Activity-Based Cost Management: An Executive’s Guide

by SmartPros Editorial Staff

Increased interest in implementing a performance management system is often spurred by an organization trying to fix a problem, according to SAS’ Gary Cokins, an internationally recognized expert in advanced cost management and performance improvement systems. In this article, Cokins describes three key problems companies are looking to cure with a performance management strategy, and recommends a three-step process for implementing the "scorecard" method.

The author of the recently published book, Activity-Based Cost Management: An Executive’s Guide, Cokins is a firm believer that, to be effective, performance measures should focus on more than financial results. As described by this expert, performance management is "a set and suite of software products, tools and methodologies. It helps translate raw data and those employee actions to meet the strategy. It’s an advancement in business intelligence from raw data into good decision support."

Cokins says organizations are turning to performance management for three particular reasons:

1. Frustrated senior executives.
   Higher CEO turnover in companies compared to a decade ago is evidence of this group’s frustration. Why are they so frustrated? Their strategies are failing. While CEOs are great at formulating strategy, their problem is executing it, says Cokins.
   
   "The dilemma with execution occurs when they announce shifts in strategy," explains Cokins. "If you don’t change the measurements, the inertia of the existing measurements keeps the organization going straight ahead. You get what you measure."
   
   
2. Lack of employee support.
   Twenty years ago, CEOs had a command-and-control style of management. The work force is different today; employees actually question management’s decisions: "Am I persuaded? Am I convinced?"
   
   To "convince" employees, management is faced with the task of exciting and empowering its staff to meet the organization’s goals. "That’s really where the source of wealth creation for shareholders resides," Cokins points out.
   
   
3. Failed – or false – implementation of large-scale systems.
   "People look at large-scale implementation as the wave of promise," explains Cokins. "But by the time it’s done, instead of really differentiating the organization from its competitors, it has, at best, maintained parity."

The result: a huge gap between business execution systems and strategy.

Three-step implementation process
Cokins warns that an organization is not faring well if employees don’t know the strategy or how their roles contribute to the accomplishment of the strategy.

Performance management "scorecarding" effectively accomplishes two goals. One, it serves as a method for executives to regain command control of the work force so they can drive it where and how they want. Two, it serves as a navigation tool for employees whose job is to meet the organization’s goals.

Cokins recommends three steps to implement the scorecard method:

1. Focus. Understand your mission and strategy. Determine objectives, and break them into digestible, manageable pieces. "This is valuable because once I am able to break it into projects associated with objectives, I can put a measure on it," says Cokins.
   
   
2. Communicate. Is senior management communicating the strategy to employees in ways they understand, and do employees provide feedback? "This is the scorecard area," explains Cokins. "The scorecard is a series of cascading measures that are high level and lagging at the top, such as market share increase, sales growth, ROI.... As they shift strategy, this allows senior executives to remove or add measures, and they can change the weightings."
   
   
3. Collaborate. "Collaboration is now allowing employee teams, based on their scores, to take actions, do more, do less," Cokins says, adding that this third step is the most vital. Through the scorecard system, employees are able to gauge their progress and work with their co-workers to improve their score. All scores are aligned with the organization’s strategy.