WHY THE NEED

FOR
PERFORMANCE
MANAGEMENT
SYSTEM?
(Chapter 1)
 “A man’s mind
stretched by a new
idea can never go
back to its original
dimensions.”
- Oliver Wendell Holmes
PERFORMANCE MANAGEMENT

● Performance management (PM) is the process of

managing the execution of an organization’s strategy.
● It is how plans are translated into results.
● Think of PM as an umbrella concept that integrates
familiar business improvement methodologies with
technology.
● In short, the methodologies no longer need to be
applied in isolation—they can be orchestrated.
SPOTLIGHT ON OBJECTIVES, OUTCOMES, CONFLICTS,
CONSTRAINTS AND TRADE-OFFS

● Even with a clearly defined strategy, conflicts are a

natural condition in organizations.
● For example, there will always be tension between
competing customer service levels, process
efficiencies, and budget or profit constraints.
● Managers and employee teams are constantly faced
with conflicting objectives and no way to resolve them,
so they tend to focus their energies on their close-in
situation and their personal concerns for how they
might be affected.
SPOTLIGHT ON OBJECTIVES, OUTCOMES, CONFLICTS,
CONSTRAINTS AND TRADE-OFFS

● PM escalates the visibility of quantified outputs and outcomes—in

other words, results. PM provides explicit linkage between strategic,
operational, and financial objectives.
● It communicates these linkages to managers and employee teams in
a way they can comprehend, thereby empowering employees to act
rather than cautiously hesitate or wait for instructions from their
managers.
● Knowing these strategic objectives and their relative importance,
managers and employee teams then use tools from the PM suite,
such as activity-based costing data and customer relationship
management information, to objectively evaluate the trade-offs.
 ACCELARATING TURNOVER AT THE TOP: WHY?

● The primary cause for the executives’ revolving door involves failed
strategies.
● Defining and adjusting strategy is the number one purpose of the
CEO. However, despite their best formulated plans, when executives
adjust their strategies, their major frustration is they cannot get their
employees to execute the revised strategy.
● The balanced scorecard has been hailed by executives and
management consultants as the new religion to resolve this
frustration.
● It serves to communicate the executive strategy to employees and
also to navigate direction by shaping alignment of people with
strategy.
● The balanced scorecard resolves a nagging problem.
● There is a substantial gap between the raw data spewed out from
business systems and the organization’s strategy.
● Figure 1.1 illustrates an upside-down pyramid-shaped diagram with
strategy located at the top and operational and transaction-based
systems and data at the bottom.
● The systems at the bottom, such as enterprise resource planning
(ERP) and general ledger accounting systems, are like plumbing—
you need to have them, but they do not tell you what to do
strategically or what risk-adjusted choices to make.
● The business intelligence of PM in the figure adds value on top of
these operational systems that organizations have invested huge
sums of money in.
FALSE PROMISES OF INFORMATION TECHNOLOGY

1. The IT infrastructure systems at the bottom, such as

for security or backup/recovery, to control, manage,
and route the hardware and communications.
2. The operational databases from which the operational
software applications draw and deposit data.
3. The operational applications that process transactions
and produce simple summary reports.
● Figure 1.3 displays the intelligence architecture on a timeline
across which successful organizations will eventually pass.
● The vertical axis measures the power and ROI from leveraging
data. Most organizations are mired in the lower left corner,
hostage to standard reports and a little analytical capability
provided by some tools selected for everyone by the IT
department—sometimes as a compromise.
● The figure demonstrates that the upside potential is enormous to
robustly analyze and understand one’s own organization, its
customers, suppliers, markets, competitors, and other external
factors, from government regulators to the weather.
 A MAJOR POWER SHIFT IN THE VALUE CHAIN

● Power is shifting irreversibly from suppliers to buyers.

The cause is the Internet.
● Customers and consumers, including purchasing
agents and buyers in businesses, now have access to
powerful search engines to seek and compare
offerings from suppliers of products and services as
well as to gain education for more informed decisions.
● And the suppliers, in effect, aid the buyer’s learning
and shopping experience by adding increasingly useful
information in their own Web sites and through
industry trade exchanges.
 DISPLACEMENT OF TANGIBLE ASSETS
BY INTANGIBLE ASSETS
● Tangible assets are buildings, machines, and
inventories. A simple definition of long-term assets is
things one purchases which depreciate as period
expenses with time.
● Employees are intangible assets. The knowledge of
workers who go home each night and return in the
morning is what produces value in many organizations
today.
● A simple definition of this type of intangible asset, in
contrast to a tangible asset, is something with potential
that grows with time, rather than depreciates.
 GENERATING INCREASING SHAREHOLDER VALUE
INVOLVES TRADE-OFFS
● Customer value or shareholder value? There are
always trade-offs because of natural conflicts, such as
with higher costs for greater service; and a
cornerstone of PM is providing the capability to make
better trade-off decisions.
● For example, if products, features, and services for
customers were expanded, would the additional
spending increase or decrease shareholder wealth? It
depends on many factors, but there can be a scenario
where customers receive higher value while
shareholder wealth declines.
WHAT IS MISSING? PERFORMANCE MANAGEMENT AS
THE INTELLIGENCE BRIDGE

● There has been too large a gap between high-end strategy and
tactical operational systems to effectively achieve an
organization’s strategy, mission, and ultimate vision.
● In complex and overhead-intensive organizations, where
constant redirection to a changing landscape is essential, the
linkages between strategy and execution have been coming up
short.
● As mentioned earlier, there is a gap between the raw data that is
spewed from transaction-intensive production and operating
systems and the required business information needed for
making decisions.
WHAT IS MISSING? PERFORMANCE MANAGEMENT AS
THE INTELLIGENCE BRIDGE

● This gap or missing piece was depicted in Figure 1.1 as the arrow
highlighting the linkage between operations and strategy—the PM
suite of systems.
● Earlier it was noted that this gap is being filled with software tools
collectively called the intelligence architecture.
● Examples of these tools are data management, data mining,
analytics, forecasters, and optimizers.
● An integrated suite of methodologies and tools—the PM solutions
suite—provides the mechanism to bridge the intelligence gap. When
orchestrated, this integrated tool suite supports executive
management’s strategy.
 MANAGEMENT AS A “DISCIPLINE” IS AT
AN EARLY EMBRYONIC STAGE

● Have organizations neglected a formal approach to PM? To answer this question,

recall that I defined PM as translating plans into results—execution.
● In this manner the important domain of strategy formulation is left outside of PM.
● It is actually a fuzzy boundary dividing strategy from execution, and there has been
much already written on strategy.
● PM is the process of managing the strategy.
● Getting from the drawing board to value realization with high certainty involves
execution. However, translating plans into results is no simple task.
● Execution may not be pretty and may not involve the highest paid employees.
● Execution is not a matter of following an instruction manual.
● It requires knowledge, reasoning, and prudence by all employees.
MANAGING COMPLEXITIES OF PEOPLE, PROCESSES,
PEODUCTS AND CUSTOMERS

● As organizations flatten and tilt 90 degrees from being hierarchical to

more process-based and customer-focused, core processes replace
the artificial boundaries of functional silos. Things get more
complicated. Many employees multitask in two or more processes.
This increases the need for matrixed management, implying that
employees have at least two types of managers—one for the
function and the other for the process.
● In addition, while process management is no longer a new concept,
the definition and scope of process continues to broaden,in some
cases extending across business-to-business supply chains.
MANAGING COMPLEXITIES OF PEOPLE, PROCESSES,
PRODUCTS AND CUSTOMERS

● Organizational charts divide the organization into work units.

Although these organizational lines are drawn and constantly
redrawn, the hierarchy will never disappear because individuals
continue to need mentoring, coaching, career development
counseling, and direction.
● Functional managers typically perform those roles. The emergence
of process owners—such as one for sales order fulfillment, which
can cover a spectrum from customer order placement to receipt of
cash payments and many other functions—involves giving process
managers fewer people but the all-important responsibility for the
purse strings.