

• Could your bonus program arbitrarily bypass an employee who’s an effective


team player?

• Are your incentives limited to purely financial considerations?

If the answer to any of these three questions is “yes,” take a fresh look at whether incentives
are being used as a constructive enabler of your strategy.

16 K P M G C O N S U LT I N G
13 M O T I VAT E B E Y O N D T H E F O U R WA L L S .

When we talk about achieving organizational commitment as an essential element of an


effective Performance Commitment framework, we should also make the point that the
commitment often needs to extend beyond the organization’s four walls.

Increasingly, a company’s strategy depends on motivating one or more members of its full
community of interests, which includes not only employees but also suppliers, customers,
regulators, investors, and alliance partners.

Consider, for example, that the ten largest software companies together claim to have
“strategic” partnerships with over 350 organizations. Creating alignment between the
daily actions of such partner alliances and your strategies is critical. This is particularly
true when you consider that some academic research has suggested that, historically, most
joint ventures end in failure.

We’ve observed successful companies using their planning processes to examine each
alliance relationship as a distinct entity. Companies must connect these allies through
their own separate plan complete with goals, objectives, strategies, and metrics—all of
which are well understood and meaningful to the alliance managers at both companies.
Within your own organization, employees responsible for relationships with very different
types of partners may need to have distinct metrics that better reflect their respective
market opportunities.

In short, take steps to ensure that the individuals and organizations that make up your
community of interests have meaningful goals and incentives tied directly to your plan.
This can help you improve the odds that your objectives for the particular relationship
will be fulfilled.

PIECING TOGETHER THE PERFORMANCE PUZZLE 17


14 L E A R N T O P R I O R I T I Z E A M O N G G R E AT O P T I O N S .

A classic conundrum for any business is the inability to fully fund every great idea. Even a
large multinational company might find itself “resource constrained” for talent, funding,
or time. Think about your allocation processes. How many times have you considered the
budget process to be complete only to find nearly 80 percent of funds or staffing has been
consumed by “keep the lights on” types of maintenance requirements. Important? Yes.
Strategic? Well…hardly.

One emerging model we first encountered was at a growing financial services company
with $750 million in annual sales. Despite its success, management was increasingly wary
that its spending might not be strategic and reacted with a two-step process. Step 1 was
to establish allocation ratios based on the type of spending. Depending on the type of
spending, Step 2 was to apply rigorous balance sheet tests such as ROI, ROA, or EVM.
An example would be plotting last year’s actual capital spending on a particular matrix.

Now, think about how your capital expenditures might have been different had you
applied allocation decisions based on the type of spending—maintenance, enhancement,
or strategic—and limited the allocation within each of those categories.

I N V E S T M E N T M AT R I X

High
RESOURCE CONSTRAINT

Balance sheet Balance sheet Less rigor in balance sheet


justification justification
(ROI, ROA, (ROI, ROA,
EVM) EVM)

approximately approximately approximately


20% 20% 60%

Low MAINTENANCE ENHANCEMENTS S T R AT E G I C

TYPE OF INVESTMENT

A strategically oriented capex plan might look like this.

The emerging rigor entices allocations across all types of spending requests. While
the actual allocation ratios can vary based on the needs of your company, the key is
for you to start your planning process knowing that not all program requests can or
should be funded. Do not allow the majority of the resources to be chewed up by
maintenance. Rather, the organization’s strategic priorities should directly influence
resource prioritization.

18 K P M G C O N S U LT I N G
15 ONE SIZE DOESN’T FIT ALL.

The planning processes in most organizations have not been established with the
organizations’ specific needs in mind. They can simply be the result of the history of the
organization or of its principal executives’ experiences, and neither may be appropriate
in the current environment.

We use a planning diagnostic quadrant to help a client understand the planning approach
suitable to its organization. The quadrant looks at the organization’s level of resource
constraints relative to its ambitions and the volatility of the business environment in which
it operates. In the past, for example, a monopolistic electric utility may have found itself
sitting in the lower left-hand quadrant (low resource constraints and low volatility).
A deregulated environment dictates that the planning processes appropriate to this “If your budget is the
lower left-hand quadrant are no longer applicable. Today, deregulation demands that the
basis for a plan, you
same utility employ strategies and commensurate planning environments that recognize
the competitive changes; accordingly, the enterprise’s place would shift into the lower content yourself with an
right-hand quadrant. extrapolation of the past.”

FREQUENCY OF PLANNING

High
A M O U N T O F D E TA I L & F I N A N C I A L

OPTION PLANNING OFFENSIVE PLANNING


MODELING (DECREASING)
RESOURCE CONSTRAINTS

• Annual plan with a focus on • Frequent planning at the appropriate


expense management level of detail
• Plan by analyzing/comparing scenarios • 4 or 6 quarter rolling forecast
• E.g., mature business, low margins • E.g., start-ups

"NO PLANNING" DEFENSIVE PLANNING


(other than Strategic Planning) (other than Strategic Planning)

• Planning does not change significantly • Frequent, high-level planning


from year to year • Reduced focus on expense management
• E.g., monopolistic or public organizations • E.g., mature high tech

Low High
B U S I N E S S V O L AT I L I T Y / U N C E R TA I N T Y

Different industries, and different competitors within the same industry, have different
planning needs, and the needs within any particular industry will likely change over time.
Moreover, virtually no business competing in a digital economy can afford to use its
previous year’s performance as a basis for its plan.

One size does not fit all. Articulate the objective for your planning process, and put in place
only those planning and budgetary processes essential to achieving your business objective.

PIECING TOGETHER THE PERFORMANCE PUZZLE 19


16 L E S S M AY B E M O R E .

At what point is planning overdone and therefore wasteful? How accurate does your
planning process have to be? How many metrics do you really need?

The answers to these questions depend on the balance that must be struck for each
organization’s Performance Commitment environment. With budgets, for example, the
additional effort required to go from 95 percent to 100 percent accuracy is seldom worth
it; effective forecasting might compensate for the 5 percent delta. With metrics, the keys
to great performance may be captured in a half-dozen well-chosen measures. While two
dozen metrics may make management feel good, they may serve to make employees feel
they are operating in a compliance- rather than performance-inducing environment.

Emphasize what is really strategically relevant. As with many valuable things, sometimes
less is more.

20 K P M G C O N S U LT I N G
17 R E P O RT I N G I S D E A D ! W E L C O M E T O E N T E R P R I S E D A S H B O A R D S .

We’ve all done it. We finish the annual plan exercise, wipe our brows, and happily place the
three-ring binder on the shelf. Some of us may even pull this paperweight down to justify
next year’s plan or to explain variances.

So, how can you keep your plan from being a meaningless paperweight?

• First, ensure that there is a review process, with executive participation, oriented
around the strategic and operational targets.

• Second, leverage today’s technologies to create ubiquitous visibility of goals and your
accomplishments against them. Exit the business of static, paper-oriented reporting.
Use your intranet and internal Web sites to propagate information anytime, anywhere. Enterprise Dashboards

can dynamically deliver


The technology exists for your plan to be a dynamic organism available for everyone
information to the desktop,
to see and act upon through their desktops every day. We advocate a CFO “Enterprise
Dashboard” wherein information related to your strategic plans, the budget, and a realm prompt corrective action,
of financial and nonfinancial data is driven to the desktop to actively help guide employee
and provide instant
decision making and progress against goals. Far more dynamic than the paper-based
plans of yesterday, these portals not only deliver information, but they can help prompt drill-down analysis.
corrective action, provide for drill-down analysis, and convey information graphically so
that employees with less financial acumen can better see and understand how to react to
the numbers.

An altogether different way to eliminate the possibility that your plan will become a docile
dust collector is to eliminate it altogether through the active management of metrics. Take
the case of Sweden-based Handelsbanken. All targets, rewards, and performance measures
are geared toward beating the competition, both inside the bank (e.g., branch-to-branch
comparisons) and outside the bank (e.g., bank-to-bank comparisons). Handelsbanken took
five years to build its decentralized model. It has since eliminated its annual budget process
in favor of a metrics-based rolling forecast approach.4 The plan delivers value not through
its size (Handelsbanken doesn’t even have the budget part anymore) but through
consistently keeping the organization focused on winning.

Your planning effort can be a success if it creates a buzz in the organization, keeps staff
constantly aware of progress against its present goals, and continuously reshapes the future
of the business.

4
“Beyond Budgeting Round Table Case Report,” 1999 CAM-I, Fraser & Hope.

PIECING TOGETHER THE PERFORMANCE PUZZLE 21


18 U S E I N F O R M AT I O N T O P R O M P T A C T I O N .

We all have seen software demonstrations like this: At 9:00 a.m. the hypothetical financial
professional turns on his or her computer and is greeted by flashing red alerts highlighting
an under-performing function somewhere in the world. Three clicks of the mouse and they
know the country, product, or business unit involved. By 9:05 a.m., management has been
informed and the company is saved from ruin.

These demonstrations look terrific at the trade shows, and new “alert” features are being
built every day. However, we know from experience that these features rarely work as
intended when real data is used. Why? In most companies, problems are rarely traceable
to a single cause, and the relevant information proves difficult to obtain.
Nothing yet comes close

to replicating the value So-called exception-based guided analysis can be an important starting point, but the
exercise needs to move quickly from a numbers game to a business decision. AlphaBlox®,
of human insight
a Web-based software company, provides an excellent case in point. The chief financial
and logical deduction. officer personally led development of the management reporting system tailored to his
company’s needs. He found that his organization, like many others, was buried in mounds
of data that were difficult to assimilate and act upon. His solution: Leverage his own
company’s software to enable better access to the right information. By carefully culling
this information and providing the guided analysis intelligence, he placed crucial
information at management’s fingertips. And, his executive group is in a better position
to respond quickly to marketplace demands and changes.

How can you engage your staff to use the information? Start by making the right
information accessible. Translate the strategic imperatives into metrics, and then identify
the data sources necessary to capture those metrics. Consider external data sources and
contingencies. For example, dramatic changes to economic conditions or serious product
issues may require updating the entire plan. Deliver this vital information through an
easy-to-use, possibly Web-based, reporting tool, and provide the guided intelligence that
enables the organization to efficiently navigate the information.

This crucial information serves as a trigger to important business decisions. However, it is


just that—a trigger. Nothing yet comes close to replicating the value of human insight and
logical deduction. So go ahead, use the trigger information and then manage the follow-
through process to ensure that the information is acted upon.

22 K P M G C O N S U LT I N G
19 I N F O R M AT I O N U B I Q U I T Y C R E AT E S N E W C H A L L E N G E S .

So, what happens when the basic business information is available to everyone? When the
right information is available at the click of a button? When the daunting task of data
assembly is finally removed from the daily task list? When the Internet creates a never-
ending, 24-hour, around-the-globe planning process?

When everyone knows the basic facts, new activities and behaviors can emerge. Reporting
can become a two-way street. Instant feedback will be available, and individual reports can
be measured both for effectiveness and usage. “Corporate reporting” should become a
customer-oriented business service that must react quickly to new requests and business
analysis. These are all positive trends, but what happens if all this technology fosters
negative behavior? While instantaneous

information can create


As the result of a new Internet reporting initiative, for example, the sales force at one
competitive advantage,
textile manufacturer started receiving dynamic, robust information about their customer
accounts. Great, right? Not quite. One of the pieces of information that the sales force companies can
focused on was the precise level of margins. Armed with this knowledge, it wasn’t long
also experience
before the sales force was aggressively discounting prices further to meet revenue goals.
And why not? Like many companies, this one incented its sales force on the top line— unexpected consequences.
ignoring the quality of those revenues. The company ultimately reacted by shutting down
the Web reporting.

Obviously, what this company needed was a balanced incentive model for the sales force,
one that focused on profitable growth that increased margins, as well as new controls to
monitor the use of corporate information.

The question is, are you ready? We encourage you to e-enable your workforce through
Web delivery of information. However, dynamic information requires new processes,
procedures, and incentives—and even more imaginative changes—before your
organization can truly realize the full potential that technology has to offer.

PIECING TOGETHER THE PERFORMANCE PUZZLE 23


20 L E V E R A G I N G E M E R G I N G T E C H N O L O G Y.

With technology playing an ever-increasing role in all aspects of business, what place
should it play in the Performance Commitment process? It’s difficult to determine what
new technologies to incorporate and how to do it. As new tools, products, and product
features become available more rapidly, decision making in this area becomes even more
complex and challenging. In selecting appropriate technologies, we see two factors as key.

First…think big, start smart, and deliver quickly. For example, we offer a Rapid Return
on InvestmentSM (R2i®) approach to all technological or process improvement initiatives.
Using this approach, we developed Planning Management, which integrates the functional
process and technology. The approach leverages existing technologies in combination with
industry-specific metrics to link the separate “islands” that probably exist across your
Performance Commitment processes.

Specifically, R2i Planning Management drives the organization to link four crucial
components of an end-to-end planning process:

• Balanced scorecard (strategic, financial, and operating metrics)

• Top-down targets based on pro forma financial modeling and action planning

• Bottom-up budgeting or forecasting

• Web-enabled management reporting

Second…choose enabling technologies. Let’s take each of the four components in turn.
A balanced scorecard may be enabled through a number of readily available vendor
solutions, or you may choose to build using a combination of desktop spreadsheets and
an on-line analytical processing (OLAP) tool. Similarly, modeling may be enabled through
use of desktop spreadsheets in conjunction with an OLAP tool. Budgeting, depending on
organization size, complexity, and business requirements, may be well served with one
of the bottom-up vendor package solutions; alternatively, a combination of a visual basic
protected spreadsheet program in conjunction with an OLAP tool may suffice. Reporting
tool selection should leverage vendor OLAP and Web-ready solutions.

24 K P M G C O N S U LT I N G
L E V E R A G I N G E M E R G I N G T E C H N O L O G Y. [ C O N T I N U E D ]

Your tool selection, regardless of build or buy, should consider performance against
several key elements:

• Desired functionality and ease of use

• Ease of installation and maintenance

• Software and hardware cost (both initial and ongoing maintenance)

• Business intelligence (the vendor or software integrator should


bring specific intelligence about your business to the table)

• Flexibility to changing business requirements

• Internet- and Web-enablement

• Scalability

• Security

So, what are your next steps? First, think about the functional requirements of your
organization. Second, choose the appropriate enabling technologies. And third, build
or buy the skills necessary to successfully implement them.

PIECING TOGETHER THE PERFORMANCE PUZZLE 25


21 F I R E U P T H E F E E D B A C K L O O P.

If you walked down the hall right now and asked ten people in your organization to
describe your strategic feedback loop, what would they say? Would you get the same
answer from each person?

If your process is advanced enough to include strategic dialogue, then the reporting process
must also be designed to close the feedback loop in order to constantly challenge and check
progress against your strategic goals. Monthly, weekly, or even daily reporting can be the
glue that ties numbers (both financial and nonfinancial) to business initiatives.

Daily reporting via the Web

can be the glue that ties S T R AT E G Y

numbers to business initiatives.

BUSINESS REVIEW
METRICS &
& WEB-ENABLED
MODELING
REPORTING

BUDGETING
& FORECASTING

A strategic feedback loop drives action-oriented dialog throughout the organization.

Line executives and corporate staff need to perceive the key business drivers as the
common points of reference. Hopefully, you will find, as we have, that effective dialogue
helps avert finger pointing and keeps the organization focused.

So, how do you tie the numbers back to business initiatives? Technology answers part of
the question, yet distributing metrics and financial reports can only start the dialogue.
Develop a process of continuous feedback that becomes second nature throughout your
organization. Insist that every staff meeting—certainly your own—begins with a review
of what people are seeing in the marketplace and how they are performing against plan,
so that it all can be incorporated back into the strategy.

26 K P M G C O N S U LT I N G
22 BUILD A WINNING TEAM.

One of the problems facing companies in a positive economic environment is a relative


shortage of exceptional professionals available to fill the most demanding positions.
The problem can be particularly acute around the finance function—a key enabler of the
Performance Commitment framework. Finance professionals need to have not only strong
technical competency but also the intangibles necessary to go beyond the numbers and
truly “connect” with senior line and corporate leaders, the board, the audit committee,
Wall Street analysts, and investors.

As a $100 billion company with a history of grooming its finance professionals for
leadership jobs, General Electric® (GE) takes some insightful tacks in hiring, training, and
retaining great performers.5 GE seeks to hire operational finance professionals early in their
careers, taking responsibility for training and developing their analytical and business
judgment skills. It tends to hire technical experts, those with specific experience in areas
such as capital markets, after they have already developed acumen in their respective fields.

To ensure its professionals’ career success and bolster its own corporate performance,
the company provides a robust agenda of career “accelerators” including formal classroom
training at GE University, extended rotational assignments, and assigned projects outside
of the professional’s current job and business. GE also mandates that 100 percent of its
finance professionals travel, taking on global assignments across all businesses.

If all this sounds regimented in theory, in practice it is not. The company’s mantra is that
finance professionals “play offense” with their careers, taking on high-risk assignments for
which they can be nicely rewarded.

Does it work? Consider the facts: Former finance professionals are presidents of 5 of GE’s 11
businesses and 10 of the 28 GE Capital Services.

To improve your own performance, challenge all members of your existing finance team
to evaluate their own work from the vantage point of line manager and to systematically
acquire a set of skills that would enable them to lead a business. Then, continuously
consider who on your staff could head tomorrow’s new business units and project
whether new hires fit the same profile.

5
“The Talent Factor: Developing The Professional Finance Organization,” Jim Parke, SVP and CFO,
GE Capital Services, Business Week’s CFO Forum, March 1999.

PIECING TOGETHER THE PERFORMANCE PUZZLE 27


23 T H I N K B I G , S TA RT S M A RT, D E L I V E R Q U I C K LY.

It’s easy enough to say that your company would perform better if only all of its
performance-related processes were better connected…just as any of us would be
Michael Jordan if we could only jump higher and make baskets as easily as we walk.

But we are mindful that whatever attractive attributes the Performance Commitment
framework may have, ease of implementation is not necessarily one of them. It doesn’t
come in a box. Integrating more than a half dozen related, but fragmented, functions
is hard enough. Add to that the inherent challenge of getting employees and process
owners to embrace new ideas, altered procedures, and common technologies, and the
task seems daunting.
Break the Performance

Commitment environment Our advice with respect to tackling this challenge is to think big, start smart, and deliver
quickly. Although the ultimate benefit of the Performance Commitment framework is its
into bite-size pieces,
power to help your organization better see the Big Picture and execute against it, your first
and get started now. step should be a relatively small one that you can complete successfully. Then leverage that
success into many others to create a fully functional framework.

If you don’t currently use a balanced scorecard, for example, a great place to start might be
to create one for your top-of-house corporate staff and a major business unit. Alternatively,
take a look at making your management reporting system more effective or improving
your forecasting process by employing some of the newest analytical applications. The
point is to choose a point and start now.

Too often we see companies break down under the weight of grandiose plans, or plans they
are trying to perfect intellectually before execution begins. A better model is that of a chief
operating officer we know who looked at his start-up credit card operation and declared
way back in 1991, “A mediocre plan executed really well is far better than the perfect plan
executed too late.” His company is now one of the top credit card issuers in the world.

Understand where the integration points of your Performance Commitment environment


should be, then break it into bite-size pieces and start improving it now.

28 K P M G C O N S U LT I N G
THE BENEFITS OF WORKING WITH US

KPMG Consulting is one of the world’s most respected business advisors and systems
integrators. We build enduring relationships with our clients by helping them create new
business models and innovative solutions, enabling organizations to leverage technology
for stronger return on investment and enhanced service to their customers, vendors,
and employees.

From business systems strategy to implementation, we combine our industry knowledge


with technology experience to deliver results-focused solutions quickly. By partnering with
technology leaders, we provide leading business and government organizations around the
globe with best-in-class solutions across every industry segment.

PIECING TOGETHER THE PERFORMANCE PUZZLE 29


THE NEXT STEPS

If you would like to learn more about how we can help your organization, please contact us
at 1-866-FOR-KCIN (1-703-747-6748 from outside the US and Canada) or visit our Web
site at www.kpmgconsulting.com.

30 K P M G C O N S U LT I N G
ABOUT THE AUTHORS

Anita Tilley is a managing director in the Performance Management practice within


KPMG Consulting’s World-Class Finance Solution. This practice focuses on delivering
innovative solutions to progressive finance leaders. Before joining the company,
Ms. Tilley was in the financial services industry with senior responsibility for various
finance, marketing, and information technology functions. Ms. Tilley can be reached
at 615-248- 5660 or atilley@kpmg.com.

Arun Kumar is a managing director at KPMG Consulting. He focuses on Performance


Management solutions—spanning the gamut of strategy, process, and technology—for
high technology clients that include some of the nation’s top technology corporations.
His industry experience includes senior financial management positions at high technology
companies and the position of CEO of a software venture that he founded. He holds a
master’s degree in management from the MIT Sloan School of Management. Mr. Kumar
can be reached at 650-404-3290 or arunkumar@kpmg.com.

Alan Hanson is Senior Manager, Corporate Business Development, for KPMG Consulting.
Before joining the company, he spent ten years in the financial services and venture capital
industry. He holds an M.B.A. in finance from the Stern School of Business at New York
University. Mr. Hanson can be reached at 212-954-6152 or ahanson@kpmg.com.

PIECING TOGETHER THE PERFORMANCE PUZZLE 31


Special thanks to our clients who have so graciously supported our efforts.

The information provided herein is of a general nature and is not intended to address the
specific circumstances of any individual or entity. In specific circumstances, the services
of a professional should be sought.

32 K P M G C O N S U LT I N G
KPMG Consulting
1676 International Drive
McLean, VA 22102
1.866.FOR.KCIN

www.kpmgconsulting.com
© 2002 KPMG Consulting, Inc. All rights reserved. Printed in the USA. KPMG Consulting, Inc.
is an independent consulting company. R 2iis a registered trademark and Rapid Return on Investment
is a service mark of KPMG Consulting, Inc. Other trademarks or service marks appearing in this
document are the property of their respective owners. C2033-0302-01-MSRD124