BUSINESS ANALYTICS BLOG
Analytics driven performance management- An operator’s panacea?
Charles Prabakar (CBS) MBA MS BS
Performance Management systems are increasingly in misalignment with strategic objectives as they are not designed with right set of indicators to clarify and update strategy, to align organization and individual goals, and to learn and improve decision making. How can Enterprise Performance Management Systems (EPM) help your organization to make strategic and operational decisions with up to date information? Emerging methods such as Analytical Hierarchical Process (AHP) can help you in developing a balanced scorecard using a relative weighting of the performance categories to make effective decisions and to align strategic objectives of implementing lean within your operational processes.
BAM – EPM vs. BPM
Business Activity Monitoring (BAM) takes the performance management to the next level – as it helps your organization to align strategic and operating decisions with strategic objectives by providing tools to monitor key performance indicators in real time. BAM is the concept of providing real-time access to critical business performance indicators to improve the speed and effectiveness of your business operations. BAM is an overarching concept comprising of Business Performance Management (BPM) and Enterprise Performance Management (EPM) and together they allow organizations to monitor data sources, detect changes to critical information, apply business rules to generate business events and deliver it in real-time to decision makers in the form of personalized dashboard driven balanced scorecard. While EPM involves setting up metrics and taking information to track against those metrics, BPM is focused on monitoring and managing the effectiveness of the business processes within the enterprise using technology based systems. EPM is a set of management and analytic processes based on a balanced scorecard to measure and manage performance against pre-set strategic goals. In other words, EPM is more about strategic business thinking than it is about technology. EPM is the true interweaving of analytics with business strategy.
As part of this article, I am laying out an EPM solution approach using the dashboards driven balanced scorecard, with a broad set of measures based on the four perspectives of Kaplan and Norton with an intent to support Lean Strategies: the learning and growth related elements, internal and external processes, customer satisfaction followed by financial results. In their book Lean Thinking, James P. Womack and Daniel T. Jones state that lean thinking can be summarized in five principles: “precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let the customer pull value from the producer, and pursue perfection”(italics theirs). Within this context, Lean can be defined as the effective utilization of various tools and techniques in a systematic, customer-focused manner that increases the flexibility of the manufacturing and supply chain processes with the goal of producing the highest-quality product within an environment of continuous improvement and thereby increasing shareholder’s value. The overarching values of lean are customer and shareholder’s prosperity and the view that the employee’s are the most important resource of an organization.
As implied by the definition, lean is multi dimensional. The customer is the driving force behind lean, which suggests that customer-focused measures should be an integral part of any performance system. It is imperative that the EPM within your organization’s context has to collect, stores, aggregates, and reports on the many dimensions of lean in real time fashion. The structure of a balanced scorecard, with its four performance categories, is a good start for developing a performance system that meets the requirements of a lean enterprise.
BALANCED SCORECARD USING AHP
As a first step, your organization must determine specific objectives and drivers in alignment with your overall business strategy. A clear linkage of drivers with causal relationship is critical for a successful balanced scorecard design. For example, the tools that document and measure your divisional processes in terms of resources allocated and results achieved will give you enough data points to build a case for additional resources to be invested in strategic investments that brings value for your division. Similarly, augmenting the financial perspectives within balanced scorecard with CVA/EVA will help you to simulate business reality and to help you to effectively make investment decisions up to the penny level.
The four perspectives of balanced scorecard must connect in a chain of cause and effect relationship: The learning and growth improve internal business processes, and internal business processes improve customer satisfaction (internal and external) which in turn leads to improved financial performance. To effectively monitor these cause and effect relationship, appropriate metrics for each of the objectives and drivers must be developed. This is where, Analytical Hierarchical Process (AHP) can help you to set the relative importance of the measures from each of the four perspectives within the balanced scorecard. The AHP uses paired comparisons of objects with the relative weighting of the performance categories to provide insights into a company’s strategy. By slightly augmenting the Thomas Saaty’s AHP model with “what if scenarios” in which every scenario has different weight factors for the measures for monitoring performance of your organization will truly give you the competitive edge you need..
The EPM solution, in addition can be designed to be dynamic and multi dimensional so that metrics can be changed or added to reflect the values and changes that are bound to happen within the business strategy. An example is that while you are trying to justify an ERP system that may aim at achieving 20% reduction of inventory carrying cost might cause a sharp increase in short shipments with increases in delivery cost. This scenario might make us to create another delivery cost metric within the balanced scorecard. To enable such flexibility, the EPM system must be designed with a flexible meta-data driven approach in which measures can be added or changed dynamically. In addition, if you are a process oriented organization, as an added step, you might be able to automate this with “real time what if scenarios” using technology based ERP and SCM systems – which in my opinion will be a true game changer in your industry.
Making sound decisions on a daily basis using an AHP based balanced scorecard solution is yet another way analytics help your organization to go from “good-to-great”. A composite score in a dashboard (along with what-if scenarios) will definitely help you to compare your divisional performance with other business units and/or with as that of your competitors and give you the true competitive edge you need in the 21st century. This unprecedented edge, not only will help you to trump your rivals, but also helps you to change the rules of the game every step of the way within your industry. In short, a well established EPM solution, apart from managing the performance of your organization, will also help you to clarify and update strategy, align organization and individual goals, to learn and improve your strategic objectives – and above all make your company the best-in-class company in your industry vertical.
ABOUT THE AUTHOR
Charles Prabakar (CBS) MBA MS BS is an approved Certified Business Specialist (CBS) with the Academy of Business Strategy and his specialist subject is business analytics. He has achieved an MBA from Northern Illinois University, an MS in Computer Science from the University of Central Florida and a BS in Computer Science from the National Institute of Technology (India). He has been employed as a Director and Executive Board Member for a variety of different companies and has experience within the consumer packaged goods, retail, travel, media, entertainment, financial services and information technology industries. A selection of his clients or employers have included Pepsico Inc, Sears Roebuck, USF Corporation, JEA Inc, the Walt Disney Company, Cap Gemini, Ernst and Young and UNISYS. He has geographical working experience in the USA, Belgium, France, Italy and the UK and he speaks English, Tamil, French and Hindi. His service skills include strategic planning, market development, consumer insights, business analytics and financial analysis.
To contact Charles Prabakar, please contact the Academy of Business Strategy by forwarding an email.