Thursday, December 31, 2009 | Last Updated Friday, January 22, 2010 20:58 Pacific/Honolulu

TechKnote #0601003

Performance Management: An Introduction

by Donny C. Shimamoto, CPA.CITP
Donny has a BBA in Accounting and MIS. He gained a broad range of experience in financial & systems auditing, business process redesign, technical project management, and application development & integration, while working at PricewaterhouseCoopers LLP. In 2001, he founded IntrapriseTechKnowlogies LLC—dedicated to enabling small and medium-sized organizations to leverage enterprise technology and knowledge management strategies.

1 Introduction

Performance management is an organization-level program, normally focused on one or more of the following activities: budgeting, planning, forecasting, reporting, process control and system controls. CFO.com also defines it as a “set of processes, metrics, methodologies, and software tools that allow an organization to forecast, measure, and react to various business drivers and performance indicators – all in service of its overall business strategy.”

1.1 Performance Management Disciplines

Performance management has many names; in the business world, it is often referred to as Business Performance Management (BPM) or Corporate Performance Management (CPM). Performance management is essentially the monitoring of an organization’s ability to achieve a given set of goals. The best example of this is budgeting and financial reporting. The budget is the goal (e.g. revenue or profit targets), and financial reporting (specifically budget versus actual comparison) is the measurement of whether the organization achieved the goal.

That however, is only the very base level of performance management. The real power of performance management is when it is extended beyond the budget to the organization’s strategic objectives and non-financial metrics are also incorporated to determine the organization’s ability to realize its strategy. Under this discipline, leading indicators (e.g. KPIs) of progress toward achieving the strategy are identified and tracked. If an indicator is lagging, action can be taken proactively to either correct the situation or adjust the strategy.

Another powerful extension of performance management is its business intelligence discipline. This normally takes two forms. The first is historical trend analysis, using actuals data and predictive analytics/algorithms to predict future behavior of a cost or revenue number. The second is the use of business driver models to project future performance based on changes to assumptions (e.g. forecasting, what-if scenarios).

Business activity monitoring (BAM) or operational performance management (OPM). With BAM/OPM, performance management principles are applied at a very low level in the organization. BAM /OPM looks for leading indicators (similar to the strategy focus, but at a much more detailed level) at the transactional or business event (e.g. process and system control points) level.

1.2 Performance Management Systems

Because performance management works with data at both a very high level (e.g. strategy) and a very low level (e.g. BAM/OPM), there is normally much more data than the normal spreadsheet can handle. Specialized software is available to help work with the data. The following is a short list of some of the commonly named vendors in the performance management area.

Applix
Business Objects
Clarity
Cognos
Hyperion
Microsoft (Analysis Services)
MicroStrategy
OutlookSof

Each vendor’s product has its own strengths and weaknesses (in terms of which disciplines they support and how robust their functionality in that are is) but they essentially do the same thing. So the best approach when selecting a vendor is to chose the vendor that is the best “fit” for your organization and the type of functions you are trying to implement.

2 Summary

Performance management is the part of the next great evolution of the role of the CFO. It can be implemented at all levels of an organization (operational, tactical, and strategic) and leverages the CFO’s strengths in measurement, control, and analysis. Wide availability and reasonable pricing of performance management systems has also helped to make good tools available to support a performance management program. Start your performance management initiative now to keep yourself and your organization ahead of the curve!