Performance management integrating strategy execution methodologies risk and analytics by gary cokins

PART ONE : INTRODUCTION PART TWO : PERFORMANCE MANAGEMENT OVERVIEW PART THREE : PERFORMANCE MANAGEMENT SUPPORTS BUSINESS INTELLIGENCE AND DECISION MAKING PART FOUR : IMPLEMENTING PERFORMANCE MANAGEMENT PART FIVE : STRATEGY MAPS, THE BALANCED SCORECARD, AND DASHBOARDS PART SIX : FINANCIAL PERFORMANCE MANAGEMENT PART SEVEN : CUSTOMER VALUE MANAGEMENT PART EIGHT : PERFORMANCE MANAGEMENT AND SHAREHOLDER WEALTH CREATION PART NINE : ENVIRONMENTAL PERFORMANCE MANAGEMENT PART TEN : CONCLUSION

PERFORMANCE MANAGEMENT Integrating Strategy Execution, Methodologies, Risk, and Analytics GARY COKINS John Wiley & Sons, Inc Additional praise for Performance Management: Integrating Strategy, Execution, Methodologies, Risk, and Analytics In his most recent book, Gary Cokins shows he has successfully been able to expand his base thinking into a contemporary and useful read In recognizing the importance of enterprise risk management to today’s organizations–and integrating it into the broader content message–this books makes a leap forward for 21st century business practices —Ellen M Heffes, editor-in-chief, Financial Executive; Financial Executives Institute Gary Cokins has cracked the code to improving performance by producing a comprehensive body of knowledge which focuses on the implementation of the strategy A unique feature of Gary’s work is that he provides an integrated framework that incorporates Governance, Risk, and Compliance, as well as Customer Value Management This is a must read for every executive who intends to show performance growth —V Kumar, Ph.D., Richard and Susan Lenny Distinguished Chair Professor of Marketing, and Executive Director, Center for Excellence in Brand & Customer Management, J Mack Robinson College of Business, Georgia State University Author of Managing Customers for Profit Gary Cokins is one of those gurus who not only is a recognized expert but truly gets it He is the first expert to truly link performance management to customer value management in a way that makes sense for the 21st century Because of that, mark my words here, this book will make a serious difference to the conduct of business in the workplace —Paul Greenberg, President, The 56 Group, LLC; and Managing Partner/CCO: BPT Partners Author of CRM at the Speed of Light, 4th edition Cokins’ writings on Performance Management represent valuable contributions to better understand why and how performance management is essential in managing in a dynamic business environment The book enables today’s managers and executives to take another critical step forward in realizing the potential operating and strategic improvements that can be derived from a well structured and implemented Performance Management system —Lawrence Maisel, Managing Partner, DecisionVu LP Gary’s latest work on Performance Management continues his thought leadership on the topic He crystallizes the broad array of performance measurement tools into a holistic approach to better and higher level performance management His emphasis on learning from others, behavioral change, making choices, focusing, and using reliable fact-based data are all sound pieces of advice that should help organizations deal with tough times and keep on the winning track —Christopher T McKittrick, CPA, Director of Members in Business, Industry & Government, American Institute of Certified Public Accountants (AICPA) Gary Cokins has been a proven thought-leader ever since he was the lead author of the popular An ABC Managers’ Primer published in the early 1990s With each of his successive books, Gary has raised the bar to help practitioners with concepts and implementation issues related to managerial accounting and performance management This book is written in a lighthearted way that anyone can understand and describes the integration the many possible solutions that an organization can use to improve their performance and also avoid implementation pitfalls —Steve Vieweg, President and CEO, CMA-Canada Gary Cokins has succeeded in creating a must have resource for anybody either in the midst of or even just considering a performance management project This book contains valuable content from the basics to advanced performance management 2.0 capabilities Gary’s book will be helpful for first time analysts trying to jumpstart their initiative to seasoned project management experts looking to advance their knowledge-base to a higher level —John Colbert, Vice President, Research and Analysis, BPM Partners Gary’s performance management expertise comes to light with increasing clarity in his newest book, Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics His writing style is direct His examples and predictions are colorful and often uncomfortably true On a personal note, readers will appreciate Gary’s accessibility and his willingness to help when needed —Ron Powell, Editorial Director, Business Intelligence Network Despite knowing Gary for some 20 years, I continue to be amazed at the depth and clarity of his thoughts and arguments This book presents a vision for performance management and how that discipline integrates with other key management processes But most importantly for readers, Gary tells us how to achieve this, not just what and why, and that makes this book that much better —Robert Torok, Executive Consultant, IBM Global Business Services Many organizations attack the parts In this book Gary, a consensus thought leader in the performance management community, shows how to align organizational gears for maximum effectiveness —Steve Player, Managing Director, The Player Group Program Director, the Beyond Budgeting Roundtable Co-author of Cornerstones of Decision Making: Profiles of Enterprise Activity-Based Management Gary Cokins offers powerful insights and practical counsel for all who are seeking to manage effectively in these turbulent times —David A.J Axson; Founder, Sonax Group Inc Author of Best Practices in Planning and Management Reporting Performance Management provides a bridge between high-level strategies and practical implementation Gary’s book is required reading for all executives serious about building shareholder value Think of it as a survival guide for managing in these tough times —Dr Stephen G Timme, President, FinListics Solutions Adjunct Professor, Georgia Institute of Technology Gary Cokins has been pioneering performance management endeavors His new book shows that he’s still not only following but leading thought processes when it comes to further developing performance management strategies It’s a must-read for everyone who wants to learn about how to improve organizational performance.’’ —Christoph Sporleder, Managing Partner, Echoˆ Advisors GmbH, Germany As always, Gary sheds light on a vast array of complex issues with an ease that I always found amazing In particular, his effective use of analogies draw great parallels with the many points he is bringing across Just as an example, his use of the brain to illustrate the distinct contributions of transactional systems versus BI and performance management information is simply brilliant —Daniel Dube´, M.Sc., FCMA, Founder and former CEO of Synerma Inc Professional Practice Manager, Raymond Chabot Grant Thornton, Montreal Canada Improving and organizing performance requires the right balance of quantitative and qualitative decision making Gary Cokins’ past writings have explained in easily understood language how to achieve the right balance of the quantitative and qualitative In this book, Gary educates, entertains, and inspires readers who are interested in improving their organizational decision making —Michael D Shields, Schaberg Endowed Chair in Accounting, Broad College of Business, Michigan State University Performance measurement and management are at the center of current corporate concerns Gary Cokins has been a global leader in this field for decades and this new contribution provides an integrated approach that is a must read for corporate leaders interested in improving business performance —Marc J Epstein, Distinguished Research Professor of Management, Jones Graduate School of Management, Rice University Cokins’ uses a holistic, action-oriented approach to explain performance measurement His framework calls for managers to conduct measurements to support strategy implementation Thus alignment with strategy defines the performance measurement process and its role in the managerial decision-making process —F Ası´s Martı´nez-Jerez, Associate Professor, Harvard Business School It takes a lot of experience and wisdom to discuss a comprehensive business concept such as enterprise performance management in a conversational way, which Gary does in his new book He has strong opinions, with which you may agree or disagree, but reading this book will make you reflect on your own beliefs —Frank Buytendijk, author of Performance Leadership Gary Cokins has been at the forefront of championing one of the most comprehensive visions of performance management in the industry for many years Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics is the culmination of this vision and will join his long list of writings that are mandatory reading for anyone in the field who wishes to understand state of the art in current thinking on this topic Heartily recommended! —Nenshad D Bardoliwalla, Vice President, Technology, Business Performance Optimization, Office of the CTO, SAP AG Performance Management provides invaluable insights into what it takes to achieve outstanding organizational performance by taking a very broad view of what ‘‘performance management’’ really means Going well beyond the establishment and monitoring of metrics, Gary Cokins successfully links topics such as strategic planning, cost management, predictive analytics, business intelligence, enterprise risk management, and organizational change management Whether you are new to the topic of performance management, or a well seasoned practitioner looking for new insights, this book is a ‘‘must read.’’ —Douglas Webster, Chief Financial Officer, U.S Department of Labor Co-author of Chasing Change: Building Organizational Capacity in a Turbulent Environment Gary has moved the dials of the evolving architecture of performance management A brilliantly landscaped mosaic The chips of the performance management fitting into a circuit of a visionary class —A.N Raman, Central Council Member, ICWA of India Organizations have been struggling for decades, arguably for centuries, on how to improve their performance Gary Cokins is an internationally recognized thought leader on this topic and active contributor to professional societies such as my organization With this book and its deep and rich insights, Gary has set a high-level mark that other experts will be challenged to exceed —Ashok G Vadgama, President, Consortium for Advanced Management - International (CAM-I) In a very important chapter on customer value management, Gary Cokins rightly views the customer as a business entity with an asset life value and a dedicated profit and loss (measure) Gary addresses the real cost to serve the customer with an activity-based management approach that is essential to maximize the business performance of critical customers —Bernard Quancard, President and CEO, Strategic Account Management Association (SAMA) Gary Cokins’ clear writing is derived of clear thinking about performance management Performance management is about nothing less than how to run an enterprise Gary cuts through the jargon and explains what performance management is, why it is important and how to it This book is invaluable for any businessperson —Neil Raden, Founder of Hired Brains Inc Gary is always focused on how technology can help manage and improve an organization’s performance–not just measure or monitor it Performance management the way Gary describes it in this new book provides the essential linkage between corporate strategy and operational decision-making Gary’s brand of performance management should be on every executive’s to-do list —James Taylor, Author of Smart (Enough) Systems: How to Deliver Competitive Advantage by Automating the Decisions Hidden in Your Business Using company strategy as a point of departure, Gary clearly articulates the ‘‘strategy as hypotheses’’ connections between business functioning and the intelligence/analytics measurement/feedback loop This scientific approach to measuring and managing business performance, a logical but important extension to the Balanced Scorecard, provides a clear (though not necessarily simple) prescription for businesses that wish to be managed nimbly from evidence and facts —Steve Miller, President, OpenBI, LLC Gary writes with a seldom encountered clarity that is conversational and collegial, but that also has a distinct tone of challenge and urgency for the reader to ‘‘get it’’ With a complex subject, he consistently engages you to work out the challenge of PM in all its implications and potential rewards His central notion that many organizations are ‘‘over-managed, but under-led’’ is one that should keep many executives up at night A thoroughly stimulating read —Peter Traynor, Editor in Chief, Dashboard Insight An excellent book whose insights into cost control and performance management are more relevant than ever in light of current economic conditions Gary Cokins has spent a career focusing on how companies can improve performance and cost management without simply resorting to cost cutting This both fun and serious book continues his numerous contributions to the study of performance management —Jack Fingerhut, President, SmartPros Ltd Our working association with Gary Cokins spans more than two decades, including his invaluable services as Advisory Board member for the journal, Cost Management Several times, Gary could have made the choice to rest in ‘‘emeritus’’ status Instead, his uncanny talent for targeting the next developments in performance and cost management–subjects covered in this volume such as sustainability effects on CFOs and social and environmental performance management–drives forward both the professional discipline as well as its receptive practitioners Gary’s inability to remain satisfied with the immature aspects of current practice has made him both reviled (to the immature) and revered (by those ready to receive his message) In these times, we opt for maturity —Joe and Catherine Stenzel, Editors in Chief, Cost Management Gary has done a terrific job of pointing out that Performance Management is about Performance Improvement rather than just Performance Measurement His emphasis that Performance Management consists of a variety of methods that must be integrated in order to successfully execute strategy is critical His focus on predictability rather than after-the-fact reporting is exactly what every organization needs to —John Antos consultant Co-author of ABM for Services, Government, Nonprofits and Driving Value Using Activity-Based Budgeting Gary’s years of experience, expertise, knowledge, and creative personality flow in this new book like a torrent! Gary’s insights and use of humor get better all the time, this new book is like having a chance to peek inside the mind of Yoda, really! A smartly written book with loads of examples and experiences for leaders and managers at all levels —Bob Paladino, CPA Managing Partner, Bob Paladino & Associates, LLC Author of Five Key Principles of Corporate Performance Management Once in a while there emerges from a cloud of conflicting three letter acronyms, poor definitions and misconceptions a ray of light that makes everything so much clearer and as a consequence so much more useful Gary’s book on Performance Management burns away the mists His emphasis on strategy execution over strategy formulation–in other words actually moving the business forward–is supported by his advice that Performance Management has to change from monitoring the dials to actively moving them and thereby improving performance —Brian Plowman, Managing Director of Develin & Partners, Cost Management Consultancy Gary Cokins is the consultants’ consultant for performance management His detailed knowledge of the subject and its role in the management of the enterprise, combined with comprehensive coverage, creates an invaluable reference guide for those in pursuit of performance improvement —Peter B.B Turney, Ph.D.; President and Chief Executive Officer, Cost Technology Author of Common Cents: How to Succeed with Activity-Based Costing and Activity-Based Management Concise and backed by real life expertise! The idea of integrating hindsight (BI) and foresight (predictive analytics) is a powerful approach to Performance Management for organizations We have always found Cokins’ inputs, value adding to our solutions and service offerings on Performance Management —Prem Swarup, Practice Manager Pawan Kumar, Vice President, Business Intelligence & Information Management, Wipro Technologies, Bangalore, India No one can explain performance management concepts better than Gary Cokins and that has never been truer than in this compilation of his recent articles and blogs The format and conversational style of the book not only make it an enjoyable read, but they enable Gary to present the issues in a variety of ways and from many different perspectives This book is a must for anyone who really wants to understand performance management —Douglas T Hicks, President, D T Hicks & Co Author of Activity-Based Costing: Making It Work for Small and Mid-Sized Companies I’ve had the pleasure of knowing and working with Gary for over 20 years During that time I know of no one that has been in better position to observe, document, and refine best practices in the arenas of ABC and business performance management In this book he deals with the much more subtle, and equally important, ways in which we accomplish the many faceted challenges of management to support these practices —Jack Haedicke, Founder, Arena CG Gary Cokins does in this book what he does so eloquently each time I see him–makes it startlingly obvious just how extensively performance management weaves through the most important systems and processes of moving an organization from where it is to where it’s planned to go He boldly and honestly admits that the field of performance management is broad and relatively immature, and tackles this daunting fact head on with a collection of practical and insightful articles that what I’ve seen no other work in this field do: give performance management a complete, clear, and compelling identity, above and beyond the individual notions of scorecards, dashboards, budgeting, performance appraisals, and the rest This book is every performance management facilitator’s reference manual —Stacey Barr, -, Director of Stacey Barr Pty Ltd Having known Gary since his first book, having travelled and seen him present throughout Europe for years, I have grown to respect Gary’s endurance of spearheading and constantly re-inventing his views on performance management Until this book, people unfamiliar with Gary, have only read his serious side Those of us who have enjoyed him present know, however, that Gary sometimes promotes his ideas by pinches of humor in the manner his latest book now does it The future will tell if some of those stories of this book will become industry classics? —Juha Jolkkonen, Sales Director, Cox Consulting Oy; Helsinki, Finland Leaders should not promise change Change can either be good or bad Instead, organizations need improvement Gary Cokins’ book is loaded with practical principles and methods every manager can use to improve their organization —Tom Pryor; Growth Coach, Texas Manufacturing Assistance Center Author of Using Activity Based Management for Continuous Improvement Gary is a gifted communicator and in this book he brings together decades of practical experience and scholarly expertise The book is a useful starting point for managers grappling with modern challenges of performance management It is also a valuable resource for the experienced manager; integrating recent advances in diverse management disciplines (e.g., strategy, marketing, operations and accounting systems) to present an integrated view of performance management —Shannon W Anderson; Associate Professor of Management, Jesse H Jones Graduate School of Management, Rice University For many years, Gary Cokins has been a globally-recognized thought-leader that translates complex management concepts into understandable insights that help managers drive breakthrough results His latest book distills the principles of performance management into practical nuggets of wisdom that will guide managers in fulfilling their most important responsibility—strategy execution —Dr Peter C Brewer, Professor of Accounting, Miami University of Ohio Co-author of the market-leading college textbook Managerial Accounting Gary Cokins, a renowned consulting expertise, has just added a brilliant piece of work to his already long list of accomplishments His new book provides conceptual frameworks and operational guidelines for a fully integrated performance management, which are much needed for a company to ’intelligently’ perform —Joonho Park; Associate Professor, School of Business, Hanyang University Former Chairperson of Accounting & Audit Committee, Korea Communications Commission Gathering reams of information has no value Information only has value when it is used to support decisionmaking aimed at increasing shareholder value This is the major lesson to be learned from (my long-standing colleague) Gary Cokins’ new book on performance management Gary has drawn upon his many years of experience to provide the reader with practical frameworks for deciding what information is meaningful to collect and how it can be leveraged to drive improved customer value and business performance —Larry Lapide, Ph.D., Director, Demand Management, MIT Center for Transportation & Logistics Gary’s book is a thoughtful work on performance measurement and management He is an author with deep experience in the accounting arena Written in a very accessible writing style —Dr Eva Labro; Reader in Management Information, London School of Economics This text combines a sound and original critique on the contemporary performance management discussion with a constructive and practical summary of some essential of its concepts The format and content of the book provides the reader with a variety of perspectives on performance management Together these form a rich and much needed addition and even alternative to some of the ’generally accepted performance management principles’ found elsewhere —Prof Dr Frank Hartmann; Management Accounting & Management Control, Rotterdam School of Management, Erasmus University 226 Performance Management As a result, it is nearly impossible to trace benefits, such as cost savings or future cost avoidance, directly back to any individual change program This is like trying to put a broken egg yolk back together again One step removed from this ROI measurement challenge is to measure the effect of having better information, such as from using an ABC/M methodology, serving as an enabler to turbocharge the effect of all of these improvement programs This further complicates quantifying the financial returns from the contribution of each change initiative program I am not big on making decisions based on faith, but there are some managerial concepts that just seem to be the right thing to Completing the full vision of the performance management framework is one of them Take action or not take action Both choices have an ROI; and with performance management, my belief is that the former is positive and the latter is negative Life, business, commerce, and government are a continuous process of making choices Strategy, which I have described as of paramount importance, is all about making choices When making choices and decisions, conflicts are naturally competing, and they are weighed among options when the final decision is made Computers, data management, quantitative analysis, and analytical theory have made huge strides that facilitate making performance management pay off Performance management provides managers and employees clear direction and the computational horsepower to measure and weigh the trade-off decisions to always point to the highest value creation DID BEETHOVEN PAVE THE WAY FOR PERFORMANCE MANAGEMENT? As I mentioned in the Preface, I was educated as an industrial engineer Engineers are not perceived as very worldly or sophisticated They are often pictured wearing a pocket protector stuffed with ink pens But some engineers, like me, have appreciation for the performing arts For example, I appreciate classical music In particular, I admire and am in awe of the great classical music composers How did Tchaikovsky and Mendelssohn transcribe such beautiful music as notes from their brain to a page of musical score for so many instruments? (Hint: I not think they had a BlackBerry or e-mail to distract their concentration.) I believe that in the next few years, the adoption rate for performance management (as I have been defining it broadly) will accelerate similar to the effect that Ludwig van Beethoven’s masterpiece, his third symphony, Eroica, had on the future of classical music After Eroica, Beethoven’s universally memorable fourth to ninth symphonies followed, and other great composers followed Beethoven’s lead What connection am I making between classical music and performance management? Before going further, you ever hear much about Beethoven’s first or second symphonies? They not seem to be played as often That is because at the point of Eroica, his third symphony, was where Beethoven himself is quoted as saying Note 227 ‘‘I will now take a new path.’’ It was a radical change in music composition Eroica, inspired by Beethoven’s admiration for Napoleon as a world leader, had true melody Prior to Eroica, Beethoven’s music compositions followed tradition where melody was subordinated within certain constraints He complied with the conventional rules of what tasteful music for the elite should sound like His earlier music was influenced by the previous masters, such as Bach and Haydn But Beethoven had a strong urge to break free from tradition of the Classical era of music to evolve to the Romantic era With Eroica, symphony music was changed forever Symphony music compositions that followed were influenced by Eroica The evidence of the ‘‘Eroica effect’’ is this: How many billions of people, including you and me, will die with little trace of remembrance generations from now but a tombstone? But the works of Beethoven, Mozart, Rossini, Sibelius, Grieg, and others, along with Bach and Haydn, will be listened to for millennia to come Are we now at a point in time where the implementation of performance management’s suite of integrated methodologies, like Eroica, will also ‘‘take a new path’’? Yes This is because tradition increasingly gives way to change—and organizations are slowly and gradually learning not just to manage change but to drive change I hope this book has convinced you of this THE FUTURE OF PERFORMANCE MANAGEMENT People are what matters, so I honor and respect the importance of applying the principles of behavioral change management However, my love for quantitative analysis influences me to conclude with a short quote by the great Princeton University mathematician and Nobel Prize winner, John Nash Nash introduced a theory describing how rational human beings should behave when there is a conflict of interests In the Academy Award–winning movie about Nash’s life, A Beautiful Mind, he said: I like numbers, because with numbers truth and beauty are the same thing You know you are getting somewhere when the equations start looking beautiful And you know that the numbers are taking you closer to the secret of how things are The executive management teams with the courage, will, caring attitude, and leadership to take calculated risks and be decisive will likely be the initial adopters of fully integrated performance management systems and will achieve its full vision Other executive management teams will follow them NOTE Gary Biddle, University of Hong Kong, Presentation at CFO Connections conference, September 11, 2007, Beijing, China Index ABC See Activity-based costing ABM See Activity-based management Accountability, 10 rewards and, 83–86 with scorecards, 95–96 social and environmental, 203–206 Accounting See Managerial accounting Accuracy of accounting information See Failure of cost reporting Activity-based costing (ABC), 51–52, 136 See also Managerial accounting budgeting and, 142 driver-based, 148–149 for lean management, 129–131 misallocating costs, 124–125, 135 product diversity, expansion of, 173 profit reporting for individual customers, 161–163 risks from inaccurate calculations, 159–161 ROI and, 20 as solution to bad accounting, 119 for starting performance management, 72–73 sustainability movement and, 209 time-driven, 126 Activity-based management (ABM), 132–133, 142 raising profit cliff curve, 165–166 Activity-based planning and budgeting (ABP/B), 142 driver-based, 148–149 Adding value See Value creation Advice for CEOs, 221–223 Agreement See Managerial accounting Analytics See Predictive analytics Anarchy, 43 Annual budgeting See Budgeting Appetite for risk, 33, 34 Arrogance, failures caused by, 100–101, 112–113 Asset efficiency, 192 Auditing, 135 Automobile, performance management as, 17–18 Automobile GPS system, balanced scorecard as, 98–100 Avoidance of decision making, 43 Back office systems, 16 Balanced scorecards (BSCs), 8, 26–27, 51–52, 93–101 accountability with, 95–96 budgeting and, 142–143 dashboards, as different, 103–109 as GPS system, 98–100 incentives for performance, 85–86 inexperience with, 100–101 lack of consensus with, 93–94 managerial attitude regarding, 97–98 maximizing financial results, 67 overemphasis on outcomes, 100 in performance management mansion, 81 poor implementation of, 94–96 as social tool, 96–97 for starting performance management, 72–73 as strategic tool, 104–107 value creation and, 146–148 229 230 Balanced scorecards (BSCs) (Continued ) without communication of vision, 111–113 BBRT (Beyond Budgeting Round Table), 143–144 Bean-counter budgeting, 139 Beethoven, Ludwig van, 226 Behavior, encouraging, 83–86 Behavioral approach to management See Darwinian managerial style Behavioral view of customers, 171 Beyond Budgeting Round Table (BBRT), 143–144 BI See Business intelligence Blow-it-all budgeting, 139 Brainstorming, 73 Breakthroughs, 25–29, 78 Brewer, Peter C., 135 Budgeting, 12, 107, 145–152 bean-counter budgeting, 139 blow-it-all budgeting, 139 with business intelligence, 143–144 capital budgeting, 150–151 dashboards and, 146–148 failure of, 139–144 history of, 140–142 incremental, 141 obsolete, 139 operational, 149–151 overscrutinized, 139 political, 139 reforming, 142–144 rolling financial forecasts, 151, 192–193, 217–218 sandbagging budgeting, 139 strategic, 150–151 strategy execution failure from, 145–146 types of spending, 149–151 wasteful, 139 Business intelligence (BI), 45–46, 57 achieving ROI in capital market firms, 189–193 Index budgeting with, 143–144 in human capital management, 49–50 leveraging, 78 microsegmentation and, 156 reconciling customer and shareholder value, 187 role of, 63–65 transaction-based profitability reporting, 166–167 Business owner wealth, 52–53 Business performance management, Business process reengineering, 26 Buyers, growing power of, 155–156 See also Customer value management Capacity planning, 148–149 See also Budgeting Capital, reducing cost of, 192 Capital budgeting, 150–151 Capital market organizations: participants in, 193–194 private equity funds, emergence of, 196–198 underachieving ROI, reasons for, 189–193 CE (customer equity), 179 CEO, role of, 8, 55–58 advice column for, 221–223 future diary entry on, 219 CFO, role of, 171, 180–181 future diary entry on, 218–219 sustainability movement and, 207–210 Chandler, Alfred D., Jr., 25–26, 85 Change, 42, 44–45 avoiding resistance to, 221–223 embracing uncertainty, 77–78 responding to, 9, 58, 111–113 risk of failure and, 111–112 rolling financial forecasts, 151, 192–193, 217–218 Channel profitability, 191 understanding costs, 160–162 Index Chief officers: executive (See CEO, role of) financial (See CFO, role of) informational, future diary entry of, 219 marketing, 171, 180–181 Christmas gift requests, 215 CIO, future diary entry of, 219 CLV See Customer lifetime economic value CMO, role of, 171, 180–181 Command-and-control-style management, 81, 90 Communication: planning versus, 89–90 of vision or strategy, 112 Compensation, managerial, 56–57 Compensational incentives, 84–86 Competitive advantage: source of, 172 theories of (Porter), 26 Complexity, 44–45 Compliance awareness, 31 Composite margins, 163–164 Conflict, 101 Consensus with balanced scorecards, 93–94 Continuous flow, performance management as, 16–17 Corporate performance management (CPM), 7, 113 See also Performance management Corporate social responsibility See Social performance management Cost allocation processes, 11 Cost autopsy reporting, 122 Cost calculation See Activity-based costing (ABC) Cost information, accuracy of, 117–119 See also Managerial accounting Costing stages of maturity, 132–133 Cost management, 132–133, 142 See also Activity-based management (ABM) 231 driver-based, 148–149 as oxymoron, 128 raising profit cliff curve, 165–166 transaction-based costing, 167–168 Cost of capital, reducing, 192 Cost reporting, failure of See Failure of cost reporting Costs to serve customers, 174, 176–177 CPM See Corporate performance management Creating value See Value creation Credit risk, 33 CRM See Customer relationship management Crosby, Phil, 26 Cross-selling, 175 CSR (corporate social responsibility) See Social performance management Customer empowerment, 155, 173 Customer equity (CE), 179 Customer lifetime economic value, 169–181 behavioral view of customers, 171 CFO, CMO, and sales director roles, 180–181 critical questions, 173–175 customers as investments, 177–179 customer versus shareholder value, 170, 179–180 drive to understand customers, 172–173 pursuing profit over value, 175–176 servicing customers, decision support for, 174, 176–177 shareholder value creation and, 186 Customer profitability, 161–163, 191 Customer relationship management (CRM), 26, 52–53, 155–157, 171 customers as investments, 177–179 customer versus shareholder value, 170, 179–180 232 Customer relationship management (CRM) (Continued ) revealing decision support, 176–177 shareholder value creation and, 185–187 single view of customer, 156–157 Customer retention, 172, 173–174, 177 Customers as independent variable, 186–187 Customer satisfaction, 15, 16 Customer segmentation, 25 See also Microsegmentation Customer value management, 11, 42, 52, 191–192 ABC (activity-based costing) and, 19 drive to understand customers, 172–173 lifetime economic value (of customer), 169–181 profitability calculations, 159–168 shareholder value creation and, 185–187 Darwinian managerial style, 47, 79 blending with Newtonian style, 81, 90 selecting performance indicators, 97 Dashboards, 93–94 balanced scorecards, as different, 103–109 budgeting and, 146–148 as operational, 104–105 ‘‘Dear CEO’’ advice column, 221–223 Decision-based managerial accounting See Managerial accounting Decision making, 10–11 avoidance of, 43 managerial accounting for, 117–119, 122 support for servicing customers, 174, 176–177 Decision support software, 21 Defining performance management, 7, 9–11, 16–18, 71 Index Delusion, failures caused by, 112–113 Demand management, 42 Demand shaping, 41–42 Deming, Edward, 26 Dependency linkages in strategy maps, 94–95 Descriptive modeling, and ROI, 20 Descriptive purpose of managerial accounting, 122 Diary entries from future, 217–220 Differentiation from competitors, 107–108 Direct expenses, 123–124 Discretionary expenses, 142 Diversity of products, expanding, 173 Drivers, 117, 148–149 to understand customers, 172–173 Dumb reporting See Dashboards ECIs (environmental condition indicators), 205 Economic downturns, 23 Effectiveness, operational, 80–81 Einstein, Albert, 185–187 Employee empowerment, 55–56, 81 Employee motivation See Motivation, employee Employee retention, 49 See also Human resources (HR) Employee turnover, Empowerment customer, 155, 173 employee, 55–56, 81 Encouraging behavior, 83–86 Enterprise performance management, 41–42 workforce planning in, 50 Enterprise resource planning (ERP), 193 Enterprise risk-based performance management, 31–38, 191 framework for, 35–36 opportunity and hazard, 31–33, 38 risk categories, 33–34 strategic objectives and, 37–38 Index Environmental condition indicators (ECIs), 205 Environmental performance indicators (EPIs), 205 Environmental performance management, 203–206 effects on CFO role, 207–210 EPIs (environmental performance indicators), 205 Equity funds, private, 195–198 ERM See Enterprise risk-based performance management Eroica (Beethoven symphony), 226–227 ERP (enterprise resource planning), 193 Errors See entries at Failure Evaluating individuals, 83–86 KPIs as report cards, 97–98 Excel spreadsheets, 133–134, 219 Execution of strategy See Strategy execution Executive job turnover, Executive officer See CEO, role of Executive teams, advice on, 221–223 Expected KRIs, 35 Expenses: recurring and discretionary, 142 shared and indirect, 123–126 Failure of budgeting, 139–144 reforming, 142–144 Failure of cost reporting, 117–119, 124–125, 135, 136 risks from inaccurate calculations, 159–161 value of properly traced costs, 127–129 Failure to execute strategy See also Strategy execution budgeting and, 145–146 understanding reasons for, 100–101, 112–113 233 Financial accounting, 117–119, 122–123 See also Managerial accounting managerial accounting versus, 122–123, 134–136, 208 misleading, 117–119 silos and, 141 Financial forecasting, 151, 192–193, 217–218 Financial officer See CFO, role of Financial performance management See Budgeting; Managerial accounting Financial return, targeted, 67 Fixed assets, efficiency of, 192 Forecasting, 151, 192–193, 217–218 Framework for performance management, 75–76 risk-based PM, 35–36 Front office systems, 16 Full vision of performance management, 75–76 Fully loaded costs of serving customers, 175–176 Future diary entries on performance management, 217–220 Future of performance management, 227 GHG (Greenhouse Gas) Protocol, 206 Global Reporting Initiative G3 (GRI G3) standards, 205, 208 Governance awareness, 31 GPS system, balanced scorecard as, 98–100 GRC (governance, risk, and compliance), 31 Green (environmental responsibility) See Environmental performance management Greenhouse Gas (GHG) Protocol, 206 Hammer, Michael, 26 Hazard, risk as, 31–33, 38 234 HCM (human capital management), 48–50, 189–193 Healthy versus smart organizations, 89–90 Historical purpose of managerial accounting, 122 HR See Human resources Human capital management (HCM), 48–50, 189–193 Human resources (HR), 47–50 accountability and rewards (See Accountability; Rewarding individuals) employee empowerment and motivation, 55–56, 81 future diary entry on, 218 lack of strategy with, 47–48 organizational health, importance of, 89–90 strategic human capital management (HCM), 48–50 Ignorance, failures caused by, 100–101, 112–113 Implementing performance management, 71–90 accountability and rewards, 83–86 getting started, 71–78 organization mansion (analogy), 79–82 smart versus healthy organizations, 89–90 Improvement: driving, 42–43 role of business intelligence and, 64–65 Inaccuracy of accounting information See Failure of cost reporting Incentives for performance, 83–86 Incremental budgeting, 141 Indirect expenses, 123–126 Inexperience, failures caused by, 100–101 Index Information delivery See Business intelligence (BI) Information officers, future diary entry of, 219 Information technology, and performance management, 41–42 Initiatives, value creation from, 146–148 Innovation, 17 management breakthroughs, 25–29, 78 Integrated methodologies, 31, 76 Integration strategy and management, 190–191 Intelligent reporting See Balanced scorecards (BSCs) Internal capital markets, 195, 196 Internet, customer empowerment from, 155, 173 Interviews (hypothetical) with CEO, 55–58 with CFO, 207–210 Inventory management, 192 Investing in customers, 177–179 Investment evaluation (in risk management), 36 IT, and performance management, 41–42 Job turnover, executive, Juran, Joseph, 26 Kaplan, Robert S., 26–27 Key risk indicators (KRIs), 35 KPIs (key performance indicators) See also Balanced scorecards (BSCs) in human capital management, 48 managerial agreement on, 93–94 micromanagement of, 97–98 PIs versus, 97, 103 process-based, 106 project-based, 106 projects and initiatives and, 147–148 as report cards, 97–98 Index rewarding performance, 83–84, 86 as social tool, 96–97 KRIs (key risk indicators), 35 Leadership, 57–58 unfulfilled ROI promises, 193 Lean management, accounting for, 129–131 Legal risk, 34 Lifetime economic value of customer See Customer lifetime economic value Liquidity risk, 34 Livijn, Kristian, 205 Loyalty, customer See Customer retention M&A (mergers and acquisitions), 189 Management breakthroughs, 25–29, 78 Managerial accounting, 11, 18–19, 51–52, 117–136 ABC (See Activity-based costing) budgeting and, 150–151 (See also Budgeting) CFO, CMO, and sales director roles, 180–181 costing stages of maturity, 132–133 for decision support, 117–119, 122 descriptive purpose of, 122 Excel spreadsheets, 133–134, 219 expenses, recurring and discretionary, 142 expenses, shared and indirect, 123–126 financial accounting versus, 122–123, 134–136, 208 history of, 122–123 for lean management, 129–131 migrating customers to higher profitability, 163–165 poor, perils of, 118–119 principles of, 121–122 profit reporting for individual customers, 161–163 235 silos and, 141 value of properly traced costs, 127–129 Managerial agreement: with balanced scorecards, 93–94, 96–97 uncertainty and, 43–45 Managerial compensation, 56–57 Managerial styles, 47, 79 avoiding change resistance, 221–223 blending, 81, 90 command-and-control-style, 81, 90 Darwinian and Newtonian, 47, 79, 81, 90, 97 selecting performance indicators, 97 Managing risk See Risk-based performance management Marketing costs, 160–161 Marketing officers, 171, 180–181 Market risk, 33 Maturity, costing, 132–133 Maximizing results, 67, 78 Measures of performance, 108–109 See also Balanced scorecards (BSCs); Dashboards; KPIs (key performance indicators) accountability for, 84–86 environmental indicators, 205 managerial agreement on, 93–94 Mergers and acquisitions, 189 Methodology, performance management as, 9–10, 75–76 using multiple improvement methodologies, 21 Micromanagement, 81 of KPI scores, 97–98 overscrutinized budgeting, 139 Microsegmentation, 15, 19, 27, 172 business intelligence requirements, 156 customers and shareholders, 187 profit reporting for individual customers, 161–163 236 Microsoft Excel spreadsheets, 133–134, 219 Misallocating costs See Failure of cost reporting Misleading, financial accounting as, 117–119 Mission, 94 See also entries at Strategic, Strategy Mistrust See Trust Modeling, predictive See Predictive analytics Monitoring results, 103–109 Motivation, employee, 56 avoiding change resistance, 221–223 incentives for performance, 83–86 making big changes, 111–112 Multidimensional reporting, 163 Navigator, managerial accountant as, 117–119 Newtonian managerial style, 47, 79 blending with Darwinian style, 81, 90 selecting performance indicators, 97 Nonrecurring expenses, 142 Non-value-added (NVA) costs, 130–131 Norton, David, 26–27 NVA (non-value-added) costs, 130–131 Obsolete budgeting, 139 One-to-one marketing, 172 O-Order fulfillment, 16 Operating expense savings, 192 Operational, dashboards as, 104–105 Operational budgeting, 149–151 Operational effectiveness, 80–81 Operational risk, 33, 34 Opportunity, risk as, 31–33, 38 Optimization, 21, 215 Optimization of price, 191 Organizational health, importance of, 89–90 Organizational learning, 26 Organizational structure, 25–26 Index Organization mansion, rooms of, 79–82 Overhead cost allocations, 123–124 Overscrutinized budgeting, 139 P&L statements for individual customers, 162–163 Paladino, Bob, 86 PDCA cycle, 77 KPI selection, 109 People See Human resources (HR) Peppers, Don, 26 Performance improvement: driving, 42–43 role of business intelligence and, 64–65 Performance incentives, 83–86 Performance indicators, 97, 103 See also KPIs (key performance indicators) Performance management, 7, 9–11, 16–18, 71 accounting and, 18–20 as automobile, 17–18 as Christmas gift, 215 as continuous flow, 16–17 enterprise, 41–42, 50 financial (See Budgeting; Managerial accounting) framework for, 35–36, 75–76 full vision of, 75–76 future diary entries on, 217–220 future of, 227 getting started with, 71–78 implementing (See Implementing performance management) information technology and, 41–42 interest in, 8–9, 12–14, 41–46 as methodology, 9–10, 21, 75–76 quantum mechanics and, 185–186 reasons for, 14–16, 19–21, 42–43, 215, 225–227 social and environmental, 203–210 tipping point, 51–53, 227 Index understanding, 59–60 value of, 28–29 Performance measures, 108–109 See also Balanced scorecards (BSCs); Dashboards; KPIs (key performance indicators) accountability for, 84–86 environmental indicators, 205 managerial agreement on, 93–94 Performance optimization, 36 Period costs, 161 Personnel See Human resources (HR) PIs versus KPIs, 97, 103 See also KPIs (key performance indicators) Planning: communication versus, 89–90 workforce (See Human capital management) PM See Performance management Political budgeting, 139 Poor performance, assuring, 3–5 Porter, Michael E., 26 Power shift toward customers, 155, 173 Precision as myth, 122 Predictive analytics, 20–21 See also Business intelligence (BI) accounting for (See Managerial accounting) as Christmas gift, 215 embracing uncertainty with, 77–78 future diary entries on, 217–219 in human capital management, 49–50 as next management breakthrough, 27 power of, 28–29 rolling financial forecasts, 151, 192–193, 217–218 sustainability movement and, 209 Price optimization, 191 Price risk, 33 Prioritization, 78 Private capital markets, 195, 197–198 Private equity funds, 195–198 Process-based KPIs, 106 237 Process monitoring, dashboards for, 106 Process reengineering, 26 Product diversity, 173 Product profitability, 191 understanding costs, 160–161 Profit cliff curve, raising, 165–166 Profit information, 159–168 See also Managerial accounting accuracy of, 117–119, 127 customers and shareholders, 186–187 future diary entries on, 217 for individual customers, 161–163 many layers of, understanding, 161–163, 191 migrating customers to higher profitability, 163–165 pursuing profit over value, 175–176 raising profit cliff curve, 165–166 risks from inaccurate cost calculations, 159–161 transaction-based, 166–168 Project-based KPIs, 106 Projects, value creation from, 146–148 Prototyping, rapid, 72–74, 77 Public capital markets, 195, 196 Purchasers, power of, 155–156 See also Customer value management Quality, 55 Quantification of risk, 37–38 Quantitative analysis See Predictive analytics Quantitative approach to management See Newtonian managerial style Quantum mechanics and performance management, 185–186 Ranking customers by profit contribution, 175–176 Rapid brainstorming, 73 Rapid prototyping, 72–74, 77 Recipe, PM framework as, 75–76 See also Methodology, performance management as 238 Recurring expenses, 142 Reforecast KRIs, 35 Report cards, scorecards as, 97–98 Reporting, multidimensional, 163 Reporting costs, inaccuracy of See Failure of cost reporting Reporting profits See Profit information Resistance to change, avoiding, 221–223 See also Change Resource capacity planning, 148–149 See also Budgeting Responsibility See Accountability Results monitoring, 103–109 Retention customer, 172, 173–174, 177 employee, 49 (See also Human resources) Return on investment See ROI Revenue growth, 191 Rewarding individuals, 83–86 KPIs as report cards, 97–98 Risk appetite, 33, 34 Risk assessment mapping, 37–38 Risk-based performance management, 31–38 framework for, 35–36 opportunity and hazard, 31–33, 38 risk categories, 33–34 strategic objectives and, 37–38 Risk exposure, 33 Risk management, 35 Risk taking, 31–33, 38 Risks from inaccurate cost calculations, 159–161 Rogers, Martha, 26 ROI (return on investment), 19–21 customer lifetime economic value, 169–181 customers as investments, 177–179 customer versus shareholder value, 170, 179–180 descriptive modeling and, 20 as justification, obsession with, 225–226 Index pursuing profit over value, 175–176 targeted financial return, 67 underachieving, reasons for, 189–193 unfulfilled, 10, 42 Rolling financial forecasts, 151, 192–193, 217–218 Salary-based incentives, 84 Sales costs, 160–161 Sales director, role of, 171, 180–181 Sandbagging budgeting, 139 Santa Claus, letter to, 215 Scientific Management (Taylor), 25 Scorecards See Balanced scorecards (BSCs) Segmentation See Microsegmentation Senghe, Peter, 26 Sensitivity analysis, 180 Service-line profitability, 191 Servicing customers, decision support for, 174, 176–177 Shared expenses, 123–126 Shareholders as independent variable, 186–187 Shareholder wealth, 52–53 See also Value creation customer-oriented strategy for, 174 customer value improvement with, 185–187 customer value versus, 170, 179–180 Silos, 79, 141 Single view of customer, 156–157 Sloan, Alfred P., 25 Smart versus healthy organizations, 89–90 Smokestacks (silos), 79, 141 Social performance management, 203–206 effects on CFO role, 207–210 Social tool, balanced scorecard as, 96–97 Sparcity, and Excel spreadsheets, 133 Speed of integrating performance management, 76 Index Spending planning, driver-based, 148–149 See also Budgeting Spreadsheets (Excel), 133–134, 219 Stacey, Ralph D., 43 Starting up performance management, 71–78 Stew, PM framework as, 75–76 Stovepipes (silos), 79, 141 Strategic budgeting, 150–151 Strategic risk, 34 Strategic themes, 112 Strategy and value management, 35–36 Strategy diagrams See Strategy maps Strategy execution, 36, 191 accountability and rewards, 83–86 charting with scorecards, 106 effectiveness versus, 80–81 failure of, 8, 9–10, 42, 75–76, 145–146 failure of, reasons for, 100–101, 112–113 human capital management (HCM), 47–48 ROI justifications, avoiding, 225–226 scorecards as GPS system, 98–100 Strategy management, 151–152, 191 Strategy maps, 26–27, 106–107 balanced scorecards without, 94–95 budgeting and, 142 communicating vision with, 111–113 dependency linkages in, 94–95 maximizing financial results, 67 in performance management mansion, 81 ROI and, 20 as social tool, 96–97 value creation and, 146–148 Suppliers and buyers, power shift of, 155–156 Supply chain management, 11–12, 42 Surgery, performance management as, 111–113 239 Sustainability See also Environmental performance management effects on CFO role, 207–210 indicators (measurement), 205, 206 SWOT (strengths, weaknesses, opportunities, threats) assessments, 73 selecting performance indicators, 97 Taking risks, 31–33, 38 Targeted financial return, 67 Taylor, Frederick Winslow, 25 TDABC (time-driven activity-based costing), 126 Team behavior, 79 Theories of competitive advantage (Porter), 26 Time-driven activity-based costing (ABC), 126 Tipping point for performance management, 51–53, 227 TQM (Total Quality Management), 26 Transactional software, 21 Transaction assignment modeler, 166 Transaction-based costing, 167–168 Transaction-based customer profitability reporting, 166–167 Trend analysis, 99 Triple bottom-line reporting, 203, 207 Trust, 42 managerial accounting, 11 Turnover, employee, See also Human resources (HR) Uncertainty, 32–33, 38, 44–45 embracing, 77–78 manager agreement versus, 43–45 Unifying the organization, 56 Unrealized profits, 127 Upselling, 175 Urgency, 113 240 Valuation, financial accounting for, 134 Value creation, 14–16, 19–21, 22 balanced scorecards and, 146–148 customer lifetime economic value, 169–181 customer value improvement with, 185–187 customer versus shareholder value, 170, 179–180 economic downturns and, 23 from initiatives, 146–148 managerial accounting, purpose of, 134–136 from projects, 146–148 pursuing profit over value, 175–176 Index underachieving ROI, reasons for, 189–193 Value stream mapping, 129–130 Vision, 94, 111–112 See also entries at Strategic, Strategy Wal-Mart, 204 Wasteful budgeting, 139 Wealth creation and destruction, 52–53 Weighted incentive formulas, 85–86 Woods, Tiger, 100 Work environment, 55 Workforce analytics See Human capital management (HCM) [...]... business students and industry clients —Alan See, Associate Faculty, Business & Management, University of Phoenix Performance Management PERFORMANCE MANAGEMENT Integrating Strategy Execution, Methodologies, Risk, and Analytics GARY COKINS John Wiley & Sons, Inc Copyright # 2009 by Gary Cokins All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada... visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Cokins, Gary Performance management: integrating strategy execution, methodologies, risk, and analytics/ Gary Cokins p cm — (Wiley and SAS business series) Includes index ISBN 978-0-470-44998-1 (cloth) 1 Performance Management 2 Risk management 3 Organizational effectiveness I Title HF5549.5.P35C65 2009 658.40013—dc22... Author of Pricing for Profitability Any book in these times with the title Performance Management ’ and a subtitle that touches ALL the key bases including Integrating Strategy Execution, Methodologies, Risk, and Analytics ’ deserves a look When it’s authored (humorously, no less) by someone with the savvy and vision of Gary Cokins, you should consider buying it When he promises ‘‘It is possible to... marketing and academic activity, the Performance Management domain has become critical, not only regarding customer and market value, but also in the holistic vision of execution, strategy monitoring and Return on Marketing Investment Gary Cokins work has become obligatory reading regarding Activity Based Management His skills and knowledge are a reference for leveraging and increasing my business vision and. .. modifying the strategy and that its adjustments are quickly linked and cascaded to those who execute the strategy 3 Enterprise governance, risk, and compliance management The observation ‘‘If you cannot measure it, then you cannot manage it’’ can be applied to risk Techniques to recognize and measure risk are emerging, which positions risk for the subsequent step—the need to control risk through risk mitigation... employees and managers to shift from the status quo and apply BI and performance management information for better decision making Today organizations can architect and customize their IT solutions to their pain points and opportunities But convincing managers and employees to use the IT solutions is another matter PERFORMANCE MANAGEMENT 2.0 Performance management 2.0 is being referenced by some IT... personnel However, performance management 2.0 places greater emphasis on more areas than just strategy management and customer value management An additional feature is analytical tools, such as for segmentation or statistical correlation analysis, that can be seamlessly embedded within all of the various methodologies to accelerate and improve decision making and risk management What performance management. .. broad view of performance management that all the subsequent chapters relate to Chapter 3 boldly hypothesizes that predictive analytics may be comparable in impact to the major management breakthroughs of the past century Chapter 4 describes enterprise risk- based performance management the comprehensive view that combines governance, risk, and compliance with performance management Risk management is... my marketing performance —Luis Bettencourt Moniz, Marketing Director, ESRI Portugal Gary Cokins who is well known in practitioner circles around the world outlines the strategic importance of performance management and the methodologies to provide executives and managers the basics and insight to adapting their organizations and management to reach their full potential —Mark Smith, CEO and EVP Research,... query, drill-down, and reporting for a few employees In contrast, since 2000, the narrow view of performance management as bolt-on software tools was requested more by the financial function The broader view of performance management tools, such as for customer intelligence, was requested by marketing and sales functions To differentiate BI from performance management, performance management can be