Business Performance Management and Strategy Execution
Think of a road trip with your family. You first establish a destination, you determine the route to reach it, you estimate the time it’ll take, you program some stops in order to refill the gas tank, stretch your legs, amongst other things. Once you’re on your way, you’ll be able to validate if you’re on the correct route and moving forward as planned, and that our vehicle is working properly to get us to our destination. While I accept that not everyone does this, at least not consciously, what we can all agree on is that this all makes a lot of sense, doesn’t it?
This is very close to what an airplane captain does, but much more rigorously. Of course, with an airplane, there are many more risks than with a road trip. The pilot counts with many more indicators that will help him with the trip, ranging from what direction he’s going, elevation, planned velocity, weather, airplane conditions during the trip, and many others. That’s without mentioning a well prepared crew, and an impressive dashboard that comes with the airplane itself. A car does come with a dashboard of course, but a much simpler one.
To my point, this is very similar to what you’re supposed to do with your business. Once you have your business plan, in which we’ve developed a vision, defined strategic goals, and strategies to achieve our vision and goals, how do we know we’re achieving such goals? In simple terms, through Business Performance Management! This is a process, in which the manager measures and evaluates in an objective manner how you’re achieving your objective, goal, or mission. Measuring performance in isolation is rather incomplete, to say the least. If you decide to measure or calculate some business variables, let’s say, your inventory rotation and cycle time to complete customers’ orders, your results should be compared with a reference value, let’s say, industry averages, or with the industry’s best practices. Even with that, some questions might be left unanswered: At what level should our business be performing now? Are these metrics improving as expected, or deteriorating over time? What trends can we observe? What do these results tell us about the overall performance of my company? How do I link these with how I want my company to perform? These are the reasons why Business Performance Management should be a constant process and integrated with our business strategy.
Amongst the many advantages that Business Performance Management offers, we could mention the following:
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It helps to identify and correct any deviation from the vision we have set for the company
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It allows us to have comparative feedback of our achievements with some standard
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It helps us communicate expectations to our staff, identify performance that we wish to motivate and reward, boost accountability for results and strengthen organizational learning
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It helps us make investment decisions, plans, policies, programs, etc.
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Traditionally, the business performance metrics have been centered on the financial aspect, i.e., the ROI, ROA, ROE, EVA, etc. The ever-intensifying competition has taught us that this only gives us a short-sighted view of the business, since they offer us a view of past performance, but gives us none to little insight into what we can expect from the future. To have such insight, our metrics should be able to answer the following:
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How do my clients feel?
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How do my personnel feel?
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How are the internal processes?
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What improvement opportunities am I missing?
During the 90s, Robert Kaplan and David Norton, of Harvard University, created the Balanced Scoreboard methodology, which is the most common framework large corporations use to help monitor strategy execution and performance nowadays. This methodology states that businesses must make sure to measure their performance in four perspectives: the financial, the customer, the internal business processes, and the organizational learning and growth. The way you measure each perspective should be all aligned with the business strategy and vision, which graphically looks like this:
So, the process to establish a formal Business Performance Management system is as follows:
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We start with the development of a Business Plan, in which we stablish a mission, a vision, objectives and strategies.
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From there, we develop the Key Performance Indicators, or KPIs, which will guide management on company’s performance in all four perspectives
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We develop the budget for revenues, costs and expenses, and cash, which should fall in line with the business plans. This will provide the target values we must aim for each KPI.
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With this base and using financial statements and operational reports of the company, the periodic management control reports are issued, which then are provided to the team.
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As a result of the analysis reflected in the periodic reports, the management decides and acts upon the improvements and/or adjustments to the internal processes, strengthening of the team, and provides feedback for any necessary adjustments in the business plan.
In any case, even if we start a Business Performance Management system without following the here proposed process step by step, we must ensure to establish objectives in quantifiable and precise terms, using metrics that should promote change in the right direction, and appropriate behavior, that is, promote that each member of our team works towards the set goals. In the selection of each indicator we must ensure that it is:
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Significant/Relevant: it must maintain a relationship with the mission, strategic objectives and goals.
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Valuable: it must measure important activities. It must clearly indicate the direction of the necessary corrective action.
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Balanced: it must include and consider key variables (quality, efficiency, etc.)
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Connected: that those in charge can see their work reflected in the indicator
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Practical: the necessary information must be easy to obtain
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Comparable: must be easy to reference to industry standards
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Credible: must be based in trustworthy information
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Simple: easy to calculate and understand
Business Performance Management is a invaluable tool to manage any business. A well-designed dashboard provides management and shareholders with a holistic view of the company, enabling timely decision making, providing everyone with coherent and uniform information. All of this makes communication amongst partners and team members exponentially better.
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