"We found that companies that are best-in-class in the area of closed-loop business performance management (BPM) have higher earnings and greater stability of earnings," says Stan Elbaum, senior vice president of planning and advanced analytics at the Aberdeen Group. "They also consistently outperformed their competitors across all industries and company sizes, with a 32.7 percent gross margin vs. 24.7 percent for the industry norm and 15.3 percent for laggards."
This becomes an opportunity for clients only if consultants reach beyond the narrow, checklist solutions of the past. Clients need more than an executive summary of enterprise performance. They need an integrated working knowledge of key performance points throughout the organization so that they can identify and analyze performance measures producing business process improvements.
Done right, Sarbanes-Oxley is less of a stick than it first seems. It is different in character from past waves of innovation that included process reengineering, ERP, and then e-commerce. It demands that we reapply the lessons learned and pick up a few new tricks. The challenge for consultants is capitalizing on improved performance insights by closing the performance management loop via analysis and then applying new approaches to managing the enterprise for improved performance.
Fortunately, new ideas that drive client value come in a steady flow. A holistic understanding of the business's performance and the drivers of that performance provide a host of new ideas to leverage. This understanding is achieved by developing a model of the business and its value drivers.
Establishing Your Control Points
The business model determines where the enterprise should focus its efforts. Should it change its strategy or should it improve the execution of its current strategy? A working model of the enterprise encompassing the external market, the costs of its own operations, and an approximation of the value of the enterprise is needed. The model enables planners and strategists to forecast corporate performance on a variety of dimensions based upon changes in strategy and tactics under consideration. By comparing the model to actual performance measures, leaders can diagnose performance problems and determine root causes for performance deviations from the model.
The business model simulates the relationship between performance measures and business value. Measures that are closely tied to creation of corporate value are identified as value drivers, and control points are established in the model to monitor the value drivers. These are often nonfinancial, leading indicators.
A sample control point for a retailer would be the point-of-sale (POS) scanner. By bar coding products and scanning them as they are purchased, the retailer knows with great certainty what has been sold. This control ensures that revenues are recorded correctly. It also provides data to evaluate the effect of marketing tactics and thus can be used to improve sales. Designing control points as an integral step in developing a business model is the most effective, least costly approach. However, even developing and implementing BPM control points after the fact as part of a Sarbanes-Oxley review can add significant value.
Coupling BPM with Real-time Technologies
To feed the analysis and the enterprise business model, we need to gather timely information about events in the value chain at the control points identified in the business performance model. This is where the transparency rubber meets the road. If we can instrument the business at critical control points, we can have a live model of the business operation that enables the leaders of the business to guide and truly control their enterprise, with the side effect being a warm, fuzzy feeling when signing those quarterly statements.
The ERP implementation wave from the mid-'80s to the mid-'90s laid out important technological groundwork to support the feedback loop. In clients of any size, it's a pretty safe bet that an ERP system is in place and that it can be used to gather information at the control points. Forrester Research reported in 2004 that the ERP market has matured and that growth slowed significantly due to a high level of adoption.
ERP can provide the backbone transaction system for a feedback loop. It captures and stores critical transaction information. Emerging technologies can give us insight into the flow of goods and services in between transactions. RFID can be used for tracking shipping containers en route. Even tried-and-true technologies like POS scanners and 3-D bar codes, when used as part of an inventory replenishment and tracking process, provide a much more complete and up-to-the-minute picture of the flow of information, goods, and services through the supply chain. Coupled with responsive management processes, this real-time information about performance enables the business to be more agile and respond more quickly to changes in the value drivers associated with the control points and to take action to improve performance and ultimately business value.
Bob Dalton, principal and co-leader of Deloitte Consulting's Value Initiative, stresses the importance of making the BPM approach a closed loop one. Consultants need to identify critical control points in the business processes and connect those control points to the business model so that information is gathered regarding performance and fed back into the model for comparison purposes similar to the way in which instruments feed performance information about a vehicle back to the driver.
Dalton observes that at any given time, an enterprise will have a wide range of potential initiatives that it can undertake. A key to driving performance is to ensure that the business is also working on the highest-order project, the one that drives the most shareholder value. There are a limited number of resources and investment dollars to be spent. Consistently spending them on the best opportunities to drive value pushes firms ahead of their competition.
Making Metrics Actionable
Clients will need to take performance information from the closed loop system and compare it to the model, looking for the highest-order improvement opportunities that can be exploited. "Companies can cut their performance improvement costs in half with proper analysis," according to Jim Hill, former Marine Corps officer and founder of Proofpoint Systems, Inc. "That analysis starts by asking, 'What business metric are we not happy with?' It needs to be granular. This prevents them from trying to boil the ocean. With specific focal points and deliberate self-assessment, companies can easily drive down the cost of their large-scale projects by 30 to 50 percent. There are now automated tools that take leaders from goal clarification to solution identification very quickly."
The metrics need to be actionable, and this requires specifics. It's a powerful thing to be able to say that the reason we're not profitable enough isn't because costs are too high, but because sales are too low. Not only are sales too low, but they are lower per person than for competitors in our market selling products like ours. Specifics enable a solution team to focus on root causes of a challenge immediately rather than on an effort to gather more information.
Considering the importance of nonfinancial information in the closed loop system, Dalton notes: "In the Dark was a Deloitte survey of how executives and board members dealt with nonfinancial performance measures. What we found was that companies that had a more balanced view across financial and nonfinancial measures performed better. But that there was a huge void in the sufficiency of nonfinancial measures and the ability to tie those nonfinancial measures ultimately to outcomes in the long term."
This was precisely the situation of a small client served by Fisher Professional Services (FPS), the graduate student consultancy at Ohio State's Fisher College, where I currently serve as the director of Clinic for Professional Services Leadership. The CEO of a small distributor approached FPS with a concern about profits that were "settling down to break-even." Operating margins, product mix, and customers remained consistent from year to year.
It was only by combining nonfinancial data about industry performance and sales team size with financial information regarding sales performance at the sales team level that the team was able to help the client zoom in on specific sales behaviors that needed to change. Once the team had achieved a level of granularity that gave the CEO confidence that the analysis was correct, the client was ready to undertake the effort to change. At that point, the team was able to make suggestions regarding sales process improvements and get the client the help it needed.
SOX Is the Primary Driver
The control points and feedback loop provide information about the performance of the business. Once exceptions are identified and root causes determined at a granular level, changes can be made in the process to improve the results. While the client in the sales example above needed fundamental sales training, larger firms with recurring and chronic process challenges are candidates for new process innovations.
As a result of technology, communication, and transportation developments, many new approaches to speeding up and improving processes are being introduced continually. Steve Pratt, CEO of Infosys Consulting, asserts that Sarbanes-Oxley is having a positive effect on the quality of global process networks:
"Sarbanes-Oxley is driving clients to have a much better understanding of their processes and to be able to measure those processes, because at the end of every quarter the CEO and the CFO have to sign on the bottom that yes, these results are the results.
"Companies are finding out that this is an expensive and hard thing to do, to go through and define the processes at that level of detail. But what they are also finding is that once you've done that, it allows you to do things that you couldn't do before. And the huge opportunity is to take the work that was in that process and to disaggregate the work and distribute the work globally.
"There's a requirement that when work transcends cultural boundaries, you must be able to define the process and measure the process because numbers translate across cultural boundaries a lot better than ambiguity. Also, making the process transparent helps build trust for the different people who are part of the process.
"There is a correlation between transparency and good governance, and good governance helps shareholder value. But the other thing about transparency is that one of the reasons that people are hesitant to distribute work globally is that their career is on the line to get something done, and they need to know whether the person on the other side is actually doing the work and they need to trust that the other person is doing the work. Making very transparent what the other person is accomplishing and what you are accomplishing establishes trust over time and allows you to take advantage of different labor around the world and different skill sets around the world. It is an interesting side effect of Sarbanes-Oxley — that it actually can improve trust among global teams." These innovative approaches are needed when the problems become too complex for skills training to resolve and when they require new solutions tailored to respond to new external environmental factors such as entry into new regional markets or the introduction of new products.
Li and Fung provides an example of a highly agile apparel firm that developed this way as a result of the markets in which it operates. Its customers are very demanding firms like Limited Brands, which requires high quality and consistency across brands, styles, and products. Li and Fung's suppliers, mostly smaller companies in Asia, often do not have broad enough manufacturing capabilities to enable them to provide a large portion of Li and Fung's customer requirements.
In order to meet its customers' demands in the markets in which it operates, Li and Fung developed a highly agile process approach that enables it to source products to its suppliers based upon competencies such as color match or weaving capabilities. This has allowed them to avoid the need to build these capabilities internally. As a powerful side benefit, their competence and speed in sourcing serves as a barrier to would-be competitors.
Li and Fung's operations serve as an example of what's possible with a highly agile global process network … once the enterprise abandons a narrow, cost-only view of corporate performance and gives greater emphasis to flexibility, scalability, and innovation. These global process networks require very different management techniques relative to conventional Western supply chain operations — the key is adopting a modular and loosely coupled approach to coordination," according to John Hagel III, McKinsey alumnus and co-author of The Only Sustainable Edge. Implementing global process networks is a great example of a new approach that can be deployed once BPM has been used to establish a framework for improving the business. Pratt puts it succinctly when he says, "I would challenge us to go from two steps behind to one step ahead of our clients when it comes to the use of global resources to run our business. And we have to be honest with ourselves: We missed this one, and it's time to catch up."
The Bottom Line
Clients need systems, processes, and analytical approaches for business performance management. Clients and their consultants who embrace new approaches and overcome the associated challenges will create explosive changes in business value and performance. Pratt has it partially correct. In fact, continual challenge on all fronts of business improvement is what's needed. We need to be diligent in identifying new approaches to serving our clients, because just as process reengineering, ERP, and e-commerce have been internalized by our leading clients, this approach will be widely adopted and we'll need to be ready with the next great idea to assist them in their Business Performance Management efforts.
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