A few years ago, a contractor of railways found themselves confronted with an increased pressure on prices and a shift of risk from client to contractor. New challenges and opportunities led to changes in the strategy. Using innovative Performance Management technology, we have been able to support the proposed changes in the organization. “The new information system serves as a catalyst”, according to the CFO.
The information system can be a catalyst for change towards increased financial and risk awareness and the ability to act accordingly on each level of business. To achieve this, the contractor has decided to use Performance Management technology in addition to business intelligence technology. But what are the differences between these types of systems and what practical benefits can they offer to the organization?
Information System: From Data to Insight
Attention to management information fits with ‘blue’ organizations where the ratio has the upper tone. It may appeal less to companies or organizations that emphasize entrepreneurship, innovation, creativity, or a top-down way of management. However, most companies have a management information system in house. After replacing the handwritten cashbook, order books, stock records, and staff lists with ERP systems, companies often have an abundance of data at their disposal. It is a logical step to turn this into information.
The data that are recorded in the ERP systems do not provide much insight. The raw data does not answer the question of the profitability of a product or customer. This requires a combination of data from different ERP systems, unambiguous definitions, one version of truth, aggregations and mathematical models, for example to allocate costs. The business intelligence (BI) tools made their entry around the turn of the millennium to create and automate this kind of insight. The second-generation BI tools by now provide wonderful dashboards and reports, with more ease. As a result, there are few companies left that support all their information issues solely with Excel.
Combining Insight with Control
There is only one problem. Using BI tools, you can only create information based on data that is already contained in the ERP systems. The information merely provides insight into the present and the past. It does not answer the expected profitability of a product or customer. Or what the impact is of expected sales on production capacity, future cash flow, deployment of staff, logistics, and so on. Continuous sharing of expectations gives a grip on the future and enables organizations to plan more and more. This budgeting, forecasting, and planning is still being done in many organizations with the help of Excel, because BI tools are not able to facilitate this. The term Performance Management stands for technology that combines business intelligence with functionality for budgeting, forecasting, and planning. It enables a multitude of users to enter their forecast – in the context of realization figures – in one application on a single, central database.
Performance Management is therefore actually a BI tool in which users can also enter data in one and the same environment. This apparently small difference, however, has profound impact. Firstly, it enables organizations to get a lot more grip on the future. The ‘predictive analysis’ that Performance Management introduces, is a consolidation of all kinds of expectations that experts in the organization share with each other. Think of project managers who adjust their expectations every month for the projects that they are responsible for. Complex investment or quotes that require input from different divisions. Or an overview of sales expectations per product and/or region. In such cases, the expectations of internal, local experts are more relevant than statistical approaches. Data input also means adding comments: share numbers with context. Additionally, planning processes can now also be supported by workflow, automated email notification and approvals. Or what about ‘real-time’ scenario analysis or all kinds of features that greatly accelerate creating your budgets?
Implement the Strategy More Effectively
Secondly, it is no coincidence that the term ‘performance management’ is used for this type of technology. It is pre-eminently technology that – in line with the vision and mission – can support the implementation of the organization’s strategy. This is made concrete with goals and future activities. The added value of Performance Management is not the conversion into budgets, targets and key performance indicators (KPIs), but the fact that you can request the expectations in the organization that have an important predictive value regarding these KPIs. Reports not only show the realization compared to an initial goal, but also the (consolidated) rolling forecast. The expected ‘performance’ comes in sight. In financial terms, this often translates into a predicted profit and loss account, based on the ‘year-to-date actuals’ and the most up-to-date ‘rolling forecast’.
Instead of taking an occasional look at dashboards and reports, Performance Management demands an active contribution from employees. The periodic request of expectations turns it into an interactive process. It therefore also requires an adjustment of behaviour so that Performance Management tools can truly be a catalyst for change. The result is a more goal-oriented organization and a positive influence on the financial and risk awareness of employees. Through this, goals that are in line with the vision and mission of a company, are pursued more effectively…
This is Part 1 in a two-part series on Enterprise Performance Management – part 2 will give you more details on what to keep in mind when selecting a EPM tool and shares use cases. (Original article published in Dutch Finance journal CM in November 2017)