The Corporate Performance Management Practitioner

In a great article from BPM Magazine, James Creelman points out that

“The point of any business performance management initiative is to improve decision-making companywide — and so, ultimately, to boost shareholder returns.”

Thank You, James!

CPM is about decision support. All to often, we lose track of that. We also have to realize that numbers and KPIs have their limits. Sometimes the best decisions are based purely on instinct. I am reading a biography of Walt Disney; he went ahead with Disneyland with complete disregard for financial projections. He just knew his Park would be a hit.

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Here it is.

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• Each department makes its own plans and reports on its own activities.
• Vision statements become empty slogans on posters, coffee cups or mouse pads.
• Long-term strategic planning is not integrated with the annual budget.
• The preparation of next years budget starts earlier and earlier every year, and is obsolete almost immediately.
• The sales department does not consult with operations when it compiles revenue forecasts.
• Potential investors and the equity markets review financial statements based on Generally Accepted Accounting Procedures (GAAP).
• The operations staff uses reports from the ERP system and supplemental spreadsheets to allocate scarce resources on a �??squeaky wheel gets the grease�?� basis.
• A business analyst uses a Business Intelligence tool to analyze sales data extracted from the ERP system. The sales manager uses a separate spreadsheet to evaluate sales person performance.
• A data warehouse project started a few years ago produces sales reports by product. The reports do not include data from the sales forecasts prepared by the marketing department.
• Each cost center manager gets a monthly income statement. There is no formal process for reviewing these statements.
• The annual budget is prepared using spreadsheet templates sent out to managers by the finance staff. The process is so time consuming that the managers rarely get feedback on their submissions.
• The procurement staff has sent up a supplier certification scorecard, but the suppliers rarely get any feedback on their scores.
• Three of the top five customers have asked for reports tied to their past buying behavior. Each of them have different requirements and are unhappy with the accuracy and timeliness of the spreadsheets they are currently receiving.
• The Information Technology group has very few standard processes or tools to measure project status. Other departments have none.
• Executive Leadership use a “Executive Dashboard” report to track KPIs, but the report is hand assembled, unaudited, and does not tie out to previously published versions of the “Executive Dashboard” or other financial statements. The executive team spends a great deal of time discussing the credibility and value of the data on the report.

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Corporate Performance Management (also known as Business Performance Management, Enterprise Performance Management, or Organizational Performance Management) is the intersection of many different management processes that are not integrated in the vast majority of organizations. There are problems with most of these processes, and the lack of integration makes the problem worse.

 A partial List of Processes:

• Financial Consolidation and Reporting: Based on Generally Accepted Accounting Principles(GAAP) these processes support external decisionmakers, such as Governments and the Capital Markets. These processes must follow the rules set out by the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board (PCAOB), the Securities and Exchange Commission (SEC) and a whole host of other regulators. The purpose of GAAP is to force all reporting businesses to a common framework, based on the core prinicples of Conservatism, Relevance, and Reliablity. Unfortunately, these principles force the assumption that all businesses, or certainly all businesses within an industry, are essentially the same. This of course, is in direct contradiction with the idea that management matters. There is also a focus on tangible assets, such as inventory, machinery, and Land/Buildings. Intangible assets, which really form the key value of the information age company, are given short shrift. There is some key thinking on this in the first Balanced Scorecard book, as well as in academic discussions of the subject. Essentially, the idea here is that investors do not value corporations based on the net book value (Acquistion cost less Accumulated Depreciation) of their assets. They make investment decisions based on future earnings expectations, which are driven in great extent by concepts such as Brand, Intellectual Property, Marketing efforts, and so on. These concepts, by definition, cannot be valued by traditional GAAP.
• Corporate Budgeting and Business Planning: Lets face it. Corporations do a terrible job at making financial plans for the forseeable business future. This in not a new opinion:
• Jack Welch said “The budget is the Bane of Corporate America.”
• Bob Lutz (the current Chairman of General Motors North America, and overall Big 3 automotive executive) said that ”The budget is a tool of repression rather than innovation.”
• The Harvard Business Review says that “Corporate Budgeting Needs to be Fixed” and “Budgeting Kills Companies”.
• Managerial Accounting: Traditional Management Accounting (TMA-My abbreviation) focused on product costing, which was basically an input for Financial Reporting. Product Costs were also used to set pricing and measure effectiveness. Most thinking around traditional product costing was formed in the industrial age. Much of it is obsolete. Before Kaplan became “the founder of the Balanced Scorecard” his focus was on Activity Based Costing and other alternatives to TMA.
• Internal Financial Reporting: Usually an byproduct of external financial reporting, internal financial reporting is based on the General Ledger. The concept of the “cost center” or “responsiblity center” is used to measure performance for a subset of the organization. It is very difficult to get an accurate picture of the effectiveness of a particular manager’s effectiveness,  because by definition, a subset of the whole is dependent on all the other subsets around it.
• Operational Reporting: For the first time, we leave the processes centered in the finance department and move into the reports everyone looks at every day. This is the realm of the business intelligence questions:
• How Many Blue Widgets are in Inventory?
• How Many Blue Widgets have been sold in Kansas?
• How Many Blue Widgets were sold in the same order as Yellow Gadgets?
• What Customers have bought the most?
• Which region has sold the most?
• How are the Sales People Performing?
• Strategic Planning: Every organization devotes time to strategic planning, but who spends time actually executing it?
• Operational Planning: In a world of limited economic resources (scarcity) how do resources get allocated…today, tomorrow, or next week.

The key to CPM is to tie these disparate processes together.

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The secret to being a good consultant is learning how to structure the problem solving process. It takes real discipline to structure massive amounts of available information into a coherent model to work through.

I have decided to apply this same discipline to this blog. Every week, I am going to choose a single theme to work through. I see this as a way to add value to my very few readers, but more importantly, I want to structure my own thinking on the key subjects of CPM.

The first week will start at the best place to start…the definitions and origins of CPM. To begin with, go to Wikipedia and review the definition of CPM there. The article is pretty poorly written (looks like a few PR types did a whole bunch of cut/paste), but there is some value there. The article states that Howard Dresner came up the term CPM in 1989…I disagree. He came up with Business Intelligence in 1989, but CPM came along a lot later.

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