ISDS 2001 CH5

ISDS 2001 CH5 - CHAPTER 5 — BUSINESS PERFORMANCE...

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Unformatted text preview: CHAPTER 5 — BUSINESS PERFORMANCE MANAGEMENT Visit Information Builders website ht_tp:llinformationbuilders.com/ Hover your mouse over Performance Management and watch the two-minute video .; rm Objectives: After completing this chapter, you should be able to: 1. Understand the ail-encompassing nature of business performance management (BPM) 2. Understand the closed-loop processes linking strategy to execution 3. Describe some of the best practices in planning and management reporting 4. Describe the difference between performance management and measurement 5. Understand the role of methodologies in BPM 6. Describe the basic elements of the balanced scorecard and Six Sigma methodologies 7. Describe the differences between scorecards and dashboards 8. Understand some of the basics of dashboard design CHAPTER OVERVIEW Managing the performance of the business is, in a nutshell, what executive jobs are all about. The technology that supports this part of their work is, appropriately, termed Business Performance Management. It differs fi'om the subjects of previous chapters in its top-level strategic focus, which lets top managers focus on the key factors that drive success rather than getting bogged down in a mass of detail. Because of its different focus and different audience, BPM requires different technologies and approaches from other types of BI/DSS. This chapter discusses them. CHAPTER OUTLINE 5.1 OPENING VIGNETTE: CISCO AND THE VIRTUAL CLOSE Cisco is one of the largest computer companies in the world. Problem Cisco developed a virtual close system that was near real-time posting of financial transactions. It was good for daily tracking of financials and operational info, but not for predicting the future. In the dot-com bust in 2001, business suffered. Solution 1) Slashed costs — reduced inventory, cut employees, and developed products internally 2) Adjusted its growth strategy and was able to enter new markets :3 i | smummmmwsflmpmam'uu Iomfimmsm n W m. Serif: ' ' 5m Mmmndumuthl mmammmm Macmillan lumen mus-w evennkwwwannulew HI mi . Mm Immune“ gall Wild .i I: ' ‘nm ,. Results A return to profitability Continuous planning 3-5 years ahead of market transitions What we can learn from this vignette It is difficult to align the company strategies, plans, analytical systems, and actions to ensure success. Cisco’s virtual close enabled the company to monitor key indicators of operational or tactical importance. It didn’t give them the means to model critical strategic assumptions such as market growth or lack of growth. Cisco learned that effective BPM requires it to model and monitor its tactics and also its strategies and assumptions on which those strategies are built. Section 5.1 Review Questions ALL 1. What is the virtual close system? “Closing” in an accounting refers to closing the books: completing the information gathering and calculati0ns needed to present the total financial picture of an organization at a particular time. The virtual close system was an information system that enabled Cisco to obtain comparable management information in two hours rather than the two weeks they needed previously—and which many companies still need. fl“? 'l‘hi til 1' ‘8) l, Cisco institutes a process called virtual close, which has the ability to determine the financial state of the company within an hour’s notice and to disseminate the information instantly through the company’s intranet. 2. What rumination did John Chambers, Cisco CEO, give for the company ’s downturn in 2001? His fundamental explanation was that Cisco was no exception to the dramatic economic downturns that started in early 2001 and that affected the entire high-tech segment. This downturn is sometimes referred to as the “dot-com implosion,” since it was triggered by the bursting of the Internet commerce bubble, but its effects spilled over to companies such as Cisco that depended on e-cornmerce indirectly for much of their business. (The first part of Section 5.3 discusses the extent of the overall downturn.) Beyond that, he pointed out that the virtual close system did not provide the sort of information needed to predict macroeconomic trends. Indeed, it was never intended to provide that sort of information. Measuring and monitoring, however sophisticated it may be, can only take one so far. 3. What was Cisch is strategic response to its financial downturn in 2001? Cisco had both a short-term response and a long-term response. Its short—term response consisted of cost-cutting moves designed to improve its profitability at lower revenue levels. These moves included: I Reducing its inventory (with a $2.5 billion write-down) 0 Reducing its headcount (by 20,000 employees) 0 Reducing the number of models in each product group (i.e., simplifying its product line) 0 Extending its product line via internal development rather than acquisition If 1* 4. BPM is an enterprise wide strategy that seeks to prevent organiz tions from optimizing local business at the expense of overall corporate performance. C. BPM defined 1. Business Performance Management (BPM) is... A real-time system that alert managers to potential opportunities, impending problems, and threats, and then empowers them to react through models and collaboration. 2. Also called, corporate performance management (CPM by Garmer Group), enterprise performance management (EPM by Oracle), strategic enterprise management (SEM by SAP) i Vi”, r'\f'=l m?! I a) A set of integrated, closed-loop management and analytic processes, supported by technology b) Tools for businesses to define strategic goals and then measare/manage performance against them c) Methods and tools for monitoring key performance indicators (KPIs), linked to organizational strategy D. BPM and BI compared 1. BPM is an outgrth of B1 and incorporates many of its technologies, applications, and techniques. 2. The same companies market and sell them. 3. Bl has evolved so that many of the original differences between the two no longer exist (e.g., BI used to be focused on departmental rather than enterprise-wide projects). a 3. BPM encompasses thrEe key components: xiii? /}( ,- :llr l Its long-term response consisted of leveraging its business and technical expertise to enter six new product areas: optical networks, wireless LANs, network security, IP telephony, storage networking and consumerfhome networking. One could argue that only the long-tenn response was strategic and the other was tactical, but the strategy consisted of the combination of both. Without the short-term part, the long-term part could not have succeeded. 5.2 BUSINESS PERFORMANCE MANAGEMENT (BPM) OVERVIEW A. Recall the Hanah’s Entertainment Case and their customer loyalty program, Total Rewards, fi‘om Chapter 1. http://www.sas.com/success/hatrahs.html What was the most important service provided by Hatrah's Total Rewards program? It provided Harrah's with a vast collection of high volume, real-time transaction data about its customers and their behaviors. B. Business Performance Management (BPM) Overview 1. BPM encompasses‘a co .set of processes, including financial and operational pléining, con 'lidation and reporting, modeling, analysis, and monitoring of KPIs, linked to organizational strategy. .jfi‘gf. 2. helps organizations translate a unified set of objectives into plans, menitor execution, and deliver critical insight to improve financial and operational performance. fig 3. BPM refers to the business processes, methodologies, metrics, and f a’ I I tedifiblogies used by enterprises to measure, monitor, and manage business performance. 4. BI is a crucial element of BPM. 5. BPM = BI + Planning (a unified solution) 6. BI used in selling Harry Potter movie DVDs httpzttwww.panoramacomtnewstinduSim-newstbuslness-intelIigence-helps-warner- bros—sell-hergy-potter-dvds-177051.html "if U . E. Understand the glosedgloop..processe§_l? , A Closed-loop Process to 'optimize business performance maritime optimum performance is achieved by these four process steps: - ' 1).Slmt§size. . .. . 7 .. _ . all Where Do We Want to G02. b) setting goals and objectives i a)§'How Do We GetIherePi. W. -' -. , .. j b)':establishin_g_ initiatives and plans to achieve those goalsI 3)Moiiitoriwfl W ' ' ‘5') How Are We Doing?l . b) monitoriugactual performance against the goals and objectivesf' assignment a) fWhat Do We Needto Difi‘erently? H b)‘3taking corrective action I " " .. l giptstrategy to execution. in order is Figure: BPM Cycle ‘ STRATEGY 5.3 STRATEGIZE: WHERE DO WE WANT TO GO‘.’ Page 178 A. Why does a company need a well-formulated strategy? 1) Without specific goals or objectives, it is difficult to evaluate alternative courses of action. 2) Without specific priorities, there is no way to determine how to allocate resources among the alternatives selected. 3) Without plans, there is no way to guide the actions among those working on the alternatives. 4) Without analysis and evaluation, there is no way to determine which of the opportunities are succeeding or failing. 5) Goals, objectives, priorities, plans, and critical thinking are all part of a well-defined strategy. B. What are the basic tasks in the strategic planning process? An organization’s strategic objectives and key metrics should serve as top-down drivers for the allocation of an organization’s tangible and intangible assets. - '- ‘ 1. Conduct a current situation analysis — Where are We? Establi, es a ",2": @521]? G a .. ~ -, . . . .- 2TDeteiinine the planning horizon — produceplans on a yearly basis with the Plazang human running 73.5.3}... .. . ,. , , ., , _. 37.7C'o'nduct an environmental scan-Iiyhichis'a standard strengths, wealniesses, _opportuni_ti_es_,_ andthreats (SWOT)reasessrneiitofthe 4. Identifl critical success factors (CSF) —, key factors thatdeh'neate the things that an organization must. excel'at tae'e'saece's'sa‘fl "5'.'Ccnip'leeagap" analyst 'I'gaps reflect what the strategy-factually \f represents and what the organization aetually'provides 9 10 ii i 6. Create a strategic VISIOD — what should the organizatiqn look like . -. . in thematic? ’ 5.4 PLAN: HOW DO WE GET THERE? Page 130 7.'Deifelop 2? business strategy based on information fijom the ' preyious steps and consistent with tliEE'Sh'ategicjisiénI ' I A) Operational planning and B) Financial planning and budgeting ii. Identify 'sfiatEg"icabiective’s'and goals V \‘v/ a) Strategic objective is a broad statement or course of action that A. Operational planning prescribes targeted directions for an organization. F /,\p \fé b) Strategic goal is a quantification of an objective for a designated \1) Operational plan: plan that translates an organization’s strategic period of time. objectives and goals into a set of well-defined tactics and c) Example: Objective to increase ROA (return on assets) must be \ initiatives, resources requirements, and expected results for some turned into quantified targets (increase ROA by 10-15%) \53 future time period (usually a year). 2) tangentsflsflssemfisns}. pleats, lissarroiectplsnthst is C. The strategy gap, page 180 designed to e " ‘ _' , Iorganization’sistrategfiisrealized} “90 percent of organizations fail to execute their strategies” 3) OMEMg can be __ i ' = ' I 411;! a. ffigfic‘gennie (operationally focused) Best practice W 7‘ Four sources for the gap between strategy and execution: ' if}; Fiorganizations’fendflto utiliie'tactie-eentric operational 1. Communication (enterprise-wide) — employees must know and ‘ planning, iJvhich' begins; are Operational planning'proceiss by understand the strategy and how to act upon it defining—die alternative tactics and initiatives that can be used 2. Alignment of rewards and incentives — example: linking pay to to reach a particular target. performance 1). Budget-cenan (fmancially focused) Arrive at tactics that meet 3. Focus (concentrating on the core elements) financial targets 4. Resources —strategic plans must be funded and resourced B.Financial planning and budgeting tangle.essentialistinstitEE‘TiEiillssléssne as 'n‘ lflonii rs. for the allocation of an organizatlon’s tangible and intangible assets 2) Resource allocations should be carefirlly aligned with the organization’s strategic objectives and tactics in order to-achieve .1- 4.5 '3 r". {Pitt/infih‘il‘h-i Strateglc Success' r’ .. _. c: , : I - 5.5 MONITOR: HOW ARE WE DOING? Page 182 11 ‘ ' 12 B.Pitfalls of variance analysis or Strategic Issue? 1) The vast majority of the exception analysis focuses on negative variances when functional groups or departments fail Grins perfotmansasllwflé ,7. Div‘iiéitb'md er a) Critical success factors to meet their targets _,\' b) Strategic goals and targets , , 2) An effective diagnostic control system encourages 2) How to monitor 1'? if 7 management by exception. , 3) Rarer are positive variances reviewed for potential _. ta) Diagnostic control systems - A cyberneticjystem that hasriiijiu'ts, a i opportunities, and rarely does the analysis focus on 5,, ,. 1.- E Jr, process for transforming the inputs intoro‘utputs, atst'andardiorm 3-} assumptions underlying the variance patterns. ‘2 ’Sfi' 2,. benchmark against which to compare the outputs, and a feiétlback- 1;" 4) Disgoveredrivenplanning a systematic-way to'nncover _. : chaiiiélto allow information on variances between the outputs and pgoblematic.'assumptions' thatotherwise'remainnnnoticed an, the standard to be communicated and acted upon. \\ ,r ,, pnohalléngediffgum'pisng ) __ 1 p. ' w/ 5) The - guiding principle of a beg practice program is firstt I :1 eliminate unnecessary works. t ' ' ' ' 7 n N Figure 5.2 Diagnostic Control System ' m 7 m 7 7 I Figure 5.3 Operational Variance or Strategic Issue? Business strategy l Critical performance variables Inputs Outputs l3 14 B- The Hacker's Gfoup WW 1) Benchmarks the planning and reporting habits of organizations. 2 Hackett’s benchmarking results indicate world-class companies {all ‘ losely align strategic and tactical plans, enabling fimcrional areas to contribute more effectively to overall business W- C. Paucity of analysis (Scarcity) Saxon Group’s findings: 1. Only 20 percent of the organizations utilized an integrated performance management system 2. Fewer than 3 out of 10 companies developed plans that clearly identified the expected results of major projects or initiatives 3. More than 75 percent of the information reported to management was historic and internally focused; less than 25 percent was predictive of the firture 4. The average knowledge worker spent less than 20 percent of his or her time focused on the so-called higher-value analytical and decision support tasks D. Most new projects and ventures fail! Application Case 5.1, page 184, Discovery-Driven Planning: The Case of Euro Disney (Disneyland Paris) 1. Hollywood movies: 60% chance of failure 2. Mergers and acquisitions: 60% . 3. IT projects (large-scale): 70% salutmn: 4. New food products: 80% 5. New pharmaceutical products: 90% Problem: Benefits: . ORMA UREMEN , 5.6 ACT AND ADJUST: What do we need to do differently?, p. 185 PERF NCE MEAS T Page 188 ,5? A. Performance measurement system is a system that assists managers in tracking the implementations of business strategy by comparing actual results against strategic goals and objectives. ; performan ti maswamrm sHs-nm new be used as a. (.{J'acrneS'll c. .__,;..__._ 15 16 Cflh‘i'mi H Slim A. Success (or mere survival) depends on new projects: creating new products, entering new markets, acquiring new customers (or businesses), or streamlining some process. 1) Comprises systematic comparative methods that indicate progress (or lack thereof) against goals a. align top-level strategic objectives and bottom-level initiatives b. identify opportunities in a timely fashion c_. determine priorities and allocate resources based on those priorities ‘2 2. An efective performance measurement system should do these three: *9 . '9‘ H I Key performance indicator (KPI) A KPI represents a strategic objective and metric that measures performarfie a ainst a goal KPI moiuS jargon r Eye all tramway-unit: C. Distinguishing features of KP15 1) W— a strategic objective 2) Targets - what you want to achieve 3) “Riggs: above, on, or below target 4) Efi'éfid'u'igs — ranges are encoded in software, enabling visual display __._———-— (green, yellow, red) 5) Time frames — time intervals to accomplish the targets 6) We targets are measured against benchmarks or baselines i (W D.The most popular system in use is some variant of the balanced I lar’é'i’ | l7 scorecard (BSC) Effiimures supported by customer, internal process, and learning and growth metrics Good performance measures should: :1. Be focused on key factors. b. Be a mix of past, present, and fiiture. c. Balance the needs of all stakeholders (shareholders, employees, partners, suppliers, etc.). d. Start at the top and trickle down to the bottom. e. Have targets that are based on research and reality rather than be arbitrary. A.An effective performance measurement system is more than keeping score. It must accomplish the aims of the organization. g B.Tvvo widel used a roaches that sport BPM balanced "F % A performance measurement and management methodology that helps trailslate an organization’s financials, customer, internal process, and learning and growth objectives and targets into a set of actionable initiatives. See Figure 5.4 Balanced Scorecard Perspectives, page 193 Financial 'l’o succeed I financially, how should we appear to our shareholders? lrltamai Business Processes "To satsfy our .. shareholders and “ Customer "To achieve our vision, how shouictwe appear to our tnstmners‘l' aislomers, what business processes must [I eaauras II amen IIIII lnllla’tllles- Learning and Growth “To achieve our .' vision, haw win ‘ we sustain our ability to change and lrnpme’l' D. The meaning of “balance ” $331. BSC is desi ed to overcome the limitations of systems that are ’ only financially focused. 19% I 2 Rivas-t bust‘rass 2. Non-fmancial objectives fall into one of three perspectives: Q59 3) Learning and amt“ COmpci’I-i'nf- A pplication Case Study 5.3, page 190, International Truck and Engine Corporation This case describes the Web-based KPI portal and offers insights into the steps this company took to implement its performance measurement system. Problem: Solution: Benefits: 5. 18 What steps did International Truck and Engine use to create the measures fiJr its system? What factors were critical to its success? International Truck and Engine created the measures for its system by surveying its financial managers, then re-surveying them annually to determine measures to add, continue or drop. The critical factors in this system’s success were: 0 A highly committed executive sponsor Adequate funding An incremental development and release schedule A thorough Web-based requirements assessment A knowledgeable and talented team A core of subject matter experts An existing data warehouse A pilot to demonstrate the value and Validity of the product Trust in the data Communication to explain the benefits, functionality, and rollout of the new system 8 BPM METHODOLOGIES, Page 192 I?! {234’ W 4“ 1. Customer 2. Internal business process 3. Learning and growth 3. In BSC, the term “balance” arises because the combined set of measures are supposed to encompass indicators that are: 1. Financial and nonfinancial 2. Leading and lagging 3. Internal and external 4. Quantitative and qualitative 5. Short term and long temi E. Strategy map A visual display that delineates the relationships among the key organizational objectives for all four BSC perspectives martian rate i 15% and mainmanea cataracts ' ..-_..ml 9:: ndatimd cal camar- meaning F. Six Sigma "BE-5C, has oil-i ntmcfaii 20 and hen- fi-nimdafl ' «35‘ Sf ma ( L9 4’) . 1 De ition: performance management methodology aimed at reducing the number of defects in a business process to as close to zero defects per million opportunities (DPMO) as possible . 2. Sigma, 0', is a Greek alphabet letter used by statisticians to measure the variabilig} in a process. 3. Recall the DMAIC performance model a) DMAIC is a closed-loop business improvement mode] that encompasses the steps of defining, measuring, analyzing, improving, and controlling a process b) DMAIC is utilized in Six-Sigma based data mining processes. - 4. Six Sigma process is ordinarily utilized in manufacturing, service delivery, management, and other business activities that rely on eliminating defects, waste, and quality control problems. SKIP 5.9 3PM ARCHITECTURE AND APPLICATIONS 5.10 PERFORMANCE DASHBOARDS, page 207 fig ht_tp:i’l‘wwwmicrosh‘ategy.comfdashboardsrl Play a 1-minute video and glance at the myriad of examples. 21 3. Performance dashboard is a multilayered application built on a business intelligence and data integration infi'astructure that enables organizations to measure, monitor, and manage business performance more effectively. 4. Dashboard design “The fundamental challenge of dashboard design is to display all the required information on a single screen, clearly and without distraction, in anner that can be assimilated quickly" (Few, 2005) 5. at to look for in a dashboard a. Use of visual components (e.g., charts, performance bars, spark lines, gauges, meters, stoplights) to highlight, at a glance, the data and exceptirms that require action b. Transparent to the user, meaning that it requires minimal training and is extremely easy to use c. Combines data fi'om a variety of systems into a single, summarized, unified view of the business (1. Enables drill-down or drill-through to underlying data sources or ' reports e. Presents a dynamic, real-world view with timely data updates f. Requires little, if any, customized coding to implement, deploy, and maintain 6. Create them: 0 DIY: PowerPivot - Quickly: SharePoint 2010 PerformancePoint Services I Custom-made: custom SharePoint, Silverlight, and .NET development Figure: Key Performance Indicator (KPI) 23 A. Dashboards and scorecards both provide visual displays of important information that is consolidated and arranged on a single screen so that information can be digested at a single glance and easily explored. .Uso the drop list emu-at; In this right to select in rim pried .1sz a: lil- limo". Humans, l_1'h"l¢h!hli will ML ' — mme peters-w . -1n=!elhum'l-N_|! I ‘ ‘ .. on . a e‘ '- lmmuu (curb-iriac' lineman Bnnu - - Del-mica! B. Dashboards versus scorecards 1. Performance dashboards: a) Visual display used to monitor operational performance (free form) b) Dashboards - Contains scorecards, analytical reports, and other analytical viSualizations 2. Performance scorecards: a) Visual display used to chart progress against strategic and tactical goals and targets (predetermined measures) b) Scorecards - Table (pivot-like) of KPIs 22 r.... .....w..m,n v, has... ..-..._.._.._.__.. a. m. ...__... ...__...__.__. ...__.. I I r _ Goal and EEI Sales Targets E E El Salas Target names 4172459_ 40000:": . .1, Reiter, Tsvi 2222123 2225mm ‘ ¢ . E Saraiveflosé 1637614 1800000 . E E Tsoflias, Lynn 701457 545000 . 1 I g . i Valdez-Smythe, Rachel 961123 nuance 0 ¢ : Vargas, Garrett 1373290 145mm: i Application Case Study 5.6, page 209, Dashboards for Doctors hfipzll'mvwemanet/webemars.html This case exemplifies a tactical dashboard in the emergency room system. Tactical dashboards are used by managers and analysts to track on a daily or weekly basis the detailed and summarized data generated from departmental processes and projects. "Our Web-based Emergency Medicine Analysis & Reporting System uses customized dashboards and web analytics to monitor the performance of clinical. financial, and patient satisfaction metrics of EMA managed emergency departments, and provides crucial and actionable information to Emergency Department Physicians, Nurses and Administrators. WEBEMARSTM also uses alerts and customized dashboards to search for unusual spikes in various medical symptoms, providing the first fully 24 ...
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This note was uploaded on 12/14/2010 for the course ISDS 2001 taught by Professor Herbert during the Fall '08 term at LSU.

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ISDS 2001 CH5 - CHAPTER 5 — BUSINESS PERFORMANCE...

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