The Economic Downturn: why Performance Management is Key to come out stronger
There is no escaping the harsh reality of the current economic climate. The crisis in the financial industry has lead to a worldwide recession or even depression and most macro-economists seem to agree that this will not end until 2010 at the earliest. Furthermore, the effects of this crisis will be felt for many years to come. While some sectors may be impacted more than others, it is clear that few industries or companies will escape its effects.
Essentially, companies can react to this changing environment in 3 different ways: defensive, offensive or do nothing. It goes without saying that inaction in the face of drastic change and economic adversity is undoubtedly the worst option available. We do not want to make any statement regarding what is the best strategy to deal with this crisis, be it offensive or defensive. In our view, this largely depends on the corporate strategy and its financial position, the industry, the geography and many other factors. There is ample research and recommendations available about successful and unsuccessful strategies from specialists such as Bain & Company (see www.bain.com ).
The point we will make here, is that both for offensive and defensive strategies, the execution of the strategy is key. And Performance Management is the combination of processes, methodologies and tools that will help you to optimally determine and execute your strategy in these turbulent times. Therefore, it is vital for the successful survival of your company to continue to invest in Performance Management.
Why is Performance Management key to economic survival and success?
Use Performance Management to fill the holes left by your competition. Very often, companies will take drastic and wrong measures to deal with a downturn, which will lead to the weakest companies disappearing. Companies who only resort to measures like cutting operations and letting go of critical assets and people will find themselves out of business rapidly. The demise of competition will create holes in the market that need to be filled. Performance Management can help you gather important intelligence to determine where the holes may appear and what actions need to be taken to pick up the customers that were left by your competition. Key activities to achieve this are integration of external data about your market, your competitors and your customers with the available internal data. By structuring all this data so it can be used for analysis and what-if scenario building, you are able to quickly identify market opportunities that you need to address in order to gain market share. Performance Management techniques and software such as OLAP (on-line-analytical-processing), predictive modeling (through data mining) and what-if scenario analysis (through Planning software) are key instruments in this process.
Better understand your customers. In order to make it through the slowdown, it is essential to have a good understanding how the crisis is impacting your customers' business. The faster you realize this, the better you will be able to serve their needs. Depending on your industry and business model (and obviously, number of customers) this may be an easy or a difficult task. Correct, detailed and up-to-date information about your customers and your transactions with them are crucial for measuring your customers' behavior. A sound Performance Management strategy that monitors the right customer KPI's and that ensures data quality and integrity, as well as providing the means to analyze customer data to a low level of detail to all concerned in your organization, will help you in quickly identifying changes in customer behavior and providing the right response to them.
Use correct financial information for decision taking. This sounds pretty basic, but experience shows that it is not always easy for executives to base their decisions on maximizing profit rather than revenue. In fact, in many organizations it is very difficult to determine what products, customers, services or geographies are contributing most to the overall profit. All organizations can produce financial statements of gain and loss, but these do nothing to help managers make hard decisions about where they should be cutting specific, unprofitable customers or segments, and where they shouldn't. During a slowdown, you should apply more scrutiny in these areas. It is likely that at some point you will need to cut costs, and the first places to cut should be those areas where you are already losing money. Analyzing the financial performance of your organization is key in Performance Management and methodologies such as Activity-Based-Costing, relying on correct data, can be a major asset for a company deciding where they are generating most profit; or - more importantly - where they are expected to generate most.
Very often, even for large multi-national or stock-quoted companies, too much data and information still resides within Microsoft Excel. While this remains an excellent personal productivity tool, it should never be the instrument that holds the key financial information used for decision-taking. We all know that Excel has issues regarding security, collaboration, data volumes, version management, consistency, metadata management, data quality etcetera. Nevertheless, companies – and especially financial departments - like to keep all of their data in Excel. Excel can be a component of a good Performance Management environment, but only as an analysis tool. A company who wants to report and analyze its financial performance in a secure, well-governed and error-proof environment cannot rely on Excel alone but needs to supplement this with a professional Performance Management architecture and process.
Performance Management enables strategic flexibility. As defined earlier, Performance Management is all about measuring and monitoring strategy execution. As external conditions change, it is essential that you are able to adjust and fine-tune your corporate strategy along with them. Once that has been done, there is also an important communication component to Performance Management, which allows you to communicate the strategy to the rest of the organization faster and more reliably. The use of Strategy Maps and Balanced Scorecarding, a well-known Performance Management methodology, is an excellent example of this. By defining scorecards and KPI's not only at corporate, but also at departemental, team and individual level, a cascading effect of the corporate strategy down to the individual employees is guaranteed. Furthermore, adopting well-functioning and fully integrated Performance Management systems and processes enables a much faster cycle of setting targets - planning - budgeting - monitoring - reporting & analyzing - reforcasting - adjusting targets - ... allowing much faster and agile responsiveness of the corporate strategy to external changes such as an economic downturn.
Fast Return-on-Investment for Performance Management projects. In times when investment funding is scarce, executives and shareholders tend to put a higher priority on investments in projects where the return-on-investment is more immediate. Performance Management projects are an excellent example of such opportunities. While most companies have spent huge amounts over the last decade on deploying corporate ERP and CRM systems, these have often evolved into vast data stores out of which it is difficult and costly to retrieve insightful and correct management information. That is exactly what the automation of Performance Management aims to achieve. For a cost that is usually significantly lower than the initial investment in ERP or CRM, it will become possible to unlock the majority of the information wealth that is contained in so-called operational systems. Furthermore, the specific nature of most Performance Management or Business Intelligence projects assures that they can be implemented incrementally in relatively short cycles of 3-4 months, yielding immediate benefits for the business. In a period of diminishing cash availability, such short payback cycles are key to obtain the required funding for these projects.
Business Intelligence and Performance Management are crucial in adjusting your corporate strategy to the new economic circumstances and to executing the adjusted strategy in an optimal way. We have shown that financial, customer and competitive intelligence (to name just three examples) are key components of an overall Performance Management strategy that can help you beat the competition in these difficult times. They will be a significant help in making your organization agile, so you can not only respond efficiently to the current crisis, but you can also shift gear quickly when things are starting to improve again.
We are therefore convinced that organizations who want to survive should continue to invest in Performance Management. Having said this, there may also be a significant shift in how Performance Management project are being executed. Rather than taking a big bang approach to Performance Management projects as has often been done in the past, the budgets will be aimed towards optimization, efficiency and short return-on-investment. This is undoubtedly a challenge, because streamlining a number different existing Performance Management initiatives with the overall corporate added value in mind is usually a more complex matter than starting a new departmental project from scratch. This requires a whole new skill set for the internal staff and for any external staff that may support these processes. In this process, the secret for success is not only in technology skills but also best practices and methodology, being able to think vendor-independently and have proven experience in solving these complex puzzles.