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Chapter 5 Business Performance Management

Chapter 5 Business Performance Management

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Chapter 5 Business Performance Management

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  1. Chapter 5Business Performance Management

  2. Learning Objectives • Understand the all-encompassing nature of business performance management (BPM) • Understand the closed-loop processes linking strategy to execution • Describe some of the best practices in planning and management reporting • Describe the difference between performance management and measurement

  3. Learning Objectives • Understand the role of methodologies in BPM • Describe the basic elements of the balanced scorecard and Six Sigma methodologies • Describe the differences between scorecards and dashboards • Understand some of the basics of dashboard design • Understand the potential uses of business activity monitoring (BAM)

  4. Business Performance Management (BPM) Overview • BPM Defined • Business performance management(BPM) A real-time system that alert managers to potential opportunities, impending problems, and threats, and then empowers them to react through models and collaboration

  5. Business Performance Management (BPM) Overview • BPM and BI Compared • BPM is an outgrowth of BI and incorporates many of its technologies, applications, and techniques • BPM is an enterprisewide strategy that seeks to prevent organizations from optimizing local business at the expense of overall corporate performance • BPM is part of the daily work of managers

  6. Business Performance Management (BPM) Overview • Summary of BPM processes • BPM encompasses a closed-loop set of processes that link strategy to execution in order to optimize business performance, which is achieved by: • Setting goals and objectives • Establishing initiatives and plans to achieve those goals • Monitoring actual performance against the goals and objectives • Taking corrective action

  7. Business Performance Management (BPM) Overview

  8. Strategize: Where Do We Want to Go? • Strategic planning • Tasks common to the strategic planning process: • Conduct a current situation analysis • Determine the planning horizon • Conduct an environment scan • Identify critical success factors • Complete a gap analysis • Create a strategic vision • Develop a business strategy • Identify strategic objectives and goals

  9. Strategize: Where Do We Want to Go? • Strategic planning • Critical success factors (CSF) Key factors that delineate the things that an organization must excel at to be successful in its market space • Strategic vision A picture or mental image of what the organization should look like in the future

  10. Strategize: Where Do We Want to Go? • Strategic planning • Strategic objective A broad statement or general course of action prescribing targeted directions for an organization • Strategic goal A quantified objective with a designated time period

  11. Strategize: Where Do We Want to Go? • The strategy gap • Four sources for the gap between strategy and execution: • Vision • People • Management • Resources

  12. Plan: How Do We Get There? • Operational planning • Operational plan Plan that translates an organization’s strategic objectives and goals into a set of well-defined tactics and initiatives, resources requirements, and expected results

  13. Plan: How Do We Get There? • Operational planning • Tactic-centric plan—tactics are established to meet the objectives and targets established in the strategic plan (used by best practices organizations • Budget-centric plan—a financial plan or budget is established that sums to the targeted financial values

  14. Plan: How Do We Get There? • Financial planning and budgeting • An organization’s strategic objectives and key metrics should serve as top-down drivers for the allocation of an organization’s tangible and intangible assets • Resource allocations should be carefully aligned with the organization’s strategic objectives and tactics in order to achieve strategic success

  15. Monitor: How Are We Doing? • A comprehensive framework for monitoring performance should address two key issues: • What to monitor • How to monitor

  16. Monitor: How Are We Doing? • Diagnostic control system A cybernetic system that has inputs, a process for transforming the inputs into outputs, a standard or benchmark against which to compare the outputs, and a feedback channel to allow information on variances between the outputs and the standard to be communicated and acted upon

  17. Monitor: How Are We Doing?

  18. Monitor: How Are We Doing? • Pitfalls of variance analysis • The vast majority of the exception analysis focuses on negative variances when functional groups or departments fail to meet their targets • Rarely are positive variances reviewed for potential opportunities, and rarely does the analysis focus on assumptions underlying the variance patterns

  19. Monitor: How Are We Doing?

  20. Act and Adjust: What Do We Need to Do Differently? • Hackett Group’s benchmarking process divides planning and management reporting into four subprocesses: • Strategic planning • Operational and financial planning • Reporting • Forecasting

  21. Act and Adjust: What Do We Need to Do Differently? • Each subprocess is evaluated in terms of five dimensions of efficiency and effectiveness: • Strategic alignment • Partnering • Process • Technology • People and organizations

  22. Act and Adjust: What Do We Need to Do Differently? • The Hackett Group’s benchmarking results indicate that world class companies: • Are significantly more efficient than their peers at managing costs • Focus on operational excellence and experience significantly reduced rates of voluntary employee turnover • Have hybrid sourcing strategies that combine shared services and outsourcing

  23. Act and Adjust: What Do We Need to Do Differently? • The Hackett Group’s benchmarking results indicate that world class companies: • Provide management with the tools and training to leverage corporate information and to guide strategic planning, budgeting, and forecasting • Closely align strategic and tactical plans, enabling functional areas to contribute more effectively to overall business goals

  24. Act and Adjust: What Do We Need to Do Differently? • Paucity of analysis • The overall impact of the planning and reporting practices of the average company is that management has little time to review results from a strategic perspective, decide what should be done differently, and act on the revised plans

  25. Performance Measurement • Performance measurement system A system that assists managers in tracking the implementations of business strategy by comparing actual results against strategic goals and objectives

  26. Performance Measurement • Problems with existing performance measurement systems • The most popular system in use is some variant of the balanced scorecard (BSC) • BSC methodology is a holistic vision of a measurement system tied to the strategic direction of the organization and based on a four-perspective view of the world: • Financial measures supported by customer, internal, and learning and growth metrics

  27. Performance Measurement • The drawbacks of using financial data as the core of a performance measurement: • Financial measures are usually reported by organizational structures and not by the processes that produced them • Financial measures are lagging indicators, telling us what happened, not why it happened or what is likely to happen in the future • Financial measures are often the product of allocations that are not related to the underlying processes that generated them • Financial measures are focused on the short term and provide little information about the longer term

  28. Performance Measurement • Effective performance measurement • Basic ingredients of a good collection of performance measures • Measures should focus on key factors • Measures should be a mix of past, present, and future • Measures should balance the needs of shareholders, employees, partners, suppliers, and other stakeholders. • Measures should start at the top and flow down to the bottom • Measures need to have targets that are based on research and reality rather than be arbitrary

  29. BPM Methodologies • An effective performance measurement system should help: • Align top-level strategic objectives and bottom-level initiatives • Identify opportunities and problems in a timely fashion • Determine priorities and allocate resources based on those priorities. • Change measurements when the underlying processes and strategies change

  30. BPM Methodologies • An effective performance measurement system should help: • Delineate responsibilities, understand actual performance relative to responsibilities, and reward and recognize accomplishments. • Take action to improve processes and procedures when the data warrant it. • Plan and forecast in a more reliable and timely fashion

  31. BPM Methodologies • Balanced scorecard (BSC) A performance measurement and management methodology that helps translate an organization’s financial, customer, internal process, and learning and growth objectives and targets into a set of actionable initiatives

  32. BPM Methodologies • The meaning of balance • BSC is designed to overcome the limitations of systems that are financially focused • Nonfinancial objectives fall into one of three perspectives: • Customer • Internal business process • Learning and growth

  33. BPM Methodologies

  34. BPM Methodologies • The meaning of balance • BSC is designed to overcome the limitations of systems that are financially focused • Nonfinancial objectives fall into one of three perspectives: • Customer • Internal business process • Learning and growth

  35. BPM Methodologies • In BSC, the term balance arises because the combined set of measures are supposed to encompass indicators that are: • Financial and nonfinancial • Leading and lagging • Internal and external • Quantitative and qualitative • Short term and long term

  36. BPM Methodologies • Aligning strategies and actions • BSC enables an organization to align its actions with its overall strategies through a series of interrelated steps: • Identify strategic objectives for each of the perspectives (about 15 to 25 in all). • Associate measures with each of the strategic objectives; a mix of quantitative and qualitative should be used. • Assign targets to the measures. • List strategic initiatives to accomplish each of the objectives (i.e., responsibilities). • Link the various strategic objectives through a cause-and-effect diagram called a strategy map

  37. BPM Methodologies • Strategy map A visual display that delineates the relationships among the key organizational objectives for all four BSC perspectives

  38. BPM Methodologies

  39. BPM Methodologies • BSC certification • BSC Collaborative offers software vendors the opportunity to have their applications certified against a well-defined set of criteria • The application must offer an end user the ability to view: • Strategic objectives from the four perspectives • The measures, targets, and initiatives associated with each objective • The cause-and-effect relationships among the objectives

  40. BPM Methodologies • Six Sigma A performance management methodology aimed at reducing the number of defects in a business process to as close to zero defects per million opportunities (DPMO) as possible

  41. BPM Methodologies • Six Sigma • The DMAIC performance model A closed-loop business improvement model that encompasses the steps of defining, measuring, analyzing, improving, and controlling a process

  42. BPM Methodologies • Six Sigma • Limitations of Six Sigma • The lack of integration among the various Six Sigma projects across the enterprise • The failure to institute the roles required to support the methodology

  43. BPM Architecture and Applications

  44. BPM Architecture and Applications • BPM architecture • System architecture Thelogical and physical design of a system • A BPM system needs three components in order to contribute to the successful implementation of strategy: • Database tier • Application tier • Client or user interface

  45. BPM Architecture and Applications • BPM architecture • Database tier designs include: • Transactional data stores • Application data marts • Centralized data warehouse

  46. BPM Architecture and Applications • BPM architecture • BPM applications: • Budgeting, planning, and forecasting • Profitability modeling and optimization • Scorecard applications • Financial consolidation • Statutory and financial reporting

  47. BPM Architecture and Applications • BPM architecture • BPM user interface • The user interface is the bridge between the BPM applications and the end user • The Web browser is currently the primary tool for accessing information in a BPM system • Spreadsheets are a popular alternative when a rich user interface is needed to support the analytical and computation needs of the user • BPM interfaces should provide is guidance to the end user

  48. BPM Architecture and Applications

  49. Performance Dashboards • Dashboards and scorecards both provide visual displays of important information that is consolidated and arranged on a single screen so that information can be digested at a single glance and easily explored

  50. Performance Dashboards