The ABCs of CPM

by Tselani Richmond

Dr. Peter Turney, president and CEO of Cost Technology, recently conducted a Webcast on collaborative performance management (CPM) with SAS’ educational partner BetterManagement.com. After his presentation, Dr. Turney shared some additional insights on CPM and its value in the organization.

sascom: Dr. Turney, thank you for joining us. We’ve heard a lot of buzz around CPM lately. Can you explain what it is?
Turney: Current economic conditions have everyone looking at ways to improve financial performance. In these challenging times, companies must develop strategies that produce results and sustain success into the future. Often times, companies know where they want to go, but don’t understand how to get there. That’s where collaborative performance management comes in. CPM is a measurement and communication system for implementing strategy across an organization. CPM creates alignment across an organization by combining measurements and collaborative techniques to build focus, ownership and participation at every level of the organization. This, in turn, drives superior results.

sascom: How does CPM work?
Turney: CPM has four distinct processes. To increase buy-in, you must first develop a communications strategy using strategy mapping. Strategy mapping is the architecture for describing the organization’s strategy – a road map to success. Once you understand the strategy, you’re ready for the second step: setting objectives and measurements. By using a balanced scorecard, each person and department can develop its own goals, objectives and measurements. Planning, target setting and budgeting are the third step in CPM. This next step is where you develop the plan to accomplish the objectives and goals set forth in the scorecard. And finally, you need feedback, analysis and learning. These components are critical to understanding how well the implementation is going. Learning feeds strategy and levels the playing field. This is accomplished using activity-based costing (ABC) – a powerful analytic tool that examines all aspects of the organization, including customers, processes and resources. Using information contained in ABC, executives can make intelligent decisions that drive results.

sascom: So this is a cyclical process?
Turney: Yes, this is definitely a continuous loop. You never really finish because the feedback and learning in the final step of the process feeds forward to modify and update the strategy.

sascom: Does a well-calibrated performance management system guarantee results?
Turney: Research has shown that CPM increases the likelihood of obtaining results. However, it does not guarantee results because it is implemented in a human environment where people use judgments and facts to make decisions. There may also be political and economic factors that affect performance that are beyond the organization’s control.

sascom: During your Webcast on BetterManagement.com, you talked about the importance of collaboration as part of CPM. What are some of the ways to make the process collaborative?
Turney: Any organization is a human system of people and groups of people who work together and communicate across the organization. CPM can achieve significant results by introducing measurement, analysis and focus. But it won’t provide the promised results if people don’t embrace it enthusiastically. People are important because they understand strategy, know how to use the system, influence design, make decisions and shape the results. Collaboration brings managers and other decisions makers actively into the performance achievement system. It increases buy-in and participation at all levels of the organization.

To make the whole process collaborative, I recommend management training, involvement of managers in CPM system design and a sound communication program. Training is important because if employees don’t understand the measurements and the process, they’re not going to use the system. Managers also need to be involved in the decision to implement a CPM system and participate in the strategy mapping, measurement, analysis and value creation phases. If they do that, they will have influence and ownership. Finally, management, especially the top executives, must communicate why this process is vital to the success of the organization.

sascom: How do companies avoid using planning terminology that employees don’t understand?
Turney: The communication plan must be clear and simple. In the early days of CPM, the terminology used was very complex. Since then, we’ve learned that you must create definitions that everyone understands. Doing so breaks down communication barriers and allows you to get buy-in from your employees. As an example, I once worked with a manufacturing company that had a high percentage of Hispanic workers. When we translated the word "brainstorm" into Spanish, we came up with a word that literally meant to explode the brain, which was not what we had in mind for the brainstorming! We realized at the time how important it is to develop definitions that cross cultures, languages and education levels so everyone can use CPM techniques and measurements.

sascom: What value does activity-based costing (ABC) bring to a performance management system?
Turney: ABC provides considerable value in a number of ways. ABC is a valuable source of information that management uses to make decisions.

It is helpful in making choices about which types of customers to serve, how to replicate the profitability of the best customers, how to create profitable products and how to price those products, which process to outsource and so on. ABC can help answer those questions. ABC can leverage and support other initiatives, such as business process reengineering, that benefit from accurate cost and profitability information.

ABC also leverages the balanced scorecard by providing important financial measurements.

sascom: Doesn’t the general ledger system provide the same type of cost and profit information that ABC does?
Turney: The general ledger system is a fine tool for accounting and financial reporting. But it was not designed to provide information for decision making on the profitability of customers, channels or market segments, or the reduction of the cost of key processes. By combining the information contained in the general ledger system with customer, product and process information, and overlaying this with ABC intelligence, you can develop a whole new set of objectives to increase profitability or reduce costs and improve bottom line results.