A METHODOLOGY FOR ENTERPRISE PERFORMANCE MANAGEMENT

A METHODOLOGY FOR ENTERPRISE PERFORMANCE MANAGEMENTAdrien R. Presley,Truman State University100 East NormalKirksville, Missouri 63501816.785.4346L.E. Whitman, Donald H. LilesAutomation & Robotics Research InstituteThe University of Texas at Arlington7300 Jack Newell Blvd. S.Fort Worth, Texas 76118817.272.5900ABSTRACTThis paper presents a methodology for the strategic management of enterprise performance. The methodology uses and integrates tools and methods for performance management found in literature and practice. The paper first presents an introduction to performance management systems and their requirements. It then reviews approaches to performance management. The paper concludes with a description of the Enterprise Performance Management Methodology, a methodology developed to address many of the shortcomings of current performance management systems.INTRODUCTIONStrategy implementation is concerned with putting in the systems of feedback and controls necessary to ensure that the strategies are successfully achieved. To support implementation, the performance measurement and management system (PMMS) should be a combination of goals, performance measures and feedback. The PMMS provides the feedback to management necessary to determine if the plans are being effectively implemented and to institute necessary corrective actions. It also is important in that it provides information necessary for strategy formulation. The literature commonly reports five important themes related to PMMSs (adapted from [1]). Derived from Strategy: The need for the alignment of the PMMS to strategy is well documented [6]. Kaplan and Norton [9] describe performance measurement as "a way to operationalize the vision of the company."Activity Based: The PMMS used for control and improvement of enterprise activities should be derived from strategy [6, 9]. Actions taken by managers and operators to control and improve business processes and activities should be guided by performance metrics that are congruent with strategy [7].Customer focused.: Performance measures should be customer focused and must measure what is important to both internal and external customers [2]. There must be a market focus and a clear understanding of who the customer is and what their values and expectation are. Dynamic: As the competitive environment becomes increasingly dynamic, so too must the PMMS. Businesses should institutionalize a system allowing for new metrics to be developed as needed. This ability can provide manufacturers with a competitive advantage [6]. Participative Development Approach: A participative approach should be used for developing performance metrics for enterprise activities [2]. The development team should include the people who are responsible for the activities to be measured to help ensure acceptance of the metrics by the people who will use them.Other Desirable Characteristics: Among the basic structural characteristics that metrics must possess are that they should be consistent, easy to understand, easy to calculate, based on reliable, timely, and easily gatherable data, be at the appropriate level of detail, and minimal in number.REVIEW OF CURRENT PMMSIn this section we review two approaches to performance management developed to address the types of issues presented in the previous section: Activity Based Costing and Management (ABC/ABM) and the Balanced Scorecard Approach.ABC/ABMActivity based costing (ABC) was developed because of the inadequacies of cost accounting systems developed many years ago in accurately reflecting the costs of producing products and services [5]. Since the 1950s, businesses have extensively relied on cost accounting information for product costing for strategic product line decisions, and performance measurement for managing operations [8]. However, the accounting systems as designed were not equipped to provide the information necessary to make product line decisions and to control the firm at the overall, subunit, and individual levels. The fundamental difference between traditional cost accounting and ABC is that ABC asserts that it is not the making of products that directly affect costs. Activities directly affect costs. Traditional accounting systems allocate costs to products. In ABC, costs are allocated to activities. Activities and their costs are allocated to products [4].The logical extension to ABC was to use the data collected for uses other than product costing. The focus of Activity Based Management (ABM) is on the use of ABC information for management control [8] and continuous improvement [3]. ABM involves a new paradigm which involves moving away from the traditional functional view of organizational structure to one that facilitates a cross-functional view of the effectiveness of activities and business processes [3]. It attempts to better manage the value adding activities and to eliminate or reduce non-value adding activities.The Balanced ScorecardKaplan and Norton [9] introduced the concept of the balanced scorecard as a way to overcome problems with traditional performance measurement systems. The balanced scorecard is presented as a comprehensive framework that translates a company’s strategic objectives into a coherent set of performance measures. The scorecard looks at the business from four perspectives: 1) financial-how the company looks to its shareholders, 2) customer -how the company creates value for its customers, 3) internal business processes - which processes the company must excel at to meet its other goals, and 4) innovation and learning - how the company constantly improve itself.THE ENTERPRISE PERFORMANCEMANAGEMENT METHODOLOGYHaving presented the issues in enterprise performance measurement and management, we now present the Enterprise Performance Management Methodology (EPMM), a comprehensive methodology developed to address these issues. The methodology uses techniques and methods found in academic and industry literature and practice including the approaches described the previous section. It integrates activity based management with the use of a comprehensive set of performance measures.The EPMM has capability in two related areas: 1) the justification of new or proposed systems, and 2) the monitoring and management of ongoing enterprise performance. In both of these activities, many of the same concepts and measures are utilized. “System”, in this context, can refer to any practice, process, or technology. The performance to be monitored and managed is that which results from the implementation of the system, with an emphasis on the activities of the enterprise. A typical use of the EPMM would be to first use its justification capability to select a system to be implemented and then to monitor its effect on the enterprise through its impacted activities. The same metrics would likely be used for both purposes, although different metrics could be used. The EPMM could also be used as strictly a justification or performance management tool. The EPMM predicts and measures impact at the enterprise level. The EPMM requires that distinct objectives, strategies, and processes be identified for the enterprise.The methodology is realized as a set of forms and matrices which leads the user through the process. Relevant information to the analysis are first documented in forms. Based on the information in these forms, matrices similar to QFD matrices are created. These matrices link the system or process under consideration to the enterprise, both in terms of activities affected and strategic areas impacted. The methodology allows for the integration of strategic metrics with more traditional cost metrics in arriving at a final "score" for the alternative. The methodology encourages and supports a group-based approach to analysis. Included in the methodology are explicit considerations of importance rankings and utility functions to allow for the capture of the decision maker's (either an individual or group of individuals) preferences. At the highest level, the methodology is organized into five phases: Identify System and Transition Impact, Estimate Costs and Benefits, Perform Justification Analysis, Audit Decision, and Track Performance.The objective of the Identify System and Transition Impact phase is to identify the enterprise activities and strategies which are impacted by the system. Strategic impacts to be considered include those relating to product, process, organization, culture, and technology. System impact is determined by analyzing the relationship between the enterprise and the system being analyzed. In effect, linkages are drawn between enterprise activities, as represented by a enterprise reference model, and thecomponents of the system that interact with the activities. Linkages are also drawn between enterprise strategies and the strategic attributes of the system. One output of this phase is a set of analysis matrices identifying the activities and strategies affected by the system. The matrices form the basis of analysis to be performed later.In the Estimate Cost and Benefits phase, the analysis matrices are populated with the cost and benefit data necessary to perform the analysis. Activity based approaches may be used to accurately represent cost, benefit, and performance data. Strategic data may need to be quantified. Quantification approaches may include relative importance weighting, ordinal ranking, analytical hierarchy process, or a number of importance perception or ranking techniques.The objective of Perform Justification Analysis phase is to perform the traditional and strategic analyses using the previously documented impact of the system. The traditional and strategic approaches are integrated in a meaningful manner with the results documented and presented to the decision maker. This analysis will result in a business case for the new system. The main output is the decision on the system (if any) to implement.The Audit Decision phase performs an audit of the decision process some time after the decision has been made and the technology implemented. When this audit takes place may vary depending on the technology and the company involved. The purpose of the audit is to review the justification process for improvement.The Track Performance phase tracks the performance of the implemented technology. The completion of the analysis and the resulting justification decision is the initial phase of the performance management process. The enterprise and system performance must be monitored. This monitoring will focus on how the enterprise performance has been impacted by the implementation. The performance of the enterprise and its practices, processes and technologies are monitored to ensure that the enterprise is making desired progress toward its strategies. The output of this component of the monitoring activity is performance information (as measured by strategic and traditional (cost) metrics) including deviation from desired performance.IMPLEMENTATION EXPERIENCESTo date, the methodology, either in part or in whole, has been applied at several companies in a range of industries, including aerospace and automotive. The applications have included analyzing investments in computer technologies and research project selection. Feedback to date has been generally favorable. Most of the comments from the use have been in regard to the magnitude and breadth of the methodology. This was to be expected as the methodology is very comprehensive in its analysis and requires the consideration of many factors. 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