Many organizations are far from where they want and need to be with improving performance, and they apply intuition, rather than fact-based data, when making decisions. Enterprise and corporate performance and management (EPM/CPM) is now viewed as the seamless integration of managerial methods such as strategy execution with a strategy map and its companion balanced scorecard (with key performance indicators, KPIs); enterprise risk management (ERM); capacity-sensitive driver-based budgets and rolling financial forecasts; product, service-line, channel, and customer profitability analysis (using activity-based costing [ABC] principles); customer lifetime value (CLV); lean and Six Sigma quality management for operational improvement; and resource capacity planning.
Each method should be embedded with business analytics of all flavors, such as correlation, segmentation, regression and clustering analysis, and especially predictive analytics as a bridge to prescriptive analytics to yield the best (ideally optimal) decisions.
Historically the term “performance management” referred to individual employees and was used by the personnel and human resources function such as for employee appraisals. But today, this term is widely accepted as enterprise-wide performance management of an organization as a whole. Clearly the performance of employees is an important element to improve an organization’s performance, but in the broad framework of EPM/CPM, human capital management is just one element.
The purpose of this article is to remove the confusion and clarify what EPM/CPM methods are, what they do, and how to make them work together. Let’s begin with discussing a major reason why there is such high interest in EPM/CPM.
Executive pain: A major force creating interest in EPM/CPM
It is a tough time for senior managers. Today customers increasingly view a supplier’s products and service lines as commodities and place pressure on prices as a result. Business mergers and employee layoffs are ongoing, and inevitably there is a limit which is forcing management to come to grip with truly managing their resources for maximum yield, internal organic sales growth and profit. A company cannot forever cut costs to prosperity.
In complex and overhead-intensive organizations where constant re-direction to a changing landscape is essential, the main cause for executive job turnover is the failure of their organization to execute their strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward sustained economic value creation for shareholders and other more long-term strategic directives? EPM/CPM provides managers and employee teams at all levels with the capability to directly align their actions and priorities toward the executive team’s defined strategies.
Ultimately, an organization’s interest is not just to monitor the KPIs derived from a strategy map and displayed in its associated balanced scorecard, but more importantly it is to move those dials. Scorecards and operational dashboards generate questions. But beyond answering “what happened?” organizations need to know “why did it happen?” and going forward “what could happen?” and ultimately “what is the best choice of my options?”
What is EPM/CPM?
EPM/CPM is all about improvement – synchronizing improvement methods to create value for and from customers with the result of economic value creation to stockholders and owners. The scope of EPM/CPM is obviously very broad, which is why EPM/CPM must be viewed at an enterprise-wide level.
EPM/CPM helps managers to sense earlier and respond more quickly and effectively to unexpected changes. Why is responding to changes so critical? External forces, including globalization and the Internet, are producing unprecedented uncertainty and volatility. The speed of change makes calendar-based planning and long cycle-time planning with multi-year horizons unsuitable for managing. As a result, strategies are never static, but rather they are dynamic. Executives must constantly adjust them based on external forces and new opportunities.
Is EPM/CPM a new process or method?
The good news is EPM/CPM is not a new process or method that everyone now has to learn, but rather it tightly integrates business improvement methods and analytical techniques that executives and employee teams are already familiar with. Think of EPM/CPM as an umbrella concept. It integrates operational and financial information into a single decision-support and planning framework. These include a strategy map and its associated balanced scorecard; costing (including activity-based cost management); budgeting; forecasting’; and resource capacity requirements planning. These methods fuel other core solutions such as customer relationship management (CRM), supply chain management (SCM), risk management, and human capital management systems, as well as lean management and Six Sigma quality initiatives. It is quite a stew, but they all blend together.
EPM/CPM increases in power the greater these managerial methods are integrated, unified, and spiced with all flavors of analytics – and particularly predictive analytics. Predictive analytics are important because organizations are shifting from managing by control and reacting to after-the-fact data toward managing with anticipatory planning so they can be pro-active and make adjustments before problems occur.
EPM/CPM can be viewed as overarching from the C-level executives cascading down through the organization and the processes it performs. EPM/CPM transcends all the way from the top desk to the desk top.
Primitive forms of EPM/CPM’s methods existed decades ago. These forms were present before EPM/CPM was given a formal label by IT research firms and software vendors. Arguably EPM/CPM methods existed before there were computers! In the past, organizations made decisions based on knowledge, experience, or intuition. But as time passed, the margin for error grew slimmer. Computers reversed this problem by creating lots of data storage memory, but this led organizations to complain that they were drowning in data but starving for information – thus distinguishing the word information as the transformation of raw data, usually transactional data, into a more useful form. In the 1990s with the speed up of IT systems integration with computer technology, the term EPM/CPM management took root.
What has caused interest in EPM/CPM?
Admittedly, there is ambiguity and confusion about what EPM/CPM really is. Regardless how one defines or describes it, what is arguably more useful is to understand what the EPM/CPM methods do and what business forces and pressures have created executive’s interest in having its methods .
There have been eight major forces and pressures that have caused interest in EPM/CPM because it resolves these problems:
- Failure to execute the strategy. Although executive teams typically can formulate a good strategy, their major frustration has been failure to implement it. The increasing rate of involuntary job turnover of CEOs is evidence of this problem. A major reason for this failure is most managers and employees cannot explain their organization’s strategy, so they really do not know how what they do – each week or month – contributes to their executives’ strategic intent. Strategy maps, balanced scorecards, KPIs, and dashboards are the elements of EPM/CPM’s suite of methods that address this.
- Unfulfilled return on investment (ROI) promises from transactional systems. Few if any organizations believe they actually realized the expected ROI promised by their software vendor that initially justified their huge large-scale IT investment in major systems (e.g., CRM, enterprise resource planning [ERP] systems). The chief information officer (CIO) has been increasingly criticized for expensive technology investments that, although probably necessary to pursue, have fallen short of their planned results. The executive management teams have been growing impatient with IT investments. EPM/CPM is a value multiplier that unleashes the power and financial payback from the raw data produced by these operating systems. EPM/CPM’s analytics increase the leverage of CRM, ERP, and other core transactional systems.
- Escalation in accountability for results with consequences. Accelerating change that requires quick decisions at all levels is resulting in a shift from a command-and-control managerial style to one where managers and employees are increasingly empowered. A major trend is for executives to communicate their strategy to their workforce, be assured the workforce understands it and is financially funded to take actions, and to then hold those managers and employee teams accountable for results. Unlike our parents’ workplaces where they retired after decades with their employer, today there is no place to hide in an organization anymore. Accountability is escalating, but it has no teeth without having consequences. EPM/CPM adds teeth and traction by integrating KPIs from the strategy map’s balanced scorecard with employee recognition, including with compensation reward systems.
- Need for quick trade-off decision analysis. Decisions must now be made much more rapidly. Unlike in the past where organizations could test-and-learn or have endless briefing meetings with their upper management, today an employee often must make a decision on-the-fly. “Go or no go?” This means that managers and employees must understand their executive team’s strategy. In addition, internal tension and conflict are natural in all organizations. Most managers know that decisions they make that help their own function may adversely affect others. They just don’t know who is negatively affected or by how much. A predictive impact of decision outcomes using analytics is essential. EPM/CPM methods are increasingly imbedded with analytical tools, ranging from marginal cost analysis to what-if scenario simulations that support resource capacity analysis and planning and calculate future profit margin estimates.
- Mistrust of the management accounting system. Managers and employees are aware that the accountants’ arcane “cost allocation” practices using non-causal broad-brushed averaging factors (e.g., input labor hours, sales volume) to allocate non-direct product-related expenses result in flawed and misleading profit and cost reporting. Some cynically refer to them as the “mis-allocation” system! Consequently, they do not know where money is made or lost or what drives their costs. EPM/CPM embraces techniques like activity-based costing (ABC) and lean accounting (which can be co-existing methods) to increase cost accuracy and reveal and explain what drives the so-called hidden costs of overhead. It provides cost transparency and visibility that organizations desire but often cannot get from their accountants’ traditional internal management accounting system.
- Dysfunctional budgeting. The annual budgeting process is being criticized as obsolete soon after it is published, prone to gamesmanship, cumbersome to consolidate cost center spreadsheets, not being capacity-sensitive to changes in sales volumes and mix, and disconnected from the strategy. The challenge is how to resolve these deficiencies. It can be done through capacity-sensitive, driver-based expense projections also useful for decision analysis. The annual budget is often perceived as a fiscal exercise done by the accountants that is: (1) disconnected from the executive team’s strategy, and (2) does not adequately reflect future volume and mix drivers. The budget exercise is often scorned as biased toward politically muscled managers who know how to overstate and “pad” their budget request. To complicate matters, traditional budgets are typically incremented or decremented by a small percent change from each cost center’s prior year’s spending level. This “use it or lose it” behavior by managers in the last few months of the fiscal year unnecessarily pumps up their prior year’s costs and consequently confuses analysis of who really needs how much budget in the coming year. Today organizations are shifting to rolling financial forecasts, but these projections may include similarly flawed assumptions that produce the same sarcasm about the annual budgeting process.
- Poor customer value management. Everyone now accepts how critical it is to satisfy customers to grow a business. However, it is more costly to acquire a new customer than to retain an existing one. In addition, products and standard service lines in all industries have become commodity-like. Mass selling and spray-and-pray advertising are obsolete concepts. This shifts the focus to require a much better understanding of channel and customer behavior and costs. This type of understanding is needed to know which types of existing customers and new sales prospects to grow, retain, win back or acquire using differentiated service levels – and how much to spend on each type of customer that is worth pursuing. It requires working backward by knowing each customer’s unique preferences. EPM/CPM includes sales and marketing analytics for various types of customer segments to better understand where to focus the sales and marketing budget for maximum yield and financial payback. The return on customer (ROC) is an emerging term.
- Dysfunctional supply chain management. Most organizations now realize it is no longer sufficient for their own organization to be agile, lean, and efficient. They are now co-dependent on their trading partners, both upstream and downstream, to also be agile, lean, and efficient. To the degree their partners are not, then waste and extra unnecessary costs enter the end-to-end value chain. These costs ultimately are cumulatively passed along the value chain resulting in higher prices to the end consumer which can reduce sales for all of the trading partners. Today supply chains compete against other supply chains for the share of a consumer’s wallet and purse. Sadly, there have been centuries of adversarial relationships between buyers and sellers. EPM/CPM addresses these issues with powerful forecasting tools, increasing real-time decision making, and financial transparency across the value chain. It allows value chain trading partners to collaborate to join in cost savings from mutually beneficial projects and joint process improvements.
EPM/CPM framework for value creation
Exhibit 1 illustrates the interdependent methods that comprise EPM/CPM for a commercial organization.
Exhibit 1 EPM/CPM Is Circulatory and Simultaneous
To explain Exhibit 1, first understand the objective is to connect the “customers” to the shareholder / owner” box. First, focus on the three counter-clockwise arrows at the center of the diagram, starting and ending with the “customers” box. The two fat arrows represent the primary universal core business processes possessed by any organization, regardless if they are in the commercial or public sector: take an order or assigned outcome, and fulfill that order or assigned outcome. These two processes apply to any organization: orders or outcomes are received, and then organizations attempt to execute them. Order fulfillment is the most primary and universal core process of any organization. An example in healthcare is a hospital admits patients and then treats and heals them. The IT support systems needed to fulfill this core process is represented by the two fat arrows; they are commonly referred to as front office and back office systems. This portion of Exhibit 1 is the realm of “better, faster, and cheaper.”
The customer-facing, front office systems include customer relationship management (CRM) systems. This is also where targeting customers, marketing campaigns, sales processes, and work order management systems reside. The back office systems are where the fulfillment of customer or work orders, process planning, and operations resides – the domain of ERP and lean/Six Sigma quality initiatives. The output from this process planning and execution box is the delivered product, service, or mission intended to meet the customer needs. To the degree that customer revenues exceed all of an organization’s expenses, including the cost of capital, then profit (and positive free cash flow) eventually accumulates into the shareholder’s box in Exhibit 1’s lower right.
Exhibit 1 should be viewed as a circulatory flow of information and resource consumption similar to your body’s heart and blood vessel system. As earlier mentioned, an organization’s EPM/CPM practices has been around for decades even before computers. Think of how speeding the flow and widening constrictions will increase throughput velocity and the yield from the organization’s resources. More with less. Value for money. These are phrases associated with EPM/CPM.
Exhibit 1 is dynamic. The starting point of the diagram begins with the “Customer Satisfaction” box. The need to satisfy customers is the major input into senior management’s box in the exhibit’s upper left: “Mission, Strategy.” As the executive team adjusts their organization’s strategy, they continuously communicate it to employees with their strategy map and its companion balanced scorecard. With strategic objective adjustments they may abandon some KPIs intended to align work behavior and priorities with the outdated strategy. In those cases, KPIs associated with outdated strategies are not unimportant but rather now less important. The team may also add new KPIs or adjust the KPI weightings for various employee teams. As the feedback is received from the scorecards, then all employees can answer a key question: “How am I doing on what is important?” The power of that question is in its second half: to focus everyone on what is most important. With analysis for causality, corrective actions can then occur. The left portion of the diagram deals with strategy execution.
Continuing on, the organization’s marketing and sales can better target which existing and potentially new customers to target to retain, grow, win back and acquire as well as determining the optimal amount to spend on each type of customer micro-segment with differentiated service levels, deals, coupons, discounts or offers.
Finally comes the order fulfillment loop previously described. Take orders and efficiently fulfill the orders.
As this circulatory system is streamlined and digitized with better information, decisions and more focused and aligned employee work, then the result is faster and higher yield of shareholder wealth creation. Remember, shareholder wealth creation is not a goal – it is a result. It is a result of addressing all of the methods in the Exhibit’s flow. In the end, EPM/CPM is about “better, faster, cheaper … and smarter and safer.” The smarter comes not only from process improvements but from achieving the executive team’s strategic objectives. The safer comes from integrating enterprise risk management (ERM) with EPM/CPM methods.
Where is a box for innovation in the exhibit? It is not there because it arguably must be inside every box and arrow in the diagram. Innovation is as mission-critical today as achieving total quality management (TQM) was in the 1980s. TQM was assumed to be a given – an entry ticket to even compete. That is how innovation is today. I do not dwell on innovation because I believe it and its associated breakthrough thinking is so critical that I leave it to other authors to devote articles and books on this important topic.
The best executive teams do not consider any of the components in Exhibit 1 as optional – they are all essential and an imperative. The best executive teams, however, not only know the priorities of where in the flow to place emphasis to widen constrictions but also to improve all of the other EPM/CPM methods in the flow.
A proven way to implement EPM/CPM’s methods is with quick rapid prototyping followed with iterative re-modeling. This approach accelerates learning and buy-in from managers, some of whom are skeptical or have fear of change. These quick-start approaches reveal findings previously unknown that can contribute to changes in processes and altering the executive team’s strategic objectives. The initial prototype model then evolves into a permanent, repeatable and reliable production reporting and decision support systems.
Note that management accounting does not appear in Exhibit 1. That is because the output of a management accounting system is always the input to some place where analysis and decisions are made. The primary purpose of management accounting is for insights and discovery to generate questions for needed conversations. In the Exhibit it supports every box and arrow.
EPM/CPM Unleashes the Return on Investment from Information
There is a shift in the source for how organizations realize their financial ROIs from tangible assets to the intangible assets of employee knowledge and information. That is, the shift is from spending on equipment, computer hardware, and the like to knowledge workers applying information for decision making.
Exhibit 2 displays across the horizontal axis the stages that raw transactional data passes through to become the information, knowledge, and insights to make better decisions which successful organizations will eventually experience and benefit from. The vertical axis measures the power and ROI from transforming that data and leveraging it for realized results. The ROI increases exponentially from left to right.
Exhibit 2 The Intelligence Hierarchy
The three bubbles on the left side are the location of transactional data for daily operations and reporting. The three bubbles to the right are where business analytics and the EPM/CPM suite of methods lifts the ROI.
Most organizations are mired in the Exhibit’s lower left corner’s first two bubbles, hostage to raw data and standard reports. In some organizations the CIO and IT staff have allowed some managers to use basic query and reporting on-line analytical processing (OLAP) tools to drill down to examine some of that data. But this data still restricts and confines workers to only know what happened in the past.
The power of EPM/CPM and analytics begins with the fourth bubble – descriptive modeling. The power of modeling is it relies on cause-and-effect relationships. As an example, ABC models the conversion of expense spending into the calculated costs of processes, work activities and the types of outputs, products, service-lines, channels and customers that consume an organization’s capacity. Costing is modeling. It is not an accountant’s general ledger with T-accounts with debit and credit journal entries. As another example, a strategy map and its associated performance indicators is a model on a single page of how an organization defines its linked strategic objectives and plans to achieve them. Data has been transformed into information. In this fourth bubble employees can now know not just what happened but also why did it happen.
The fifth bubble passes from historical information from which organizations are reactive to predictive information, such as what-if scenarios and rolling financial forecasts. In this fifth bubble organizations can be proactive. As mentioned earlier organizations are shifting their management style from after-the-fact control based on examining variance deviations from plans, budgets and expectations to an anticipatory management style where they can adjust spending and capacity levels as well as projects and initiative before changes in work demands arrive. Information is used for knowledge. At this stage employees can now know not just what happened and why did it happen but also what can possibly happen next.
The sixth and final bubble in the upper right corner is highest stage – optimization. At this point organizations can select from all of their decision options examined in the prior stage and answer which is the best decision and action to take. This stage has been termed by IT analyst firms as “prescriptive analytics.” A few software vendors now offer this functionality using linear programming techniques.
IT transactional systems may be good at reporting past outcomes, but they fall short on being predictive or prescriptive for effective planning. Given a sound strategy, how does the organization know if its strategy is achievable or affordable? What if pursuing the strategy and its required new projects and initiatives will cause long-term negative cash flow or financial losses? Will the needed resource requirements exceed the existing capacity?
Management’s Quest for a Complete Solution
Many organizations jump from improvement program to program hoping that each new one may provide that big yet elusive competitive edge like a magic pill. However, most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change – particularly a long-term sustained change. The key for improving is integrating and balancing multiple improvement methods and spicing them with analytics of all flavors – particularly predictive and prescriptive analytics. In the end, organizations need top-down guidance with bottom-up execution.
Organizations that are enlightened enough to recognize the importance and value of their data often have difficulty in actually realizing that value. Their data is often disconnected, inconsistent, and inaccessible resulting from too many non-integrated single-point solutions. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily.
How does EPM/CPM create more value lift? One fundamental capability that EPM/CPM has is it transforms transactional data into decision-support information. Transactional systems (e.g., enterprise resource planning [ERP] ) were designed for a different purpose – short-term operating and control with historical reporting of what happened.
Fortunately, innovation in data storage technology is now significantly outpacing progress in computer processing power heralding a new era where creating vast pools of digital data is becoming the preferred solution. The pools of data are commonly referred to as “big data”. As a result, there are now superior software tools that offer a complete suite of analytic applications and data models that enable organizations to tap into the virtual treasure trove of information they already possess. This enables effective EPM/CPM on a huge scale that is enterprise-wide in scope.
EPM/CPM is the integration of these technologies and managerial methods. The EPM/CPM suite of methods provides the mechanism to bridge the business intelligence gap between the CEO’s vision, mission and strategy to meet investors’ expectations and employees’ actions.
ABOUT THE AUTHOR
Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA with honors from Northwestern University’s Kellogg School of Management in 1974.
Gary began his career as a strategic planner with FMC’s Link-Belt Division and then served as Financial Controller and Operations Manager. In 1981 Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting. In 1992 Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) now part of HP. From 1997 until 2013 Gary was a Principal Consultant with SAS, a leading provider of business analytics software.
His two most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics, and Predictive Business Analytics. His books are published by John Wiley & Sons.
Mr. Cokins can be contacted at firstname.lastname@example.org .