Page 2By Karen S. Henrie | Posted 02-05-2005
Corporate Performance Management and the Metrics That Matter
It's tempting to view the current buzz around corporate performance management as just the latest in a long line of dashboard-based executive information systems that have overpromised and underdelivered for decades. But the reason so many of CPM's predecessors have failed is not because the products were unworthy; it's because mining and monitoring strategic data is fraught with logistical and cultural problems. And while current CPM products might have made some incremental advances in functionality, they are still at the mercy of the data they renderand the individuals who run them.
Even though many organizations have become more disciplined and methodical about creating strategic plans, they've been far less successful in executing and assessing performance against those plans. That's where CPM, also known as business performance management or enterprise performance management, is supposed to help. CPM is really just a fancy acronym for using a constant stream of corporate data to ensure a company is heading in the right direction. In a perfect world, a company defines specific metrics that best measure its ongoing success, be it sales, profit margins, customer acquisition, delivery times, or any countless data points that make up the business. Ideally, different business units use different metrics to measure their performance, but they all tie into one overriding corporate strategy.
CPM software, increasingly bundled in suites from vendors such as Business Objects S.A., Cognos Inc. and Hyperion Solutions Corp., is designed to help with all these different processes. CPM suites are typically built on top of a business intelligence platform and provide users with easily understood analytical applications, reporting tools and metrics management applications such as dashboards and scorecards.
Research firm IDC estimates that the total market for business performance management applications (financial consolidation, planning and budgeting, and scorecards/dashboards) was $1.2 billion in 2003 and it is expected to grow to $2.1 billion by 2008. But the market is still young, and few organizations have yet calculated a return on their investments in these applications. In fact, many view CPM as a way to extract additional value from their existing investments in business intelligence, data warehouses and the like. All of which underscores the fact that CPM software is only as good as the data that lies beneath it.
Robert Paladino, former senior vice president of Global Performance at Canonsburg, Pa.-based Crown Castle International Corp., believes in CPM. With $930 million in revenue in 2003, CCI is a leading independent owner and operator of cellular towers and broadcasting infrastructure, and leases tower space to providers such as Cingular Wireless and Verizon Wireless, among others.
As CCI's strategic goals shifted over time, so did the way it viewed CPM. In 2001, after the capital markets collapsed, CEO John Kelly shifted from a capital-intensive, growth-through-acquisition strategybasically a land grab to expand the network of towerstoward a strategy of operational excellence. A new corporate function, dubbed "Global Performance," was formed to improve operations. Functioning as internal consultants, the Global Performance group facilitated the companywide design, development and implementation of more than 45 balanced scorecards, a tool that translates strategy into a comprehensive set of performance metrics. CCI relies on CorVu Corp.'s CorStrategy to manage the balanced scorecards that are the central focus of its performance management efforts. Although CCI doesn't use the term CPM internally, "collectively, you could wrap a CPM [moniker] around our efforts," says Paladino.
One metric that was of great importance to CCI was past-due receivables, or sales outstanding more than 90 days. When that metric consistently "showed red" on a dashboard, Paladino's group investigated and discovered a mismatch between CCI's expectation of when rent cycles began and those of the clients who lease capacity on CCI's towers, among other factors. In 2004 alone, CPM initiatives helped CCI reduce the number of accounts with past-due receivables from 40 to less than ten, improving free cash flow by more than $100 million as part of a broader capital improvement effort. "We've undergone a cultural shift away from managing by anecdote to a more rigorous analysis of trends. Our decisions are more grounded in facts than in the past," says Paladino, who recently left CCI to start a CPM consultancy.
CPM can often reveal areas in which companies are wasting eye-popping amounts of money, especially upon initially installing the software. Toyota Motor Sales U.S.A. claimed a 506 percent ROI from its CPM efforts, largely because the software identified an unnecessary port in Baltimore that was subsequently closed. (See "Oh! What a Feeling," CIO Insight, October 2004.)
Making CPM part of the overall corporate strategy can be tricky. Few organizations have a team dedicated to monitoring and managing global performance full time à la CCI; most CPM initiatives are still driven by the finance department, and often begin as tactical efforts to streamline labor-intensive, outmoded finance processes.
Yet backing out from tactics to strategy is rife with difficulty, not least because it forces finance to think more broadly across the organization, about which nonfinancial metrics are important, about who truly contributes to strategic objectives and what tools they need to monitor their own progress, and so forth. That's the juncture many organizations are at today.
Meanwhile, finance typically still makes the key decisions regarding CPM approaches and applications, funds CPM initiatives and selects vendors. And the fact that most CPM initiatives are linked to annual budgeting processes doesn't help. But users throughout the organization must derive their own value from CPM effortsbeyond simply the ability to comply with information requests from finance. This becomes especially true as individual contributions to corporate performance are linked to compensation.
And though finance typically drives CPM efforts, IT's role is just as critical, if not more. Visibility into corporate performance across a broad user base, and consistency of the information they are viewing, are critical for CPM success. IT's primary role is to ensure both by providing access to a reliable business intelligence infrastructure, including the data repository and business analytics, used in all CPM-related activities.
The earlier IT gets involved, the better. At a practical level, IT's role entails no small measure of policing: preventing individual business units from installing renegade planning systems, just for the slick reporting tools, for instance. That means establishing policies and procedures and asking the tough questions like: Why do you need a proprietary database? Where are you sourcing your data? How much will it cost to integrate?
Maintaining the integrity of the data also requires vigilance. As Terry Williamson, vice president of IT at CCI explains, "My role and the role of my group is to act as the gatekeepers, or the custodians, of the information. That takes discipline, organization and a lot of procedures." Demanding clear and consistent definitions, maintaining a single, central repository that can be used by all applications, and making sure all the components that go into derived (or calculated) figures are included in that repository, are just three examples of the kind of discipline that's required.
Gartner Research Director Brian Wood adds: "You want to get to that single source of truth so you don't have ten definitions of the same thing. When you create a planning application for finance, for example, it should define profitability in exactly the same way as in operational systems."
Defining the metrics that will track progress toward strategic goals is the key to any CPM implement-ation. Charlotte, N.C.-based LendingTree Inc., a division of InterActive Corp., and an online marketplace for consumer loans and realty services with a network of more than 200 lenders and 700 realty services brokers nationwide, found that it needed a more formal approach to monitoring performance as it matured from a start-up to a large, fast-growing company. Senior Vice President and CFO Keith B. Hall says, "We always had the numbers in great detail and used them to prepare our books and disclosures. But we lacked a focus on the key summary statistics that drive the business." In other words, the company was having trouble seeing the forest for the trees.
LendingTree, which uses Hyperion technology for modeling, planning and scorecarding, is typical of many Internet-based companies in terms of the key performance metrics that it tracks closely, including Web site traffic, the rate of Web site visitors who converted to customers, and marketing costs per customer, among them. "Everyone down to the receptionist now knows we focus on certain numbers," says Hall.
Because the metrics are widely distributed, more people feel ownership of them. "If operating managers expect you to be looking at certain statistics, then they'll get more involved in the details that make them tick," says Hall.
Bret Furtwengler, vice president of financial systems at Cincinnati-based Fifth Third Bank, says, "The biggest struggle I've seen in 20 years in financial systems is managing consistent metadata. If I define 'region one' in the Chicago affiliate as including these 40 banks, is it defined the same way in our online analytic processing tool and in our general ledger?" That job has never been easier due to the availability of so-called hierarchy management tools such as those from Austin, Texas-based Razza Solutions, which is a common tool among financial institutions including Fifth Third Bank. Furtwengler's effort to improve data consistency is part of an overall CPM initiative in the retail banking arm of Fifth Third, which is using the Hyperion Business Performance Management suite of products.
Eventually, performance metrics will be a component of performance evaluations and will inform compensation decisions at Fifth Third. Paladino recommends a cautious approach here. "BSC takes two or three business cycles to mature. We waited three years to fully integrate compensation into the scorecard."
While scorecarding is currently a favorite method for measuring performance, "Sometimes people forget the 'balanced' in balanced scorecard," says Kathleen Wilhide, research director of compliance and BPM solutions at IDC. "You can micromanage one key performance indicator to the detriment of another. Cut call-center costs too deeply and customer service will decline. Linking and aligning key performance indicators is something companies traditionally have not done well." Wilhide's comments are one final reminder that corporate performance management software doesn't manage itself. Perhaps someday, someone will design a software program for that as well.
Karen S. Henrie has been researching, analyzing and writing about information technology and business strategy for nearly 20 years.