In my last article I argued the case for an EPM framework that would provide a clear definition of what EPM is and how to identify systems that support it. The reason is that for many, EPM has become synonymous with planning and reporting, and while these are some of the capabilities of an EPM solution, unless their implementation is linked to strategic goals and driven through continuous management processes, the result will fall far short of what is actually required.
In this article I’m going to outline the components of an EPM Framework.
EPM is concerned with the way in which an organisation manages its overall performance. As defined by Gartner that involves combining the methodologies used to manage strategy, the metrics for evaluating performance and the processes used to direct people within the organisation – all of which should be supported by a technology solution.
To support organisational decision-making the EPM framework combines the following four areas:
Organisational Business Model
At the heart of an EPM system is an organisation model containing the relationship of activities that lead to organisational objectives. Although this model will differ between industries, it will typically include how revenue/income is generated; how products/services are manufactured / created and distributed to customers; how employees are recruited, trained and assessed; and how the organisation complies with its legal responsibilities. These activities are linked to one or more organisation departments that determine those responsible for their execution.
Some activities will have a one-to-one relationship with the organisation structure, but other activities will go across multiple departments. Quite often the relationships between activities can be built as a driver-based model where the value of an input such as the number of enquiries can be used to determine the volume of sales and hence revenue via a set conversion rate. These models can be used to plan or assess the operation of the business by entering a few key values or ‘drivers’.
The second area – Strategy – typically has an emphasis on how performance of the business model can be improved. It focuses on one or more organisational objectives and details specific strategic initiatives that describe how that improvement is to be actioned and who is to be responsible for their delivery.
The terminology involved depends on the management methodology being employed (e.g. Balanced Scorecard) but most methodologies will show the relationship between an action and the objective being supported as a ‘Strategy Map’.
The third element of the framework relates to the resources (money, people, assets) that the organisation has at its disposal, with financial resources often being the focus of a budget. These resources should be allocated to both sustaining the business model and in ensuring that the agreed strategic initiatives are properly resourced at the right time.
The final area of the framework is the organisation’s management processes that direct and control the way performance is planned, resourced, implemented and monitored. These are typically seen and often implemented as the six distinct processes of Strategic Planning, Tactical Planning, Financial Planning, Forecasting, Management Reporting, and Risk Management.
However, on closer examination, these processes consist of a number of interconnected activities that only together form the basis for managing performance. Even within each activity, there are interconnected tasks that each department has to perform, in a specific order and at specific times.
For example, Budgeting may start off with the setting of a high level goal to which sales will decide on how this will be delivered throughout the year. To do this they may need to work in collaboration with marketing and production. Once this has been completed, other areas of the organisation can start allocating resources that fit in with the sales and marketing plan.
As a consequence, what goes on within these processes and how they are interconnected will determine whether performance actually gets managed.
The Role of Technology
As with a car, these four components need to be combined and operated as a single technology solution. It needs to support decision-making through the total integration of driver based business modelling (the engine) and strategy improvement plans (visual indicators showing the intended direction) with organisational resources (the fuel), all controlled through management processes (the pedals and steering wheel).
None of these components can be run in isolation – the degree of integration will determine how ‘smooth the ride’ will be. Around this central EPM system will be a range of BI analytical applications that provide insight into particular aspects of each component. This insight is used to formulate plans to improve the operation of the business model.
The role of management reporting is to bring all relevant information together in context – i.e. to link strategy with the business model and resources, in a format that’s transparent and usable to motivate the many people involved to make the best informed decisions. Those decisions will typically lead to altering the business model; modifying or developing new strategic initiatives; and where necessary, the re-allocation of resources. All of which is performed under the control of management processes.
In the next article we will look at how these four areas can be combined into a technology solution. But in the meantime if you can’t wait, you can download the full set of articles from ….
By Michael Coveney, STW Consulting, EPM Contributor
Michael Coveney has more than 35 years of experience in the financial analytic software industry, helping enterprises combine ‘best management practices’ with technology to improve the efficiency and effectiveness of their performance management processes.His energetic style and insightful views has led him to become a regular speaker at international events, a course leader with the Antwerp Management School, and the author of many articles and books including his latest ‘Strategy to the Max’ – a down to earth look at all you need to know in setting up systems that support the implementation of corporate strategy.
The highly respected, UK based STW Consulting firm has developed a vendor independent, Performance Management framework built on years of experience that:
- Provides a clear holistic view of what Performance Management is by describing the processes involved and how they interact with each other.
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