Finding the Right Balance in Performance Measurement and Management

A recent study by Meta Group reveals that approximately 80% Performance Metric Systems fail or are discontinued within two years. With all the buzz around measurement programs such as Six Sigma, Benchmarking, and Activity Based Management, this statistic is pretty surprising.

But first, what is performance management? In short, it is a way to measure and benchmark performance to identify areas for continuous improvement. It is also a powerful tool to ensure benefits realization and return on investment for large capital investments such as IT projects or acquisitions.

The only problem with Performance Management programs, however, is that most companies fail to implement them correctly. Most business cases for large investments such as IT projects or mergers focus only on high-level measures, which can be difficult to track against and drive employee accountability.

For example, a business case for a large IT project may indicate that headcount can be reduced by 10% across the company because of increased efficiencies. This may very well be an accurate quantification of the benefits, but the benefits will not be realized unless they are cascaded to a more operational level that will drive accountability and visibility to the benefits. This requires a more detailed analysis of processes to understand with more accuracy where exactly the process inefficiencies lie and where the benefits will be achieved.

On the other end of the spectrum, many performance measurement and management programs fail because of their complexity and cost. The advent of Six Sigma and Activity Based Management has encouraged many companies to go overboard with costly and time-consuming data collection efforts that are not cost justified and lack focus. While performance management is extremely beneficial, there is a point of diminishing returns when organizations go too far in their efforts. In light of today's pressures to reduce short-term costs and headcounts, it is far more cost effective to focus performance measurement efforts on the areas that will produce the most significant results; managers need not measure and overanalyze every minute aspect of their operations to achieve a significant improvement in results.

To be successful in their performance management pursuits, managers need to maintain a balance between "operationalizing" performance measures and keeping the approach simple. This balanced approach will ensure a proper focus on areas that can provide measurable improvements without spreading costs and resources too thin.

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Establishing ERP and IT Performance Measures

Our last posting gave on overview of how to build and ERP or IT business case. That is one big step toward achieving a healthy Return on Investment for the millions of dollars required to implement any large system. However, to truly realize the benefits of ERP, you have to go one step further and develop performance measures at an operational level.

Most business cases develop high-level corporate performance measures that define potential areas of an IT or ERP project's business benefit. Examples include reduced inventory, reduced sales order processing time, reduced headcount, etc. The problem with these high-level measures is that the associated benefits will not transpire unless the metrics are pushed from the executive down to the operational levels of the organization. This helps drive accountability and visibility to achieve the benefits outlined in the business case.

Let's use reduced sales order processing time as an example. Perhaps it was determined that an ERP system could potentially reduce sales order processing by 30% and an annual savings of $1 million in reduced headcount company-wide. This is a tangible benefit, but it means nothing to mid-level operational managers of a global conglomerate that will need to contribute to this benefit. So if you have a Director of Sales and Marketing in charge of Western Europe, that person should be given a specific target to contribute to this $1 million savings so they are held partially accountable for the project's overall ROI. The same should be done for the directors in charge of other areas of the business until the full $1 million savings target is assigned to the appropriate people.

Obviously, this process is easier said than done. In order for this performance management approach to succeed, effective communications along the way will be crucial. Ideally, these operational managers that will ultimately be accountable for project results on the business side should be involved in helping define the business case and potential savings of an ERP system. In addition, they should also be given support to help identify root causes of anticipated benefits that are not realized. This will help ensure buy-in to the established targets.

In short, the only way to achieve the ROI defined in a business case is to cascade target improvements and accountability out of the boardroom down to lower levels of your organization.

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Building an IT or ERP Business Case

One of the biggest selling points that ERP or IT software vendors use is that implementing their product can result in a short payback period with a healthy Return on Investment (ROI). While there is some truth to this possibility, such an ROI is only achieved if you develop a realistic business case.

Here are some commonly overlooked aspects of developing a solid business case that will drive measurable business results:

1. Identify Hidden Costs. Many costs associated with a large IT or ERP implementation are obvious. For example, software licenses, implementation services, and data conversion are all direct costs that make it into most business cases. However, there are others that are not so obvious, such as internal resources required to support the project team, costs to backfill the day-to-day work of project team members, process improvement, training, and organizational change management. All of these costs should be included to accurately reflect the true project costs.
2. Document the Costs of Benefits. In many cases, technology makes a company more efficient, which may ultimately result in a headcount reduction. However, there are costs associated with reducing staff, such as severance. In addition, there is usually a short-term decrease in efficiency as employees learn the new system, even though there are usually long-term benefits associated with making employees more efficient and effective. These costs should be quantified in a business case as well.
3. Track Benefits After Implementation. Developing a business case is only half the battle; tracking and realizing business benefits is the other half. Prior to go-live, it is important to develop lower-level operational measures that directly relate to the dollars identified in the business case. These measures should then be assigned "owners" within the company who will be responsible for monitoring and tracking actual results. Then, after go-live, actual business benefits should be measured and compared to the business case on a regular basis to identify areas for improvement.

Obviously, there are many other aspects to developing a business case. By avoiding these common pitfalls, however, you are much more likely to have an air-tight business case that drives measurable business results.

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How To Ensure ERP Success

The world of technology and business consulting is tainted by horror stories of ERP projects gone wrong. Companies such as Hershey's have had widely publicized lawsuits against ERP software vendors because of their failed implementations. In some extreme cases, these companies sue because they couldn't ship product or their entire business shut down because the software did not work correctly.

So how does one ensure ERP success? Many assume success or failure is the fault of the software you purchase, but in reality, 95% of a project's success or failure is in the hands of the company implementing the software, not the software vendor.

Here are just a few ERP implementation critical success factors that we have seen:

1. Focus on business processes and requirements first. Too often, companies get tied up in the technical capabilities or platforms that a particular software supports. None of this really matters. What really matters is how you want your business operations to run and what your key business requirements are. Once you have this defined, you can more effectively choose the software that fits your unique business needs.
2. Focus on achieving a healthy Return on Investment, including post-implementation. This requires doing more than just developing a high-level business case to get approval from upper management or your board of directors. It also entails establishing key performance measures, setting baselines and targets for those measures, and tracking performance after go-live. This is the only way to truly realize the benefit potential of ERP.
3. Strong project management and resource commitment. At the end of the day, your company owns the success or failure of a large ERP project, so you should manage it accordingly. This includes ensuring you have a strong project manager and your "A-players" from the business to support and participate in the project.
4. Commitment from company executives. Any project without support from it's top-management will fail. Support from a CIO or IT Director is fine, but it's not enough. No matter how well-run a project is, problems arise (such as conflicting business needs), so the CEO and your entire C-level staff needs to be on board to drive some of these
5. Take time to plan up front. An ERP vendor's motive is to close a deal as soon as possible. Yours should be to make sure it gets done right. Too often, companies jump right in to a project without validating the software vendor's understanding of business requirements or their project plan. The more time you spend ensuring these things are done right at the beginning of the project, the less time you'll spend fixing problems later on.
6. Ensure adequate training and change management. ERP systems involve big change for people, and the system will not do you any good if people do not understand how to use it effectively. Therefore, spending time on money on training, change management, job design, etc. is crucial to any ERP project.
7. Make sure you understand why you're implementing ERP. This is probably the most important one. It's easy to see that many big companies are running SAP or Oracle and maybe you should too, but it's harder to consider that maybe you don't need an ERP system at all. Perhaps process improvement, organizational redesign, or targeted best-of-breed technology will meet your business objectives at a lower cost. By clearly understanding your business objectives and what you're trying to accomplish with an ERP system, you will be able to make a more appropriate decision on which route to take, which may or may not involve ERP.

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Aggressive Business Strategies in Industry Downturns

It's no secret that US auto manufacturers are struggling lately. As consumers shy away from gas-guzzling SUVs and seem unwilling to buy new cars without steep discounts, Ford and GM have both seen their sales and market shares slip significantly this year. US sales at GM were down 7.5% in November 2005 compared to that same month a year ago, and Ford's decline was an even more staggering 15%. As a result of these sales declines, Ford and GM have both announced additional plant closings and layoffs over the last two weeks.

Then there's Toyota. Because of less reliance on SUVs and more innovative product development like the Scion and hybrid sedans, they are bucking the industry trend and actually growing sales in a tough climate. At the same time, they announced a few weeks back that they will increase their capacity in the US and hire additional manufacturing workers.

This is a good example of a strong industry player exploiting the overall weakness of competitors by getting more aggressive to take market share while others may be on the defensive. It's an entirely different way of thinking about business strategy that will most likely put Toyota in a better position once the overall industry rebounds. Executives at Toyota are aiming to become the world's #1 auto manufacturer in terms of sales volume by 2007, and this aggressive strategy puts them in a better position to achieve that goal.

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