When should an organization decide to implement one or more components of an enterprise performance management (EPM) system? To answer this we can learn a lesson from Malcolm Gladwell, a social scientist and author of the best-selling book The Tipping Point, who describes how changes in mindset and perception can attain a critical mass and then quickly create an entirely different position of opinion. Let’s apply Gladwell’s thinking to the question of whether the widespread adoption of EPM solutions is near its tipping point or whether we will only realize this in retrospect after it has happened.
Gladwell observed that to determine whether something is approaching the verge of its tipping point, such as an event or catalyst, it should cause people to reframe an issue. For example, in the 1990s just-in-time (JIT) production and inventory control reframed manufacturing operations from classical batch-and-queue economic order quantity (EOQ) thinking to the method based on customer demand-pull product throughput acceleration. So, is EPM reframing organizational challenges and nearing its tipping point? To answer this, we should first acknowledge that EPM is not a new concept that everyone has to learn, but rather it is the assemblage and integration of existing methods that most managers are already familiar with. Collectively, these methods help better manage the execution of an organization’s strategy, planning and analysis functions together with the support of business intelligence tools.
Multiple Tipping Points of Performance Management Components
Enterprise performance management is comprised of multiple methods, all interdependent and interacting. They have been around for some time but what is profound is that we are now experiencing the combined influence of multiple and concurrent sub-tipping points all at once. Ultimately their collective weight is resulting in an overall tipping point for adopting EPM. These tipping points are:
The Balanced Scorecard (BSC) – Thanks to successes on how to properly implement the combined strategy map and balanced scorecard framework (and there are plenty of improper implementations), executives are now viewing BSC differently. Rather than the focus of a BSC being a means of reducing the massive number of collected measures (the so-called key performance indicators, or KPIs) and distilling them down to the more relevant few, executives now understand the strategy map and BSC framework as a mechanism for improving strategic execution and performance improvement programs. They are reframing BSC as a way to better execute their strategy by communicating it to employee teams in a way they can understand it, and then aligning the employees’ work behavior, priorities, and resources with the strategy.
Decision-Based Managerial Accounting – Reforms in management accounting practices, led by activity-based costing (ABC), may once have been viewed as simply a more rational way to trace and assign increasing indirect and shared overhead expenses to products and standard service-lines (in contrast to misleading and flawed cost allocations based on broad, cost distorting averages). Today, reforms to management accounting practices are being reframed as the essential managerial information necessary to better understand which products, services, types of channels, and types of customers are more profitable or not – and why. There is a shift from less cost control (hindsight cost monitoring to correct unfavorable deviations from expectations) to more cost planning (providing a level of spending supplied to match demands). This is because most capacity spending cannot be quickly adjusted up or down in the near term. This means better capacity and resource planning, understanding of cost drivers, and less historical cost variance analysis.
Customer Value Management – Customer relationship management systems (CRM) have been narrowly viewed as a way to communicate one-to-one with customers. However, executives have learned that it is more expensive to acquire new customers than to retain existing ones, and that their products and service-lines have become commodities that offer little competitive advantage. As a result, organizations are reframing CRM more broadly as a way to analyze and identify characteristics of existing customers that are more profitable and valuable, and then apply these traits to formulate differentiated and tiered treatments (such as marketing campaigns, deals, offers, and service levels) to existing customers as well as targeting new customers that possess relatively higher future potential value. This reframing places much more emphasis on micro-segmenting customers and post-sale value-adding services via cross-selling and up-selling. The new recognition is to not just grow sales but rather grow the more profitable sales.
Shareholder and Business Owner Wealth Creation and Destruction – The strong force of the financial capital markets to assign financial value to organizations has caused executive teams and governing boards to realize that old, traditional methods of placing value on a company are obsolete. Balance sheet assets now only account for a small fraction of a company’s market-share price capitalization. As a result, executives are reframing their understanding as to how to increase its positive “free cash flow,” the financial capital market’s metric of choice, to convert potential value (ideas and innovation) into realized value (financial ROIs). Consequently, they have reframed a path of continuous shareholder wealth creation governed by customer value management.
Advances in Technology – There is now a growing consensus that technologies, such as cloud computing and in-memory computing, are competitive advantage differentiators for those organizations that embrace them. Organizations are reframing their view of technologies as not just being tools but as enablers.
Synergy from the Links Among EPM’s Components
Each of these five tipping points have interdependencies. Transactional systems now provide valuable source data at faster speeds, and EPM methods then transform data into decision-based information. This produces even a higher ROI of an organization’s prior investments in its information technology assets. The tipping point then is the growing demand for EPM solutions as value-multipliers.
By Gary Cokins, EPM Channel Contributor, from: http://cfoknowledge.wordpress.com/2014/09/09/realizing-a-tipping-point-for-enterprise-performance-management-epm/
Gary Cokins is an internationally recognized expert, speaker, and author in advanced cost management and performance improvement systems. He is the founder of Analytics-Based Performance Management LLC at www.garycokins.com in Cary, North Carolina. His career: First ten years as an executive with a division executive with FMC Corporation; next fifteen years in consulting with Deloitte, KPMG, and EDS; and last fifteen years as a Principal Consultant with SAS, a leading provider of business intelligence and analytics software. See Gary’s articles on EPM Channel here.