Cokins, Gary. Performance Management: Integrating Strategy ... · PERFORMANCE MANAGEMENT AND...

Cokins, Gary. Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics. Copyright © 2009, SAS Institute Inc., Cary, North Carolina, USA. ALL RIGHTS RESERVED. For additional SAS resources, visit support.sas.com/bookstore.

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Contents

About the Author xi

Preface xiii

PART ONE

INTRODUCTION 1

1 Rules for Assuring Poor Performance 3

2 Performance Management: Myth or Reality? 7

3 What Will Be the Next New ManagementBreakthrough? 25

4 The Future: Enterprise Risk-Based PerformanceManagement 31

PART TWO

PERFORMANCE MANAGEMENT OVERVIEW 39

5 Why the High Interest in Performance Management Now? 41

6 Human Capital and Workforce Management:Art or Science? 47

7 Tipping Point for Performance Management 51

8 An Interview with a CEO You Might Want to Work For 55

9 Does ‘‘A Word to the Wise’’ Mean Ignore the Dummies? 59

PART THREE

PERFORMANCE MANAGEMENT SUPPORTS BUSINESSINTELLIGENCE AND DECISION MAKING 61

10 How Do Business Intelligence and PerformanceManagement Fit Together? 63

11 CEO’s Targeted Financial Return: A Goal or a Wish? 67

vii



PART FOUR

IMPLEMENTING PERFORMANCE MANAGEMENT 69

12 First Barrier to Performance Management: How Do WeGet Started? 71

13 Where Do You Begin Implementing PerformanceManagement? 75

14 The Many Rooms of the Organization Mansion 79

15 Accountability and Incentives for Rewards: How DisconnectedAre They? 83

16 Why Do You Have to Be a Sociologist to ImplementPerformance Management? 89

PART FIVE

STRATEGY MAPS, THE BALANCED SCORECARD,AND DASHBOARDS 91

17 The Promise and Perils of the Balanced Scorecard 93

18 How Are Balanced Scorecards and Dashboards Different? 103

19 When Performance Management Becomes Surgery 111

PART SIX

FINANCIAL PERFORMANCE MANAGEMENT 115

20 Do Accountants Lead or Mislead? 117

21 Confusion with Managerial Accounting 121

22 What Is Broken about Budgeting? 139

23 Put Your Money Where Your Strategy Is 145

PART SEVEN

CUSTOMER VALUE MANAGEMENT 153

24 From Working for the Boss to Working for theCustomer 155

viii Contents



25 How Profitable to Us Is Each Customer Today—andTomorrow? 159

26 Optimizing Customer Lifetime Economic Value 169

PART EIGHT

PERFORMANCE MANAGEMENT AND SHAREHOLDERWEALTH CREATION 183

27 Can Performance Management Accomplish What EinsteinCould Not? 185

28 Why Do Capital Market Organizations Underachieve TheirPlanned ROI? 189

29 Will Private Equity Funds Turbocharge ApplyingPerformance Management? 195

PART NINE

ENVIRONMENTAL PERFORMANCE MANAGEMENT 201

30 Social and Environmental Performance Management 203

31 How Is a Chief Financial Officer Affected by the SustainabilityMovement? 207

PART TEN

CONCLUSION 213

32 Christmas Gift Letter to Santa Claus 215

33 Performance Management from Future Diaries 217

34 A Dear-CEO Advice Column You Might Want to Read 221

35 From Nag to Wag: Why Performance Management Now? 225

Index 229

Contents ix



E1C01_1 12/23/2008 3

Chapter 1

Rules for Assuring PoorPerformance

In 1773, Benjamin Franklin, one the founding fathers of the United States, wrote a

pamphlet aimed at the royalty of England, titled Rules by Which a Great Empire

May Be Reduced to a Small One. Satire is one way to get your point across. I apply

my own style of satire in this chapter to appeal to organizations to cease their hesi-

tation and skepticism and embrace the benefits of performance management. I

apologize in advance if I offend anyone, but sometimes there is truth in humor.

* * *

Imagine I took over the management of a poorly performing organization and

wanted to keep it that way. For example, I might not want it to grow so quickly

that it would leave me less time to pursue my hobbies. What steps would I take?

First, I would ensure that all of the managers and employees are totally ignorant

of the executive team’s strategy. That way, no one will understand how the work

they do each week or each month contributes to successfully achieving the strategy.

Next, I would figure out ways to ensure that managers and employees do not trust

one another. I would discourage dissent and debate. It would be tricky to preserve

some level of harmony by not allowing healthy conflict among managers who are

already distrustful of each other, but I think I could do it.

Next, I would avoid holding anyone accountable. That would be fairly easy,

because I would disallow reporting of performance measures. Anyone mentioning

the phrase ‘‘the balanced scorecard’’ would be summarily fired. I would allow

employees to measure their local processes and results in dashboards. After all, I

do not want the organization to go bankrupt; I just want poor performance. But I

would restrict any measures from being key performance indicators (KPIs) because

we would not want to monitor our progress toward any targets that are strategic.

I would try to disallow setting of targets, but some managers have a nasty habit

of liking them. I think those managers believe that if they could make it appear

that they are better performers than others, then I would reward them with a ‘‘pay-

for-performance’’ bonus system. If I allow people to be motivated this way,

performance might improve. I am not going to fall for that trick.

I would freeze our managerial accounting system to remain in its archaic state.

It probably was designed in the 1950s, but our external financial auditors would

always be giving us an OK grade. I would allow managers to hire more support

overhead to manage the resulting complexity, but I would preserve the primitive

overhead cost allocations to processes and products using those distorting and

3



E1C01_1 12/23/2008 4

misleading broad averages, such as product sales volume or number of units pro-

duced. Most employees would already know that these cost allocations cause big

cost errors, but I would want to keep them guessing about which products make or

lose money and what it actually costs to perform our key business processes. I do

not think my financial controller will correct this, but I need to keep a watchful eye

because my accountants are getting much smarter about how to improve operations

and serve as strategic advisors to me.

We would need to be careful about how much information we collect and report

about our customers. Obviously, we would report their sales volume data, but I

would not segment our customers into any groupings. I would keep sales reporting

at a lump-sum level. I do not want anyone asking questions such as, ‘‘Which types

of customers should we retain, grow, acquire, or win back from competitors?’’ To

keep our company from tanking, I would encourage sales growth by putting

big signs in the marketing department, saying, ‘‘More sales at any cost!’’ I would

prevent my chief financial officer (CFO) from harboring any thoughts of measuring

customer profitability. That would be easy, because our arcane cost accounting

system would not be capable of calculating that information. The marketing people

typically spend their budget with a spray-and-pray approach, anyway. Targeting spe-

cific types of customers and getting a high-yield payback from our marketing spend

would be beyond their level of thinking. I would maintain our advertising spending

as the black hole that no one understands.

I would, of course, implement an enterprise resource planning (ERP) system. I

would not want to be at a cocktail party with other executives and admit I do not

have one. That would be too embarrassing, like a teenager without an iPod. Luck-

ily, ERP systems alone will not improve performance; they produce mountains of

transactional data for daily control, but not meaningful information from which

anyone could make wise judgments or good decisions.

Our budgeting system would be another way to assure our poor performance.

Since the budget numbers are obsolete a couple of months after we begin the fiscal

year, assembling the budget for six months during the prior year would provide a

great distraction and prevent anyone from working on more important things. Plus,

I would love to send the budget back down a few times to be redone to lower the

budgeted costs. Everyone would moan. I would be very stingy about giving manag-

ers any budget for one-time projects. When those kinds of initiatives sneak in, com-

panies always get a jolt of productivity improvement, which is counter to poor

performance.

We would squeeze our suppliers. We could talk about partnering and collabora-

tion, but any attempt to actually do so would be squashed immediately. Never trust

a supplier. If you drive one out of business, you can always find another.

I do not think I could stop employees from using spreadsheets. They are con-

tagious. But since every department would have its own spreadsheets, it would be

like a Tower of Babel. Employees would waste a lot of time trying to make their

numbers match. I might allow a few departments to purchase a common database

to warehouse their information. Fortunately, there would be lots of incorrect input

4 Performance Management



E1C01_1 12/23/2008 5

data in it, so that bad experience would burst their bubble. Those employees with

spreadsheets might want to use them for forecasting and planning. I would put a

stop to that by calling it gambling and promote our company as being conservative.

Gambling is for fools, so I would set a policy forbidding risk taking.

I know that operating a poorly performing business is an extremely difficult job,

but I think I would be up to the task. Suppressing the efforts of all those employees

and managers who want to think, contribute, and make the business successful

requires constant vigilance. The business world is full of subversive ideas that

could hamstring my efforts to keep the business floundering aimlessly.

I am particularly concerned about this new concept called performance

management. Whatever it is, I will stop it from happening. I believe that with hard

work and dedication, I could keep any company from reaching its profit-making

potential.

NOTE

1. OliverWendell Holmes, ‘‘The Path of Law’’ (1897), as quoted in George Seldes, The Great

Thoughts (New York: Ballantine Books, 1985).

Note 5


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