Performance management - Software to watch over me

The notion hardly seems radical. Establish the goals you want the business to achieve, formulate detailed plans to transform those aspirations into reality, allocate enough resources to do the job, then put in place a set of measures to monitor your progress toward the objective. Put like that, most FDs would argue that’s precisely the job they perform.

Maybe so, but a clutch of software companies think they can help them do it better. Under a variety of labels – Enterprise Performance Management (EPM), Business Performance Management (BPM) and Corporate Performance Management (CPM) – software solutions are being marketed that aim to close the loop, taking a business from the starting point of a budget or forecast all the way to a balanced scorecard or performance review.

Coining the acronym may be simpler than defining the application, though. One of the better definitions comes from John Hagerty, a VP at technology analysts AMR Research. Hagerty sees the term as a catch-all, embracing “an emerging superset of applications and processes that cross traditional department boundaries to manage the full life-cycle of business decision-making, combining strategic goal-setting and alignment with planning, forecasting and modelling capabilities”. In other words, if it’s telling you about performance and is focused at a higher level than an individual product or machine, it’s probably EPM-BPM-CPM.

It’s a definition broad enough to make even the most hard-boiled software executive salivate, especially given AMR Research’s estimate that spending on the category is rising by a compound 13% per year. And even vendors acknowledge a certain ‘hype factor’. Defining performance management is simple, says Michael Coveney, Comshare director of strategy management.

“Technology vendors have leapt on the bandwagon and hijacked the term,” he complains. “Technology is only part of it, and not the whole thing.”

In his book, The Strategy Gap: Leveraging technology to create winning strategies, Coveney explains that performance management can only deliver once a company identifies what drives success. He says many budgeting and reporting systems focus on things that are strategically irrelevant and believes the organisation’s budgeting and monitoring systems should be aligned.

Importantly, Coveney stresses that companies need to pay people to do the right things. “Many people are paid to beat the budget, which is crazy,” says Coveney. “That just drives people to negotiate low revenue targets and high cost structures.”

The concept is a waypoint on a journey that’s still in progress – a journey that began with the ‘green bar’ reports printed off from IBM mainframes in the 1960s and 1970s, which arrived on managers’ desks a week after month-end and already out of date. Driven by technological progress, the journey since has embraced everything from digital cockpits to portals, but has had a common destination: faster, better information, and information aimed at informing better decision-making.

“The idea is that it’s an extension of a businesses existing technologies, leveraging what they’ve already got and adding value in improved reporting and information analysis,” says Andrew Kellett, a senior research analyst at Butler Group. “It plugs the gap between the day-to-day operational and financial systems that run the business and the top-level strategic reviews that show whether it’s on course.”

Even so, it’s not an argument that cuts ice with Ian Inglis, Bracknell-based MD of Swedish financial accounting firm Frango. “The whole notion is a fabrication, devised by software vendors. Users weren’t demanding it until software companies created it.”

Software, he argues, “is an enabler. At the end of the day, smart people make smart decisions, and less smart people make less smart decisions.” The role of software, he believes, is to provide information in a format that can be readily analysed, but people must determine the actions that are to be taken. “We certainly don’t say, ‘Buy our product and we’ll drive your business performance.’ That’s your job.” Coveney, on the other hand, believes companies should exploit technology to do the communicating and monitoring.

But Bryan Kettles, FD of Edinburgh-based financial services institution Aegon (formerly Scottish Equitable), agrees with Inglis. “It’s nothing more than another consultant-speak acronym,” he scoffs. “It’s the same old stuff with a new dressing on it.”

The charge isn’t entirely refuted by the software companies in the vanguard of performance management. Certainly, agrees Mark Stimpson, London-based director of product management at Cognos. “In terms of performance management software’s individual components then, yes, we have been here before.

But in terms of the concept as a whole then, no, it is a departure,” he insists.

“The individual elements have been around a while, but weren’t tied together,” he argues. “Forecasts, budgets, scorecards – the pieces of the puzzle were there, but weren’t assembled. You couldn’t see the complete picture. What’s new today is that the vision is there, and so is the platform to turn it into reality.”

For example, says Stimpson, an organisation interested in increasing revenue growth can build a model that looks at the factors that influence revenue growth – such as the numbers of sales people – and work out the complex inter-relationships between headcount in the salesforce and sales, cash flow and profitability. “It’s then possible to track a downward trend in sales staff recruitment, and extrapolate the impact on cash flow and profits. Granted, it was possible to do this before performance management, but generally after the event.”

It’s an argument that certainly finds favour with Ron Watson, FD at Glasgow-based Student Loans Company, a 900-employee, 2.5 million customer financial services organisation. Using a tool from ALG Software, the business has been able to improve its efficiencies dramatically. “We have a clear understanding of the cost of our internal processes and are reorganising them as a result,” says Watson.

Even so, performance management’s path toward universal adoption is far from assured. While developments such as the Sarbanes-Oxley Act have provided a useful fillip, long-term trends within the world of business look set to act as a brake. The most significant is the growing tendency for businesses to outsource portions of their activities to other companies – almost an extended enterprise. The logic, of course, is specialisation, with the theory being that businesses focus on core competencies and outsource everything else to specialists. But with critical aspects of a business’s operations being performed by half a dozen or so third parties, performance management becomes a data integration nightmare – even if these third parties were minded to provide such intimate access in the first place.

The stresses are already apparent in hi-tech electronics companies that outsource much of their manufacturing, says Mark Pearson, a London-based partner in the supply chain practice of consulting firm Accenture. “The initial outsourcing and selection decision is usually based on a lower unit cost of manufacture,” he says. “The trouble is, there are too many other important metrics that are in conflict with this, such as quality, accuracy and inventory levels.”

In practice, most companies avoid these conflicts by setting minimum standards that outsourcing providers must meet and then focusing on unit cost of manufacture. But ticking a box as ‘acceptable’ then makes ongoing improvement difficult, which is precisely the kind of thing that performance management would be good at helping to do, of course.

The irony is rich. In a business environment where EPM-BPM-CPM is most needed, it’s likely to remain tantalisingly out of reach. And at present, what that implies for the future of the entire application is unclear.

SINK OR SWIM?
In mid-2001, Basingstoke-based communications company Fibernet Group installed an EPM-BPM-CPM system from Comshare to help it manage its growth.

Within months, the severe downturn that hit the telecoms sector began to bite. Ironically, a system bought for growth helped it survive the ‘perfect storm’ that was to sink several of its competitors.

“By January 2002, we issued a profits warning and moved to reduce expenses,” recalls Fibernet FD Nick Bray. But worse was to come. A major network supplier for France and Germany went into administration, leaving Fibernet with a stark choice: pull out of those markets or invest its own money.

The new system was pressed into service for scenario-planning. “(There was) much at stake, and the information had to be reliable.”

Spreadsheets could have done the job, concedes Bray, “but while spreadsheets are flexible, it’s hard to get control over them from the centre of the business,” he argues. “Reporting actuals against budgets work best when you have a controlled environment, where there’s one version of the truth. You’re much better off with an integrated, structured database, where people are inputting account lines in a controlled manner.”