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November 18, 2009

Link Strategy and Operation with EPM

Ask any executive what is the toughest aspect of business, and near the top of the list will be that of operationalising strategy. Business consultancy Group Partners notes: "All too often organisations suffer a disconnect between the strategy determined by the executive team and its subsequent implementation and delivery at the operational level. The implications of strategy on people, processes, data and systems can be significant and must be fully assessed if the strategy is to be successfully implemented. Added to this are the challenges of maintaining business as usual and striking a balance between strategic and tactical initiatives."
Larry Bossidy and Ram Charan comment in their groundbreaking book, "Execution": "Unless you translate big thoughts into concrete steps for action, they're pointless. Without execution, the breakthrough thinking breaks down, learning adds no value, people don't reach their stretch goals, and the revolution stops in its tracks. What you get is change for the worse, because failure drains the energy from the organisation. Repeated failure destroys it."
Setting strategy is hard enough; obtaining buy-in can be similarly difficult: but the real hard part is taking a strategy and executing it.
One tool that can assist is enterprise performance management, or EPM. EPM, more than almost any IT-enabled application, can bridge the disconnect between strategy and operations.
This disconnect, which is to be found in almost every organisation of substance, can see managers mistaking activity for progress: they are frantically busy executing at an operational level, but with no understanding if they are impacting on the company's stated strategy. The alternative is that executives have a top-down view, focusing on strategy, but unable to operationalise it.
To reiterate, EPM is an approach to business management that centres on two assumptions:

A business intelligence database, a multidimensional online analytical processing (OLAP) cube, is at its centre; this cube has drawn its data from production systems which run the business, and the integrity of its contents are beyond question, making it a generally excepted single view of the truth; and
A set of integrated and inter-related business functions draw their data from and fulfil critical processes against this data; and because the cube is multidimensional, it permits analysis and what-if scenario planning

While EPM draws on BI for its data, it lies four-square in the domain of business, while BI is still very much an IT imperative. EPM can embrace the full range of business activities, from planning, budgeting and forecasting to financial consolidation, activity-based costing and the balanced scorecard.
As most organisations focus on improving financial management, this is always where EPM begins, either with the financial consolidation or budgeting component.
A number of vendors are now coming to the fore with dedicated financial applications, typically arising out of their ERP suites: these include spend analytics and profitability and cost management. This trend is set to continue and we should expect the large software vendors increasingly to seek a slice of the EPM pie.
EPM works best when it is driven from the top down; when it occasionally is done at a departmental divisional level, its benefits are limited and realised within silos. And it is silo-based operations that lead to the biggest problems.
EPM guru Frank Buytendijk notes: "Most missed deadlines, quality problems and costs happen in the handoffs from one activity to the next." This emphasises the importance of EPM being driven from the boardroom to give effect to the company's strategy.
Southwest Airlines is a great example of a company which applied EPM in a top-down manner. Its strategy formulated after 9/11 was to become the lowest cost carrier in the US. To do so, it implemented performance management in a way that involved all employees by giving them a daily report focusing on the aspect of the business which directly affected them. The measures as articulated were net income, net income margin, unit cost per available passenger seat mile, and return on invested capital.
The entire exercise was done in a fun way and linked to employees' bonuses. The airline has become legendary for the way it linked strategy to key performance indicators and the communication of these in a fun way which delivered line-of-sight accountability to each employee.
And it would not have been possible without EPM.

Posted by Adrian van der Merwe at 4:45 AM | Comments (1)