teams are the performance management captain of the corporate ship
empowered to provide the executive team, and business and support units
with real insight and understanding of past, present, and future
performance while guiding them on what the information means to each of
their constituents and how it can be interpreted for decision making.
That is their most strategic value to the business. However, because of
the explosion of information, speed of business, growing systems
through M&A and unique information capture needs of different areas
of the business not to mention growing business practice demands, such
as regulatory compliance to meet the regional, national, and global
reporting requirements, the corporation’s most important analytical
asset, finance departments, remains mired in just completing the basic
week-to-week tasks without providing this strategic guidance. As a
result, emerging trends, exploitable opportunities, efficiency gains,
addition-by-subtraction divestitures, and M&A opportunities go
undiscovered because the analytical part of finance is asleep at the
wheel. It has its proverbial head down doing the day-to-day grind of
low-value activities where this analytical blind spot can eventually
drive the company out of business.Let me illustrate.
the 1960′s, IBM was the 800-pound gorilla in the mainframe business
whose technology supremacy went unchallenged and superior performance
went virtually unabated into the 1970′s. They were the blue suits
bearing information-based mainframes to help companies use data to run
their large – sometimes multinational – businesses with greater know-how
about customers, products, operations, and financial performance far
more adeptly than any other technology could. Yes, they were considered
the masters of product innovation largely due to world-class business
practices and industry expertise. However, Big Blue got complacent and
far too comfortable in their long held pole position. Their inflated
confidence and market share eventually disintegrated as they missed the
advent of the new information-based technology, which, if they would
have had the right analytic capabilities in place, they would have seen
it coming; the emergence of the minicomputer. Minicomputers were
technologically simpler than mainframes but with stronger computing
power while requiring less resources to run them. To be fair, it wasn’t
just IBM that missed the advent of minicomputers. It was virtually
every mainframe company in existence at that time. This new technology
virtually wiped out the entire mainframe business such that no mainframe
business would be a major player in the minicomputer business at all.
What happened? What was missed? Who screwed up?
In my opinion, there were many failures that caused this emerging
technology to go unaddressed by IBM and others, but the chief culprit
who could and should have been prepared for it was finance. Yes, I
think it’s up to finance as the owners of business performance (past,
present, and future) to fundamentally understand the business climate –
internally and externally – to then advise their corporate constituents
on what the information they’ve analyzed means to them. For this to
happen finance needs to get a handle on its core responsibilities before
it can begin to really spot these performance-sapping icebergs that can
possibly turn into business shuttering threats.
Let’s get back to the technology story for a minute if that’s okay. Then, I’ll finish my point.
Where were we? IBM’s out because the mainframe business has gone
south – way south by way of the minicomputer. Exit IBM. Enter Digital
Equipment Corporation. DEC virtually created the minicomputer business
along with a few other aggressively managed companies like Data General,
Prime, Wang Computer, Hewlett-Packard, and Nixdorf. Did DEC and others
in the minicomputer business learn any lessons from IBM’s big miss on
the minicomputer market so as to not repeat the same mistake? Of course
not. The story of DEC’s demise rings almost too tellingly true to
IBM’s mainframe debacle of the 1970′s. In fact, the management gurus
and business journals missed it too. Digital Equipment Corporation was
considered by all who had some insight into the company’s operations as
being the ultimate technology company for decades to come. For certain
it was a featured company in the McKinsey Study that became the stellar
1980′s management book, In Search of Excellence. DEC seemed
destined for monster success. Still, despite all this fanfare, DEC
missed the next wave in computing technology, the desktop computer
Again, where was finance watching past performance by measuring and
monitoring it, to get analytical insight into what the future might look
like to then advise their constituents across the business on what all
of this means to each one of them? Answer: Heads down.
The desktop computing market was predictably seized not by DEC or one
of its minicomputer compadres but by Apple Computer, Tandy, Commodore,
and IBM’s PC-division. (Yes, IBM can’t be held down for long!)
What happened next? Like Rick Blaine says in the movie Casablanca,
“Play It Again, Sam.” Apple, Tandy, IBM and the rest of the desktop
computer gang focused on making the best desktop computers they could
but ended up missing the next new, new thing. Apple Computer and IBM
lagged 5 years behind bringing the latest-and-greatest technology rage
to the market: portable computers. That market was owned by Silicon
Graphics, Sun, and Apollo – all newcomers to this market.
each case, the leading companies mentioned were regarded as the gold
standard given their product excellence and operational execution only
to be quickly pushed aside by an out-of-nowhere, technologically
superior solution that reset the market’s expectations rendering the
prior leader’s solution frumpy and stale. Missing emerging trends in
the marketplace and not adapting to them quickly enough can ring a death
knell for most companies. Think Wang, Silicon Graphics, Apollo. For
others, this misstep can set them back 5 or even 10 years before they’re
back on their feet again.
As a note, in the above example, I simply chose the technology sector
but we could have easily used the retail merchandising sector (Think
Sears vs. Nordstrom) or retail books (Think Barnes & Noble vs.
Amazon), or Automotive (Think GM vs. Toyota). Each situation is an
example of a failure to see the changing landscape which, I believe,
finance is mostly at fault for squandering these opportunities.
How come finance? I think finance failed their companies in each
instance because they weren’t effective enough in managing the
day-to-day, low value tasks which, if they had them under control, they
would have greater leverage to spend time on higher-value practices like
forecasting and business analytics to uncover data points that can help
the entire business spot emerging market forces before it’s too late to
respond. This responsibility to identify these threats and
opportunities lies squarely on finance. If not them, then who else? Be
careful because whomever you’ll name will probably expect finance to
provide them with the meaningful insight into performance results across
the business as well as external information, which, again, means it’s
incumbent on finance.
So, how does finance get to that point where it’s able to provide
this kind of insight with the resources it has because Lord knows it’s
not going to get additional headcount? Well, it all starts with finding
a way to better leverage the resources it has. This requires finance
teams to get the lower value tasks automated as much as they can so that
they can off-load these process management steps to take on added
capacity for these analytic practices.
What are the world class finance teams doing to be analytic leaders
in their industry? World class analytic finance teams have these
repeatable practices down to great consistency and repeatability from
Process: Financial close, financial consolidation, and financial reporting processes;
Process: Disclosure management-related efforts, including all external reporting, such as regulatory compliance reporting;
Solution:Identify these processes and automate the end-to-end needs through a disclosure management technology solution, such as IBM Cognos FSR;
Process: Financial, strategic, and operational
budgeting and forecasting, including Profitability modeling and
real-time analytical capabilities;
Solution:Leverage an enterprise-class budgeting,
forecasting and profitability modeling solution with real-time
calculation capabilities for high volume data sets, such as IBM Cognos TM1;
These practices are the foundational elements required for finance to
be the advisor in providing guidance to the business. Excel at the
practices mentioned above and you’re soon positioning your analytic
experts on your finance team to do the real analysis they’re supposed to
be doing. It’s incumbent upon the CFO’s finance department to provide
this guidance and leadership given finance’s role as the performance
managers for the company. It is therefore finance’s job to provide
insights into past, present, and future performance but also trends,
anomalies and market opportunities that become visible only after
thorough analysis of the information-based business results gleaned from
systems, i.e. ERP, CRM, SCM, etc. and processes, i.e. forecasting,
what-if scenario analytics, etc.
This finance role is looked to not only explain past business
performance and its financial effects but also advise and guide the
strategy in determining where to make investments with the resources at
hand. The CFO’s analytics team – finance – needs to spend its time not
on the everyday execution of basic, low value process steps, like
compiling, validating, and reconciling data for various internal and
external reporting needs but also analyzing past, present, and future to
present guidance on what’s happened, what’s happening now, and what
could happen. Only with an infrastructure in place to easily manage
these basic elements of the finance team’s mandate can the real
value-added analytic insights come to light. Otherwise, their companies
will continue to drive through its business climate with a perpetual
blind spot on what’s coming soon rendering them the next Tandy Computer,
Silicon Graphics, or Apollo.
It’s up to you finance to not let this happen.
Check out more blogs by Tim O'Bryan by clicking here!
If using analytics in the Office of Finance isn’t particularly new, the kinds of analytics now available to finance professionals most certainly are. Finance still builds budgets and closes the books, but now it’s in areas such as model-based forecasting, advanced fraud detection and portfolio optimization where Finance professionals are finding new sources of value and competitive advantage. Here, I speak to Miles Ewing and Scott Wallace of Deloitte. (Download the podcast version)
Analytics can mean different things to different people because you can do so many things with them. Can you explain how Deloitte defines analytics for its clients?
Miles Ewing: Analytics is a very broad term, and from our perspective they’ve been going on since humanity created fire and decided it was warmer to stand next to it than further away from it. But when we think about what’s different today, there are three aspects. First is the fundamental volume of data that’s available today. There will be more information created this year than in the past 5,000 years. Next is the speed at which we can analyze this data. If it took us 10 years to code the genome a decade ago, we can do that it in a week today with our processing power. Third, there’s the reach and breadth of the data. From social networks to sensing technologies there’s a dramatically broader reach.
These combine to give us an enhanced capability to look at both patterns in data and advise on specific individual transaction-level data. Because of this we can make decisions either at a higher level or lower level that we weren’t able to do in the past. And it’s that combined capability and bringing those disciplines to business that is really where Deloitte defines analytics.
Scott Wallace: More tactically speaking, it's really bringing what used to be back-office functions – either with your statisticians and actuaries - into the front office, where Finance professionals can use capabilities to do this analysis on their own. There’s an ability to do more with analytics tactically than before that’s bringing it to life.
Deloitte has different analytical disciplines. Can you provide us with some examples?
Miles Ewing: We break analytics into three areas. The first is core analytics – from basic variance analysis in your budget to the analysis that goes into your external reporting. It’s not just in your traditional FP&A group, but the analytics in your tax department, treasury, investor relations and operations. Companies have been doing that for a long time will continue to do so.
There are two things that are new. The first is where Finance teams are taking advanced analytic methods such as model-based forecasting - algorithmic-based forecasting, advanced fraud detection or portfolio optimization - and bringing those capabilities to their core, either to improve the efficiency and accuracy of these functions, or to add a different way of looking at it and get more bang for their buck on the core analytic side.
The second area is what we would call Finance-supported analytics. And these are areas where Finance is bringing its cross-functional capabilities to the problems faced by other parts of the business, be they in supply chain, procurement, IT or sales and marketing. What we see here is Finance taking a cross-functional view of the situation and coming out to support things like pricing, or vendor spend analysis or technology investment prioritization. These are areas where because of the reach and speed of data, Finance can support decisions at the micro level and provide better, more effective decision-making in those functions in a way that they couldn’t in the past.
Scott Wallace: It’s been core to Finance for a long time to have access and visibility across the organization. The CFO and his or her team need to be aware of what’s happening in other parts of the organization. What you’re seeing with analytics is that coming together and making it more meaningful and more impactful to the organization. Lately we’ve have a lot of requests from our clients asking how to integrate their sales or operational planning with their financial planning. So not only has Finance typically taken a cross-functional view, now there’s a demand pull for that view across organizations because of the capabilities of the tools and the data availability.
What areas of Finance need the most help?
Scott Wallace: As you read the different literature around Finance and analytics from firms like ours and from the academics, they’re really pushing the envelope on how to become a more value-added function using analytics; yet many organizations are still fundamentally trying to fix core processes. I do see a continuing demand and convergence in the area of forecasting. That’s where you’re seeing this convergence of the analytic capabilities and when you think back to what Miles said about the different kinds of analytics, the ability to have insight into other functional information and data, and then how do I move that kind of information into predictive forecasting – identifying those real key drivers of the business across the functions that I can model based on historical data, based on external data, and start to have more confidence in my ability to predict the future financial performance of the company. That’s where we’re asked to provide help.
Miles Ewing: Companies are at very different places. Some are still trying to get the core right and they need to get that set first. Organizations that have been unable to get that core right over the past decade will find it difficult to really advance into that support. They may lack credibility as analytical leaders in their company. Focusing on that core becomes increasingly urgent for them.
Where does the demand for analytics come from? Is it from a CFO setting out a new vision, or does it come from the bottom up? What trends are you seeing?
Scott Wallace: Right now we’re experiencing lot of top-down demand from the CEO and CFO. A lot of it is borne of frustration – despite all the data they have in their ERP and their more advanced operational systems they still don’t feel they’re getting the right levels of transparency and insight. Also, because of the influx of information about analytics and tools and methodologies and success stories they’ve seen, CFOs are really asking themselves how they can continue to grow their relevance within their organizations. They’re really pushing on analytics.
Deloitte has six guiding principles for getting started with analytics. Can you outline them?
Scott Wallace: First off, link your goals and objectives with clear business drivers. If you’re going to use analytics, make sure they tie to your existing strategies or other initiatives you have inside and outside Finance. Ask yourself: What am I really trying to do? What are the competitive differentiators I’m trying to find in my data set?
The second is to know your data. Many of our clients have a good vision. They know what they want to do and how to tie their analytics together, but they run into data issues because the data isn’t in a single location or it’s not clean enough to provide the right insights.
The third is to start simple. Analytics needs to be something that can be accepted by your organization. Pick an area where there’s a need or pent-up demand. Stay focused on that area, get the numbers right and get them delivered properly. Build the confidence within your leadership team that the predictive capabilities and outcomes you’re providing make sense.
The fourth is to leverage existing insights. If you’ve got programs under way – customer analysis programs, working capital analysis programs, for example – look for ways to enhance them using insights you can get from analytics. How can you better project things that are already being looked at by the organization? You’re adding insight to a point of view that’s already being used in the organization.
Learn the value of the new IBM Cognos Planning 10.1.1 (GA November
22). You will be pleased to learn of this release as it affirms IBM’s
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- features for greater ease and speed;
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- exceptional integration that improves a customer’s financial performance management capabilities.
IBM Cognos Planning v10.1.1 delivers additional functionality for
contributors (end users), faster access to data for reporting, an
improved installation features, and conformance with IBM Cognos BI
version 10.1.1 and Microsoft Excel 2010, and other key solutions.
often hear Business Analytics being so many different things that we
feel it’s near impossible to get a handle on what it really is. I’m
sure you were just getting used to the idea of what Performance
Management is and now we throw Business Analytics into the equation. To
make matters worse, there’s a great deal of prognosticators, thought
leaders, and industry analysts who still are married to the idea of
calling the space Business Intelligence. I thought it might make sense
to pass along a simple explanation of each without all of the Big 5
consulting speak that usually goes with it. So, here you are.
BI is where the historian in all of us comes out. This is where
you’re doing rear view mirror analysis, querying, reporting, with
enabled “alerts”, real-time monitoring, dashboards, scorecards, and
visualization focused on past performance. This is your investigative
practice area asking the questions ‘what happened?’ and ‘how are we
doing?’ followed by thorough analysis of the detail behind the answers
to these questions, i.e why are we on- or off-track?
Performance Management (“The Pragmatist”)
Performance Management builds off of “The Historian” to include the following: planning, budgeting, forecasting, and scenario modeling; customer and product profitability, i.e. profitability modeling and optimization; strategy management; governance, risk, and compliance;
and, financial consolidation and external reporting. Performance
Management is “the Pragmatist” who looks not only at monitoring and
analyzing past performance (“The Historian”) but also wants to then use
this past performance to help determine what the future outcomes are
expected to be (Think budget/forecast), which is based off of these past
results weighed against current conditions and intuitive insight, i.e.
the “knowns” and “unknowns” about today and the foreseeable future.
Also included is the practice of governance, risk, and compliance.
Of course, there needs to be rigor and accountability around these
processes, including stringent compliance controls to meet all
regulatory requirements. In addition, risk assessments are a necessary
component of performance management should not only your performance
assumptions (Think Risk-Adjusted Forecasting) be wrong not to mention
other business risk elements of the business including strategic risk,
market risk, credit risk, IT risk, operational risk, etc. The practice
of governance, risk, and compliance
enables customers to identify, manage, monitor and report on risk and
compliance initiatives across the enterprise, helping businesses to
reduce losses, improve decision-making capabilities about things like
resource allocation, and, ultimately, optimize business performance.
“The Futurist” looks at everything the “The Pragmatist” does but then runs what’s called Predictive Analytics
against the Performance Management data that you already have to
uncover unexpected patterns and associations and develop models to guide
what should be done next. It turns the human element in planning,
budgeting, and forecasting on its head by applying pure user-enabled
algorithms and customizable statistical analysis providing you with the
data driven answers. More simply, with predictive analytics companies
are able to prevent high-value customers from leaving, sell additional
services to current customers, develop
successful products more efficiently, or identify and minimize fraud
and risk. This is all being done by businesses all over the world
today. Predictive analytics is just what its name suggests: It’s about
giving you the knowledge to predict. [Business Analytics = [Performance Management] + [Predictive Analytics]
The evolution of the CFO from cost extractor and compliance enforcer whose primary concern had been to ‘manage the numbers’ into providing strategic support and organizational leadership helping drive profitability and growth for the enterprise certainly didn’t happen overnight. There’s been a series of events over the years driving this change, including the advent of Sarbanes-Oxley (Think Enron/Arthur Andersen/Worldcom) to today’s Dodd-Frank as well as greater internal and external demand for performance data. In addition, there’s increased CEO and board interest and oversight into the ‘World of the CFO’ where board members require more than just a simple view of the annual operating plan; They want it all now given that they have to put their John Hancock on documents like no time before. (The threat of a little jail time for malfeasance has a way of getting people to sit up straight and pay closer attention too.)
Given the CFO’s more strategic role and influence in companies today it’s no surprise that the entire finance function’s visibility and criticality requires more demands on it too. In an ideal world, the CFO’s finance department has its eye on implementing best practices to streamline inefficiencies and error-prone efforts. Yes, implementing best practices sounds good on paper but the common response I hear from finance departments concerning why they’re not being adopted right now makes me think of the Beach Boys’ tune, “Wouldn’t it be nice…if we only had the time.” (Note: Click that link if you want the actual Beach Boys song playing in the background while you read this post.)
Still, I’m consistently hearing that the goals for CFO’s and their finance departments remain the same. They are:
Linking financial to operational plans
Guaranteeing the quality and accuracy of financial numbers for timely, sustainable compliance
Tracking individual performance against strategic objectives
Performing “what if” scenario modeling and creating flexible rolling forecasts
Replacing their rigid budgets with continuous planning
To read the remainder of this blog, please click here.
The global economic crisis, which began with the U.S. housing market’s nose-dive in late 2007, continues to burn brightly across nations far and wide. This financial meltdown has served as a jack-hammered catalyst for corporations today to re-evaluate their risk management practices – assuming, of course, they had one in the first place. Most didn’t. Apart from very large, globally diverse corporate behemoths, formal risk management practices didn’t really exist outside of the top-level business strategy sessions conducted between CEOs, CFOs, and other members of the executive team.
Until recently, boards of directors were simply there to listen and learn what the strategy and execution plan was. Not much more was asked. Part of the problem was that back in the day – let’s call it pre-crisis – having some celebrity status for board membership was de rigueur. That’s all gone, of course, in the name of being more legally accountable in their roles where board members are actually looking after the business in ways unlike before. (There’s a famous story about a Goldman Sach-delivered board presentation where Gerald Ford stopped the presenters and asked, “What’s the difference between revenue and equity?” …He was our U.S. president at one time. Ouch.) Yes, now boards are more actively involved in the business including taking an interest in not only the business strategy, but also what the risk assessments are for it and how they’re going to be mitigated, including the next-step plans to address them in the unlikely event they come to fruition. For all of these reasons, risk management practices arebecoming more pervasive and universally adopted by organizations, both large and small. These companies are expected to meet the demands of an uncertain and ever-changing marketplace not to mention evermore interested (read activist) shareholders, regulators, compliance hawks, and don’t forgot those employees. Yes, regulatory measures like Sarbanes-Oxley, Basel II, Dodd-Franke and other forthcoming reporting requirements have pushed companies to throw much greater rigor around how they’ve planned and executed their responses to risk events. Companies now are adopting risk management strategies to assess, manage, and mitigate strategic, operational, and functional risks in all shales and sizes. A formalized risk management framework is no longer optional or a nice-to-have.
Still, many companies are way behind the curve. According to risk management trade organization RIMS, only 17% of organizations have implemented company-wide risk management to look at risk categories like operational, legal, financial, compliance, IT, strategic, market, and health and safety risk in total – not in siloed isolation lacking an “enterprise view”. To a large degree, internal audit has been commonly given ownership of cross-organization collaboration.
If you’re in the camp that hasn’t implemented a risk management strategy or is only doing it in some, but not all, areas of the business, consider placing more (or some) focus around strategic risk management. Reason being is that according to the research firm, Corporate Executive Board, 70% of the risks that cause the most harm to corporations are strategic risks.
What is strategic risk, you ask? Well, it’s any risk whether it exists today or may crop up in the unforeseeable future that could force the company to change, modify, or overhaul its business strategy forcing it to change the way you do business. RIMS defines it as “a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect an organization’s strategy and strategy execution.” Still too ambiguous? Well, think of it as defining what risks could be applied to your company’s product lines, M&A actions, economic conditions, overall business model, or baseline assumptions that come into play when defining the business strategy. This is one reason bringing the risk team into the business strategy sessions is essential. The Risk Management team (or their leader) needs to have a seat at that table. More often than not the CFO, given his or her management of financial and operational risk, owns strategic risk. Gone are the days where the CFO is simply in charge of reporting prior year numbers – long gone. In this case, CFOs are the overseers of risk while delegating the task of ‘selling’ the concept to departments outside of finance.
It was reporting in a 2011 Accenture survey that 39% of the organizations surveyed said that risk managers have a seat at the company objectives-setting table; In 2009, it was only 27%. It’s getting there but needs to be at 100%. Rome wasn’t created in a day but headway is being made.
In summary, if you’re new in adopting a formal risk management strategy, given that 70% of the risks that cause the most harm to corporations are strategic risks, take a look at starting with strategic risk management. Then, attempt to apply financial metrics to these risk events and how they align with your business plan. You want to be asking questions that look at your strategic assumptions, specifically what if they’re wrong. An example is, what if you’re expected EPS growth is X% over the next 5 years…Ask yourself, what’s stopping the company from getting there? Also, try setting up a risk committee to review the risk events in question and explore the outcomes and the company’s response(s) to these events. Don’t take this on yourself. Tackle strategic risk first.
One summer’s day, a rooster scoured the barnyard looking for food. As he scratched the straw on the ground he uncovered a jewel. The rooster suspected the jewel might be valuable because of the way it glittered in the sun.
“The object is probably worth a lot”, the rooster thought to himself, “but I’d trade a bushel of these shiny things for a single kernel of corn.”
Because the enabled collaboration and feedback mechanism didn’t exist the Rooster was willing to settle for the hear-and-now need. Only he benefitted from this, not the other roosters and hens or the local community. Unfortunately, it only solved an isolated need and wasn’t effectively exploited.
The primary moral, of course, is that beauty is in the eye of the beholder. …But, there’s something else to be learned from Aesop’s fable. What would have happened if the rooster had seen the bigger picture beyond his simple need for a little sustenance?He certainly would have known that the jewel could fetch much more than, “a single kernel of corn.” Because he lacked access to basic facilitators from which to discuss this discovery not much was to be gained from it. Imagine if he had collaborative access to his peers, including perhaps more wise and worldly roosters and hens with greater influence and relationships with other rooster groups, large villages, or other rooster- or hen-run businesses? If so, he might have been able to draw greater value out of this discovery. Workgroups could have been quickly setup to weigh options and determine how best to use this newfound resource. One might learn through this group involvement that the ‘jewel’ should be invested for a later date when times are not as prosperous? Maybe it could be used to purchase new equipment to update the existing company’s plant & equipment or analytics technology? Maybe it could be used in smaller bits to payoff the dreaded fox community to keep them at bay from invading the sanctity of their henhouse?
This scenario is obviously entirely made up but there’s a great degree of truth in it, especially how it can impact a business enterprise. Look, ‘jewels’ exist in every organization. They don’t always make themselves known. Basically, good ideas don’t only come from the top. Or, “there isn’t a monopoly on ideas coming from only the executive suite.” They come from all over the business and can have high- or low-impacting repercussions: good and bad, that is. It’s what happens with these ideas after they’re learned that matters. A collaborative platform for wide participation in enterprise planning, budgeting and forecasting is the enabler that can take those jewels and turn them into something far more valuable that can benefit the entire organization. The key is capturing this information so that it can be acted on. Missed opportunities happen in business all the time. The individual contributors, managers, directors, and even vice presidents not to mention the C-level executives all have insights and performance-impacting contributions that can benefit the organization. But unbeknownst to the executive team, these ideas and insights into the business get lost unless there’s a channel in place for that feedback to be captured or heard.
We know the workforce is filled with employees’ great ideas; McDonald’s Big Mac Sandwich, 3M’s Post-It Notes, Sony’s Walkman, and Dunkin’ Donuts’ Munchkins are just some big-bang examples. All over the organization there’s cost savings and process efficiencies (streamlining order-to-cash), growth opportunities (expanding into new markets and product lines), and a risk awareness (unforeseen commodity/raw material price changes) that front-line employees, middle management, and even back-office workers have visibility into that necessitate a feedback loop so they are captured and acted upon.
IBM Cognos® TM1and its planning, budgeting, and forecasting capabilities not to mention analytics power can promptly facilitate the ideas exchange process through managed contributions and enterprise-scale input and high-powered analytics with enabled comments facilitates best practices and the enterprise wide collaboration necessary to drive, monitor, and understand the business better.
A multidimensional, 64-bit, in-memory OLAP engineprovides exceptionally fast performancefor analyzing complex and sophisticated models, large data sets and even streamed data.
A full range of enterprise planning softwarerequirements is supported—from high-performance, on-demand profitability analysis, financial analytics and flexible modeling to enterprise-wide contribution from all business units.
Personal scenarioscreated with advanced personalization enable an unlimited number of ad-hoc alternatives so individuals, teams, divisions and whole companies can respond faster to changing conditions.
Best practices suc
h as driver-based planning and rolling forecastingcan become part of your enterprise planning process.
Model designand data access adapt to your business process and present business information in familiar formats.
Managed contributionmakes it possible to assemble and deploy planning solutions for your enterprise and collect input from systems and staff from all divisions and locations, quickly consistently and automatically.
Integrated scorecarding and reporting— the complete picture from goal setting and planning, to measuring progress and reporting—is possible with IBM Cognos Business Intelligence.
Total control over planning, budgeting and forecasting processes is provided to Finance and lines of business.
A choice of interfaces—Microsoft® Excel®, Cognos TM1 Web and the Cognos TM1 Contributor client—allows you to work with your preferred look and feel.
built-in collaborative and social networking capabilities to fuel the exchange of ideas and knowledge that naturally occurs in decision-making processes today.
helps groups streamline and improve decision-making by providing capabilities for forming communities, capturing annotations and opinions, and sharing insights with others around the information itself.
establish decision networks and expand the reach and impact of information.
provides transparency and accountability to ensure alignment and consensus.
communicate and coordinate tasks to engage the right people at the right time.
With six weeks to go before the end of the year my thoughts have of late been going in two directions, usually at once. If I'm not looking back on the year that was (an extraordinary year for IBM, given its 100th birthday as a company) I'm looking at the year that will be, given our persistently uncertain economy and the blinding pace of change.
We'll be recapping the major themes of the year over the next few weeks, but in the meantime I'd like to highlight some recent research from IBM that should help you chart your course as you look ahead to next year as well.
Mind the gap. (The analytics gap)
The first is Analytics: The widening divide. This is the second study from MIT Sloan Management Review and the IBM Institute for Business Value to explore how organizations are using business analytics to outperform and drive better outcomes. The 2010 survey identified three types of analytical sophistication: Aspirational, Experienced and Transformed. This new survey reveals what these organizations were able to achieve competitively through their use of analytics. IOD attendees saw a sneak peek of the results (Read my earlier post here).
The study's main finding was the growing gap in the ability of organizations to gain competitive advantage through analytics. Almost 60 percent of organizations are now
achieving competitive advantage with analytics. Transformed organizations that apply analytics for a
competitive advantage are 3.4 times more likely to substantially
outperform their industry peers. Companies that wait to advance their
analytics capabilities do so at their own risk.
Next is the 2011 IBM Tech Trends Survey, which came out earlier this week. This extensive survey asked more than 4,000 IT professionals from across our developerWorks community about the future of analytics, cloud, mobile computing and social business and returned some fascinating results.
For cloud adopters, "developing new applications" is
expected to be the top activity in the next 24 months, surpassing
today's top cloud focus areas of virtualization and storage.
51 percent of respondents stated that adopting cloud technology is part of their mobile strategy
India may be all about social business technology (57% adopting), but other countries including Russia (19%) are more hesitant.
Respondents cited Java (77%) Linux (56%) and Linux (50%) as the skills most valued by employers, with PHP, (35%), SOA (33%) and C# (33%) finishing off the list.
The third report is the 2011 IBM Midmarket CMO Study, which points out the big-time concerns of small- and mid-sized businesses. For example:
Building and sustaining brand loyalty is the top concern for midmarket CMOs, yet 72 percent of them are not sure how to effectively build this loyalty.
70 percent of these CMOs are concerned about data explosion, as they are tasked with making sense of highly complex information generated constantly from a variety of sources such as consumer blogs,
Tweets, mobile texts, and videos.
Only 40 percent of midmarket CMOs are taking the time to understand and evaluate the impact of consumer generated reviews, blogs and third party rankings of their brands.
The report also suggests that today’s CMOs need to be better prepared with an empowered consumer that is impacting brands instantly on Twitter, Facebook, and other social channels. (Look no further than this week’s challenge that Bank of America faced when its Google+ channel was “brandjacked”!)
The power of personally-assigned key performance indicators, or KPIs, is tremendous. If done incorrectly, KPIs might be used like a drunk would use a light post, for support not illumination. You could call KPIs industry-speak for one method to measure employee, departmental, and/or organizational performance. If effectively constructed, they can drive the right workforce actions supporting strategic and operational objectives. Yes, they could be tied to achieving an operational goal, such as on-time customer shipments, best-in-class inventory turns, or an industry-leading order-to-cash (Finance) or procure-to-pay (Procurement) process. Selecting the right KPIs is very important because they will drive employee behavior.
You might want to consider cross-functionally-shared KPI targets like revenue, EPS, EBITDA, or even gross margin % because an organizationally-shared KPI can reap additional benefits. Making revenue a company-wide KPI can help cement a cross-functional, collaborative, ‘we are all in this together’ corporate culture. It’s human nature to want to work more closely and collaboratively with people that have a shared interest in your success. Of course, there’s going to be KPIs useful to finance (Think Cost of Finance-to-Revenue, or even Close-to-Report days) which will certainly be quite different than marketing’s (Think Validated Leads). Personal and organizational KPIs can make up one scorecard.
So, how many KPIs is the ‘right’ amount? Well, I’ve seen as many as 40 KPIs for certain individuals. Is that a best practice? No. Absolutely not. There are levels of KPIs and, in this particular case, the person in question has their primary KPIs and their secondary KPIs. The primary ones drove their behavior (and, by the way, these primary KPIs determined his compensation as should everyone’s primary KPIs…just sneaking in a best practice approach for ya!) So, to answer the question of what’s is the right amount of KPIs for each individual, the answer is no less than 4 but no more than 12. If really pressed it’s 6 KPIs per employee. If there’s too many they’re probably going to spread this individual too thin while too few KPIs might mean there’s some activity for which isn’t accounted.
The most important element to be aware of is the law of unintended consequences. You want these KPIs to drive the right behavior. Be careful what you measure because it will dictate employee actions, especially if you tie it to compensation (which you should). Conversely though, if you don’t tie these KPIs to compensation then don’t call me if they’re not properly focused. Invariably people do what they like doing if they’re not directed otherwise. They may be comfortable with some tasks versus others so they do what they like doing most. Everything else may be left at the altar. Hello, runaway bride. A set of KPIs by which they’re measured will enforce (stick) the right employee actions while, by the way, tying them to compensation (carrot) helps nudge them in the right direction too.
These personal KPIs ensure people are doing the right things and not working on non-essential tasks that don’t directly contribute to the organization’s or department’s primary goals and objectives. If they don’t you at least can have an intelligent discussion with that employee and/or department to see if the related activities are important enough to continue doing. They also provide a benchmark by which to measure each employee’s progress not to mention being effective at assigning accountability while better aligning the company. To determine KPI targets most companies will look at industry benchmarks for certain KPIs where actual decisions can then be made regarding what’s a reasonable target given not only current conditions but also what the organization’s goals are because these KPI targets need to be aligned with those corporate goals and expectations. KPIs clearly linked to enterprise strategy promotes greater transparency from the ivory tower executive suite down to the people in the trenches. People start thinking about how they can achieve their KPI targets and who the influencers are that can help them get there. They’re collaborating more. They have a sense of purpose now. They know what they’re supposed to do and they’re being empowered to do it. No shades of gray. The corporate culture soon changes. KPIs become the stitching in the corporate quilt. Employees start to learn how to use the KPIs as a guide to clearer thinking in problem solving and weighing multiple options. They’ll start asking questions about what data elements, departments, and individuals (internal and external to the organization) influence their KPIs. This is the epitome of using data to drive better decisions. It’s partly about the actual data put in front of the individuals or teams; the other part is the resulting questions it inspires and behavior it drives. This is the behavior we’re trying to inspire when we talk about the power of analytics and smarter decisions.
KPIS & THE BUSINESS ANALYTICS PLATFORM
Of course, for KPIs to be leveraged most effectively you’ve got the provide the information technology infrastructure behind them to support constant updates to the actual KPI metrics. This would include drill-thru capabilities so that employees, managers, and executives can quickly and easily learn why they’re on- or off-target for each KPI, say on-time customer shipments, by drilling-thru for more detailed reporting and analysis. Once they’ve explored the reasons they’re on- or -off target, they’ll then need to be able to quickly run scenarios to see the operational and financial effects of each option to help them determine the best course of action based on this analysis. At this point, the forecast is updated to reflect the decision made and its expected outcome(s). This is business analytics. This platform is the holy grail of fact-based decision making for enterprises today. Yes, I know just when you were getting comfortable with Performance Management as a business practice we throw Business Analytics into the mix.
To further reinforce this concept, think of Business Analytics as a single platform of tightly-integrated solutions empowering users to run their ‘personal data analysis’ where each employee can easily measure and monitor – when possible, in real-time – their KPIs through a dashboard or scorecard. Once they’ve evaluated their KPIs in their dashboard or scorecard, they’re able to drill-thru within the same screen on that metric in question to understand why this item is reported as such (Why are we off- or on-target?). Now, they’ve got real context around why they’re on- or off-target. Perhaps, they discovered there’s been a shortage of inventory in their Denver plant or poor weather in northern Europe caused a critical shipment of product to be delayed. At this time they can perform scenario and predictive analytics to evaluate different options to resolve this issue. Once an option has been determined the results can be updated in the enterprise forecast.
These actions are nothing new. It’s simply that all of this would be done in a single, integrated platform to run through this decision-making process in its entirety. The real question is, how difficult is it for each employee, manager, and executive to get this type of information which we know they need to make their day-to-day decisions not to mention the more strategic decisions? Better yet, are they even getting this level of information in the first place?
For now though we’re hear to discuss KPIs. KPIs drive behavior through better alignment, accountability, and transparency across the business. We’ll explore further in future posts.
Between now and then, here’s a quick exercise: Think about how your KPIs are created today. Are they manual or automated? Are they trusted by their owners to be accurate and timely? Do they understand what the drivers of the metrics are so they know what actions on their part will influence them? Are these KPIs tied to compensation?
Hope this was helpful. Any feedback is certainly appreciated.
Other posts @ http://ibm-business-analytics.com
Youtube Best Practices Videos @ http://www.youtube.com/user/ProvenPractices?feature=mhee
In this blog, I’m going to highlight the critical importance of integrating the organization’s financial plan and the actual finance function in general into the operations department-led sales & operations planning process. Yes, in this sales & operations planning process, or S&OP, where future supply and demand plans are compiled, aligning the S&OP with the financial plan results in greater corporate alignment, improved information transparency, and more timely and effective organizational execution. The finance function needs to lead this effort though they’re already lord-and-master over what seems like too many critical business processes, including financial planning & analysis, treasury, finance transactional processes, compliance, cash management, tax management, and in most companies today, risk management. Adding this role to their agenda seems like it will only exacerbate an already overburdened finance team. My response is that a financial plan (and forecast), for which finance is responsible, isn’t worth the paper it’s printed on if it doesn’t align with the S&OP process. Here’s why:
Operations with finance involved in the S&OP process are able to develop a more robust supply plan and a single consensus demand plan than without finance involved. Yes, with finance actively engaged in the S&OP process, better performance can be attributable to finance, operations, and the executive team’s improved understanding of the dependencies and business context of the S&OP process given finance’s involvement in financial reconciliation to identify errors, inconsistencies and out-of- balance elements of the plan while even reducing forecast bias given finance’s role as an objective participant in the S&OP process.
The key in all of this is that each plan needs to be on a common, integrated platform, with the same level of financial and operational data detail available to both. Granular alignment is critical. This way the impact of changing an assumption or parameter on either end can be seen from a financial and operational perspective. Sure, planning parameters are still unique to each, but the impact of a parameter or assumption change in one domain is directly reflected in the other. Imagine the benefits resulting from this alignment??? Indeed, the insights developed through this integrated process enable the allocation of resources and alignment of commercial and operational activities to support the real revenue and profit drivers of the business: your customers, products and services!
Other outcomes are that the quality of the sales and operation plans themselves improve. In addition, there becomes a corporate culture shift to a more long-term, strategic focus. Everybody’s able to see the financial implications from their operational decisions. It puts everything in greater context for both sales and operations, which in turn helps the executive team make smarter strategic decisions because they’ve got greater insight into the financial and operational plans. The focus is on strategy and not on simply the veracity of the numbers. Also, improved buy-in and commitment to plans from the business results and increased cross-functional collaboration, financial modeling and planning assumptions materializes too.
Other things to consider to help jump-start this process are:
Get CFO involved in the process as an owner or co-owner communicating why finance is becoming more involved in the process and what the expected outcomes will be
Determine a common method across each planning domain for calculating the financial implications of plan changes
Set a short-, medium-, and long-term strategy for aligning these two planning domains;
Assign an overall program manager for this effort
Align these two processes on a single, technology platform that can manage each domain’s planning, forecasting, and reporting current and future needs.
I encourage you to check out IBM Cognos TM1 which has the capability to manage massive data volumes at SKU-level detail with embedded controls, simplified modeling capabilities, and ease-of-administration functionality to streamline all of your planning, forecasting, budgeting, reporting and analytic needs. It’s what I call the ‘Swiss Army Knife of Technology Solutions’.
IOD started with kids playing with jigsaw puzzles and ended with naked baseball players.
I dare you to say that analytics isn't fun.
And transformative. And an absolute priority should you want to survive in these uncertain times. Over the past three days we've all seen and learned so much that it's sometimes difficult to recall the key themes. So I've presented them for you here, built as we've gone along learning to turn insight into action:
3. Commit to change, embrace the new: Last year's assumptions and last month's targets are history; focus on what will take you forward. Commitment to change has helped IBM survive for a full 100 years. Billy Beane overturned an entrenched century-old culture to redefine value and change the way his game was played. Your presence at IOD attests to your desire to change, too.
4. Paging Dr. Watson: Hospital readmissions are punitive for the provider and counterproductive for the patient. Incomplete data drives incorrect diagnoses. Medical errors cost real human lives. With our health care partners we've put Watson to work with real-world solutions to reverse these trends and eliminate these errors. With Watson's help doctors can better understand each patient in startling new detail and treat each patient in effective new ways.
5. Don't mess with Billy Beane's mom. If you're writing a book about a baseball GM who swears a lot, be prepared for her withering glare. Her son just doesn't talk like that.
6. No industry is immune from disruption. Urbanization. Changing citizen and customer expectations. Economic uncertainty. Increased regulations. Lots and lots of data. All are interconnected; all are hitting you on every side, all the time. Your task is to quantify the impact, assess the risk and harness opportunities in new and productive ways. On a planet that is instrumented, interconnected and intelligent there is no domain that is untouched by these forces. There is no domain where analytics - and IBM - cannot help. At IOD you've seen how we're doing precisely this.
7. Jeff Jonas is evil. Just look at the guy. Look at the way he dresses. Luckily, he's the charismatic, smart kind of evil you can't help but listen to, because you can feel yourself getting smarter the longer – and faster - he talks. Frankly, I'm glad he's on our side.
8. Got social? It's time to get serious about social media analytics. There's enough data out there and enough computational power to build predictive customer loyalty models based on blogs and tweets alone. That's along, long way from zip codes. Need the tools to get started? We have them, too.
9 .Congratulation, Ginni. Our soon-to-be President and CEO will take charge with IBM operating from a solid foundation and 'at the top of its game.' She's successful, she's thoughtful. She gets things done. 10. It's business, and it's personal. This is the age of the empowered consumer. They're demanding, they're patient and they're in control of your brand. If you want to win their business – and keep them coming back – you'll need to know more about them than their zip code. The data to do this is out there and so are the tools. The choice of how and when to use them is entirely up to you.
11. Kudos to the Mandalay Bay staff for keeping us fed and caffeinated. Greeting 11,000 bleary-eyed conference goers with a friendly smile before 9 AM is no easy task; yet to a person you outdo yourselves every single year.
Well, that's it from my end for this year's edition of Information On Demand 2011. As of right now, I'm taking what I believe to be a very necessary vacation. I'll return refreshed and recharged in two weeks. Safe travels, and see you next year.
Moneyball author Michael Lewis and Moneyball pioneer Billy Beane closed out Information On Demand 2011 in a rollicking conversation with event host Katty Kay. Among the topics were challenging a century-old business culture with business analytics, the risks of standing still and why it's never a good idea to mess with Billy Beane's mom. Turbo's already done a great summary, so I've distilled their conversation into a few key quotes.
On the meaning of Moneyball: 'This was riveting to me. The number crunching was less interesting than what it exposed about the markets people operate in. The people running baseball considered themselves player experts because they'd been doing things the same way for 150 years. And here was Beane recruiting people the market perceived as defective. He was building a juggernaut out of defective parts.'
On bias: 'People tend to overvalue things that are flashy and easy to see. And they tend to undervalue things that are more difficult to see. You need to understand the forces that are clouding your judgement.'
On Beane and his players: 'He had tremendous credibility with the players because he was a great athlete. Being bigger than them also helped. The players were physically intimidated. It was kind of the law of the jungle in the clubhouse – reason imposed by violence.'
On offending Beane's mother because he left in Beane's profanity: 'She said, 'My son doesn't talk like that.' After the book signing I invited her to a two-hour dinner. It was the most awkward conversation I've ever had. I laid on as much charm as I could and got nowhere. She was just as angry with me at the end as at the beginning.'
On the need for change: 'For us it was out of necessity. Where were we going to get the best return on our dollar? We weren't in a position to trust emotion to run our business. We couldn't invest in the romance of the players. We had to be disciplined card counters.'
On taking risks: 'We didn't think it was risky because the math told us we'd be successful. Over enough games we knew we'd weed out the randomness. There was certainly resistance, but there was more risk in not doing it. Going with our gut would have been the most irrational thing to do.'
On Lewis revealing the secret: 'You could see the market was going move. It was just a matter of time. There was already momentum – you could feel the rumblings. You couldn't ignore the fact that the data was everywhere. The secret now is to keep your expertise in-house.'
On outcomes: 'I believe the best teams make it to the playoffs, but the best team doesn't always win the World Series. Small events in a short series can have a bigger impact; we never try to make decisions based on short-term results.'
On being played by Brad Pitt: 'You tend to hold your breath while they're casting the film. When you hear it's Brat Pitt, you exhale.'
T-minus eight hours before I'm off to the Mandalay Bay, so I'll make this one short and sweet.
One thing to watch
We've just released a great new video called 'From Information to Analytics: The IBM Story.' It outlines our history in helping you wrangle and make sense of your increasingly messy landscape of data and features most of the IBM Software Executives you'll see on-stage next week.
Two things to read
The first our research report, 'Analytics: The new path to value' produced by our Institute for Business Value in partnership with the MIT Sloan Management Review. Its findings propose solutions to the different pieces of your information-and-analytics value
puzzle, based on surveys of nearly 3,000
executives, managers and analysts working across more than 30
industries and 100 countries.
Believe it or not, I always need to remind myself of these every time I go somewhere:
Business cards: E-introductions are handy, but until everyone has the 'Bump' app on their iPhone (and everyone has an iPhone) these little gems still have a lot of currency.
Comfortable shoes: It's a long walk from the Mandalay to the EXPO and you'll spend more time on your feet between those two destinations.
Memory sticks: Much like business cards, these little miracles are essential until we're all comfortable sharing info in the cloud.
I'll be spending a lot of time between sessions in our 'Share' and 'Connect' social spaces and would love to meet you if you have the time. If you're heading down, safe travels to all, and I'll see you in the twitter stream (remember to use #iod11 or #ibmsoftware).
entering the cockpit of a modern jet airplane and seeing only a single
instrument there. How would you feel about boarding the plane after the
following conversation with the pilot?
Q: I’m surprised to see you operating a plane with only a single instrument. What does it measure?
A: Airspeed. I’m really working on airspeed this flight.
Q: That’s good. Airspeed certainly seems important. But what about altitude. Wouldn’t an altimeter be helpful?
A: I worked on altitude for the last few flights and I’ve gotten pretty
good on it. Now I have to concentrate on proper air speed.
Q: But I notice you don’t even have a fuel gauge. Wouldn’t that be useful?
A: You’re right. Fuel is significant but I can’t concentrate on doing
too many things well at the same time. So on this flight I’m focusing on
air speed. Once I get to be excellent at air speed, as well as
altitude, I intend to concentrate on fuel consumption on the next set of
We suspect you wouldn’t board the plane after this discussion. Even
if the pilot did an exceptional job on air speed, you would be worried
about colliding with tall mountains or running low on fuel. Clearly,
such a conversation is a fantasy since no pilot would dream of guiding a
complex vehicle like a jet airplane through crowded airspace.
This is an often cited story by many business strategists and other
management prognosticators which I will attribute to Drs. David Norton
and Robert Kaplan, pioneers of the Balanced Scorecard. It’s intended to
reflect how critical the actual indicators are that we setup for not
only pilots but also the indicators by which you establish for your
entire workforce because these indicators will serve as the guiding
force behind their decision-making.
Why is this so important? Well, many reasons starting with the
business environment has substantially changed where no longer can a
company operate rudderless without a core set of metrics to steer each
of its employees individually and as a collective unit in the right
direction. That right direction is the enterprise strategy. The speed
at which these decisions are being made seem to have increased
exponentially in just in the past 5 years. The days of top-down,
command-and-control authority over decision-making are far from over in
deference to a more nimble, decentralized execution hierarchy intended
on keeping pace with the velocity of the related competition and
customer expectations. The need for getting relevant and actionable
information to the business users has never been more pronounced than
we’re seeing today. If you can’t react fast enough to the market
realities your customers will go elsewhere. We live in a world where
product or brand loyalties are becoming more and more a thing of the
past. It’s about execution. Good execution is about making smarter,
more informed decisions that support the organization’s goals.
These decisions being made are happening across all levels,
geographies, and functional areas of the business everyday. For this
post I want to zero in on the first question asked which falls under
measuring and monitoring the business. This question is, how are we
the executive suite is constantly measuring and monitoring overall
business performance to ensure the company is on track to meet its
strategic targets. In addition, the function leads in marketing, sales,
finance, HR, and development all the way down to the individual
contributor levels of the organization are measuring and monitoring the
performance of their area of the business too. But how does everyone
know they’re doing the right things at all times? What are their real
priorities helping the organization achieve its goals? Is it
guesswork? Is it trust-based that the entire workforce is going to
naturally make the right decisions supporting top-line goals? How can
we be so sure?
This fictional story referenced at the beginning of this post is
really about measuring and monitoring – not an aircraft – but your
business thru a tool called a scorecard.
There are personal, departmental, and enterprise scorecards. A
scorecard includes the key performance indicators, or KPIs, for which,
in the case of a personal scorecard, an employee is responsible which,
if these KPIs are correctly defined, would include measurements that,
when looked at in aggregate, support the enterprise’s top-line strategic
goals and objectives. Inevitably, there will be shared targets for some
of the KPIs in a personal scorecard either within a specific functional
area of the business (Think Marketing Director/Marketing Associate
having similar campaign targets) or as shared KPIs across functional
groups like marketing, sales, procurement, and development/manufacturing
for something like overall corporate sales targets. To illustrate what
I mean, if the organization has a revenue target of 15% annual growth
each of these functions might also have the 15% target in their KPIs.
Of course alone none of these groups is solely responsible for achieving
that total growth target but this enterprise target is still one of
their KPI’s. This shared goals can incent these groups to work more
closely together given that it’s mutually beneficial for these teams to
work together because they’re all needed to make this corporate goal.
Also, there are typically individual KPIs for their own controllable
element of that 15% growth figure that might apply. Sales will play a
role in this 15% growth target by needing to make actual sales to
existing and new customers accounts; Marketing is also integral because
they will have to generate enough pipeline to contribute to those sales
figures; Procurement will need to make sure the appropriate amount of
labor, materials and supplies are available to produce enough product;
and, Development/Manufacturing will need to have enough finished product
ready for shipping in time to meet these customer demands. Each of
these functions and the people working within these functions would also
have their own more specific KPIs that outline what their required
contribution is to achieve this top-line revenue growth goal that will
typically be measured within the respective functions too. Make sense?
actual KPIs – typically there’s about 6-10 for each individual – are
critical because they will define the actions taken by the individual
for which they’re responsible. The ultimate alignment via scorecards
composed of KPIs across these business groups, departments, divisions,
business units, etc. is the embodiment of what we call a company’s
strategy execution framework.
Harvard Business School having done a study on this framework found
that, “a 35% increase in Strategy Execution leads to 30% gain in
shareholder value”. That’s a pretty strong argument for at least taking
a harder look at it.
How do you deploy such a framework, you ask? Well, in theory it’s
very simple. You just translate the business strategy and its related
goals into a set of performance indicators that outline the targets for
which each department and employee within each department are
responsible and away you go, right? Yes, I know. It sounds easy in
theory. But, in practice it’s a little more work.
The key is working top-down with each business and support unit area
to translate their contribution towards meeting these higher level
targets so that these lower-level, cascaded measurements, or KPIs, will,
when rolled up in total, directly tie to the top-level enterprise’s
strategic goals. This ensures proper alignment of the organization
while providing an ongoing set of metrics by which the workforce can
Even more important in defining the right KPIs is the understanding
that whatever the indicators are, this will determine the individual’s
behavior so take care as you define these. Something else that makes
this framework so effective is that it makes it that much easier to
reset the workforce when those top-level strategies change. the
infrastructure is in place to restructure the scorecards. This allows
the company to adapt more quickly.
Think about deploying such a framework for your organization. The
best incentive I can give you for taking on this effort is that going
through the KPI definition process for each set of scorecards it forces
discussions across functions, within departments and at the executive
level that will expose how achievable these targets really are with the
current resources in place today and who is ultimately responsible for
what. This is just about the most important exercise I think a company
can go through to make sure it’s not setting itself up for failure
because its strategy isn’t attainable given the resources currently in
place. Once this KPI definition process is complete and everyone knows
who’s doing what and where the synergies lye it’s all about execution.
This framework sets companies up to execute well because they’ve already
identified their needs and resources at their disposal and now it’s a
matter of delivering. It’s go time.
If done right this will be the outcome for your organization:
Workforce is engaged in this process arguing the questions about
what the targets are, how to achieve these targets, searching out
solutions, debating resource needs and actions, and reaching specific
and practical conclusions.
Ultimate enterprise-wide agreement is made on the KPIs where
everyone agrees on their commitments for getting things done and accepts
Given the share and collaborative ownership of some KPIs, processes
are more tightly linked to one another, not compartmentalized among
Through this exercise the strategy takes account of people and
operational realities. Through the debates and bartering between
managers, directors, executives within and across functional areas, an
enlightened awareness of what everyone is responsible for and whether or
not they have the resources to accomplish it is realized and addressed.
People are chosen and promoted in light of strategic and operational plans.
Operations are linked to strategic goals and human capacities.
Most important, the leader of the business and his or her leadership
team are deeply engaged in the People, Strategy and Operational
processes – not just the strategic planning or the HR or finance staffs.
Lastly, this serves to expose gaps in execution levels and important resource needs.
More coming on this subject. Stay tuned. In my next post I’ll tell
you some of the best practices in defining the right KPIs for personal
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Arthur makes the argument that digitization is creating a "second" economy that's vast, automatic and invisible. In turn, this economy is driving the biggest change to our world since the Industrial Revolution:
In 1850, a decade before the Civil War, the United States’ economy was small—it wasn’t much bigger than Italy’s. Forty years later, it was the largest economy in the world. What happened in-between was the railroads. They linked the east of the country to the west, and the interior to both. They gave access to the east’s industrial goods; they made possible economies of scale; they stimulated steel and manufacturing—and the economy was never the same.
Deep changes like this are not unusual. Every so often—every 60 years or so—a body of technology comes along and over several decades, quietly, almost unnoticeably, transforms the economy: it brings new social classes to the fore and creates a different world for business. Can such a transformation—deep and slow and silent—be happening today?
We could look for one in the genetic technologies, or in nanotech, but their time hasn’t fully come. But I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential—it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.
A Second Economy on a Smarter Planet?
As I read through the piece I was struck by how closely Arthur's Second Economy mirrors the attributes of a Smarter Planet - that is, one that's increasingly instrumented, interconnected and intelligent. Take, for example, the dramatic transformations we've seen in air travel:
Twenty years ago, if you went into an airport you would walk up to a
counter and present paper tickets to a human being. That person would
register you on a computer, notify the flight you’d arrived, and check
your luggage in. All this was done by humans. Today, you walk into an
airport and look for a machine. You put in a frequent-flier card or
credit card, and it takes just three or four seconds to get back a
boarding pass, receipt, and luggage tag. What interests me is what
happens in those three or four seconds. The moment the card goes in, you
are starting a huge conversation conducted entirely among machines.
Once your name is recognized, computers are checking your flight status
with the airlines, your past travel history, your name with the TSA1
(and possibly also with the National Security Agency). They are
checking your seat choice, your frequent-flier status, and your access
to lounges. This unseen, underground conversation is happening among
multiple servers talking to other servers, talking to satellites that
are talking to computers (possibly in London, where you’re going), and
checking with passport control, with foreign immigration, with ongoing
connecting flights. And to make sure the aircraft’s weight distribution
is fine, the machines are also starting to adjust the passenger count
and seating according to whether the fuselage is loaded more heavily at
the front or back. Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep
qualitative change that is bringing intelligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end. [...]
I think that for the rest of this century, barring wars and pestilence, a
lot of the story will be the building out of this second economy, an
unseen underground economy that basically is giving us intelligent
reactions to what we do above the ground.
An economist and "pioneer in the science of complexity," Arthur also posits on the impact of this Second Economy on the nature of work:
The second economy will
certainly be the engine of growth and the provider of prosperity for the
rest of this century and beyond, but it may not provide jobs, so there
may be prosperity without full access for many. This suggests to me that
the main challenge of the economy is shifting from producing prosperity to distributing prosperity. [...] For centuries, wealth has traditionally been apportioned in the West
through jobs, and jobs have always been forthcoming. When farm jobs
disappeared, we still had manufacturing jobs, and when these disappeared
we migrated to service jobs. With this digital transformation, this
last repository of jobs is shrinking—fewer of us in the future may have
white-collar business process jobs—and we face a problem.
What's your role?
As the architects of your organization's own information networks, I'd argue that you have a direct hand in building this Second Economy. As the largest conference in the IBM Software universe, I'd also argue that Information On Demand is the ideal forum to discover these ideas and discuss the ways you can harness them to drive better outcomes on all fronts.