E-Business Strategy Topic Ten: E-Business Performance Management
The question is, if you don't measure, monitor, manage and control your e-business initiatives, how can you know what your real costs and revenues are (or should be) and therefore what the profitability is; or work effectively to maximise it?
Until a business returns a profit that is greater than its cost of capital, it does not create wealth; it destroys it.' (Drucker 1998: 13)
It seems like a simple question—so simple in fact that many managers struggle to identify meaningful and practical reasons. The following reasons are outlined by Halachmi (2005: 503-504):
If you cannot measure it, you do not understand it.If you do not understand it, you cannot control it.
If you cannot control it, you cannot improve it.
If they know you intend to measure it, they will get it done.
If you do not measure results, you cannot tell success from failure.
If you cannot see success, you cannot reward it.
If you cannot reward success, you are probably rewarding failure.
If you cannot see success or failure, you cannot learn from it and will repeat mistakes.
If you cannot relate results to consumed resources, you cannot know the real cost.
If you cannot know the real cost, you cannot effectively outsource where necessary.
You are unlikely to know who is happy and unhappy with your own performance.
Performance assessment: The process of quantifying the efficiency and effectiveness of business activity through metrics. Also known as performance measurement (PM) (Tangen 2004).
A verifiable measure that consists of three elements:
1. The specific measure (what is being measured),
2. The standard (minimum value acceptable to management)
3. The context in which the activity/person being measured operates (Melnyk et al. 2005).
Metrics set: A collection of metrics assigned by a higher level of management to direct, motivate and evaluate a single person in charge of a specific activity, process, area or function (Melnyk et al.2005).
Metrics (system): A collection of metric sets that provides an overall performance assessment system.
Performance management: The establishment and use of a performance assessment system by management to help monitor and control strategy, goals and activity in order to maximise organisational performance.
Metrics, sets and systems have a number of important characteristics that managers must understand in order to maximise their effectiveness.
Informational versus diagnostic, qualitative as well as quantitative, predictive versus retrospective
Managers who wish to make more formal use of qualitative data can employ the Analytic Hierarchy Process (AHP). This can be especially important in the strategy formulation phase of the e-business process to ensure the right objectives, and therefore the right metrics, are established in the first instance. AHP takes a prioritisation problem and makes it simpler and easier to measure in a meaningful way (Halliwell 2006). First, it reduces assessment criteria into pair-wise comparisons and asks for a ratio assessment of each pair.
Metrics are the lifeblood of effective performance management as they reveal satisfactory and unsatisfactory results. Therefore, rather than just measuring performance, we need to manage performance, and that requires an effective system.
According to the Working Council of Chief Information Officers (2003), the best performance management systems have six key characteristics:
1. Simplicity: Limited to a single page of 10 to 20 metrics, presented in non-technical language.
2. Explicit links to strategy: Tightly coupled to the strategic planning process and helps track progress against key goals and processes.
3. Executive commitment: Senior business managers are involved in the performance assessment process—both its creation and ongoing use.
4. Enterprise-standard metrics: Agreement is reached on consistent enterprise-wide metrics. Review meetings focus on decisions, rather than debate about metrics definitions.
5. Insights: The assessment system permits detailed review of trends and variance by providing more granularity (detail) on component elements as required.
6. Individual manager compensation: Linked to scorecard performance.
7. Cost-effectiveness. The additional value provided by the performance management system exceeds the cost of its implementation and use. Management's challenge is to make this so.
Having identified the seven key characteristics of effective e-business performance management systems, how do we implement them in practice? We use the four-step framework:
1. Ensure links with vision and mission. Ensure that all e-business initiatives are compatible with the organisation's vision and mission.
2. Establish performance objectives and metrics. A vital issue here is that the performance objectives and metrics must be deliberately included in the strategy development itself and not bolted on as an afterthought.
3. Measure and communicate performance results. Objectives and metrics are of no value unless they are embedded in action. A key performance management activity then is to ensure that the metrics are collected as required in the performance management specifications.
4. Correct off-target performance. Perhaps the most important characteristic of a performance management system is its ability to lead to action where required.
There are differences in implementing performance management systems between major corporations and small to medium enterprises (SMEs). For SMEs, it is important to be highly selective with the processes and measures used, because SMEs are by definition shorter of resources than are larger organisations.
Performance management systems
Before the 1990s, most performance management systems focused largely on the financial aspects of the enterprise. Financial measures such as Return On Investment (ROI), Internal Rate of Return (IRR) and Break Even (BE) analysis were not only common, but were often the only quantitative measures used to assess performance. However, a performance management system that uses only financial measures can be problematic because:
* Financial measures are not necessarily directly related to the e-business strategy (at least, not tightly). For example, an e-business strategy may be about brand-building, and that may not reflect directly or immediately in financial measures.
* Exclusive focus on ROI can distort strategy creation and may conflict with other important objectives such as repositioning the company or product brand.
* Short-term financial criteria may move managers' focus from strategic objectives to immediate results.
* They are generally inappropriate for new e-business management approaches that decentralise control and move authority down the chain. The e-business job market is becoming much more flexible in this way, with flexible, fluid groups of highly-skilled, entrepreneurial, consultant-like employees (Landry et al.2005).
* The gap between overall ROI measures and the accountability of individual workers makes analysis, interpretation and actioning of performance difficult at best.
* Financial measures are often only descriptive rather than diagnostic.
These shortcomings created the environment for the birth of a range of new performance assessment and management tools. Key among these have been:
* Activity-based costing (ABC): concerned with the cost of activities with regard to specific products, rather than to basic functional areas. It is intended to result in more accurate and useful cost identification than traditional cost allocation. It suffers still from only measuring (cost) financial factors.
* Sink and Tuttle model: this model is based on the interrelationship between seven performance criteria: effectiveness, efficiency, quality, productivity, quality of work life, innovation and profitability/budgetability. While a step forward from the purely financial measurement systems, it is more operationally focused than strongly linked with strategy.
* The Performance Pyramid: this approach links the organisation's strategy with its operations by translating objectives from the top down (based on customer priorities) and measures from the bottom up. It addresses both external effectiveness and internal efficiency.
* The Performance Prism: is organised around five distinct but linked dimensions: stakeholder satisfaction, strategies, processes, capabilities and stakeholder contributions. It has a much more comprehensive view of stakeholders than man other models.
* The Balanced Scorecard (BSC): offers a balanced set of measures (although it is light in stakeholder consideration) for a quick yet comprehensive view of the enterprise's performance from four perspectives:
a) Financial: How do we want to appear to our shareholders?
b) Customer: How do we want our customers to see us?
c) Internal business: What do/must we excel at?
d) Innovation and learning: How can we continue to improve and create value?
The BSC was first described by Kaplan and Norton in 1992 (Kaplan and Norton 2005—(reprinted)) and is still one of the most commonly-used performance assessment tools today.
The BSC links the four perspectives directly with vision and strategy. The perspectives are born of vision and strategy and may in turn influence them. Each of the four perspectives has its own scorecard with objectives or goals, and has metrics that are used to measure them. The objectives are critical success factors (CSFs) for the achievement of the overall vision and strategy, while the metrics are the key performance indicators (KPIs) used to assess and manage the achievement of the CSFs. A key element of the system is that objectives and metrics are set for each of the four perspectives—otherwise the overall scorecard would not be balanced! Typically, three to five broad objectives are set for each perspective.
Like e-business initiatives themselves, the management of e-business strategy performance has its own risks that managers should be aware of and take steps to deal with. According to the Working Council for Chief Information Officers (2003), the six major risks in using the BSC approach for e-business initiatives are:
* An IT- or technology-centric view of performance in which the metrics system is heavily laden with technology measures (e.g. web page hits) at the expense of business measures that matter (e.g. purchase behaviour and revenues).
* Measures that don't matter. Bourne et al. (2005) confirmed this in an empirical study that found the highest-performing business units placed adequate resources only into tracking and managing relevant goals and metrics.
* Lack of standard metrics definitions, leading to conflicting or confusing performance reports, which make it difficult to take action.
* Over-reliance on tools, where managers implement a host of software-based metrics that provide plenty of numbers, but don't tie in strongly with strategy or objectives.
* Lack of drill-down capability (from informational measures to diagnostic measures) hindering interpretation and action.
* Too many metrics, overloading management and costing more than they are worth to collect and use.
* No individual impact of metrics. Metrics that are not tied to the performance of an individual (or at least, a specific team) don't produce action plans to which any identifiable person or persons can be held accountable.
* Use of metrics to enforce standards rather than maximise performance. In a bid to 'appear effective', some managers put specific objectives in place that seem to be clear but have little value—that is, fail to link with one or more strategic objectives.
Implications for managers
To ensure that e-business strategy ties in with vision and mission and delivers according to the set objectives of the enterprise, managers should keep the following points in mind for measuring and managing performance:
Performance management is not an afterthought. It needs to be built into the e-business strategy implementation plan so that performance relative to the strategic objectives can be monitored, and corrected if necessary.
It is vital to measure performance. Without measurement, you cannot know how well you are performing (to objectives) and can therefore increase the enterprise's risk profile.
Performance management is more than just measuring and monitoring (assessment). It is active, and managers will be required from time to time to make decisions and take or direct action that will correct a substandard performance or further extend performance and value.
The Balanced Scorecard (BSC) provides a reasonably balanced method for ensuring performance measures are relevant to the strategic objectives. It is, though, a little weak in considering an effective range of stakeholders, and managers should also consider these in addition to the four key scorecard perspectives included in the BSC.
It is vital that a range of metrics (KPIs) are selected that are relevant to the strategic objectives (CSFs) and can be communicated quickly and simply.
The risks of performance management, such as over-reliance on tools, need to be understood, and managers should try to avoid them and take corrective action if necessary.