Some companies are so caught up in the thrill of making accurate measurements of corporate minutiae that they’re losing sight of the big picture. That’s the message from a new report by Hyperion and Cranfield University School of Management, Business Performance Management: Current State of the Art (www.hyperion.com/cranfield). Financial Director has had exclusive first sight of the survey results.
This is despite whether all these figures actually help in achieving business objectives. In some cases, they could be doing more harm than good, says Bernard Marr, a research fellow in Cranfield’s Centre for Business Performance. That’s because managers are focused on hitting the performance target in view rather than pursuing the strategic objective behind it.
“It’s always dangerous to communicate any measure out of context,” says Marr. “Measures clearly drive behaviour. If I give someone five key performance indicators for the next year, then they’ll make sure they deliver them. But if I don’t give any indication of the context, they won’t understand why they’re important.”
Marr cites the case of the call centre that wanted to cut the average length of calls to two minutes. As a result, agents started to race through the way they dealt with customer problems. They hit the two-minute target, but customer satisfaction declined because people felt their calls weren’t being handled properly.
Cranfield’s research suggests there are three main reasons why companies turn to formal business intelligence, what they term business performance management (BPM). These are to implement and validate their strategy, influence employee behaviour, and report externally on performance and corporate governance. Yet Cranfield’s research, conducted in the US, suggests that only a minority of companies use BPM to plan or validate their strategy.
And in the UK, it is difficult to identify many companies that use BPM extensively to monitor their progress towards a broad range of both financial and non-financial strategic objectives. One that does is pub operator and brewer SA Brain.
When Martin Reed was appointed its FD, his brief was to focus on seven strategic areas of company performance – customers and consumers, market share, internal products and branding, profitability, return on investment, cash flow and people. The company defined main business goals and translated them into KPIs. Then it installed Cognos software, which helps monitor those KPIs that aren’t being hit.
Other companies might be thinking about a broader strategic approach to BPM in the future but are still focused on financials. One is Pearson, the publishing company that owns the Financial Times and Penguin Books. At Pearson, the main driver for installing new BPM software – in its case from Hyperion – was to produce faster period closures, centralise financial data and standardise systems, says Noel Gorvett, business systems manager.
These benefits are not to be sniffed at. Month-end closing is now down from 12-15 days to five or six. The company has managed to standardise on definitions used by subsidiaries around the world, such as what constitutes domestic sales. As a result, there are no longer 16 different versions of the software operating around the company.
“We’ve now got 250-plus users in excess of 60 countries putting data in and taking it out of one source at a more granular level of detail,” says Gorvett. “From all levels of the organisation, people are talking the same numbers and seeing things in real time. They’re not having to wait until month-end before they see what’s happening because there’s more transparency and visibility.”
These are all valuable benefits, but not necessarily the over-arching link between strategy and BPM the Cranfield researchers have in mind. Even so, Gorvett suggests that once the financial part of the system is nicely bedded in, Pearson may move in the direction of a broader range of measures – in “very loose terms”, a balanced scorecard.
Old Mutual, a FTSE-100 financial services group, is another company learning to walk before it can run with BPM. The 160-year-old company demutualised in 1999; since then the new group function has grown to about 100 people.
Reporting was based on Excel spreadsheets, which were flexible in some ways but hardly ideal for consolidating and preparing management information. So in 2002, the company embarked on a two-year programme of “continuous improvement”, says Simon Cordier, finance systems manager.
One of Old Mutual’s objectives was (like Pearson) to standardise reporting so that managers were getting “one version of the truth”. Cordier recalls: “With Excel, we were getting multiple versions of the same data.”
A second objective was to expand the type of information collected. The spreadsheet approach had majored on income statement data. Now the company is finding it easier to provide data on KPIs, including important figures such as funds under management, repeat business and earnings per share. Cordier also notes that the new system, based on Geac software, will help the company handle new requirements under international accounting standards, such as sensitivity analysis.
Like those who go on to make the best of what BPM has to offer, Cordier recognises that Old Mutual is on a journey of discovery. “Putting in a robust information system that allows us to collect better information is only the start for us. It has allowed us to explore more opportunities than we would have done previously.”
And Cordier is also keenly aware of the strategic implications of performance measurement – a key theme of the Cranfield research. It’s not just about installing software. “You have to understand where you are in terms of what information you collect and what you think is valuable,” says Cordier. “Then you need to think long and hard about what really drives your business.”
FDs and other executives may well be doing the hard thinking. But are they then translating that into a meaningful performance measurement regime? If the Cranfield research is to be believed, the results are patchy. Seventy-four per cent of the 780 companies in the study use BPM to link strategy to financial and operational plans. But only 55% use it to link strategy to budgets, and just 53% to link compensation to performance. If the same is true in the UK, it’s no wonder so many quoted companies are in trouble with their shareholders over compensation packages for directors.
The problem is that “most organisations tend to measure what is easy to measure and not what really matters”. The result is that “when organisations implement a BPM approach, they often just recycle existing measures and map them into the new perspectives”.
That’s perhaps being a bit unfair because companies such as Pearson and Old Mutual are untypical in that their FDs have to cope with constant changes caused by reorganisations, mergers and acquisitions, and divestments, not to mention the ever-quickening pace of technology change. So, when it comes to performance measurement, there’s a certain amount of running to stand still.
But those companies that want to get ahead of the game are certainly going to need to think more about how they can make performance measurement the servant of their broader strategy. That’s a debate FDs will want to be in involved in, but it’s not their sole responsibility given that the seat of responsibility for many performance measures – customer service, quality and learning, for instance – resides elsewhere round the boardroom table.
But one point the Cranfield study rams home is that companies that have a formal BPM approach generally do better than those that don’t. So a hard look at how the performance management process measures up might not be a bad place to start.
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