PERFORM OR PERISH - Aug 15,  2003

Companies often talk of measuring performance of employees and of business units. But few actually measure corporate performance — the exact returns their strategies fetch the company. For most companies, strategy revolves around three important questions: what products or service lines to offer, what markets to serve and, finally, how to win in the marketplace.

Quite frequently, organisations seem to jump from one improvement program to another, hoping that each one may provide that ‘big’ competitive edge. However, as most managers would acknowledge, pulling one lever for improvement rarely results in a substantial change. The key for sustained corporate improvement is in integrating and balancing multiple improvement methodologies.

In order to address the critical issue of measuring the results of strategies employed, Corporate Dossier spoke to Gary Cokins, Ace Strategist at the SAS Institute, and an expert on corporate performance and strategy. Cokins is the author of An ABC Manager’s Primer, Activity-Based Cost Management: Making It Work and Activity-Based Cost Management: An Executive’s Guide, among other books on management.

Commenting on corporate performance management (CPM), Cokins says it’s not enough to merely define strategies and plans. What’s needed is reliable and fact-based data that brings far broader visibility to managers and employee teams, so that actions are taken rather than pondered. In other words, organisations need to understand their cost structure and how this behaves relative to changes in volume, by customer, and by market influences.

CPM interconnects with business needs like customer relationship management, supply chain management, and human capital management (which is much more than just a personnel and payroll system) to provide an enterprise-wide view of employee, customer and supplier for co-ordinated execution of strategy across the enterprise. Says Cokins, “CPM is an ongoing process and is about sense-and-respond balancing; always striving for better organisational direction, traction and speed. It involves constructing powerful combinations — linking software, such as business intelligence analytics, with core processes enhanced by improvement initiatives (Lean/Six Sigma) to prioritise efforts and align an organisation’s work activities with its corporate strategy.”

Cokins, who’s an expert on activity-based management (ABM), feels ABM can be an effective means to measure corporate performance. ABM emerged in the mid-1980s when companies began noticing that their overhead and indirect expense component of their cost structure was displacing the direct labour expense component. These companies had minimal visibility (or means) to understand these costs. They reported what was spent for resources, such as workers’ salaries, but gave no insight as to what caused the expenses. These companies initially believed their relative increase in overhead costs were due to technology, equipment, automation or computers. As companies offer a diverse range of products, all this does not hold good anymore.

ABM resolves this by focusing on the individual work activity costs, regardless of which department performs the work, and traces and assigns that cost into products using a measurable ‘activity driver’, such as the number of inspection tests for a manufacturer or the number of loans processed for a bank.

Activity-based management is linked to corporate performance through work activities. These work activities are also central to activity-based cost management (ABC/M) systems used to accurately measure output costs and customer profitability. ABC/M also aids in understanding the ‘drivers’ of work activities and their consumption of resource capacity. With this knowledge, organisations can test future outcomes given different events. Explains Cokins: “This helps managers and employee teams understand capacity constraints, and that cost behaviour is rarely linear but a complex blend of step-fixed input expenses relative to changes in outputs.”

Acting on the ABC data, ABM drives the performance management wheel by providing it with high-octane information based on which cost of execution of strategy can be measured at each level in the organisation. One may wonder how different ABM is from MIS or an accounting system that can also keep track of such things.

As companies increasingly link employee compensation to their performance and that of the company, it’s fair to ask if CPM is linked to individual employee performance. To understand this, Cokins says one must dive into work activities and the concept of strategy maps and balance scorecards, and their link to CPM.

Work activities, says Cokins, pursue the actions and projects essential to meet the strategic objectives constructed in strategy maps and the outcomes measured in scorecards. He says: “Strategy maps are truly like geographical maps that visually aid in understanding how one gets from A (the present capability, organisation, and focus of the enterprise) to destination B (the future desired state of capabilities, organisation, and focus) as laid out in the enterprise vision, mission and strategy plan.

Strategy maps and scorecards go hand in hand. Scorecards without strategy maps may lead to failure. When scorecards are built and reported in isolation, there’s no direct linkage to strategy. Once created, they embody the strategic intent of the organisation and communicate to all both the strategic objectives the organisation intends to meet as well as the critical measures of success for attaining those objectives — be they strategic, tactical or operational. They then keep the organisation on track as part of performance management.

Typically this endeavour to ‘manage the strategy’ is the responsibility of the CEO and his core team. Says Cokins: “It (managing strategy) is performed separately from the annual budgeting process without linkage (and usually by the finance department). The budgeting process needs to be much more than managing the next year end’s financial results; it must link to executing the strategy.”

Like any other performance matrix, measuring a company’s performance can have its own problems if the strategy is not articulated properly. The challenge, says Cokins, involves how well executive management communicates it's strategy. “Most employees and managers, if asked to describe their organisation’s strategy, cannot adequately articulate it. That is, many employees are without a clue what their organisation’s strategy is.”

In short, there’s a communication gap between senior management’s mission or vision and employees’ daily actions. It also supports why a mantra for scorecards is the powerful question that all employees and managers should be able to quickly answer: “How am I doing on what’s important?”

Clearly, employees and managers should be provided with the tools to align their work with the strategy, and to be recognised for their contribution to the organisation’s success.