BI and CPM

Business Intelligence is a very powerful tool when used in combination with Corporate Performance Management [CPM]. BI drives the insight essential to ensure effective execution of strategy and ensures that activities remain aligned to key performance indicators throughout the organization.

The following updates are provided by BI Vendor SAS.

David Warren (1925-2010) – Do Companies Need his “Black Box”?

David Warren, the inventor of the prototype of the airplane flight recorder “black box”, passed away in July, 2010. An Australian, he was inspired by the death of his father from a plane crash. His device accomplished his objective: to simultaneously record the conversations of pilots and instrument readings. Do companies need a “black box” or something much better? The analogy of the cockpit of an airplane and jet is a popular one for understanding business analytics and the role they play in improving an organization’s performance. The pilots rely on cockpit dials for feedback. They lock in the navigational system to the flight’s destination. They use levers and buttons to act on the information. They use an autopilot with manual override to steer the craft. They learn and test from a flight simulator. However the purpose of a “black box” is to aid in the investigation of a catastrophe. For a business, by then it is too late. Maybe other managers can learn from understanding the causes of bankruptcies of failed companies, but a more positive way of thinking of navigational technology is for steering and control. A strategy map is an effective instrument for steering, and its companion balanced scorecard is effective for control. But they are just a starting point. It is not just about monitoring the dials but moving the dials, especially the specific dials where their movement will most contribute to achieving the executive team’s strategy and in turn result in financial performance optimization. This is where business analytics fits in. How? Scorecards and dashboards are about measurements. You cannot manage what you cannot measure. You cannot improve what you cannot manage. Organizations struggle with identifying their strategic key performance indicators (KPIs) and their subsequently cascaded operational performance indicators (PIs). They are both important, but they serve different purposes. Embedding KPI and PI correlation analysis is the trick that maximizes alignment of the measures with executing the strategy. Which measures have the most contributory and explanatory value of the outcomes desired? Adding correlation analysis creates a laboratory, like the cockpit flight simulator, to continuously test for the vital and few measures that managers and employees can focus on. With this focus, they can determine which projects, initiatives, and core processes to amplify. A “black box” is important to understand failure. Enterprise performance management methodologies with each embedded with business analytics is critical for improvement and pursuit of optimization. 07/26/2010

Which Managerial Style is Superior? Western (USA) or Eastern (Japan)?

Eastern hemisphere managerial styles are different than Western ones. These styles can be compared to understand how they implement and apply enterprise performance management methodologies embedded with business analytics. I describe this comparison in my article East versus West – Are Management Styles That Different? Click on this hyperlink to read this article. The source for writing this article came from Jorgen Ellingson, Manager of Risk Management for TECOM, a major real estate development and management firm in Dubai. Jorgen exposed me to some provocative research about Eastern versus Western culture’s attitudes toward risk. In an article Jorgen authored in the December 2009 issue of Risk Management (pages 50-53), he references a study by Geert Hofstede about multi-cultural differences with risk appetite. Some of the observations from the study can be applied to implementing enterprise performance management and business analytics. 07/20/2010

Beware Misguided Accountants

Over the past few years I have discussed a paradox with Doug Hicks, President of D.T. Hicks & Co. ( www.dthicksco.com ), a performance improvement consulting firm in Farmington Hills, MI. The paradox, which continues to puzzle me, is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it. Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits by CPA firms. I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes. Perils of poor navigation equipment I speculated to Doug that I think some CFOs and controllers are simply lazy. They do not want to do any extra work or have two sets of books with potentially confusing product and service-line cost numbers. Doug explained this counterintuitive phenomenon using a fable: Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticated instruments. Without the effective functioning of these instruments, it would be impossible for him to chart the ship’s safest and most efficient course. One day the navigator realized that one of his most important instruments was calibrated incorrectly. As a result, he provided the captain inaccurate navigational information. No one but the navigator knew of this calibration problem, and the navigator decided not to inform the captain. He was afraid that the captain would blame him for not detecting the problem sooner and then require him to find a way to report the measurements more accurately. That would require a lot of work. As a result, the navigator always made sure he slept near a lifeboat so that if the erroneous navigational information led to a disaster, he wouldn’t go down with the ship. Eventually, the ship hit a reef that the captain believed to be miles away. The ship was lost, the cargo was lost, and many sailors lost their lives. The navigator, always in close proximity to the lifeboats, survived the sinking and later became the navigator on another ship. Read on to see how this story can apply to today’s organizations. Continue reading "Beware Misguided Accountants" 07/13/2010

Is Business Analytics Just Another Passing Fad?

Some of my most enjoyable years of my work career were employed as a consultant with Deloitte. Although they were from 1982-88, I remember them well as a formative period. I proudly refer to myself as a Deloitte alumnus comparable to a graduate from a university, and I enjoy receiving Deloitte’s newsletters. One of their communications is “Deloitte Debates” that recently posed a question if business analytics is another passing fad. Since I am a believer that applying business analytics is a competitive edge game changer, I was glad to see supportive replies from their leaders. Here are a few excerpt quotes from the debate: “The executives I talk to every day are wrestling with business decisions where a better understanding of data at a very deep level can make all the difference. … Low-level analytics just won’t get you there. Work your way through the list of ground-shaking developments in business today – none are areas where companies can continue to shoot from the hip. Pricing. Workforce trends. Health reform. Even security and terrorism threats. These are all complex challenges where advanced signal detection capabilities are critical. … It’s no fad. It’s a serious competitive advantage.” --- Jane Griffin, Principal, Deloitte Consulting LLP “The retailers I talk with think business analytics is the real deal. Retail has always been about intuition – in a world of fickle customer desires, the person who can predict the next big thing is the one who wins. No algorithm could ever replace that. Right? … But the kind of predictive insight that can be obtained from business analytics is already proving to be a game-changer for some of the leading retail companies. … Analytics can help retailers make smarter choices that lead to real business value. Organic sales growth. Margin increases. Reductions in costs or spending. Talent retention. You name it and business analytics can probably help.” --- Mary Delk, Director (Retail), Deloitte Consulting LLP “The shackles of the past (standard reports with standard data) will inevitably bind companies to increasingly failing strategies. I believe it is time leadership embraces predictive modeling to enable more effective decision making. So many companies when faced with gradual market shifts and increasing competition or strengthening barriers keep turning to old solutions and don’t recognize they are in the midst of new problems. Leadership needs to embrace the notion that analytics can help them create and find insights that will yield competitive advantage. … Leadership with many companies react so slowly to change that the companies are often in dire straits before the mandate for change comes…usually from the newly appointed CEO.” --- W. Scott Evengelista, Principal (National Life Sciences), Deloitte Consulting LLP It feels good for me to see my Deloitte colleagues waving the business analytics banner. Somehow we are all on the same team. 07/06/2010

If you are now the CEO

Imagine that you are now the CEO. Further imagine that your organization is underperforming. Worse yet, your organization has low employee morale, high labor turnover, declining market share, falling profits, competitors that are under-pricing you, and constant criticism from your board of directors, investors and investment analysts. Sound like a fun job? What are you going to do? You start building. How different would this challenge be than accepting a head coaching position for a college sports team that has been winless for the last four years? You begin looking for the athletes who want to win. But that is not enough. You need to grow talent and lead them to work with each other. Being a CEO is not much different. Starting the rebuilding journey Where do you begin? There is no road map. There is no stepwise sequence. So many things need to get fixed. When you are alone, in solitude, you need to dwell on the right vision and mission for the organization from which to formulate your strategy. That is your primary job – to set direction. Everyone will want to know your answer to the question, “Where do we want to go?” You don’t have to fully decide yourself. That is what your executive team is there for – to bounce your ideas off. They may not all want to get on the bus with you. Choose quickly who should stay with you – and who should not. It is not going to be an easy journey. You have so many secondary jobs besides just direction setting and strategy formulation. And there is little time to delay. Of course, there are dozens of best-selling books on leadership. Perhaps one will provide you a winning formula. If it were my decision, I would create a culture for metrics. You cannot manage what you cannot measure. I suggest you also create a culture of manager and employee involvement. My favorite methodology for this is constructing a strategy map and quickly delegating to your managers the task of identifying a few manageable projects, as well as the core processes, to implement and improve. Also, ask them to propose the key performance indicators (KPIs) that can be monitored to assess the progress of achieving the strategic objectives in your strategy map. The KPIs will monitor those same projects and core processes. The benefit of this approach is that your managers and employees will have ownership of the actions and more easily accept the accountability they will be responsible for. You asked, “Where do we want to go?” They must answer, “How are we going to get there?” and also “How are we doing on what is important?” You cannot get there without customers Are you done? No. What about your customers? You can try to make them all happy. However, my suggestion is to first identify which types of customers to retain, to grow, to win back and to acquire – and which types not to. You are not a charity organization; you have shareholders expecting financial returns from your business. You do not want to just grow sales. You want to grow profitable sales. This will require measuring, reporting and analyzing customer profitability and their future potential value. Treat customers as investments in a portfolio. The ones with the highest financial return will translate into increasing the rate of shareholder wealth creation. This can silence the criticism of your board of directors and the investment community. Continue reading "If you are now the CEO" 06/28/2010

Up in the Air

Did you see the movie Up in the Air starring George Clooney? Those of you who have not seen it probably have heard something about it. It involves a professional with a job who flies in airline jets so much that hotels and airports become his life. There are parts of this movie I relate with. I recently learned that with Delta Airlines I have traveled to the moon and back eight times. In the last 18 months I have visited over 70 international cities. I am not as good looking as George Clooney (who is arguably the Cary Grant of our era). But I did relate to a part of his character in the movie. That involved thinking rationally and always trying to make the best out of unexpected circumstances. What does this have to do with enterprise performance management or the finance and accounting component of it? There is a connection. Few implementations of performance management methodologies ever go smoothly. There are always some hiccups or worse. For example, some projects run into input data quality and data management obstacles that adversely affect the modeling, calculated results, and output information. Some projects run into under-estimated change management and behavior modification issues including the natural resistance to change in people. Some projects are scoped too widely or narrowly. Some projects are under-funded or the implementers are inexperienced. What is an organization to do? What would you do? Most organizations over-plan and under-execute. So extensive planning does not guarantee success. There are always unexpected events and surprises. My favorite implementation approach and practice is to work backwards with the end in mind. This involves imagining and visioning the results after the project is completed. What should it look like? How would the organization behave and make better decisions after the performance management methodology, like a balanced scorecard, is in place? Ask yourself what would be the required steps to get to the projects’ end. What could be the speed bumps and traps? What could go wrong? Another implementation practice of mine is to begin with rapid prototyping followed by iterative re-modeling. The purpose is to gain accelerated learning with both the design team and the people who will be using the system. The concept is to construct the system at a higher level in a day or two without caring about accuracy or detail. It is like 18 holes of golf on a polo horse. Get to the 18th green, and then you know what it is all about the next round when you get more serious. Make your mistakes early and often, not later when it is too costly or problematic to make changes. (To read more about this, read my article The First Barrier to Performance Management: How Do We Get Started?) Returning to George Clooney’s character in Up in the Air, another trait he displayed that I relate to is long time periods of solitude. I have a family (including grand children), so I do not long for being away from home and solitude, however periodic doses of time alone to think, ponder and dream of ideas are valuable to consider the possibilities of all angles and flavors of a project. I make a practice to immediately record them as notes or else I may forget some of my ideas. Also, I try to not always “be digitally on.” This is so that I can be more productive. I routinely shut off my BlackBerry and connection to the Internet. (To read more about my feelings on this, read my blog Texting – Dangerous for Cars and Decision Makers Too. ) Being up in the air can help you when your feet are on the ground. Having time for solitude helps you get your thoughts together and generate ideas. I suggest treating airline flying time, airports, and hotels as being precious time. Use it wisely. Gary Cokins … and I wrote this at 37,000 feet flying from Amsterdam to Dubai. 06/22/2010

Ethics and Fraud – From a Gray Area to Prison

I was recently honored to be a keynote speaker at the Institute of Management Accountant’s 91st Annual Conference in Baltimore, Maryland. Events like this provide me the opportunity to hear other speakers and to get a sense for hot topics and trends. My talk’s topic was on business analytics. But at this year’s conference there was an emphasis on ethics and fraud. A riveting presentation was by Aaron Beam, co-founder and first CFO of the scandal-ridden HealthSouth. Beam served time in prison for “cooking the books” at HealthSouth. The audience was breathless listening to how an apparently honorable person could spiral into unethical behavior. The HealthSouth Fraud Beam was recruited in the 1980s by HealthSouth’s Richard Scrushy to create the company and be CFO. The business model of HealthSouth was to create outsourced rehabilitation centers, similar to fitness centers, that are located off-site from hospitals. This is less costly than a recovering patient occupying a hospital room. Beam early on suspected a problem with Scrushy, a charismatic and egotistic character, when Scrushy lied during their first meeting with a third party. Scrushy said he and Beam had spent hours the prior night preparing for the meeting. This had not happened. Beam reflected that he then realized that Scrushy was testing Beam’s reaction to his lie. Prior to HealthSouth Beam had been an accountant with his estimate of financial savings of about $50,000. Within a few years Beam was a multi-millionaire. Scrushy’s net worth was $600 million, and he proclaimed his goal to be a billionaire. HealthSouth’s sales and profit growth rising and its stock price would accomplish this, but this required maintaining and increasing an already high price-earnings ratio. As with any growth company consistent double-digit percentage growth is difficult to maintain as the base grows large, its market gets penetrated, and aggressive competitors appear. These all happened. Eventually a fiscal quarter arrived where HealthSouth’s financial results would not meet Wall Street’s expectations. Beam described how Scrushy’s powerful personality persuaded him to alter accounting entries that deferred recognition of expenses and accelerated revenues. Beam lost sleep that night. The nightmare continued. The stress on Beam led to his retirement with great wealth. Years passed. Then FBI agents appeared at his home. The nightmare was to become reality. Meanwhile Scrushy demonstrated civic generosity with donations to local schools, hospitals and churches. He and his wife also began religious preaching on local radio and TV stations. Despite overwhelming evidence at the trial, the jury found Scrushy to be “not guilty” but Beam and three successor CFOs were given prison sentences. The IMA audience gasped. After prison, the USA government took all of Beam’s net worth except for a subsistence amount that his wife and he could live on. He now cuts lawns as a one person company. He said he receives more satisfaction being paid by widows for cutting their grass than on any day when he was with HealthSouth. Scrushy subsequently was convicted of bribery and is now serving seven years in prison. You can read Beam’s story in his book, HealthSouth: The Wagon to Disaster. At the IMA conference Professor Marianne Jennings also presented on the topic of ethics. Her book is The Seven Signs of Ethical Collapse. Her talk helped explain reasons why conservative people like Beam, a CPA, slip past the “gray area” to be unethical. She described how small baby steps like accounting adjustments of asset and liability reserves lengthen past gray areas into fraud. Additional unethical behavior? I have an additional sense of unethical behavior. My feeling is when accountants report misleading and flawed internal product and costs or deny their managers of an expanded insight to channel and customer profitability reporting, they are doing a disservice to managers and employee teams. These people need insights to analyze to make better decisions. It is not breaking a law, but in my mind it is discourteous behavior. Financial reporting for external reporting is formally audited by CPA firms. Internal reporting is not. I describe this in my article Increased Regulatory Governance – Why not also for Management Information? In my article I explain why I believe internal operating data and managerial accounting should eventually also be certified. 06/14/2010

Horse Racing’s Triple Crown – Just like Business Analysts*

The Belmont horserace, third leg of the USA’s prestigious Triple Crown races, was this past week-end. It made me think that thoroughbred racehorses and business analytic and performance management project leaders have similarities depending on which type they are. (This metaphor is also applicable to professional careers.) There are three types of racehorses: starters, stalkers and deep closers. How are business analytics and performance management methodologies project managers similar? Starter racehorses directly break to lead from the starting gate. They do not normally win races because their early energy burst takes a toll. Similarly, some project managers, for example of a balanced scorecard project, try to move too fast for the organization. The obstacles that slow the adoption rate for business analytics and performance management methodologies are not technical – they are social. This type of project manager, often ambitious young ones, does not patiently earn buy-in from their organization. Consequently they are likely to come up short of a fully successful implementation of the fully integrated analytics-based performance management framework. Stalker racehorses run a few lengths behind the starters until near the end of the race before turning up their speed to the finish line. They often win. Similarly, this type of project manager who paces them self are often successful. They carefully watch what lies ahead of them and how others are reacting to changing conditions. Which horse is changing lanes? Which manager is changing allegiances? Deep closer racehorses run near the back. After about half way through the race they begin to advance forward weaving through the horses ahead with momentum to pass the somewhat surprised leaders just before the finish line. The 2009 long-shot Kentucky Derby winner, Mind That Bird, ran as a deep closer and just missed winning the Preakness, the second jewel of the horseracing’s famous Triple Crown. I personally like the deep closer project manager (and career person too). They do take a risk by lying low and being somewhat out of sight, but they understand the finish line is at the end of the race – not in the middle of it. These types of project managers know the virtue of patience. While ahead of them during the race there is much “jockeying” for position, their goal is ultimate success – the fulfillment of helping their organization complete the full vision of the combined business analytics and performance management framework that I passionately write about. Each of these three types can win. I do not know which type of racehorse wins relatively more than the others. Personally I like deep closers. They are exciting to watch, and when they win you sense they had the perspective of how races and organizations work. *This is an edited version of my May, 2009 blog titled “How Are Racehorses and Performance Management Implementers Similar?” 06/08/2010

Wedding Bells: Risk Management and Performance Management

Inevitably all managerial methodologies, like customer relationship management and profit management and strategy management, will all be integrated. It may not happen for a few years, but software will make it inevitable. The most recent marriage of two of them, enterprise risk management and performance management, is another indication of this bonding. As evidence, Professor Robert S. Kaplan and Dr. David Norton, the authors of the balanced scorecard book series, have begun publishing materials on this marriage. You can read my interpretation of this marriage in my article published by Canada’s professional institute for managerial accounting, CMA-Canada. It is titled The Future: Enterprise Risk-Based Performance Management. In my article I begin by saying, “Enterprise performance management is now more correctly being defined as a much broader umbrella concept of integrated methodologies – much broader than its previously misconceived narrow definition as simply being dashboards and better financial reporting. What could possibly be an even broader definition? My belief is enterprise performance management is only part – but a crucial, integral part – of how an organization realizes its strategy to maximize its value to stakeholders, both in commercial and public sector organizations. This means that enterprise performance management must be encompassed by a broader overarching concept–enterprise risk management (ERM).” 06/01/2010

Jack Bauer, “24,” Googly, Appel, and Analytics

Ever watch the television serial “24” starring Kiefer Sutherland, the never-smiling Jack Bauer and counterterrorism agent? Although the network claims the show is ending with its final show this week, don’t believe it. Jack Bauer can be hooked up to power cables and never confess, but I was able to get the truth out of him. Here is a sneak preview next season’s script for “24.” The easy plot twists have already been used in prior “24” seasons. Nuclear weapons. Ebola-type virus. Government corruption. This plot twist involves techie conspirators. “24” – The Next Season The following takes place in real time in 2017. 08:27:04.37 …. Competition has become fierce between two IT titans: Googly with its software and Appel with its hardware. The two giants have begun to introduce new products that cross over into each other’s space. Googly is now developing a voice-activated device with earphones where you ask it any question and it “tells” you audibly the best answers – rank-ordered. In the other corner of this brawl, Appel is developing a device that inserts into an easily implantable plug attached to one’s brain. The surgery is painless, takes only five minutes, costs $19, and can be done at local drugstores like at Walgreens or CVS. It’s creepy, but focus group market tests have validated that this product will be hotter than every i-product collectively. Its easily accessible archived film and music library includes every film frame and musical note in existence. Evil techie plotters from Iceland are planning to steal both Googly’s and Appel’s designs and combine the two devices into a single one. They will sell it under a new brand name. These Iceland techies are both nationalistically zealot-like and altruistic. They want to offset the reputational damage their country inflicted on the world economic system from their reckless banks and volcanic ash clouds. At this moment in time the techies are penetrating both Googly’s and Appel’s presumably impenetrable R&D facilities to steal the new designs. How are they gaining access? Who knows? They are techies! 12:24:44.12 …. Back at the techie’s headquarters in Reykjavik, Iceland their secret start-up company’s business analysts have lots of work to accomplish. There is little doubt that the Iceland techie hackers will successfully steal Googly’s and Appel’s designs. With those designs in hand, combining them and outsourcing the design and production of the devices will easily be done by outsourcing its manufacturing in China. China is still somewhat lawless in 2017. The challenge to the techie’s company is its marketing, production, and cash flow plans. Their business analysts are furiously busy day and night. Special espresso coffee has been shipped in from Iceland’s once motherland, Denmark. 14:19:52.21 …. Jack Bauer has become aware of the theft. He was tipped off by his 12 year old step-son of his now fourth wife in the “24” series. The kid overheard the Iceland plotters when he was hacking into the USA’s National Security Agency (NSA) communication networks. He told Bauer, “Hey Jack! These guys are gonna steal some product designs from Googly and Appel.” Jack immediately drives his Prius to Googly’s headquarters. 16:51:18.11 …. Jack’s stepson redirects his hacking to the Iceland start-up company’s headquarters. What he hears, sees, and learns is in his words, “Awesome.” The techie firm’s marketing analysts have determined every micro-segment and consumer demand for the “combined” product. They have calculated the exact offering prices, discounts, and add-ons for every potential customer on the planet earth. The production team has optimized the distribution channel schedules for delivery dates and service levels (negotiating the lowest prices with UPS, DHL, and FedEx) for every single potential global customer. The finance team has optimized the calculations of product, channel, and customer profitability to optimize the ROI of the private equity investors for the Iceland start-up. The start-up has mastered hyper-advanced analytics! Jack’s stepson calls Bauer again. He says to Jack, “It’s like Microsoft’s Steve Balmer’s eureka moment in the 1990s when visiting Cornell University to observe that all students on campus are connected via the Internet. Balmer says to Bill Gates, ‘Cornell is wired!’ A huge Microsoft strategy change resulted. Well, Jack, the Iceland start-up might take Googly and Appel into bankruptcy.” 16:21:14.21 …. Jack Bauer goes to a seedy Los Angeles bar and ponders what his stepson has told him. Jack is frustrated. He can save the President of the USA but can’t handle his own 16 year old daughter. What is he to do? Epilogue Jack Bauer weasels his way into investing with the private equity firm investors of the Iceland start-up. He short sells Googly and Appel stock assuming they will begin to fail and their stock prices crash. These outcomes all actually happened. The Iceland start-up becomes the global rage. Its new products have fanatical customers who line up days before retail stores start selling them at midnight. Jack Bauer becomes an obscenely wealthy billionaire from his inside trading and astute short selling. Bauer concludes that all this counter terrorist chasing is way too dangerous. He retires. The “24” series finally really ends. Concluding message: Help your organization get analytical. Then move them higher to advanced business analytics. Retire early. 05/23/2010

Miles Davis’ Music Lesson for Performance Management

Count Basie, Louis Armstrong, and Duke Ellington were jazz greats. And then came MilesDavis. What can we learn from the jazz legend musician, Miles Davis, about enterprise performance management? Let’s start with Davis’ second quintet from 1964-1968 which consisted of Davis on trumpet, Herbie Hancock on piano, Ron Carter on double bass, Tony Williams on drums, and Wayne Shorter on tenor saxophone. Each of these talented musicians continued on with notable individual music careers. But what was exceptional when they played together was an observation Davis made when he said, “We weren’t playing chords anymore.” Initially the quintet played structured music following the notes. But then they evolved and connected as a team and played improvised music spontaneously. They could think like one without being inhibited. They knew they were free to go anywhere with their sound, and the others would follow. How often have you enjoyed a shared experience like that? What the five of them were able to do is to play solo but complement each other to create the sound of a quintet. My vision is that is how an integrated enterprise performance management team of project leaders should play together. Imagine each project leader taking charge of these foundational methodologies: Strategy mapping, performance measures (with a balanced scorecard and cascaded dashboards), and the resulting projects and initiatives portfolio. These link operations to the executive team’s strategy and align employee behavior and priorities with the strategy. Demand Forecasting. Forecasting is arguably the independent variable from which all other plans and actions are dependent variables. The purpose is to reduce uncertainty. And as a side bonus, the outcome facilitates shifting to performance-based budgeting and driver-based rolling financial forecasts. Customer intelligence, economic value, and profitability analysis. These answer the questions of which type of customer is attractive to retain, to grow, to win back, and to acquire? And which types are not? And, one step further, how much should be spent on each customer micro-segment to gain optimal profit lift? Activity based costing is an important element. Risk management. To properly balance the organization’s risk appetite with its risk exposure and to optimally fund risk mitigation projects. Business analytics. To ask questions and solve problems that lead to better decisions with exploratory and confirmatory analysis. Each of these pursuits can stand on their own as a component to manage and improve an organization’s performance. But as with Miles Davis’ “Second Great Quintet,” the integration of them, with business anaytics embedded, produces a sound that is much larger than the sum of the parts. When they are synchronized, you “aren’t playing chords anymore.” Volatility is the new normal, so the ability to continuously improvise and synchronize in an agile way can fulfill the complete vision for enterprise performance management. 05/17/2010

Put Managers Back in the Driver’s Seat

I recently met in Brussels with Jeroen De Flander, co-founder of the performance factory, a research and advisory firm which is solely focused on helping organizations increase performance through best-in-class strategy execution. Jeroen and I first met in a Linkedin.com discussion group. I became intrigued in further dialoging with him because, if you noticed, the subtitle of my recent book, Performance Management, refers to strategy execution, not to strategy formulation. My belief is executives are reasonably good at defining their strategy. Their frustration is making it happen – implementing their strategy. Jeroen said something during our meeting that caught my attention. He said, “Organizations need to put managers back in the driver’s seat.” I asked him to explain that, and what I understood him to say is this: In past decades executives of organizations hired high-end consultants, like a McKinsey or Bain, to assist them in formulating their strategy. Goals and targeted results might be planned from this work, but the actual implementation is where things become somewhat gray and fuzzy. He said that achieving the strategy comes best from the heads, hearts, and hands of the managers and employee teams who must actually define the initiatives and action steps, complete them, and test along the way that they are realizing the expected benefits – otherwise adjustments are needed. Jeroen’s thinking resonates with me. I have been fairly consistent with my opinion that despite the importance of executive sponsorship to drive improvement and organizational transformation, often there are enough distractions and fire-fighting at the top that an alternative next best lever is with managers. I described this in my article We’re Down Here. One substantial difference between the backgrounds of Jeroen and me is that his initial job experience was with compensation and incentive consultants who formulate pay-for-performance and goal setting for individuals. In contrast my mid-career experiences (following a decade of line management with a blue-chip Fortune 100 company) were from 15 years as a management consultant with Deloitte, KPMG, and EDS usually addressing organization-wide or core process issues. In short, Jeroen has come at enterprise performance management from a bottoms-up view whereas I arrived at it from a tops-down view. But these two views must be fused somewhere in the middle, or else there is a disconnect between them. And I believe addressing this disconnect will be the next big wave in managerial methodologies – translating strategy into operations. Lots of organizations have two-inch thick strategy documents with lots of measures and plans. But this document does not deliver the strategy and its plans. Managers do. Jeroen’s position is it requires heads (understanding the strategic intent, of the executives, hearts (being inspired and motivated), and hands (taking actions). In the past, strategy implementation was left in the hands of the same executives who formulated the strategy. Can they wear both hats? Today, there are individuals with experience who can be hired to facilitate the process of strategy execution. 05/10/2010

C. K. Prahalad (1941-2010) – Core Competencies and Business Analytics

The recent death of C. K. Prahalad, a proponent of that organizations should build core competencies, is a sad loss. He was the co-author with Gary Hamel of the book Competing for the Future. His message was that a core competency is a specific factor that a business sees as being central to the way it, or its employees, works that fulfills three key criteria: 1. It provides consumer benefits 2. It is not easy for competitors to imitate 3. It can be leveraged widely to many products and markets. . Wikipedia describes core competencies as particular strengths relative to other organizations in the industry which provide the fundamental basis for the provision of added value. Core competencies are the collective learning in organizations, and involve how to coordinate diverse production skills and integrate multiple streams of technologies. It is communication, an involvement and a deep commitment to working across organizational boundaries. What is a core competence that organizations should be building now? A strong candidate should be business analytics. With hindsight, I should have included Prahalad in my article What Will be the Next Management Breakthrough? In this article I stated that Professor Tom Davenport of Babson College authored a January, 2006 Harvard Business Review article (and subsequent book) proposing that the next differentiator for competitive advantage will be predictive analytics. He has coined the phrase, “competing on analytics.” His premise is that change at all levels has accelerated so much that reacting after-the-fact is too late and risky. He asserts that organizations must anticipate change to be pro-active, and the primary way is through robust quantitative analysis. This is now feasible due to the combination of massive amounts of economically stored business intelligence and powerful statistical software that can provide previously undetected patterns and reliable forecasts. Those organizations that embrace building the application of business analytics will enjoy a sustainable competitive advantage. Will I be correct? Let’s see about five years from now which organizations are ahead and which have fallen behind. To learn more about why organizations fail, read my article Why Do Once Successful Companies Fail? 05/03/2010

A Kite with a Broken String

How do executives expect to realize their strategic objectives if all they look at is financial results like product profit margins, return on equity, earnings and interest before interest, taxes, depreciation, and amortization (EBITDA), cash flow, and other financial results? These are really not goals – they are results. They are consequences. Measurements are not about monitoring the summary dials of a balanced scorecard. They are about moving the dials of the dashboard that actually move the scorecard dials. Worse yet, when measures are displayed in isolation of each other rather than with a chain of cause-and-effect linkages, then one cannot analyze how much influencing measures affect influenced measures. This is more than just leading indicators and lagging indicators. Those are timing relationships. A balanced scorecard reports the causal linkages, and its key performance indicators (KPIs) should be derived from a strategy map. Any strategic measurement system that fails to start with a strategy map and/or reports measures in isolation is like a kite without a string. There is no steering or controlling. My belief is there is confusion about what the difference is between a balanced scorecard and a dashboard. There is similar confusion differentiating key performance indicators (KPIs) from normal and routine measures that we can refer to as just performance indicators (PIs). The adjective “key” of a KPI is the operative term. An organization has only so much resources or energy to focus. To use a radio analogy, KPIs are what distinguish the signal from the noise – the measures of progress toward strategy execution. As a negative result of this confusion, organizations are including an excessive amount of PIs in their scorecard system that should be restricted to KPIs. When someone says to me our organization has 300 KPIs, I ask them, “How can they all be a “K”? A misconception about a balanced scorecard is that its primary purpose is to monitor results. That is secondary. Its primary purposes are to report the carefully selected measures that reflect the strategic intent of the executive team, and then enable ongoing understanding as to what should be done to align the organization’s work and priorities to attain the executive team’s strategic objectives. The vital and few strategic objectives should ideally be articulated in a strategy map, which serves as the visual vehicle from which to identify the projects and initiatives needed to accomplish each objective, or the specific core processes that the organization needs to excel at. After this step is completed, then KPIs are selected and their performance targets are set. With this understanding, it becomes apparent that the strategy map’s companion scorecard, on its surface, serves more as a feedback mechanism to allow everyone in the organization, from front-line workers up to the executive team, to answer the question: “How are we doing on what is important?” More importantly, the scorecard should facilitate analysis to also know why. As mentioned, the idea is not to just monitor the dials but to move the dials. To go one step further, a truly complete scorecard system will have business analytics embedded in it. An obvious example would be correlation analysis to evaluate which influencing measures have what degree of explanatory contribution to influenced measures. This way the scorecard becomes like a laboratory to truly optimize size and complexity. To read more about the difference between a scorecard (strategic KPIs) and dashboards (operational PIs) read my article, How is a Balanced Scorecard and Dashboard Different? 04/26/2010

The Iceland Volcano Ash – A Great Way to Validate Business Analytics

Like many business travelers my flight home to the USA was delayed several days due to the Iceland volcano ash causing cancellations of flights across Europe. I was not alone. I was stuck in Brussels. Now, of course, there are a lot of worse places to get stuck at. In fact, a week-end in Brussels would have been many stranded travelers desired choice. For me, it turned out to be a learning experience. Three times I had the occasion to meet business travelers with the same predicament as me. In all three occasions in restaurants and hotel lounges I struck up conversations. Despite the perception you may have of me, I am normally shy. I like my solitude as I described in my recent blog Texting – Dangerous for Cars and Decision Makers Too. However, the conversations I had with other stranded travelers were educational. Inevitably new conversations with business travelers leads to the standard questions of what do you do for a living and who is your employer. It always takes a little longer explanation for me since describing SAS, my employer, as a business intelligence and analytics software provider requires educating why organizations would spend money on solutions that solve complex problems. But it does not take long for people to quickly grasp the benefits that come from converting raw transactional data into meaningful information to improve decisions. Here is a summary of my takeaways. Every business manager wrestles with eternal questions like these: What should we measure? How do we align employees’ behavior and priorities with the executive team’s strategy? How do we determine which types of customers are attractive or not to retain, grow, win-back, and acquire – and how much should we spend to optimize the valuable ones? How can we better forecast the future demand to reduce uncertainty and allow are planned actions to be more reliable and stable? What are the true profits of our products, service-lines, channels, and customers? Why do we feel the annual budgeting exercise is so broken and needs to be replaced with something that serves the same purpose – like rolling financial forecasts? With some of my stranded companions, after a few cocktails, the conversation got more interesting. The discussion expanded to why their organization has not fully embraced and implemented techniques like statistical analysis (e.g., regression and correlation math), strategy maps, scorecards (KPIs), dashboards (PIs), segmentation analysis, risk management, text mining, activity-based costing, and others. My companions’ answers formed a consensus. The barriers are no longer technical (e.g., data quality) or weak skills to design the systems. The big barrier is social and cultural. One vice-president confessed, “Our executives do not have the willpower or guts to delegate decision rights to the managers and employee teams below them.” That is so telling. Admittedly the pressures are high on executives to produce constantly greater results. Hence executives feel compelled to control the ship. But there is a difference between steering and controlling. I repeat what I said in my article More Spocky, Less Rocky. Successful managers lead with vision and inspiration. They answer the question “Where do we want to go?” By empowering their workforce with tools of analytics and enterprise performance management solutions, then managers and employees can answer “How are we going to get there?” 04/19/2010

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