February 5, 2007
Corporate Performance Management Definition 1: Process Focus
Joel Vander Weele wrote this mid-afternoon:
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.
Filed under: Uncategorized, CPM Theory
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March 26th, 2007 at 2:40 pm
[…] Found out that forgot to post a link to this excellent overview of CPM process Posted in BI&CPM […]
April 17th, 2007 at 12:24 am
[…] Is corporate performance depending from good management of management processes? Sure it is a key necessary condition, but not sufficient! […]