making strategy happen by kpmg

8/9/2019 Making Strategy Happen by KPMG

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P I E C I N G T O G E T H E R

T H E P E R F O R M A N C E P U Z Z L E

M A K I N G

S T R A T E G Y H A P P E N


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P I E C I N G T O G E T H E R T H E P E R F O R M A N C E P U Z Z L E 1

C O N T E N T S

S E C T I O N P A G E

1 Seeing the Big Picture Is Not Enough. 2

2 No Process Is an Island. 3

3 Connect the Dots. 4

4 Building Strategy? Involve Those Who Are in the Know. 6

5 Dont Just Communicate the Strategy. Literally Drive It Home. 7

6 Make the Strategy Wag the Budget. 8

7 Find and Focus on the Leading Indicators. 9

8 Tie Your Metrics to the Market. 11

9 Target the Model You Want to Be. 12

10 It Doesnt Have to Be Annual. 14

11 Be Careful What Compensation Buys. 15

12 Cash Isnt Always King. 16

13 Motivate Beyond the Four Walls. 17

14 Learn to Prioritize Among Great Options. 18

15 One Size Doesnt Fit All. 19

16 Less May Be More. 20

17 Reporting Is Dead! Welcome to Enterprise Dashboards. 21

18 Use Information to Prompt Action. 22

19 Information Ubiquity Creates New Challenges. 23

20 Leveraging Emerging Technology. 24

21 Fire Up the Feedback Loop. 26

22 Build a Winning Team. 27

23 Think Big, Start Smart, Deliver Quickly. 28

About the Authors 30


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2 K P M G C O N S U LT I N G

1 SEEING THE BIG PICTURE IS NOT ENOUGH.

We can all think of organizations whose fortunes have rocketed because they were able

to see the really Big Picture ahead of their competitionand realize their visions.

FedEx, for example, adapted a simple approach to a business nearly as old as time to

become a global delivery giant. Microsofts focus on software rather than hardware

created a powerhouse company.

But as much as we like to credit such fabulous successes to vision, winning companies are

distinguished by more than their ability to see the Big Picture. Companies that truly excel

can execute against their visions, getting their organizationsfrom top to bottomto

committo a desired level ofperformance.

No matter how big the Big Picture is for FedEx, Microsoft, or your company, it means

nothing if the ability to implement strategy is lacking. Vision needs to be matched by

execution. No matter how good your strategy is, performance against it has to be truly

outstanding or competitors will defeat you in the marketplace. Recognizing the crucial

importance of a well-orchestrated execution strategy, we developed the Performance

Commitment framework.

The framework encompasses three elements of commitment that demand attention

strategic, operational, and organizational commitment. A few organizations, public and

private, address some aspect of Performance Commitment well. Others go through the

motions but never quite derive true value. Few organizations, if any, are getting allof it

right. The power of Performance Commitment stems from the linkage of these three

components and their ability to motivate performance through a shared commitment.

Effective Performance Commitment processes can help you convert those Big Picture

ideas into reality. They can help you spot and execute on the next Big Idea ahead of

the competition.

Companies that truly excel

know how to get their

organizationsfrom top to

bottomto commit to a

desired level of performance.


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2 NO PROCESS IS AN ISLAND.

In many organizations, the performance management systems and processes are

fragmented and misaligned.

Is it any wonder, for example, that many executives are critical of their annual budgeting

process when it is fairly common for the budget to be created by one department while

the strategic plan is created by an entirely different department?

Think about your own organization, and ask yourself these questions:

When your strategy shifts, are team and individual goals and incentive compensation

revisited and revised?

Are your training programs going beyond compliance-driven objectives to really

developing employee skill sets that are consistent with your strategy?

In the next hour, can you get useful and relevant information about progress toward

your strategy, performance against your metrics (and against your competition),

progress against individual employee goals, and the status of your budget against

compensation bogeys?

Do you finish your budgeting process in less than 30 days, and are the results

consistent with your strategic imperatives?

If you answered yes to each of these questions, your organization is probably well on its

way to developing a truly integrated Performance Commitment approach to managing

the business. If not, however, yours is like many organizations, and theres probably room

for improvement.

And that improvement comes from enhancing the individual elements of your

Performance Commitment processes and linking the islands so that they work in concert.


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3 CONNECT THE DOTS.

Perhaps the reason many organizations have not connected their islands is because

they view each process in isolation. We advocate the holistic, linked approach of the

Performance Commitment framework.

The underlying principle of this framework is that its all about the execution of strategy.

You win competitively by executing on your strategy, so your overall organizational focus

must harness and direct all elements of performance toward successful strategic execution.

Can you imagine an environment where your budget is complete andyou align individual

employee goals on the same day? Or where your management information reflects how you

stack up against the competition?

We view the elements of Performance Commitment as a process of commitment

commitment of resources, naturally, but also commitment to outcomes and performance

goals. The alignment and effectiveness of the organization in its entire planning activity

will depend on:

The quality of the individual plans that make up the corporate whole

The linkages that make up the different kinds of plansstrategic and operating plans,

financial plans, and operational forecasts

S T R A T E G I C C O M M I T M E N T

S T R A T E G I C F E E D B A C K

S T R A T E G I C A S S E S S M E N T

B A L A N C E D S C O R E C A R D

O P E R A T I O N A L C O M M I T M E N T

M O D E L I N G & A C T I O NP L A N I N I T I A T I V E S

B U D G E T I N G &F O R E C A S T I N G

W E B - E N A B L E DP E R F O R M A N C E

R E P O R T I N G

O R G A N I Z A T I O N A L C O M M I T M E N T

I N D I V I D U A LG O A L S E T T I N G

E M P L O Y E ED E V E L O P M E N T

I N D I V I D U A LP E R F O R M A N C E

A P P R A I S A L

R E W A R DS Y S T E M S

The Performance Commitment

framework links crucia

elements of the

management environment


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CONNECT THE DOTS. [CONTINUED]

We encourage organizations to view all their planning activities in the context of the

Performance Commitment framework, rather than as isolated processes.

As mentioned earlier, the Performance Commitment framework has three primary

elements that are linked:

Strategic commitment is intended to provide both a point of focus for the

organization as well as the metrics to ensure that its on track every step of the

way. Useful tools to align strategy and metrics include balanced scorecards and

target models.

Operational commitment provides the pathway to operationalize strategy. Budget

and performance reporting are typical tools used here.

Organizational commitment is concerned with individual goal setting, performance

appraisal, and reward systems and is intended to mobilize and motivate the individuals

responsible for executing the plan.

So often in making substantive changes to how a company plans for and manages its

business, top executives fail to manage these three components in an integratedfashion.

If you sense a fundamental disconnect in your organization, do something about it now.

Successful integration provides the discipline, the measures, and the feedback loop

necessary to achieve desired results.


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4 BUILDING STRATEGY? INVOLVE THOSE WHO ARE IN THE KNOW.

A first step toward improving your organizations Performance Commitment is to start

with a specific elementstrategic, operational, or organizational commitment. Consider

both how to improve it and how to link it with the others.

In the strategic part, for example, we often advise companies to start with a simple change:

Open up the strategy-forming process to as many people as is practical.

Think about it. As a leader you rely on information provided by a variety of sources,

including direct reports, analysts, industry peers, and partners. Now consider this:

The salespeople pounding the pavement daily have a distinctive perspectiveon the competition, pricing, and the customers mindset.

The manufacturing staff understands what factors lead to plant downtime

and material waste.

Programmers know how to employ emerging Internet technologies.

Financial analysts develop new insights about profitability that can be meaningful

in guiding future strategy.

Consider your organization. Does everyone, regardless of rank, have the opportunity to

surface ideas and provide feedback? Ideally, strategy should not be level consciousit

should be idea conscious. The best strategies come from thought leaders throughout your

organization and are not solely the domain of the corner office. If they were, there wouldnt

be so many exciting new start-ups around.

So, as you kick off your next strategic planning or forecasting cycle, take a hard look at

who is at the table. Regardless of their levels, include staff members with direct customer

contact, hands-on product development, and manufacturing experience. Include thinkers

from all disciplines. Challenge them to propose strategic options, goals, and metrics that

will keep your business ahead of the competition.

If the best strategies were

solely the domain of the

corner office, there wouldnt

be so many exciting

new start-ups around.


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Employees often have a

great sense of what precise

actions can drive a

desired outcome...and

Ameritechs drivers proved

it with a 25 percent

increase in productivity.

5 DONT JUST COMMUNICATE THE STRATEGY.LITERALLY DRIVE IT HOME.

It is said that only the CEO and the front line of the organization know whats going on.

Everyone else is only shuffling information.

To ensure that everyonein an organization is contributing to the execution of the

companys strategyand to build on the strategic commitment we spoke about earlier

the next step is to operationalize the strategy. One effective way to do this is to reengineer

the strategy into a balanced scorecard, a tool first proposed by KPMG Consultings business

and IT strategy practice, Nolan, Norton & Co., in the early 1990s. A balanced scorecard

helps to enable the execution of strategies by identifying manageable metrics that guide the

day-to-day activities of each business functional area and individual in the organization.

For example, if an Internet sale saves a company half of what it costs to make a traditional

sale, the companys strategy might involve driving its existing customers to order products

via the Web. To enable the strategy, salespeople may have metrics related to changing their

customers ordering habits. And customer service representatives may need metrics tied to

training in new technologies, such as co-browsing software, to better help customers find

the products they seek.

In developing a balanced scorecard, we again recommend that you seek input from others

besides management. Employees often have a great sense of what precise actions can drive

a desired outcome. One example is Ameritech, which, in a quest to improve operations,

set about educating its staff on the importance of their chosen metrics. One Ameritech

garage manager saw that the company could become more cost efficient through optimal

use of its assets (the trucks in his garage). He asked his drivers for incremental ideas to get

that done. The combined ideas completely changed the way the garage dispatched trucks.

Drivers took them home at night and were dispatched to their calls via phone each

morning. This eliminated unnecessary trips to the garage and effectively added almost

two hours to the productive workday of each installer.1

The lesson is threefold. First, figure out what kind of company you want to be. Second,

determine the right metrics. Third, drive focus and commitment by educating and

involving all levels of staff.

1Noel M. Tichy, Eli Cohen,The Leadership Engine, HarperBusiness, 1997, pages 84-85.


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6 MAKE THE STRATEGY WAG THE BUDGET.

Whether in the workplace or in their private lives, most people wince at the word budget.

Nobody really wants to be limited by a budget, so maybe its natural that the budgeting

process isnt viewed favorably. Yet, correctly positioned, it can be a critical component of

the Performance Commitment framework.

The value of budgeting is often compromised because pure politics or superfluous rules

encumber the process. A typical example is the familiar across-the-board reduction in

departmental budgets based on false principles of equal tension rather than on the

reality that different lines of business face very different market opportunities and risks.

A better approach is to recognize that when constraints or market changes demand

cutbacks, often it is better to kill one program than to slowly starve all programs. Using

such a strategy-based approach, you might fully fund certain programs so that they stand

the best chance of being effective and therefore enabling the companys overall strategy

and performance.

The lesson is simple: An effective budget is not an entitlement. It is one benchmark

through which progress may be measured. And that benchmark must be tightly

connected to the organizations strategic goals.

Where constraints or market

changes demand cutbacks,

often it is better to kill one

program than to slowly

starve all programs.


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7 FIND AND FOCUS ON THE LEADING INDICATORS.

Do your management reports comprise predominantly profit and loss statements,

balance sheets, and other financial measures? Historically, the way to measure business

performance was through ROI, ROE, EPS, EVM, gross margins, EBITDA, and several other

well-known financial metrics. While the universal familiarity of such measures allows us

to more easily communicate performance, unfortunately they dont tell the whole story.

Because financial metrics are typicallyafter-the-factindicators, telling employees that they

must improve EPS doesnt ensure that EPS will grow.

Instead of focusing on measuring outcomes, the most successful companies have shifted

their focus to causal measureswith key performance indicators (KPIs). Most financial

indicators are lagging indicatorsmeasures of water under the bridge. Sample leading

KPIs might include yield and capacity variables, investment in R&D, customer or employee

retention, or new-product time to market. Such metrics reflect the fundamental core of

business operations. Improve on these and the odds are that youll also improve your

financial performance as measured by ROI, ROE, EPS, EVM, or any of the other financially

oriented outcome metrics.

Focus on leading indicators

that drive performance

and the odds are that youll

improve your financial

performance as measured

by ROI, ROE, EPS, EVM, or

any of the other financially

oriented outcome metrics.

V I S I O N

S T R A T E G Y T OS T R A T E G I C T H R U S T S

C R I T I C A L S U C C E S S F A C T O R S

K E Y P E R F O R M A N C E I N D I C A T O R S

FinancialPerspective

CustomerPerspective

BusinessProcess

OrganizationLearning

Perspective

CorporateCitizenship

Where is the organization going?

How do we get there?

What do we need todo well to achievethe strategy?

How do wemeasure howwell weare doing?

B A L A N C E D B U S I N E S S S C O R E C A R D

Critical success factors and

key performance indicatorsare derived from strategy.


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1 0 K P M G C O N S U LT I N G

FIND AND FOCUS ON THE L EADING INDICATORS. [CONTINUED]

For example, in the early 1990s, a direct-response, multiline insurance company

consistently missed its revenue growth expectations. Since every metric used by the

company was financial in nature, it sought greater insight by establishing a set of

nonfinancial indicators, one of which tracked the ratio of accepted paid policies to

applications received. As a result, the company discovered that an alarming number of

applications were never accounted for throughout the process. The insurer put in place

corrective actions that led to the discovery and partial recovery of almost $32 million,

contributing nearly $.02 toward EPS growth.

The lesson learned: Identify and measure the right things. When you compare actual

results to expected performance and when deviations invoke alternative actionsthen

your metrics have greater potential to add value. This is not to suggest that you eliminate

financial metricsnot by a long shot. It is of great value to have financial expectations

clearly articulated and understood for individual business units and the enterprise at large.

The accomplishment of these financial expectations is greatly advanced by using a balanced

set of metrics as guidepostsstriking a balance between leading and lagging indicators

and a balance between financial and nonfinancial metrics.

Take a fresh look at your organization by stepping back from your metrics to determine

whether they are balanced enough to guide everyday actions and drive long-term performance.


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P I E C I N G T O G E T H E R T H E P E R F O R M A N C E P U Z Z L E 1 1

8 TIE YOUR METRICS T O THE MARKET.

Weve heard it all. Organizations that barely have time to do anything but put together

their annual financial plan. Line executives who claim they know how to run the business,

so corporate has no need to worry about the operating metrics. CEOs afraid of adopting

rolling forecasts because that might mean renegotiating performance with line execs more

than once a year.

How many times do people within your organization manipulate the system, sandbag

results, or save for a rainy day?

Your best safeguard against this sort of value-destroying behavior is to tie your strategy

and metrics to the external environment. If cost analysis indicates that its ten times

cheaper to sell to existing customers than find new ones, your goal may be to excel

at managing customer retention. Obviously, youll need metrics that drive customer

retention. But the metrics cant stop there; only competitive or benchmarking data can

ascertain whether youre making the desired progress against your goal.

In a real-world example, in the early 1980s Intel was consistently beaten on memory

chip pricing by its Japanese competitors. Intel tried to respond in several ways before

discovering that a specific Japanese competitors sale strategy was to have its people always

quote 10% below their (Intels) price. Recognizing that it couldnt win on price alone,

Intel eventually used this piece ofmarket-based information to refocus its strategy. The

solution Intel ultimately reached was to abandon its biggest business. Memory chips had

become a commodity to which it could add little value, so it decided to start out almost

entirely anew, designing and building the best microprocessors in the world.2 The lesson

learned is that even in a large, entrenched business, management needs to tie together

both its strategic plans and all the metrics designed to enable those strategic plans to the

market. And because the market is always changing, you need to revisit and revise your

organizations goals and metrics throughout the year.

2Grove, Andy, Only the Paranoid Survive, Bantam Books, 1999, pages 87, 88, 95.

Recognizing that it couldnt

win on price alone, Intel

eventually used a piece of

market-based information

to refocus its strategy.


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A target model translates

your intended strategic

actions into a set

of pro forma financials.

9 TARGET THE MODEL YOU WANT TO BE.

Weve all heard declarations that this or that companys strategy is to grow revenue by 20

percent, 30 percent, or even 40 percent. No matter how galvanizing such messages can be,

however, they are not by themselves strategy, particularly if employees have no idea how

to meet such targets. Instead, strategy comes from using implicitly intuitive or external

market analysis to determine the most desirable course of action from among a variety of

options. After the strategy is determined, it needs to be converted into the right financial

and nonfinancial key performance indicators.

In our experience, a powerful mechanism to clarify the end goals of a strategy is some-

thing we call target models. A target model helps you translate desired key performance

indicators into actions (or drivers) that force you to understand the pro forma financial

implications of those intended actions. If you like the pro forma, keep going. If you dont,

stop and rethink the actions or maybe even the strategy. Target models are most effectively

built top-down. Done properly, target models pave the way for constructing meaningful

budgets, force the organization to think through the actions required to achieve the goal,

and eliminate much of the horse trading that probably takes place in your existing,

bottom-up budgeting process.

S T R A T E G Y

C U S T O M E R S &M A R K E T S

S T R A T E G I C " P R O F O R M A "

" D I M E N S I O N S " O F T A R G E T

F I N A N C I A L

I N T E R N A L B U S I N E S SC A P A B I L I T Y

L E A R N I N G &K N O W L E D G E

B U D G E TY E A R Q 1 Q 2 Y r 1 Y r 2 Y r 3

% % % % %

$ $ $ $ $

$ $ $ $ $

$ $ $ $ $

Business Unit KPITarget Allocation

Revenue

Gross Margin

Net Income

Revenue

Unit Shipments

R&D Expenses

Sales

Marketing

Administrat ion

Operating Profit

Interest Expense

Tax

Net Income

Earnings per Share

Assets EmployedROA

PRODUCT

LINE

GEOGRAPHY/TERRITORY

DISTRIBUTION

CHANNEL

M

ARKET/CUSTOM

ER

SEGM

ENT

The target model links strategy

to budgets or forecasts.


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TARGET THE MODEL YOU WANT TO BE. [CONTINUED]

Wal-Mart got it. Back in January 1996, it used an earnings disappointment as a cue

to make significant changes and take the organization to the next level. Wal-Marts CFO

and his colleagues determined that the key was to develop a planning process that would

enable the company to understand where it needed to go, how to get there, and what key

drivers it should focus on along the way. In Wal-Marts case, there was no problem

attracting customers to its stores, but it needed to target wallet sharea fancy way

of saying customers should spend more when they are in the store. Better planning could

make that happen, but only if it provided a road map for the operating divisions to use

in determining the key initiatives they needed to focus on to rev up growth.3 The resulting

stretch targets and related action initiatives yielded the positive results. Use your target

model to validate and communicate the strategic direction and commensurate actions

for your organization.

3The Finest in Finance, CFO magazine, October 1999, page 72.


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10 IT DOESNT HAVE TO BE ANNUAL.

Perhaps one of the places where companies often go wrong is that they think exclusively

in terms of annual plans and metrics. Annualstrategic plans. Annualbudgets. Annual

bonuses. But just because we commonly look at things on an annual basis, it doesnt mean

thats the optimal time frame for your plans. In a digital economy, it better not be!

When it comes to launching new products, for example, pharmaceutical companies have

become a lot more like consumer products companies. The typical drug company is going

to place great emphasis on the 90-day period between which it launches a new over-the-

counter product and attains projected market share. During those 90 days, it closely

scrutinizes and compares daily sales activity with its forecasts. It also needs to create the

right short-term incentives and be quick to respond to management reports. But the same

company additionally needs to have effective ways to plan and measure progress toward

developing blockbuster drugs that typically do not get to market for 15 years and require

hundreds of millions of dollars in investment.

Clearly, a companys strategic plans, incentive compensation budgets, and forecast should

not be oriented purely by annual guideposts. Nor are we saying that it should have a

single 15-year plan because of the long-term development of a drug. The frequency of

planning, the length of the planning horizon, and the level of detail attempted in the plan

should reflect the companys market environmentand strategic ambitions should drive

all. Often, in a dynamic environment, it would be appropriate to plan through a perpetual

continuum of shorter periods.

At the end of every 90 days, for example, refresh your plan, communicate it, and

continuously refocus your organization.

A better antidote might be

to think, and plan, in terms

of the enterprise operating

through a perpetual

continuum of shorter periods.


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11 BE CAREFUL WHAT COMPENSATION BUYS.

Like great ideas, strategic plans without execution are useless. Even after youve created

a strategy and established the key metrics essential to converting the strategic plan into

reality, you need to have organizational commitment, or people alignment, to ensure

that employees are actively furthering the plan. Thats where compensation comes in.

Unfortunately, our experience has shown that many compensation systems create

less-than-optimal results. For example, many executives receive bonuses based on their

performance against budget expectations. In many cases that leads to sandbagging or

parochial behavior, with executives setting targets that they know can easily be achieved.

The consequence of this behavior is that organizations may be robbed of maximum

performance by virtue of the very reward systems they create.

We recommend linking compensation to a balanced set of strategic objectives and tying

compensation to the market. What does that mean?Forget about bonuses based purely on

budgets. Instead, tie your bonuses to the accomplishment of individual and team goals as

defined by key performance metrics established in relation to the market and competition.

Rewarding someone for beating the budget by 10 percent in a market growing by more

than 30 percent wont win market leadership. It will simply guarantee the same kind of

sandbagging and underperformance in the future.

In many cases budget-

based bonuses lead

to sandbagging, with

executives setting targets

that they know can

easily be achieved.


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12 CASH ISNT ALWAYS KING.

After youve taken the time to properly link compensation to the market and adopted the

right metrics, dont stop there. Consider that you may achieve even more organizational

commitment by rethinking what your compensation plan comprises.

For one thing, money doesnt motivate everyone equally. While some employees will be

motivated by money only, others will be motivated by nonmonetary incentives such as title,

community prestige, or authority. Still others will respond to lifestyle incentives like more

time off, the ability to work from home, shorter workweeks, or on-site day care.

In August 1999, The Wall Street Journalreported an example of a Midwestern company

that polled its employees and concluded that what they valued most was more time off to

spend with family. Shrewdly, the company implemented a plan allowing salespeople who

achieved their monthly goals to leave the office by 2:00 p.m. each day for the remainder

of the month.

The result?The sales force broke every record set in the previous 52 years.

Could an employee receive incentive compensation without genuinely helping

to execute the strategic plan?

Could your bonus program arbitrarily bypass an employee whos an effective

team player?

Are your incentives limited to purely financial considerations?

If the answer to anyof these three questions is yes, take a fresh look at whether incentives

are being used as a constructive enabler of your strategy.

Using time off as an

employee incentive,

one company eclipsed

every previous sales record.


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14 LEARN TO PRIORITIZE AMONG GREAT OPTIONS.

A classic conundrum for any business is the inability to fully fund every great idea. Even a

large multinational company might find itself resource constrained for talent, funding,

or time. Think about your allocation processes. How many times have you considered the

budget process to be complete only to find nearly 80 percent of funds or staffing has been

consumed by keep the lights on types of maintenance requirements. Important?Yes.

Strategic?Wellhardly.

One emerging model we first encountered was at a growing financial services company

with $750 million in annual sales. Despite its success, management was increasingly wary

that its spending might not be strategic and reacted with a two-step process. Step 1 was

to establish allocation ratios based on the type of spending. Depending on the type of

spending, Step 2 was to apply rigorous balance sheet tests such as ROI, ROA, or EVM.

An example would be plotting last years actual capital spending on a particular matrix.

Now, think about how your capital expenditures might have been different had you

applied allocation decisions based on the type of spendingmaintenance, enhancement,

or strategicand limited the allocation within each of those categories.

The emerging rigor entices allocations across all types of spending requests. While

the actual allocation ratios can vary based on the needs of your company, the key is

for you to start your planning process knowing that not all program requests can or

should be funded. Do not allow the majority of the resources to be chewed up by

maintenance. Rather, the organizations strategic priorities should directly influence

resource prioritization.

I N V E S T M E N T M A T R I X

RESOURCE

CONSTRAINT

T Y P E O F I N V E S T M E N T

M A I N T E N A N C E E N H A N C E M E N T S S T R AT E G I C

Balance sheet

justification

(ROI, ROA,

EVM)

approximately

20%

Balance sheet

justification

(ROI, ROA,

EVM)

approximately

20%

Less rigor in balance sheet

approximately

60%

High

Low

A strategically oriented capex plan might look like this.


20/34


15 ONE SIZE DOESNT FIT ALL.

The planning processes in most organizations have not been established with the

organizations specific needs in mind. They can simply be the result of the history of the

organization or of its principal executives experiences, and neither may be appropriate

in the current environment.

We use a planning diagnostic quadrant to help a client understand the planning approach

suitable to its organization. The quadrant looks at the organizations level of resource

constraints relative to its ambitions and the volatility of the business environment in which

it operates. In the past, for example, a monopolistic electric utility may have found itself

sitting in the lower left-hand quadrant (low resource constraints and low volatility).

A deregulated environment dictates that the planning processes appropriate to this

lower left-hand quadrant are no longer applicable. Today, deregulation demands that the

same utility employ strategies and commensurate planning environments that recognize

the competitive changes; accordingly, the enterprises place would shift into the lower

right-hand quadrant.

Different industries, and different competitors within the same industry, have different

planning needs, and the needs within any particular industry will likely change over time.

Moreover, virtually no business competing in a digital economy can afford to use its

previous years performance as a basis for its plan.

One size does not fit all. Articulate the objective for your planning process, and put in place

only those planning and budgetary processes essential to achieving your business objective.

F R E Q U E N C Y O F P L A N N I N G

O P T I O N P L A N N I N G

Annual plan with a focus on

expense management

Plan by analyzing/comparing scenarios

E.g., mature business, low margins

O F F E N S I V E P L A N N I N G

Frequent planning at the appropriate

level of detail

4 or 6 quarter rolling forecast

E.g., start-ups

" N O P L A N N I N G "

( o t h e r t h a n S t r a t e g i c P l a n n i n g )

Planning does not change significantly

from year to year

E.g., monopolistic or public organizations

D E F E N S I V E P L A N N I N G

( o t h e r t h a n S t r a t e g i c P l a n n i n g )

Frequent, high-level planning

Reduced focus on expense management

E.g., mature high tech

B U S I N E S S V O L A T I L I T Y / U N C E R T A I N T Y

RESOURCE

CONSTRAINTS

AM

O

UNT

OF

DETAIL

&FINANCIAL

MODELING(DECREASING)

High

Low High

If your budget is the

basis for a plan, you

content yourself with an

extrapolation of the past.


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16 LESS MAY BE MORE.

At what point is planning overdone and therefore wasteful? How accurate does your

planning process have to be? How many metrics do you really need?

The answers to these questions depend on the balance that must be struck for each

organizations Performance Commitment environment. With budgets, for example, the

additional effort required to go from 95 percent to 100 percent accuracy is seldom worth

it; effective forecasting might compensate for the 5 percent delta. With metrics, the keys

to great performance may be captured in a half-dozen well-chosen measures. While two

dozen metrics may make management feel good, they may serve to make employees feel

they are operating in a compliance- rather thanperformance-inducing environment.

Emphasize what is reallystrategically relevant. As with many valuable things, sometimes

less is more.


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17 REPORTING IS DEAD! WELCOME TO ENTERPRISE DASHBOARDS.

Weve all done it. We finish the annual plan exercise, wipe our brows, and happily place the

three-ring binder on the shelf. Some of us may even pull this paperweight down to justify

next years plan or to explain variances.

So, how can you keep your plan from being a meaningless paperweight?

First, ensure that there is a review process, with executive participation, oriented

around the strategic and operational targets.

Second, leverage todays technologies to create ubiquitous visibility of goals and your

accomplishments against them. Exit the business of static, paper-oriented reporting.

Use your intranet and internal Web sites to propagate information anytime, anywhere.

The technology exists for your plan to be a dynamic organism available for everyone

to see and act upon through their desktops every day. We advocate a CFO Enterprise

Dashboard wherein information related to your strategic plans, the budget, and a realm

of financial and nonfinancial data is driven to the desktop to actively help guide employee

decision making and progress against goals. Far more dynamic than the paper-based

plans of yesterday, these portals not only deliver information, but they can help prompt

corrective action, provide for drill-down analysis, and convey information graphically so

that employees with less financial acumen can better see and understand how to react to

the numbers.

An altogether different way to eliminate the possibility that your plan will become a docile

dust collector is to eliminate it altogether through the active management of metrics. Take

the case of Sweden-based Handelsbanken. All targets, rewards, and performance measures

are geared toward beating the competition, both inside the bank (e.g., branch-to-branch

comparisons) and outside the bank (e.g., bank-to-bank comparisons). Handelsbanken took

five years to build its decentralized model. It has since eliminated its annual budget process

in favor of a metrics-based rolling forecast approach.4 The plan delivers value not through

its size (Handelsbanken doesnt even have the budget part anymore) but through

consistently keeping the organization focused on winning.

Your planning effort can be a success if it creates a buzz in the organization, keeps staff

constantly aware of progress against its present goals, and continuously reshapes the future

of the business.

4Beyond Budgeting Round Table Case Report, 1999 CAM-I, Fraser & Hope.

Enterprise Dashboards

can dynamically deliver

information to the desktop,

prompt corrective action,

and provide instant

drill-down analysis.


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18 USE INFORMATION TO PROMPT ACTION.

We all have seen software demonstrations like this: At 9:00 a.m. the hypothetical financial

professional turns on his or her computer and is greeted by flashing red alerts highlighting

an under-performing function somewhere in the world. Three clicks of the mouse and they

know the country, product, or business unit involved. By 9:05 a.m., management has been

informed and the company is saved from ruin.

These demonstrations look terrific at the trade shows, and new alert features are being

built every day. However, we know from experience that these features rarely work as

intended when real data is used. Why? In most companies, problems are rarely traceable

to a single cause, and the relevant information proves difficult to obtain.

So-called exception-based guided analysiscan be an important starting point, but the

exercise needs to move quickly from a numbers game to a business decision. AlphaBlox,

a Web-based software company, provides an excellent case in point. The chief financial

officer personally led development of the management reporting system tailored to his

companys needs. He found that his organization, like many others, was buried in mounds

of data that were difficult to assimilate and act upon. His solution: Leverage his own

companys software to enable better access to the rightinformation. By carefully culling

this information and providing the guided analysis intelligence, he placed crucial

information at managements fingertips. And, his executive group is in a better position

to respond quickly to marketplace demands and changes.

How can you engage your staff to use the information? Start by making the right

information accessible. Translate the strategic imperatives into metrics, and then identify

the data sources necessary to capture those metrics. Consider external data sources and

contingencies. For example, dramatic changes to economic conditions or serious product

issues may require updating the entire plan. Deliver this vital information through an

easy-to-use, possibly Web-based, reporting tool, and provide the guided intelligence that

enables the organization to efficiently navigate the information.

This crucial information serves as a trigger to important business decisions. However, it is

just thata trigger. Nothing yet comes close to replicating the value of human insight and

logical deduction. So go ahead, use the trigger information and then manage the follow-

through process to ensure that the information is acted upon.

Nothing yet comes close

to replicating the value

of human insight

and logical deduction.


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19 INFORMATION UBIQUITY CREATES NEW CHALLENGE S.

So, what happens when the basic business information is available to everyone? When the

right information is available at the click of a button? When the daunting task of data

assembly is finally removed from the daily task list? When the Internet creates a never-

ending, 24-hour, around-the-globe planning process?

When everyone knows the basic facts, new activities and behaviors can emerge. Reporting

can become a two-way street. Instant feedback will be available, and individual reports can

be measured both for effectiveness and usage.Corporate reportingshould become a

customer-oriented business service that must react quickly to new requests and business

analysis. These are all positive trends, but what happens if all this technology fosters

negative behavior?

As the result of a new Internet reporting initiative, for example, the sales force at one

textile manufacturer started receiving dynamic, robust information about their customer

accounts. Great, right?Not quite. One of the pieces of information that the sales force

focused on was the precise level of margins. Armed with this knowledge, it wasnt long

before the sales force was aggressively discounting prices further to meet revenue goals.

And why not?Like many companies, this one incented its sales force on the top line

ignoring the quality of those revenues. The company ultimately reacted by shutting down

the Web reporting.

Obviously, what this company needed was a balanced incentive model for the sales force,

one that focused on profitable growth that increased margins, as well as new controls to

monitor the use of corporate information.

The question is, are you ready? We encourage you to e-enable your workforce through

Web delivery of information. However, dynamic information requires new processes,

procedures, and incentivesand even more imaginative changesbefore your

organization can truly realize the full potential that technology has to offer.

While instantaneous

information can create

competitive advantage,

companies can

also experience

unexpected consequences.


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20 LEVERAGING EMERGING TECHNOLOGY.

With technology playing an ever-increasing role in all aspects of business, what place

should it play in the Performance Commitment process? Its difficult to determine what

new technologies to incorporate and how to do it. As new tools, products, and product

features become available more rapidly, decision making in this area becomes even more

complex and challenging. In selecting appropriate technologies, we see two factors as key.

Firstthink big, start smart, and deliver quickly. For example, we offer a Rapid Return

on InvestmentSM (R2i) approach to all technological or process improvement initiatives.

Using this approach, we developed Planning Management, which integrates the functional

process and technology. The approach leverages existing technologies in combination with

industry-specific metrics to link the separate islands that probably exist across your

Performance Commitment processes.

Specifically,R2iPlanning Management drives the organization to link four crucial

components of an end-to-end planning process:

Balanced scorecard (strategic, financial, and operating metrics)

Top-down targets based on pro forma financial modeling and action planning

Bottom-up budgeting or forecasting

Web-enabled management reporting

Secondchoose enabling technologies. Lets take each of the four components in turn.

A balanced scorecard may be enabled through a number of readily available vendor

solutions, or you may choose to build using a combination of desktop spreadsheets and

an on-line analytical processing (OLAP) tool. Similarly, modeling may be enabled through

use of desktop spreadsheets in conjunction with an OLAP tool. Budgeting, depending on

organization size, complexity, and business requirements, may be well served with one

of the bottom-up vendor package solutions; alternatively, a combination of a visual basic

protected spreadsheet program in conjunction with an OLAP tool may suffice. Reporting

tool selection should leverage vendor OLAP and Web-ready solutions.


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LEVERAGING EMERGING TECHNOLOGY. [CONTINUED]

Your tool selection, regardless of build or buy, should consider performance against

several key elements:

Desired functionality and ease of use

Ease of installation and maintenance

Software and hardware cost (both initial and ongoing maintenance)

Business intelligence (the vendor or software integrator should

bring specific intelligence about your business to the table)

Flexibility to changing business requirements

Internet- and Web-enablement

Scalability

Security

So, what are your next steps? First, think about the functional requirements of your

organization. Second, choose the appropriate enabling technologies. And third, build

or buy the skills necessary to successfully implement them.


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21 FIRE UP THE FEEDBACK LOOP.

If you walked down the hall right now and asked ten people in your organization to

describe your strategic feedback loop, what would they say? Would you get the same

answer from each person?

If your process is advanced enough to include strategic dialogue, then the reporting process

must also be designed to close the feedback loop in order to constantly challenge and check

progress against your strategic goals. Monthly, weekly, or even daily reporting can be the

glue that ties numbers (both financial and nonfinancial) to business initiatives.

Line executives and corporate staff need to perceive the key business drivers as the

common points of reference. Hopefully, you will find, as we have, that effective dialogue

helps avert finger pointing and keeps the organization focused.

So, how do you tie the numbers back to business initiatives? Technology answers part of

the question, yet distributing metrics and financial reports can only start the dialogue.

Develop a process of continuous feedback that becomes second nature throughout your

organization. Insist that every staff meetingcertainly your ownbegins with a review

of what people are seeing in the marketplace and how they are performing against plan,

so that it all can be incorporated back into the strategy.

S T R A T E G Y

M E T R I C S &M O D E L I N G

B U D G E T I N G& F O R E C A S T I N G

B U S I N E S S R E V I E W& W E B - E N A B L E D

R E P O R T I N G

Daily reporting via the Web

can be the glue that ties

numbers to business initiatives.

A strategic feedback loop drives action-oriented dialog throughout the organization.


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22 BUILD A WINNING TEAM.

One of the problems facing companies in a positive economic environment is a relative

shortage of exceptional professionals available to fill the most demanding positions.

The problem can be particularly acute around the finance functiona key enabler of the

Performance Commitment framework. Finance professionals need to have not only strong

technical competency but also the intangibles necessary to go beyond the numbersand

truly connectwith senior line and corporate leaders, the board, the audit committee,

Wall Street analysts, and investors.

As a $100 billion company with a history of grooming its finance professionals for

leadership jobs, General Electric (GE) takes some insightful tacks in hiring, training, and

retaining great performers.5 GE seeks to hire operationalfinance professionals early in their

careers, taking responsibility for training and developing their analytical and business

judgment skills. It tends to hire technical experts, those with specific experience in areas

such as capital markets, after they have already developed acumen in their respective fields.

To ensure its professionals career success and bolster its own corporate performance,

the company provides a robust agenda of career accelerators including formal classroom

training at GE University, extended rotational assignments, and assigned projects outside

of the professionals current job and business. GE also mandates that 100 percent of its

finance professionals travel, taking on global assignments across all businesses.

If all this sounds regimented in theory, in practice it is not. The companys mantra is that

finance professionals play offense with their careers, taking on high-risk assignments for

which they can be nicely rewarded.

Does it work?Consider the facts: Former finance professionals are presidents of 5 of GEs 11

businesses and 10 of the 28 GE Capital Services.

To improve your own performance, challenge all members of your existing finance team

to evaluate their own work from the vantage point of line manager and to systematically

acquire a set of skills that would enable them to lead a business. Then, continuously

consider who on your staff could head tomorrows new business units and projectwhether new hires fit the same profile.

5The Talent Factor: Developing The Professional Finance Organization, Jim Parke, SVP and CFO,

GE Capital Services, Business Weeks CFO Forum, March 1999.


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23 THINK BIG, START SMART, DELIVER QUICKLY.

Its easy enough to say that your company would perform better if only all of its

performance-related processes were better connectedjust as any of us would be

Michael Jordan if we could only jump higher and make baskets as easily as we walk.

But we are mindful that whatever attractive attributes the Performance Commitment

framework may have, ease of implementation is not necessarily one of them. It doesnt

come in a box. Integrating more than a half dozen related, but fragmented, functions

is hard enough. Add to that the inherent challenge of getting employees and process

owners to embrace new ideas, altered procedures, and common technologies, and the

task seems daunting.

Our advice with respect to tackling this challenge is to think big, start smart, and deliver

quickly. Although the ultimate benefit of the Performance Commitment framework is its

power to help your organization better see the Big Picture and execute against it, your first

step should be a relatively small one that you can complete successfully. Then leverage that

success into many others to create a fully functional framework.

If you dont currently use a balanced scorecard, for example, a great place to start might be

to create one for your top-of-house corporate staff and a major business unit. Alternatively,

take a look at making your management reporting system more effective or improving

your forecasting process by employing some of the newest analytical applications. The

point is to choose a point and startnow.

Too often we see companies break down under the weight of grandiose plans, or plans they

are trying to perfect intellectually before execution begins. A better model is that of a chief

operating officer we know who looked at his start-up credit card operation and declared

way back in 1991, A mediocre plan executed really well is far better than the perfect plan

executed too late. His company is now one of the top credit card issuers in the world.

Understand where the integration points of your Performance Commitment environment

should be, then break it into bite-size pieces and start improving it now.

Break the Performance

Commitment environment

into bite-size pieces,

and get started now.


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THE BENEFITS OF WORKING WITH US

KPMG Consulting is one of the worlds most respected business advisors and systems

integrators. We build enduring relationships with our clients by helping them create new

business models and innovative solutions, enabling organizations to leverage technology

for stronger return on investment and enhanced service to their customers, vendors,

and employees.

From business systems strategy to implementation, we combine our industry knowledge

with technology experience to deliver results-focused solutions quickly. By partnering with

technology leaders, we provide leading business and government organizations around the

globe with best-in-class solutions across every industry segment.


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THE NEXT STEPS

If you would like to learn more about how we can help your organization, please contact us

at 1-866-FOR-KCIN (1-703-747-6748 from outside the US and Canada) or visit our Web

site atwww.kpmgconsulting.com.


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ABOUT THE AUTHORS

Anita Tilleyis a managing director in the Performance Management practice within

KPMG Consultings World-Class Finance Solution. This practice focuses on delivering

innovative solutions to progressive finance leaders. Before joining the company,

Ms. Tilley was in the financial services industry with senior responsibility for various

finance, marketing, and information technology functions. Ms. Tilley can be reached

at 615-248- 5660 or [email protected].

Arun Kumar is a managing director at KPMG Consulting. He focuses on Performance

Management solutionsspanning the gamut of strategy, process, and technologyfor

high technology clients that include some of the nations top technology corporations.

His industry experience includes senior financial management positions at high technology

companies and the position of CEO of a software venture that he founded. He holds a

masters degree in management from the MIT Sloan School of Management. Mr. Kumar

can be reached at 650-404-3290 or [email protected].

Alan Hanson is Senior Manager, Corporate Business Development, for KPMG Consulting.

Before joining the company, he spent ten years in the financial services and venture capital

industry. He holds an M.B.A. in finance from the Stern School of Business at New York

University. Mr. Hanson can be reached at 212-954-6152 or [email protected].


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Special thanks to our clients who have so graciously supported our efforts.

The information provided herein is of a general nature and is not intended to address thespecific circumstances of any individual or entity. In specific circumstances, the services

of a professional should be sought.


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