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How to make your case for performance management

April 18, 2007

Editor's note: The following is excerpted from Justifying your Performance Management Investment: It's Not Just Smoke and Mirrors," the first in a new series of White Papers by David Axson, former Head of Corporate Planning at Bank of America, co-founder of The Hackett Group, and an advisor to the Cognos Innovation Center for Performance Management ™.

For many managers, the phrase make better decisions faster is the raison d'être for investing in performance management. Today's ultra-competitive, volatile, and uncertain markets demand that managers are able to make high-quality decisions in real time.

Based upon my experience working with over 200 organizations in the area of performance management, this translates into describing the impact of CPM in four areas:

Process quality	+	Staff leverage	=	Efficiency
Risk mitigation	+	Decision quality	=	Effectiveness

Process quality and staff leverage are the primary sources of cost or efficiency, while risk mitigation and decision quality are the sources of value or effectiveness. Let's look at each of the four elements in turn.

Process quality

The most effective measures of process quality address a combination of cycle time and accuracy. The ability to rapidly deliver accurate projections of future performance allows managers to make decisions with confidence.

Best-Practice Process Metrics	Acceptable	Best Practice Standard
Forecast completion time1	< 3 days	< 1 day
Forecast accuracy2	+/- 3 %	+/- 1 %
Annual plan completion time3	8-12 weeks	< 8 weeks

¹From request or trigger of a forecast activity to executive management approval

²Achievement of revenue and net income forecasts for the next quarter

³From the issuance of targets to Board approval

An organization that moves from Acceptable to Best-Practice in each of these areas will typically realize a threefold improvement in the productivity of their standard planning, budgeting, and forecasting processes.

Staff Leverage

Enhanced staff leverage is accomplished in two ways: first, by increasing managers' ability to satisfy their needs directly through functional self service tools; and second by either eliminating or automating the lower-value tasks that consume so much professional staff time.

There are three measures that can help companies size their overall opportunity:

1. The Staff Leverage Ratio
2. The Manager Support Ratio
3. The Value-Added Ratio

The Staff Leverage Ratio (or SLR) measures the ratio of productive, high-value work undertaken by professional staff versus lower value data manipulation and reporting activities.

Research by The Sonax Group shows that the average SLR for U.S. companies is between 0.2 - 0.3; this means that only 20-30% of a manager's or professional's time is devoted to high-value work. With average fully loaded compensation for these positions typically in the range of $80,000-$150,000 per year, the waste is clear.

The Manager Support Ratio assesses the degree to which processes and systems have been optimized to allow business managers to complete many traditional performance management tasks on a self-service basis.

This metric looks at the ratio of finance staff engaged in business support to the population of managers being supported. For an organization with 100 managers, a change in the support ratio from 1:5 to 1:10 can be worth $1 million a year.

The Value-Added Ratio compares the number of finance managers and professionals who are engaged in decision support and risk management activities versus those engaged in transaction processing.

Best Practice Staff Leverage Metrics	Acceptable	Best Practice Standard
Staff leverage ratio 1	0.5	0.25
Manager support ratio2	1:5	1:10
Value-added ratio 3	1:1	1:1.5

Taken together, these three measures establish the economic baseline for justifying your investment in performance management, and also address whether talented resources are being effectively utilized.

An organization that can move from Acceptable to Best Practice across all three metrics will realize a 30 to 40 percent staff productivity improvement.

¹Ratio of professional staff time spent on value added tasks versus lower value tasks

²Ratio of finance professionals and managers engaged in business support to the number of business managers being supported

³Ratio of managerial and professional finance staff engaged in transaction processing as opposed to business risk management and decision support

Risk Mitigation

Risk-taking is fundamental to a company's ability to create value. Therefore, risk management must be a key element in an effective performance management process.

This goes beyond traditional compliance and financial risks to encompass the effectiveness of the planning and performance management processes in:

• Identifying viable initiatives or projects in pursuit of agreed goals.
• Identifying those initiatives that are failing and rapidly taking remedial action or canceling them.
• Developing rational estimates of expected benefits and managing the realization of those benefits.

It is not unusual for a company to dedicate 20-30 percent of its total resources to new projects and initiatives: For a billion-dollar company, improving the yield on those investments by only 5 percent per year can deliver $15 million in value.

Using performance management tools to develop a continuously updated view of the performance of key initiatives allows managers to rapidly identify both opportunities and threats that dictate changes in tactics.

The ability to dynamically realign resources across the overall project portfolio is one of the hallmarks of a high performing organization.

Decision quality

Effective performance management embraces all aspects of the management process from setting strategy, developing plans, and allocating resources, all through the monitoring of performance and the adjustment of tactics, so that failed execution means failed performance management.

Failing initiatives should be detected early by the performance management process, thereby enabling management to take appropriate remedial action or – if necessary – cancel the program.

If you accept this definition, then the only valid measure of performance management effectiveness is business success.

Any company that has average-or-worse performance in its chosen markets must make changes to some aspect of its performance management process. These changes may take place in leadership, process, organization, or systems.

Decision Quality Metrics	Acceptable	Best Practice Standard
Relative revenue growth1	At peer group average	#1 or #2 in peer group
Relative earnings growth 2	At peer group average	#1 or #2 in peer group
Management satisfaction 3	50% "top 2 box" score	75% "top 2 box" score

¹Rate of revenue growth over a multiyear period (typically 3-5 years) relative to a peer group of industry competitors

²Rate of earnings growth over a multiyear period (typically 3-5 years) relative to a peer group of industry competitors

³Percentage of managers rating the performance management process a "9" or "10" on a ten point scale

In most cases, changes in people, process, or organization require changes in systems. Hence, a key element in justifying any performance management investment is the expected upside in overall business performance.

Conclusion

A comprehensive performance management business case will establish baseline economics in terms of process quality and staff leverage improvements, while setting out clear measures of value added in terms of risk mitigation and decision quality.

Taken together, these four elements allow organizations to craft a compelling rationale for upgrading their performance management processes.

This is not a "systems-only" argument, but an integrated view that combines people, process, and systems.

Today more than ever, it is almost impossible to isolate the benefits of new systems from the benefits that accrue from improved processes and more effective, more productive staff.

Find Out More See David Axson in person at Cognos Finance Forums Read more by David Axson and Greg Hackett

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