Frank Buytendijk Blog

ERP systems have had a huge impact on the way organizations are run. ERP systems have streamlined many fragmented systems landscapes; they have driven the cost down of business processes; they have introduced operational excellence in many companies. In short, ERP systems have helped us integrate and get a grip on our business processes.

The name and nature of many business processes is clear. We all know processes such as "procure to pay" and "order to cash."

So if our business processes are that clear, surely we have benefited from that in our management processes! Unfortunately that is not the case. Many of the components of what is needed for a complete management process exist in an organization already, but they usually happen in isolation.

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  There is a fair bit of variance analysis, but how deep can you drill down if actuals and plans don't match?
  
  
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  Scorecards are a key requirement for many businesses, but the data is often disconnected from other systems; no alignment.
  
  
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  Every Line of Business has its own BI systems, but can your analysis flow from domain to domain?
  
  
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  Financial Consolidations are work for specialists, but can you move towards a fast close without deep integration with transactional systems?
  
  
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  Many organizations move from an annual budget to a rolling forecast, but how do you assess changes in the market?
  
  
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  Scenario analysis is an incredibly powerful tool, but do we really have an understanding of external trends that impact our business?

This is concerning. The downside is that most organizations have ERP systems. In many cases operational excellence is not a competitive differentiator anymore. In the words of fellow-strategist at Oracle, Thomas Oestreich: "Operational Excellence makes you play, Organizational Excellence makes you win." Competing is about being faster, more agile, or by having superior insight. What these trends have in common is that they require strong management, being "on the ball." Competitive differentiation is not in running the company, but managing the company. Competing on Analytics by Prof. Thomas Davenport is an excellent book that describes numerous organizations who have done that.

So the next big thing for business systems is to define management processes as clear as business processes, something we call EPM (Enterprise Performance Management). Tell me, how would the management process(es) be called?

frank

It is still happening... some IT departments prefer to handcode data quality and ETL processes. Programming is labor of staff, and those costs are made anyway. Buying a tool actually costs money and that is hard to justify. And some organizations still suffer from the NIH syndrome (Not Invented Here) and think they can do better themselves. "Standard tools are for sissies, here we build our own stuff that is faster than anything else!" I recently witnessed a few of these cases, and I just can't believe this to be true in 2007. First of all, much of ETL, DQ and other functionality simply sits in the database these days, and it is not needed to spend hundreds of thousands of dollars on specific technology. But that's not even the point. It is about understanding IT strategy.

ETL, data quality, master data management and other related areas are infrastructure. They should not be seen as a tool to support a single project, such as a BI or CRM system, but they should support the complete flow of information within and between systems and business processes. Billing systems getting data from transactional systems require ETL and the likes, system conversions do, Financial Consolidation does, etc etc etc. The return on investment on configuring a tool is high and is achieved in a very short time. The first project may be harder, but once configured, results are booked faster. I think the break-even point usually is reached at the 3^rd project or application already.

A good IT strategy distinguishes the areas where IT is a standardization game, usually on the infrastructure level. Where that is the case, you simply take the tool that comes with your database or middleware provider. Then there are specific areas where there can be competitive difference, probably at the analytical level. There it pays off to be smarter than others and build a more heterogeneous environment (that in Oracle terms should be hot-pluggable). Developing stuff yourself can still be a cool thing, as long as you can really make a difference, making your organization smarter and more agile. Focus your skills on that, and use standard tools for everything else, as the necessary intelligence is built in there already.

frank

Measurement drives behavior. That is one of the most fundamental rules of performance management. Another way of saying this is "what gets measured, gets done." Setting goals and targets, and linking performance indicators to incentives is meant to motivate people. However, people's behaviors are culturally dependent. Looking someone in the eye is polite in my country (The Netherlands), yet very impolite in others. The Dutch are known for being very direct (others would call it blunt), which doesn't always work in the UK or USA. My wife Alexandra is German, and she needed to learn to explain "why" if she wants something done (or not done) in The Netherlands, where in Germany authority counts more.

Yet, management culture seems to equate to USA culture in many cases. Methodologies such as balanced scorecard, and best practices for implementing them, may usually work in the USA, but may completely fail somewhere else. Global companies have cultures too, but national cultures seem to be stronger than company cultures.

We have to make performance management culturally dependent in order to drive the right behaviors of people. Fortunately, in the field of intercultural management there is a lot of research on this topic; for instance, by Trompenaars and Hofstede. These scholars, and others, have defined many dimensions on how to describe cultures. Here is one example of how to apply performance management in different cultures, making use of one interesting cultural dimension, called Rules Orientation. The spectrum has two extremes: universalism and particularism.

Universalist cultures play it by the book. There are clear rules to make sure there are no exceptions and everyone is treated the same. This counts for citizens, customers, but also employees. Contracts need to be kept, regardless of the circumstances. Particularist environments contrarily focus on specific situations at hand. They speak of people in terms of relationships, such as "friend," "special customer," and "loyal employee."  Rules or not, the relationship needs to be protected. Contracts can easily be changed if circumstances change. If we apply this to performance management, it creates two entirely different sets of best practices. In universalist environments everyone is measured te same way. Metrics are clearly defined, consistent and comparable. Feedback is very open, rankings are public information within the company. The number speak for themselves. There is a clear bonus schema based on under- or over-performance.

However, in particularist environments, this would lead to dysfunctional behaviors. People will find ways to discredit the system, they will find alternative versions of the truth. Metrics in particularist environments are personal, they describe a person's unique position in the company. Feedback is not public at all, it is personal too, and the metrics are used to trigger a qualitative discussion. Incentives are at the discretion of the managers. However, in a universalist culture, this way of working would be totally rejected. It would lead to cynicism, and accusations of favoritism and even nepotism. Surely no collaboration can be expected in such a situation.

Behaviors of people, when confronted with performance management, can be predicted. And positive behaviors can be triggered. All it needs is a little cultural sensitivity.

frank

Enterprise Performance Management (EPM) and Enterprise Risk Management (ERM) have always been very separate disciplines, run by different specialists, speaking a different language, wearing different suits, having different wallpaper in their offices on entirely different floors. Largely this can be explained by the pressures of compliance. Regulators, I am sure, will not be happy to see if "Company X" tells them they have adopted the risk management COSO-framework, however "their version of it," to adapt it to their performance management framework, such as the balanced scorecard. Better to stick to the standard.

Yet, EPM and ERM are two sides of the same coin. In fact, you could claim that ERM is proactive EPM. Why wait until the EPM key performance indicators show a certain business result being below expectations, when a risk management exercise could've uncovered that way before it happening. At the same time, you can say that EPM is proactive ERM. One of the best ways to avoid risks is to have an strong strategic focus, and an aligned organization that is all geared up to reaching a certain strategic goal.

I am not aware of any methodologies that actively combine EPM and ERM. I think such a methodology could be the "next generation" of EPM and ERM together. Anyone?

frank