Closing the Intelligence Gap - Gary Cokins on Performance Management

Gary, you’re right about the far-reaching effects Performance Management can have on the enterprise. We look at Performance Management ROI from the bottom-up. We ask “what impact can one or more Performance Management components, or the interconnecting of those components, have on financial results?”

In other words, how can better reporting, business intelligence, integrated planning, scorecard, dashboarding, ABM, or financial modeling improve revenue growth, COGS, SG&A expense, cash cycle, fixed asset utilization, and so on?

If you buy-in to the idea that just by measuring a thing, you can improve its performance (by paying attention to it, by making decisions that try to improve it, by introducing accountability when results are published, shared, and communicated) then this ROI methodology is appropriate for enterprise reporting and business intelligence at a minimum, let alone Performance Management.

For example, a large component of COGS (Cost of Goods Sold) or COS (Cost of Services) is labor. A workforce planning component of Performance Management can help identify redundant hires, non-revenue generating headcount, excessive overtime by department, and overhead that is beyond a company’s average, and so on.

Or take Fixed Assets – a company’s property, plant & equipment. A Fixed Asset dashboard could pinpoint underutilized assets, poor occupancy rates, capacity constraints, and so forth.

Here’s a quick example using Google based on the last 4 quarters of publicly available 10Q data. If Performance Management can improve Cost of Services by 1% and Fixed Asset utilization by 1%, then there is $US 87 MM in cash as well as $US 74 MM in recurring benefits available to the business. First of all, these are very conservative performance improvement targets and secondly, we know this is possible in their industry since their COS is much higher than Ebay’s, Microsoft’s, and others. Their Fixed Asset utilization is worse than Amazon, Ebay, Microsoft and Yahoo!

I’m sure the investment in software, hardware, and consulting, training and even internal time is far less than $150MM.

-Ron

Hi Jon,

I agree with you wholeheartedly that we must set objectives first. And we must align our objectives and targets with our organization’s strategy. And we must also align our measures and our systems with those strategy & objectives.

Nowhere in my post am I advocating measuring too many things, nor am I advocating improving performance by creating ‘a bunch of measures.’ On the contrary, what you measure (and plan for, and model, and analyze) must directly relate to those key financial drivers that shareholders use to measure performance: Revenue Growth, Profitability, Cash Flow, ROE, etc. In my work with clients we help them discover exactly what are those key drivers of value across the enterprise, and how do they directly add or subtract value from the key financial measures.

One of the promises of (Business/Corporate/Enterprise) Performance Management (I use the term xPM, the x can be a B, C, or E, or it can mean eXtended) – is that by paying attention to the key drivers of value in an organization, by making decisions that try to improve those drivers, and by introducing accountability around those drivers when results are published, shared (fed back into predictive models), and communicated, then we expect better performance than we had when we didn’t do those things. Only when we have access to the evidence are we working on fact-based decision-making.

My challenge is that I haven’t seen a study that ties a percentage improvement to the drivers of value when you introduce xPM. So I use an extremely conservative 1% and ask for a leap-of-faith that by doing all those things, surely we must be able to get at least 1% improvement. Some anecdotal studies I have seen show triple digit ROI, for example http://www.sas.com/news/analysts/idc_bi_0906.pdf ,and I know Cranfield University and Ohio State were working on studies, but I haven’t seen the results.

In the Google example I used, the potential of realizing $150MM is certainly worth the effort to find out if xPM components could impact results by 1% or more, don’t you think?

Best,
-Ron