Business performance management: Tools and techniques

By Thomas D. Foard, CPA, MBA, CMA, CFM

Business performance management (BPM) is a relatively new concept that has been gaining wider acceptance and increased momentum as a legitimate method to drive improved business performance.

While different definitions exist to describe BPM, the general view is that BPM is a closed-loop planning and measurement process to monitor and enhance business performance through the use of both financial and non-financial key performance indicators (KPIs). BPM is also a communication process to describe the connection of underlying business fundamentals to the historical and forward-looking financial condition of the business.

A natural question to ask with respect to the growth of BPM initiatives is, "Why now?"

There are several factors driving the need for a more direct and naturally intuitive way to monitor and forecast business performance, including a more dynamic business environment, a more competitive landscape / global competition, and a desire for more transparency and investor scrutiny. Thus, there is a growing need to be able to quickly identify the nature and degree of changes in the underlying fundamentals affecting future performance.

There is good news for financial leaders, as they are well-positioned to create BPM programs in their organizations. The favorable attributes of strong financial leaders include a broad business perspective; a balanced and objective point of view; and competencies in tools and techniques to collect, organize, understand, interpret and communicate information. A recent study by the Financial Executives Research Foundation (FERF) suggests 51 percent of BPM projects are headed by CFOs; 33 percent are headed by CEOs and 16 percent by other vice presidents. There is clearly a tremendous opportunity to use the BPM objective to transform from financial advisor to business partner.

BPM connects many different business processes, including business strategy, business planning, business development, operational excellence, enterprise risk management and compensation management. While the need for balanced alignment across these business processes seems intuitively obvious, it is not uncommon to have different measures for different components of the business model working against each other or creating dysfunctional behavior.

For instance, a plant manager given a production volume metric will produce more volume but may compromise quality to do so, ultimately reducing the business development team's ability to have satisfied customers and grow sales volume.

There are four basic steps involved in creating BPM for an organization:

Create a strategy map for the business.
Create a scorecard / dashboard by carefully choosing executive-level KPIs aligned with the strategy map.
Gain buy-in of managers throughout the company and cascade the KPIs downward at each level.
Continuously re-evaluate the KPIs for alignment and relevancy at each level of the organization.

While most organizations find creating a strategy map for the business to be challenging, almost all organizations would agree that the most challenging part of the process is in choosing the appropriate KPIs aligned to the strategy map. From there, the KPI effort cascades down the organization at each level. This is where the BPM leader's interpersonal skills and ability to influence the organization will be truly tested, as gaining the buy-in from line management is crucial to the success of the BPM process.

KPIs are the metrics associated with the drivers of business performance pertaining to volume, quality and productivity. Likewise, KPIs are the metrics associated with the drivers of business improvement pertaining to people, process and technology. "SMART" KPIs are specific, measurable, agreed, relevant and timed.

KPIs can take many forms, including absolute numbers, percentages, rankings, indices, ratios, ratings, etc. Research by FERF has found that it takes an average of 11 months for an organization to choose its KPIs. This highlights the degree of difficulty in this part of the process.

The financial leader will need to help the organization "connect the dots" between the non-financial (leading indicators) and financial (lagging indicators) KPIs. Typically, non-financial KPIs are either known or have a higher degree of predictability than the financial KPIs, which are typically the end result of the non-financial indicators.

For example, the planned production mix (known in advance) for the upcoming time period will have implications for production efficiency (a non-financial KPI), which ultimately has implications for the average cost per unit (a lagging financial KPI). The financial leader will need to look back at historical information to see which non-financial KPIs have a strong correlation to financial KPIs to understand and help guide the organization as to which KPIs might be more appropriate than others.

Once the KPIs are established, the role of the financial leader becomes focused on the planning and monitoring cycle, providing commentary ("telling the story") along with the KPIs ("showing the numbers") and charts ("painting the pictures"). The commentary should be focused on takeaway points supported by analysis and interpretation of the data. The KPIs should be presented for both financial and non-financial indicators of performance to demonstrate the trends occurring in the business. Charts showing trends, proportions and correlations provide the business team a visual characterization of the same information, reinforcing the commentary and numbers presented in the reports.

Many companies, especially the medium to smaller-size entities, are simply using spreadsheets to maintain the KPI data and perform analysis. The spreadsheet tool continues to thrive due to its simple, easy, intuitive nature and the broad organizational comfort with spreadsheets. Spreadsheets, however, are difficult to scale and keep up with as the organization grows larger and the business becomes more complex. It is also difficult to maintain control over the integrity of spreadsheets as users are updating them at different points in time or begin to change the sources of data or definitions along the way.

Software vendors have recognized the growing need for BPM software tools to enable and support the BPM process. Some of the tools now available are very impressive and have become easier to use. Many software vendors have stopped bashing the traditional spreadsheet and have instead begun to embrace the spreadsheet in a "hybrid" approach that has the spreadsheet serving as an integral interface in the more sophisticated software platform to obtain the best of both worlds.

In summary, the BPM process creates alignment and accountability, improves business intelligence and analysis, and improves predictability and forecasting, leading to the expected benefits of improved financial performance, improved compensation management and improved enterprise risk management.

The key to success is to have the entire business leadership and management teams focus on improving the business through the BPM process in an objective and team-oriented approach. The financial leader is now, more than ever before, expected to lead this effort and provides financial leaders with a tremendous opportunity to transform from financial advisor to business partner.

Thomas D. Foard, CPA, MBA, CMA, CFM, is chief financial officer for Publishers Circulation Fulfillment in Towson and secretary / treasurer of the MACPA's Board of Directors.

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