S COMPANIES AROUND THE WORLD transform themselves for c.docx
PrinciplesBasedApprochtoCPM
1. Corporate Performance Management (CPM)
based on best principles
March 2005
“I can’t change the direction of the wind, but I can adjust my
sails to always reach my destination”
- Jimmy Dean
– Joseph J. Alenchery
Globalization and the technology revolution herald an era of intense
competition. At the same time, increased regulatory and investor
pressures reemphasize the need for predictable corporate performance.
The need for improved decision making and for quicker reaction to
external stimuli has never been more critical. In this context, global
corporations are making incremental improvements to their management
processes. However, isolated and siloed implementations of
management methods and processes lead to failure in strategy
execution. The need of the hour is to make integrated improvements
across the performance management cycle based on best principles.
Infosys has used this concept very effectively within the company
to achieve significant results. Perhaps, leveraging the CPM
approach may unearth a host of new efficiencies for global
corporations.
2. Global pressures are driving the need for CPM
Increasing regulatory pressures and demanding investors drive the need to demonstrate
significant control over every aspect that impacts corporate performance. The Sarbanes-Oxley
Act in the US and the new International Accounting Standards (IAS) in Europe demand greater
accountability at all levels. ‘CXO certification’, part of the new regulatory mandate, requires senior
executives to have reasonable assurance regarding the reliability of financial reporting. For this,
they need transparency into financial results; the processes that produce these results; and the
operational data that drives these results. The need for real-time disclosure of material changes
in operations calls for speed and capability of adapting forecasts and plans in the face of such
change. However, increasing organizational complexity in terms of size and structure often masks
the linkage between a business decision and its operational consequences.
At the same time, globalization and the technology revolution herald an era of intense competition
and declining entry barriers. Global business cycles have become compressed and
unpredictable. Economic uncertainty is the norm rather than the exception. This is compounded
by a proliferation of products, customers and channels, and frequent changes to the corporate
structure. Consequently, organizations seek constant readjustments to strategy based on causal
inputs. The need for improved decision making and for quicker reaction to external stimuli has
never been more critical. Organizational agility has become an imperative to compete effectively.
Agility, as management guru C. K. Prahlad has said, is about improving the cycle time for
managerial action.
In this context, global corporations are forced to re-look at their management processes. In fact,
according to a recent study, over 70%1
of global corporations intend to make significant changes
to their budgeting and planning systems and processes. Incremental improvements are being
made to critical processes which are part of the performance management cycle.
Performance Management Cycle
The performance management cycle refers to the whole set of management processes that starts
with strategy formulation and is followed by alignment of corporate objectives and measures
Continuous
Optimization
Continuous
Optimization
The Performance Management Cycle
Measure
&
Analyze
Align
&
Execute
Review
&
Refine
Define
&
Plan
Competitive
Advantage
Strategy
Formulation
Strategy
Formulation
Understand
stakeholder needs
Understand
stakeholder needs
Analyze
Market dynamics
Analyze
Market dynamics
Define
Strategic Objectives &
Measures
Define
Strategic Objectives &
Measures
Develop Operational
Plans
Develop Operational
Plans
Formulate strategies to achieve
Corporate Vision
Strategy
Execution
Strategy
Execution
Communicate
Strategy & Plan
Communicate
Strategy & Plan
Align
Objectives &
Measures across
levels
Allocate
Resources
Allocate
Resources
Manage
Organizational
Change
Manage
Organizational
Change
Align entire organization along
key strategic objectives
Review
performance
Review
performance
Collaborate
with other
Decision Makers
Collaborate
with other
Decision Makers
Refine
Strategy &
Execution Plan
Refine
Strategy &
Execution Plan
Collaborative Planning for Holistic Improvements
Performance
Analysis
Performance
Analysis
Model
Business Information
Architecture
Model
Business Information
Architecture
Track
Progress along
KPIs
Track
Progress along
KPIs
Forecast
Performance
Forecast
Performance
Analyze
“What-If“
Scenarios
Analyze
“What-If“
Scenarios
Measure organization performance
& track strategic initiatives
Generate
Integrated
Insights
Generate
Integrated
Insights
3. across levels. Robust performance analysis is the next step. Finally, disciplined review and
strategy refinement based on business insights complete the cycle.
Define & Plan
A typical management cycle starts with strategy formulation based on the corporate vision.
Ideally, this first stage in strategic planning starts with identifying value drivers relevant to the
organization based on market insights, competitive intelligence and on feedback from
implementation of current strategy. It takes into account technology and business trends. After
achieving consensus on overall strategic objectives, measures are defined for each objective and
appropriate targets are set.
Scenario planning, simulation and business modeling can be used to evaluate various business
scenarios. The business model reflects the drivers for revenue, cost and profitability. It helps
understand the risk factors associated with each decision. Consequently, the company can plan
for mitigation measures and define the risk management framework.
Align and execute
Communicating and cascading the corporate strategy to various levels are the next steps.
Business managers in collaboration with the corporate define targets and measures, and develop
operational plans for various business units. A business manager is most effective when focused
on the few things that really matter in each industry vertical. The corporate management can
collaboratively identify those few things, and tie compensation specifically to their
accomplishment. Thus, an important part of the performance cycle is organizational alignment to
corporate strategy. Identifying key strategic initiatives to achieve objectives and allocating
resources appropriately lay the basis for effective execution.
Measure & Analyze
Measuring and continuous monitoring of performance against operational targets constitute an
integral part of the performance management cycle. Progress is tracked along KPIs defined
earlier and performance gaps are analyzed. The business information architecture that consists
of appropriate systems and processes to deliver timely, accurate, relevant and accessible
information forms the backbone of performance analysis. The ability to see the entire organization
regardless of geographic or divisional boundaries through a single global view of information
enables accurate forecasting. Such forecasting takes into account more than just the needs of
one division.
Managers can review sales forecasts by opportunity, geography, or product. Planning and
analysis capabilities, with sophisticated data modeling and multi-dimensional analysis, are
tailored to existing business processes and business users’ needs. Sales forecasts based on
sales opportunities as well as operations forecasts and product forecasts based on actual versus
targets data at the business level are all “rolled-up” to enable accurate corporate-level forecasts.
9
Review & Refine
A strategic learning feedback loop is one of the most important elements of the performance
management cycle. “By far the most serious indictment of conventional strategy is that it is static,”
says William Pietersen of Columbia Business school. Strategic learning enables a dynamic cycle
of renewal and change. It consists of reviewing performance, generating business insights and
feeding this back into the strategy formulation exercise. Business insight is derived out of the
capability of analyzing information – financial, operational and market – that enables decision-
makers to understand and act, before their competitors, to create sustainable shareholder value.
4. Thus, the ideal performance management cycle consists of a set of integrated activities that
reinforce each other. Though its effectiveness might be questionable, most companies have had
deeply entrenched management processes across the performance cycle. Consequent to the
increasing global pressures of recent years, they have made attempts to revamp some of the key
functions in this cycle.
Global corporations are revamping their management processes
Today, many leading companies have sharpened their focus on strategic planning. After all, as
Seneca has said: “When a man does not know what harbor he is making for, no wind is the right
wind.” In fact, according to a Harvard study, for every $1 billion in revenue, global companies
today spent more than 25,000 man-days on planning. Typically, however, the planning cycle is so
long and convoluted that it has little relevance or impact on actions taken downstream. For
instance, while a growing consensus of senior finance executives regards a rolling quarters
method as best practices, 60% of all companies are on an annual budgeting cycle
1
. In addition,
lack of structured market information flowing into the strategic planning process has led to
ineffective response to market changes. Many have failed to break down corporate strategy
across the organization so that it is directly relevant at each level (corporate, business-unit, team,
and individual). As a result of all this, less than 10% of strategies formulated are effectively
executed
2
. No wonder then, that in a survey by Ernst and Young, investors and analysts opine
that execution is often more important than the strategy itself. Competitive advantage is
predicated on ensuring efficiency of strategy execution, while at the same time improving its
effectiveness.
Towards this, corporations have spent ample time in making incremental improvements to their
execution framework. For instance, more than 50% of the Global 2000 are deploying the
Balanced Scorecard (BSC) to some extent for strategy management and execution
3
.
Unfortunately, companies continue to work towards different solutions for each element of the
corporate management framework – strategic planning and evaluation, budgeting and
forecasting, performance analysis and review, just to name a few processes. Today, they realize
that isolated and siloed implementations of management methods and processes lead to failure
in strategy execution. In fact, only 12% of companies think that their planning process is
completely reliable
4
. 60% of organizations don’t link resource allocation to strategy. According to
a study
5
, only one-sixth of the organizations have a formal process for reviewing performance;
Strategy formulation
Macro-economic
environment
Market
analysis
Regulatory
environment
Technology
trends
Organizational
value drivers
Strategic choice Plans and budgets
Risk factors & mitigation measures
Scenario Planning & Business Modeling
Business
insights from
operations
5. and more than two-thirds of organizations don’t align their IT activities with corporate strategy –
not surprising, once we learn that only one-third use formal management processes to create
alignment and integration. The need of the hour is to make integrated improvements across the
performance management cycle based on best principles.
Principles-based CPM approach
Corporate Performance Management (CPM) is an approach to bring in systematic and integrated
improvements across the performance management cycle. The objective is to increase the
effectiveness of strategy through alignment and efficiency of its execution. It covers the entire set
of processes right from understanding stakeholders’ needs to translating them into organizational
goals and achieving them. It is supported by a metrics-based strategic planning and execution
framework that helps businesses align plans (long, medium and short term) with execution and
ensure linkage with review mechanisms. Typical approaches to CPM have been characterized by
excessive reliance on popular management frameworks such as the BSC, Six Sigma or Activity
Based Management (ABM). While these frameworks do help implement change, empirical
evidence of success hardly justify the faith consulting organizations seem to repose on them. The
effectiveness of many of these frameworks is predicated on the fit with the organizational culture,
with its value system and with the specific processes being worked upon. Gartner’s alarming
statistic that “80% of enterprises that fail to integrate the BSC into their planning and performance
management cycles will drop it and return to a less-organized set of metrics”
6
only proves that
point solutions based on indiscriminate implementation of management methods seldom deliver
sustained results.
Infosys’ CPM approach focuses on incorporating the best principles of CPM rather than on a blind
implementation of popular frameworks. These best principles are derived out of first hand
Nimble
Management
Architecture
Best principles of CPM
Information
-based
Decision
Making
Integrated
Management
Processes
Disciplined
Execution
& Review
Comprehensive
& Structured
Planning
6. experience at Infosys in managing the underlying processes across the performance
management cycle for many years. The guiding principles of this approach are:
• Comprehensive & structured planning
• Disciplined execution & review
• Information-based decision making
• Integrated management processes
• Nimble management architecture
Frameworks such as the BSC, Value Based Management and ABM are judiciously used
depending on the organizational context, to incorporate the best principles, for achieving better
corporate performance.
The sequence of activities from assessing environmental inputs and assimilating stakeholder
needs, to continuously reviewing operational needs and performance issues, is an important
aspect of a comprehensive & structured approach to planning. For instance, research proves that
companies should avoid combining strategy reviews with discussions of budgets and financial
targets. When the two are considered together, short-term financial issues dominate at the
expense of long-term strategic ones
7
.
A disciplined approach to execution avoids an overload of operational metrics that will cloud the
view of performance vis-à-vis strategy. It also ensures that performance accountability to a task
and level-of-influence over the outcome goes hand-in-hand. This leads to increased effectiveness
in achieving goals. Setting up reward and recognition commensurate to execution challenges and
creating clear traceable execution paths for all plans generated during the planning phase are
other important aspects.
Disciplined review ensures that the organization isn’t just measuring results, but also assessing
results against strategy and adjusting the course – including changes in budgets and forecasts –
if needed. Unfortunately, as Eric Beinhocker and Sarah Kaplan of Mckinsey
7
say: “The annual
Clearly established forums
to cover all aspects
Appropriate participation to
ensure right influence
Avoid information overload
to top management
Define information flows
into reviews and plan outputs
Adequacy
of review
Appropriate
authority
Hierarchical
structure
Information based
and action oriented
Adequacy
of review
Adequacy
of review
Appropriate
authority
Appropriate
authority
Hierarchical
structure
Hierarchical
structure
Information based
and action oriented
Information based
and action oriented
Disciplined Review
7. strategy review frequently amounts to little more than a stage on which business unit leaders
present warmed-over updates of last year’s presentations, take few risks in broaching new ideas,
and strive above all to avoid embarrassment.” Ensuring: appropriate ‘hierarchical structure’ for
review forums that avoids information overload to top management; ‘adequacy of review’ by
establishing forums to cover all aspects of strategy execution; and ‘appropriate authority’ of
review by having the right people manage review forums, ensure a disciplined approach. In fact,
exception-based reviews that focus on actionable information are found to result in as much as
30% reduction in review time.
Effective strategy formulation and execution are enabled by information-based decision-making
across all functions of the performance management cycle. The CPM approach helps identify
appropriate technology changes needed to generate actionable business insights from
operations. Interestingly, according to a recent study
8
on global corporations, finance personnel
spent only 20% of their time on analyzing data. They spent 70-80% time on collecting and
integrating data, as well as on attending meetings trying to reconcile or agree on the data.
Needless to say, Global 2000 corporations have spent billions of dollars on “Business
Intelligence” – a term used to denote the technology and the method of extracting useful
information through reporting and analytics. However, what many executives fail to understand is
how BI integrates with performance management methodologies (such as the BSC) and
management processes (such as budgeting, planning and forecasting). Without such integration,
BI, unfortunately, remains a reporting exercise under-utilized by business users.
Integration across the management cycle is the bedrock of the CPM approach. Various
‘integration stubs’ include integrating: planning with performance analysis and business insight
generation; business portfolio management strategy with capability building; capacity planning
with growth planning; resource allocation process with strategy; planning with review; and,
strategic goal setting and alignment with planning, forecasting, and modeling capabilities. This
integrated approach enables strategy, planning, execution, and measurement to function as
collaborative, rather than separate disciplines.
Finally, nimbleness in managerial action through reduced cycle time is a core principle that runs
across all functions throughout the performance management cycle. The CPM approach offers
dramatic improvement in process cycle time and review frequency. Faster deployment of plans;
review frequency aligned to industry cycle times; and a shift in the thinking from ‘big-bang
approach’ to an iterative mode are corner stones of the principle of nimbleness. This ensures that
plans are in tune with market realities and that strategic initiatives do not lose their relevance,
among other benefits.
Principles-based CPM approach provides competitive advantage
The principles-based CPM approach impacts performance management processes from
organizational planning (strategic planning, risk management, budgeting & forecasting, business
unit planning, and operational planning) to decision support processes (performance analysis and
predictive business modeling) to review processes aimed at creating a closed loop of
performance improvements. This provides the organization with a unique combination of flexibility
and control. Companies may measure business performance on a calendar basis, but business
events happen at random times. The ability to respond to changes or opportunities as they occur,
to re-plan business activities, and to begin execution quickly gives firms advantage. By creating a
circular connection among forecasting and planning, corporate strategies, and operational data,
this approach gives users a more realistic view of the entire organization. It helps identify those
areas that may adversely affect forecasts for growth. By forecasting more accurately and
strategically aligning goals and execution, you gain credibility in the marketplace and greater
agility to respond in more turbulent environments.
8. Infosys has used this approach
Infosys has used this concept very effectively within the company to achieve significant results.
The company has streamlined bottom-up information flow to senior management (moved from
400 metrics to 30 metrics directly linked to strategic objectives). It has achieved over 65%
reduction in cycle time for budgeting, thus allowing for frequent reviews. This has meant that
budgets remain relevant throughout the year. Further, there has been a 40% reduction in
planning cycle time. Re-engineering of the review processes has freed up 20% of senior
management time which was spent on review meetings. In addition, this has improved the
effectiveness of these reviews. Most importantly, Infosys achieved a dramatic 30% improvement
in forecast efficiency. The company has met financial forecasts for the last 48 quarters in a row,
since it went public in India. Perhaps, this bears testimony to the effectiveness of the multi-
generational improvement program that it embarked upon through the CPM approach.
About the Author:
Joseph Alenchery is a Senior Consultant with the Corporate Performance Management (CPM)
solution at Infosys Technologies Ltd. He has experience in corporate management processes
and business development in the IT and Telecom industries. At Infosys, Joseph was part of the
Corporate Planning group. He also provided executive support to the Chairman of the Board
before taking on his current role. He may be reached at: joseph_alenchery@infosys.com
1 Ventana Research
2 Fortune Magazine Survey
3 Gartner Research
4 CFO Magazine Survey
5 Society for Human Resource Management (SHRM)
6 “CPM: A Strategic Deployment of BI Applications” Gartner
7 “Tired of strategic planning?” Eric Beinhocker and Sarah Kaplan: Mckinsey & Co.
8 Accenture survey
9 For more information on the technology architecture that underpins the performance management
cycle, refer to the white paper titled “Information Architecture for CPM” by Anoop Nambiar.
