Help Desk -- A User's Guide to Analytics-based Performance Management

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Imagine if an organization had a chief analytics-based performance officer and a department that assisted line managers in applying business analytics embedded in the various methodologies of its the performance management framework. Further imagine if that department had a help desk. Here are some questions, including answers from help desk staff members, that might be fielded:

I am in the pricing department. We determine what price the market can bear in an attempt to maximize our sales volume. Next, we also make sure that the price provides an adequate profit margin. My concern is this: Our cost accountants provide standard costs that are grotesquely flawed due to the way our sizable indirect and shared indirect expenses are allocated to products. I want true costs, not the reported costs. What should I do?

Almost every pricing department is in the same boat as ours, except for those organizations where the accounting department reformed from their traditional costing to an activity-based costing (ABC) method. What most pricing departments do is create their own shadow product costing data separate from the accountants. They assign the various indirect expenses to those products that use more or less (or all or none) of the indirect expenses -- thus applying some cause-and-effect consumption relationships. Sadly, these pricing departments are doing the cost accounting department's job. Needless to say, things get confusing because managers are always asking, “Whose cost data are you using?” Eventually, you may want to get up the nerve to suggest to the CFO and financial controller that they implement an activity-based costing system. But be prepared for their backlash argument: They must use only their traditional costing method to comply with generally accepted accounting principles (GAAP). They don't want to break the rules and go to jail. What they don't realize is that if they trace and assign costs the correct way for internal managerial accounting, they won't go to jail.

I am the manager of our delivery operations. It baffles me that our marketing and sales departments seem to provide so many deals and special services to specific groups of customers who cause us so many headaches. We are constantly jumping through flaming hoops to do extraordinary activities for these customers (such as special packaging and expedited shipments). My guess is that if we added up all these extra costs and combined them with our regular costs, these customers may possibly even be unprofitable to us. What should I do?

You and our marketing and sales departments have a misconception. By only considering short-term profitability -- and focusing too much on the current costs of customer acquisition and retention and not enough on a customer's long-term economic value to shareholders -- you are missing the big picture.

By classifying our customer segments into a 2-by-2 matrix with the two axes as “easy or hard” and “to acquire or to retain,” what will be revealed will influence managers to target mostly those customers who are easy to acquire and easy to maintain. But this leads to the false assumption that acquisition and retention costs are the major driver of customer profitability. This would not be a problem if each customer segment were equally profitable. But they are never equal!

I suggest you try to educate someone in marketing and accounting to apply business analytics to segment customers into this 2-by-2 or 10-by-10 grid of acquisition and retention. But don't stop there. Next, project the future for each segment using forecasting tools for future price, volume, cost, up-selling, cross-selling, and so on. This information can guide them to determine the optimal level of spending to maximize long-term customer profitability. Applying business analytics provides a competitive edge.

I am the CEO. I am constantly challenged to make difficult decisions regarding trade-offs between cost-saving measures and high customer satisfaction levels. For example, how do we improve customer service levels and cost-saving process efficiencies while restricted to fixed contract-like budget constraints and profit targets? How do I balance short-term and long-term goals?

I think we need better performance measurements -- and they should somehow be causally linked to our strategy as well as to each other as leading or lagging measures. We also need to rethink how we conduct our annual budgeting process.

As background, I understand your pain that external forces are producing unprecedented uncertainty and volatility. The speed of change makes calendar-based planning (and long cycle times for planning with multiyear horizons) unsuitable for management purposes. Both short- and long-term time frame-horizon pursuits involve change.

• Short-term goals require agility to maintain the linkage of a constantly adjusting strategy with operational execution, while complying with and meeting aggressive performance-level expectations of stakeholders, including our board of directors' demands for constantly increasing earnings.

• Long-term strategic objectives require continuous innovation, foresight of risk and opportunity, relentless process improvement, an eye on recruiting and retaining a motivated workforce, and leveraging partnerships and alliances of all kinds for interdependent mutual benefits.

Have you considered implementing a strategy map and its companion, the balanced scorecard? I think that a reason we struggle with executing our overall strategy is that most managers and employees cannot explain what our organization's strategy is. As a result, they really do not know how the work they do contributes to our executive team's strategic intent. Strategy maps, balanced scorecards, key performance indicators (KPIs), and dashboards are the components of performance management's suite of solutions that address this. If we all understand what our strategy is and are involved in selecting projects to implement and key processes to improve (including the KPI measures and targets that will monitor our progress), then our behavior and priorities can be aligned in order to manage our corporate strategy. By approving funding for our project selections and applying driver-based budgeting for our processes (which would require implementing activity-based costing measures to get the appropriate data), you can link our budget to your strategy. If we use business analytics software, you can receive reliable rolling financial forecasts to parallel all the changes.

The Reality

I don't believe that organizations need an analytics-based performance management help desk. They simply need to complete implementing the integrated components of their performance management framework and be sure that each component is embedded with business analytics. ###

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Gary Cokins shares his advanced cost management and performance improvement systems expertise with the Business Finance community.

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