Let’s get one thing straight right from the start, Corporate Performance Management (CPM) is not a software solution.
A Spark for Analytics
A couple of months ago, one of my partners sent me a link to an interesting blog post by Cloudera Board Chairman and Chief Strategy Officer, Mike Olson. Olson’s article had to do with the emergence of Apache Spark as the preferred analytics development platform for Hadoop.
Let’s get one thing straight right from the start. Corporate Performance Management (CPM) is not a software solution. Instead it describes a management approach that should help organizations to better execute corporate strategy. Gartner initially defined the term as “the methodologies, metrics, processes and systems used to monitor and manage an enterprise’s business performance.’
Have you ever wondered why organisations set an annual budget? Yes it fits in nicely with the way an organisation views performance; the way in which employees are reviewed for the work they do; and it’s easy to schedule. It’s September so it must be time to budget.
But there are also some major downsides:
I’m always amazed at how tenuous the link is between strategic goals and budgets. Most senior managers will claim that the budget process is there to help the organisation implement strategy, and yet when you look at the submission sheets budget holders are asked to complete, there is no link. Sure, the revenues and costs when accumulated with other departments may equate to a strategic target, but budgeting is much more than this. After all we can get a monkey to fill in those sheets and even get them approved by ensuring they line up with targets set by senior managers. But we all know that the numbers themselves are meaningless unless they have been placed in context of organisational activities.
Many organisations budget either because they have to, or because it’s something they always do. While visiting a large client who had expressed concern over the time it was taking to open up a budget data entry sheet, I was astonished to find it had around 1300 rows and 36 columns (they were attempting to set a budget for the next 3 years). A quick calculation showed that users were expected to enter around 46,800 numbers. Now assuming that you could enter numbers at the rate of 12 a minute, that would take each user approximately 65 hours to complete! This is assuming that they don’t have to think about what the numbers mean.n>
Why Budgeting And Stretch Targets Are Incompatible
What is a stretch target?
First of all, what is actually meant by a stretch target. This can differ depending on where you sit. As the budget holder of a sales division this may mean setting sales targets that are higher than what would normally be expected. For production this may mean producing more goods for less, while marketing may see this as attracting more enquiries than last year.
Stretch targets are by definition, pushing the boundaries on what can be realistically achieved. And each has the increased potential to reduce organisational performance – the very opposite of what they were supposed to do. For example, if the increased production volume is not achieved but sales achieve their goal, then customers won’t get what they ordered in time. Similarly, if manufacturing achieve their goal but marketing falls short, then valuable resources will be tied up in stock. Both scenarios will adversely impact the company. In the first case it will be their reputation with customers, while the second will impact working capital. The end result of both will be to decrease profitability.
One of the problems about using terms such as ‘budgeting’ and ‘forecasting’, is that there is no generally accepted definition of what they mean. Budgeting is often referred to an annual exercise where the organisation’s resources gets spread among the departments, while forecasting is about predicting the future.
In recent times, forecasting is seen by some as a replacement for budgeting, and the mechanism through which continuous planning can be achieved. Given my understanding of ‘budgeting’ and ‘forecasting’ I would have to disagree – but it may be that I have misunderstood what is implied by these terms.
This makes it very confusing for organisations wanting to adopt a ‘best practice’ approach as they too may misunderstand what is meant. For example, making a statement such as ‘replace your outdated budgeting process with rolling forecasts’ could imply that budgeting is bad while forecasting is all you need. Which could be both right and wrong depending on how your understand what is meant by each.
Now I’ve got you totally confused, let me explain how I sees the difference between planning, budgeting and forecasting.
Most, if not all organisations, constantly strive to improve performance. There are only three basic ways of doing this: reducing costs, improving income, or finding new ways to satisfy their customers. Out of these, cost reduction has been a dominant theme and is typically achieved by telling budget holders not to spend. But logically this can only go so far – at some point the impact on saving costs will be minimal. Also just cutting budgets could mean that some vital activities may become underfunded, which in turn will have an adverse affect on improving performance. But there might be a better way ….
We live in an unpredictable world where the future is uncertain. If it was then we would all make a fortune by making strategic ‘bets’ on certain outcomes – we would know what products and services to back, what level of stock and staffing to have, and when and where to market our capabilities for maximum effect.
But the world is not like that.