Performance Management: Creating Economic Value

Article excerpt

EXECUTIVE SUMMARY

Executive pain is a major force in creating interest in performance management - the act of turning plans into execution. Customers increasingly view products and services as commodities, which increases price pressure. But a company cannot become prosperous by cutting costs. Executives who need to expand their focus to include economic value creation will find that performance management delivers the capability to move toward defined strategies.

It's a tough time for senior managers. Customers increasingly view products and service lines as commodities, which increases the pressure on price. Business mergers and employee layoffs are ongoing, but a company cannot forever cut costs to prosperity Inevitably there are limits that force management to come to grips with managing its resources for maximum yield.

Evidence suggests that this is also a tough time to be a chief executive. Surveys by the Chicago-based employee recruiting firm Challenger, Gray & Christmas Inc. repeatedly reveal increasing rates of involuntary job turnover at the executive level compared to a decade ago.

In complex and overhead-intensive organizations where constant redirection to a changing landscape is essential, the main cause for executive job turnover is the failure to execute strategy. There is a big difference between formulating a strategy and executing it. What is the answer for executives who need to expand their focus beyond cost control and toward economic value creation and other more longterm strategic directives? Performance management provides managers and employee teams at all levels with the capability to move directly toward their defined strategies.

The balanced scorecard has been heralded as an effective tool for the executive team to communicate their strategy down through managers and employees to improve strategy attainment. A scorecard is designed to align the work and priorities of employees with the strategic objectives that make up an organization's defined mission. But are scorecards and at-a-glance dash-boards that display key performance indicators enough? Or does a balanced scorecard provide only one component of delivering economic value creation through achieving the strategy?

Ultimately, an organization's interest is not just to monitor a dashboard's dials but more importantly to move those dials. That is, reporting historical performance information is a minimum requirement for managing performance. Beyond answering What happened? organizations need to know Why did it happen? and even move toward What could happen next?

Performance management

Performance management is all about improvement - synchronizing improvement in creating value for and from customers with economic value creation to stockholders and owners. Its scope is very broad, which is why it must be viewed at an enterprise-wide level.

A simple definition of performance management is the translation of plans into results - in other words, execution. It is the process of managing an organizations strategy. For commercial companies, strategy can be reduced to three major choices:

* What products or service lines should we offer (or not offer)?

* What markets and types of customers should we serve (or not serve)?

* How are we going to win?

Although performance management provides insights to improve all three choices, its power is in achieving number three - winning by continuously adjusting and successfully executing strategies. It does this by helping managers sense earlier and respond faster to uncertain changes. Strategies are never static. Executives must constantly adjust them based on external forces and opportunities.

Think of performance management as an umbrella concept. It integrates operational and financial information into a single decision-support and planning framework. Performance management tightly integrates business improvement and analytic methods that executives and employee teams are already familiar with. …