FP&A Week: Breaking the Paradox
October 10-13, 2023
By Michael Coveney, Analytics Thought Leader and Author
Corporate Performance Management (CPM) concerns how an organisation manages its overall performance. As defined by Gartner, it involves combining the methodologies used to manage strategy, the metrics that evaluate performance, and the processes used to direct people within the organisation – all of which should be supported by a technology solution.
To support organisational decision-making, the framework combines the following four areas:
At the heart of a CPM system is an organisation model containing the relationship of activities that lead to organisational objectives.
Although this model will differ between industries, it will typically include the following:
These activities are linked to one or more organisation departments that determine those responsible for their execution.
Some activities will have a one-to-one relationship with the organisation structure, but other activities will go across multiple departments.
Quite often, the relationships between activities can be built as a Driver-Based model where the value of an input, such as the number of inquiries, can be used to determine the volume of sales and revenue via a set conversion rate. These models can be used to plan or assess the operation of the business by entering a few key values or ‘drivers’.
Each activity can have different sets of measures that include:
The second area – Strategy – typically has an emphasis on how the performance of the business model can be improved. It focuses on one or more organisational objectives and details specific strategic initiatives that describe how that improvement will be implemented and who will be responsible for their delivery.
The terminology involved depends on the management methodology being employed (e.g. Balanced Scorecard), but most methodologies will show the relationship between the action and the objective being supported as a ‘Strategy Map’.
The sets of measures associated with strategy include:
The third element of the framework relates to the resources (money, people, assets) that the organisation has at its disposal, with financial resources often being the focus of a budget.
These resources should be allocated to sustain the business model and ensure that the agreed strategic initiatives are properly resourced at the right time.
The final area of the framework is the organisation’s management processes that direct and control how performance is planned, resourced, implemented, and monitored.
However, on closer examination, these processes consist of a number of interconnected activities that only together form the basis for managing performance.
Consider the following schematic:
Even within each activity, there are interconnected tasks that each department has to perform in a specific order and at specific times.
For example, budgeting may start off with setting a high-level goal, which sales will decide on how this will be delivered throughout the year. To do this, they may need to collaborate with marketing and production.
Once this has been completed, other areas of the organisation can start allocating resources that fit in with the sales and marketing plan.
There are three essential things to bear in mind when designing processes:
As with a car, these four components need to be combined and operated as a single technology solution. It needs to support decision-making through the total integration of driver-based business modelling (the engine) and strategy improvement plans (visual indicators showing the intended direction) with organisational resources (the fuel), all controlled through management processes (the pedals and steering wheel).
None of these components can be run in isolation - the degree of integration will determine how ‘smooth the ride’ will be.
Around this central CPM system will be a range of BI analytical applications that provide insight into particular aspects of each component. This insight is used to formulate plans to improve the operation of the business model.
The role of management reporting is to bring all relevant information together in context – i.e., to link strategy with the business model and resources in a transparent and usable format to motivate the many people involved to make the best-informed decisions. Those decisions will typically lead to altering the business model, modifying or developing new strategic initiatives, and, where necessary, re-allocating resources. All of which is performed under the control of management processes.
Performance management is all about making decisions on the operation of the business model and any associated strategy improvement initiatives. What goals should be set? What things have to be done to achieve those goals? How much will it cost? How much did it cost? What will it cost in the future? Is the outcome worth it? What changes should be made? Why has a past change been agreed? And so on.
These decisions are typically made through a series of activities based on information presented to a user.
Therefore, when implementing the CPM framework, three things are necessary:
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