If you read enough, or talk to enough people, you may begin to think that business performance management (BPM) is some sort of new government regulation. The business press has extensively chronicled the concerns of people who spend more time worrying about their subpar budgeting and financial reporting, or figuring out how to avoid making changes, than planning how they can better drive value for their business. There seems to be a lot more talk than action when it comes to BPM, so it's easy to overlook the many companies that are quietly and purposefully moving forward in the pursuit of sophisticated and efficient performance management. Armed with specific strategic needs and operational imperatives, these companies are not only improving their internal controls structure, they're also improving shareholder value.
Looking at exhibit 1, it's easy to see why so many companies have been distracted from the pursuit of better performance management. For more than a decade, although articles have been written and seminars conducted about the benefits of one BPM derivative or another, external events have been diverting attention away from performance management. Companies have been thrashing around in survival mode. But if you believe in leading indicators such as the level of corporate merger-and-acquisition activity, the number of IPOs, and the quantity of capital reported to be on the sidelines, you know that the time has come to once again focus on value.
Moving From Survive to Thrive
The capabilities and mind-set developed through a BPM implementation are key to shifting a company's focus from surviving to thriving. Not surprisingly, then, a February 2005 Alvarez & Marsal study of large companies' priorities shows that BPM is an important development initiative for leading organizations today. When we asked respondents to identify the top improvement initiatives of their senior finance team, the four most common answers all point toward the growing importance of BPM (see exhibit 2 below).
The third and fourth choices -- improving transactional processes and upgrading controls, respectively -- are initiatives that companies undertook last year to get through the Sarbanes-Oxley test. Most organizations initially deployed a lot of detective controls because those are easy to conceive and implement. After rolling them out, though, managers found that they had a lot of redundancy and only spotty coverage in some key risk areas. In addition, detective controls are challenging and expensive to maintain. As a result, many companies are moving toward establishing preventive controls and embedding them in traditional business processes to simultaneously gain an operational advantage and achieve stronger governance.
BPM is a logical place to start. Implementing a single software system in which managers throughout the company do budgeting, forecasting, and both internal and external reporting carries obvious benefits for compliance efforts. In fact, many view BPM as an über-control. If an organization can set a firm plan and monitor progress carefully -- i.e., if it has a comprehensive and effective BPM system in place -- then it stands to reason that the company will more readily discover events which drive unusual results.
The second-most-popular initiative among surveyed finance teams is upgrading the organization's financial management capabilities. Companies have come to realize that they need savvier people who can work constructively with business groups to establish better financial controls, awareness, and accountability. Finance departments are creating new positions that move finance staff closer to the action and provide business teams with a direct contact who can deal with financial issues and ensure that financial objectives are well-considered.
The only improvement initiative that is a higher priority for senior finance managers than either staffing concerns or sustainable Sarbanes-Oxley compliance is improvement of corporate plan-to-measure activities. Exhibit 3, below, shows that among respondents who said that plan-to-measure activities are a top improvement initiative in their organization, the highest proportion consider planning, budgeting, and forecasting to be a priority. However, exhibit 3 also shows that many companies are focusing attention on improving their management reporting and analytics capabilities.
The survey's finding that organizations are selecting different jumping-off points for moving into performance management is borne out by what we see happening on the street. Each month, we see scores of companies take a step forward by aggressively pursuing a targeted BPM initiative. Unlike broad BPM implementations undertaken with only a vague notion that they're needed to keep up with the competition, purpose-built initiatives generally have the sponsorship to be seen through to completion -- and the focus to end on time, on spec, and on budget. Having a clear starting point, with an overall plan in place to guide future BPM development, appears to be a critical success factor for these initiatives because the expectations are bounded and the development activities are acutely focused.
Rotating Toward a Value Orientation
Wise companies focus first on the issues that matter the most to them. And there are very few organizations for which BPM's biggest opportunity isn't its ability to enhance the company's value. A BPM project with a clear orientation toward enhancement of corporate value makes the new software and processes instantly useful. A focus on value also serves as a simplifying construct for the application of performance management.
In very simplistic terms, the price of a company's shares represents its overall value. An increase in share price represents an increase in corporate value. We're assuming that the market takes the company's earnings into account, then applies some factor representing expectations of its future performance -- essentially its price-to-earnings, or P/E, ratio -- to determine the share price (see exhibit 4 below). For most companies, the P/E ratio is substantially influenced by the market's assessment of the quality of its corporate strategy and estimation of whether the management team will be able to execute on that plan.
The key, then, to corporate value management is getting enough information to the company's managers that they can make sound decisions when setting and executing on strategy. We are all too familiar with the struggles of companies that fail to gain in-depth knowledge of what drives their earnings. Organizations have spent billions of dollars on enterprise resource planning (ERP) and other financial management software, yet in truthful moments, business leaders will tell you they don't have sufficient insight into their earnings. Of even greater concern are the companies that don't have an in-depth understanding of why the market is assigning them a P/E ratio that is vastly different from their competitors'. Because these businesses don't have a handle on what they are doing to deserve their current value, they have no idea how to increase shareholder value.
Let's look at the case of a young company in the medical-device field. The company initially grew organically; it developed strong core businesses that way. For a time, it reinvested its earnings in acquisitions, but it later decided to spin off those side businesses because they were not core to corporate strategy. Proceeds from the spin-offs have been reinvested in acquisitions of companies that are a better match for the organization's strategic plan. The resulting company is in a position to do very well in key market segments, but it has been held back because it consists of 12 operating companies, each with its own business model and data model. Its management team is eager to drive value, and its investors want to understand its past performance and future prospects across multiple dimensions. Does this sound familiar?
The company needs one consistent approach to managing performance. It has an enviable P/E ratio compared with its peers, and managers have to work hard to maintain that premium. To determine the information, processes, and software they need to accomplish that goal, the company first has to articulate the drivers of its value. The bottom section of exhibit 4 shows the company's value drivers.
The company already has a solid understanding of its revenues, expenses, and margins. It can break these figures down by division, by market, by product, and by reportable segment. But some of the drivers of its P/E ratio are not so clear. In order to further delineate its performance management needs -- and determine the benefits it can expect to achieve when it has implemented the right BPM system -- the company needs to articulate the factors that influence each of its value drivers. For illustrative purposes, consider two of the more straightforward drivers of this company's value: its ability to leverage its customer base and the expansion of its service offerings. Exhibit 5, below, shows a mere starting point of the knowledge base the company wants to build to optimize the impact of value drivers on the business.
Identifying the primary drivers of its P/E ratio and then figuring out which business factors most benefit each value driver's impact on P/E calculations is a good way for a company to generate a list of the pieces of information managers should have available when they plan, monitor, and gauge the progress of the business. The trick is to make sure everyone has access to all the relevant data on a consistent, timely, and reliable basis.
In the recent research commissioned by Alvarez & Marsal, 67 percent of the companies surveyed said they have "something going" in the BPM space. Some of these projects are bound to end badly because they will lose focus and meander through a quagmire of strategy, business, and technical issues. This saps the project of momentum and resources.
An initiative that focuses on value creation is focusing on the things that matter most. To avoid losing steam, though, its champions need to be sure they deliver the three Rs of BPM:
Reliable information. Make early decisions about your information management architecture and strategy; doing so will take away a lot of the technology mystery later in the process. Acknowledge that delivering information reliably and in a way that compels action requires some behind-the-scenes complexity in your information management strategy. Data integrity is crucial if BPM is to benefit the company. Project managers who pay too little attention to this issue risk a scenario in which executives who don't like the insights a BPM system delivers will dismiss the data as inaccurate.
Relevant information. Make early decisions about the key question you want your BPM system to answer, the issues that concern you, and the opportunities that await you. Be sure that the information you gather and analyze in the BPM software includes all data that is relevant to those issues. If other questions arise, put them on a different agenda and pick them up later; establish a "first in, first out" mentality with regard to making progress on the original project. If you set a good information strategy and architecture up front, it is unlikely that new insight requirements will knock you off course.
Readily available information. Make your BPM information available in the format in which end users want it. Go the extra mile and present it in a sequence that best suits how they are prepared to deal with the questions and issues they face.
Executives who believe their company may be able to create more value through better performance management should focus intently and objectively on the factors that drive value in their business. They should candidly answer the question of whether they currently have access to all of the information they need to drive value in the business. They should ask themselves how much longer they will be willing to make critical assessments and visions while enshrouded in a veil of fuzzy information. They should ask themselves whether their company can afford what it's costing to remain focused on survival rather than on thriving.
In days gone by, pilots flew using a compass, a chart, and dead-reckoning capabilities. After World War II, they added radio beacons and measuring devices to help them navigate. All of these tools are still available today. However, they have been supplanted by global positioning systems, autopilot technologies, and traffic-avoidance systems, which are all synchronized. These advancements not only keep pilots on course, but also keep them out of trouble. Any of us can choose to fly with the old, nonintegrated tools. But most of us prefer to trust our lives in the hands of more modern technologies. Why, then, do so many executives choose to fly without the help of the best technologies available today? A BPM initiative undertaken with a focus on value helps move a company to its chosen destination safely and on time.
Patrick McCormick is a managing director with Alvarez & Marsal. He spends a significant portion of his time helping clients create and sustain value.