TWO POPULAR TERMS FROM the last fifteen years are corporate performance management (CPM) and enterprise performance management (EPM). They are synonymous terms. The only difference is that the public government community prefers the latter because the former refers to “corporate,” a word that can alienate government professionals because it appears to refer to commercial businesses. So, we will only use the term EPM.

In Figure 2.6, the enterprise performance management (EPM) methods were represented by an ellipse in “The Mechanism” floor of “The House of VBM.” The depiction of EPM in this figure was intended to illustrate the role of EPM with the balancing of the three scales (results/resources/risks) required to maximize the delivery of stakeholder value. In this chapter we build upon that simple depiction to more completely describe the role EPM plays in ensuring this essential balancing of management considerations.

MANAGEMENTS' DELUSION THAT THEY HAVE EPM METHODS

Many organizations overrate the quality of their EPM methods and their IT systems, both in comprehensiveness and the degree of integration among the EPM methods. For example, when you ask executives how well they measure and report either costs or nonfinancial performance measures, most proudly boast that they are very good. This conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.” Every organization cannot be above average!

Let's not attempt to be a sociologist or psychologist and explain the incongruities between executives boasting superiority while anonymously answered surveys from their subordinate managers reveal inferiority. Rather, let's simply describe the full vision of an effective integration of EPM methods that organizations should aspire to possess.

First, we need to clarify some terminology and related confusion. EPM is not solely a process or a system. It is instead the integration of multiple managerial methods – methods that we earlier mentioned have mostly been around for decades, well before the term “performance management” was added to our business lexicon and arguably before there were even computer systems to support these methods. This is why we refer to EPM as being EPM methods. EPM is also not just a CFO initiative with a bunch of scorecard and dashboard dials. It is much broader. Its purpose is not about monitoring the dials of a balanced scorecard or dashboards but rather moving the dials.

Second, the authors of this book seek to share a broader vision for EPM – a vision that will more clearly add to generating stakeholder value across the entire organization. For those readers who have been previously introduced to the term Enterprise Performance Management, we ask you to put your current thoughts on hold for the time being and consider the following.

As we indicated in Chapter 2, the ultimate objective of any organization is the creation and delivery of maximum stakeholder value. As discussed in that chapter, this occurs when targets are set that will achieve that value. An organization then moves toward delivery of that future target value based upon wherever the organization is at a particular point of time. These are often referred to as the “As-Is” and “To-Be” states. The first step in this process can be represented as shown in Figure 5.1.

As seen in Figure 5.1, an organization needs to set a target for delivery of maximum value based on its proposed delivery of results, resources to be consumed, and risks to be accepted. This is reflected in the right side of the figure – the future target value. Setting these targets for results, resources, and risks needs to consider the multiple tradeoffs among these three considerations, as represented by the circles and arrows in the right side of the figure. Setting future targets also needs to consider the organization's current balance of results, resources, and risks, and determine a plan to get from the balance for “Today's Value” to that of the proposed “Future Target Value.”

Moving from today's “As-Is” to the future “To-Be” may be a significant undertaking and require formal project management as the organization moves to revise processes and priorities in the delivery of results, allocation and consumption of resources, and the management of risks. This is reflected by the left-to-right horizontal arrows connecting the current and future states in Figure 5.2.

Finally, as we have noted previously, constant change is a fact of life. It is essential that as EPM seeks to move the organization from the “As-Is” state of “Today's Value” to the proposed “To-Be” state of the “Future Target Value,” changes in the internal and external environments are evaluated and responded to in a timely fashion.

Progress in achieving results may be faster or slower, or more or less robust, than was originally planned. Similarly, the consumption of resources may differ from the original budget, and the assessment of risks may change over time. We thus need to monitor the progression of results, resources, and risks over time in moving from the “As-Is” to the “To-Be,” and make adjustments as necessary to maintain an optimal balance among our tradeoff considerations. This ongoing monitoring and adjustments (as appropriate) are reflected in Figure 5.3. As adjustments may become necessary in the journey toward value delivery, the projection of optimal results may need to be adjusted over time.

EPM METHODS ARE LIKE MUSICAL INSTRUMENTS IN AN ORCHESTRA

The authors like to think of the various EPM methods as analogous to musical instruments in an orchestra. An orchestra's conductor does not raise the baton to the string, woodwinds, percussion, and brass instruments and say, “Now everyone play loud.” They seek balance and guide the symphony composer's fluctuations in harmony, rhythm, and tone.

Here are five primary components of the EPM methods as they apply to government. They are the musical instrument sections:

1. Strategy execution. This component was described in Chapters 3 and 4. It is where a strategy map and its associated balanced scorecard with key performance indicators (KPIs) fits in. The authors recognize that there are several strategy management methods, but since the strategy map and its balanced scorecard are a prominent one, we selected it to describe. (It was discussed in detail in Chapter 4.) Together a strategy map and its balanced scorecard serve to translate the executive team's strategy into navigation aids necessary for the organization to fulfill its vision and mission. The executive's role is to set the strategic direction to answer the question “Where do we want to go?” Through use of correctly defined KPIs with targets, the priorities, actions, projects, and processes of managers and employee teams become aligned with the executives' formulated strategy to execute their strategy.
2. Cost visibility and driver behavior. This component will be discussed in detail in Chapter 8, “Resource and Cost Management.” For commercial companies, this is where profitability analysis fits in for products, standard service-lines, channels, and customers. For public sector government organizations, this is where understanding is necessary that processes consume resource expenses in the delivery of services and report the output costs, including the per unit cost, of their services. Activity-based costing (ABC) principles model cause-and-effect relationships based on cost drivers. This involves progressive, not traditional, managerial accounting such as ABC rather than calculating costs with broadly averaged cost factors without causal relationships. Cost visibility does not end with calculating only the costs of services. It includes “full costing” to detect different types of citizens or stakeholders who disproportionately consume an agency's expenses across a spectrum of being difficult (i.e., high demanding) or easy (i.e., low demanding) at the end extremes.
3. Risk management. This component will be discussed in greater detail in Part Four. Risk management serves as a brake to the potentially unbridled gas pedal that EPM methods are designed to step hard on. For commercial businesses, risk mitigation projects and insurance require spending, which reduces profits, which in turn adversely impacts compensation incentive bonuses for executives. For public sector organizations, risk management is one of the three balancing scales. It takes discipline to ensure adequate attention is placed on appropriate risk management practices.
4. Forecasting, budgeting, and predictive analytics. This component will also be discussed in detail in Chapter 13. Data mining typically examines historical data “through the rear-view mirror.” This EPM component directs attention forward to look at the road “through the windshield.” The benefit of more accurate forecasts is reduced uncertainty, which is an aspect of risk management. This contributes to the balancing of the three scales – results, resources, and risks. Forecasts for the future volume and mix quantities of services for citizens and other stakeholders are core independent variables. The costs are the dependent variables. In complex environments forecasting may rely on predictive analytics (e.g., regression analysis). Based on those forecasts with which so many dependent variables have relationships, process-related costs derived from the resource expenses can be calculated and managed. Examples of dependent variables are the future headcount workforce and spending levels with suppliers and contractors. CFOs increasingly look to capacity-sensitive driver-based budgeting and rolling financial forecasts grounded in ABC principles using this component.
5. Process improvement. This component will be discussed in Chapters 7 and 12. This is where business process reengineering (BPR), lean management, and quality management (e.g., Six Sigma) initiatives fit in. Their purpose is to remove waste and streamline processes to accelerate and reduce cycle times. They create productivity and efficiency improvements.

What makes for exceptionally good EPM is that its multiple managerial methods are not only individually effective, but they are also seamlessly integrated and imbedded with analytics of all flavors.

Examples of analytics are segmentation, clustering, regression, and correlation analysis.

ENTERPRISE PERFORMANCE MANAGEMENT (EPM) METHODS IN GOVERNMENT

Enterprise performance management (EPM) methods serve as enablers for VBM. Their primary focus is on two of the three “scales” in Figure 2.1 (i.e., costs). The EPM methods assist an organization to align its resources and their associated costs to achieve policy and strategic objectives, measure results against targets, and identify the best opportunities for improvement. However, organizations that have been implementing improvement methods in isolation of one another miss the increased value from the synergy of seamlessly integrating the EPM methods with IT technologies to facilitate achieving the full vision of the VBM framework.

The good news is that EPM methods are not new methods that everyone now has to learn, but rather they are the assemblage and integration of existing methods with which most managers are already familiar. They may not have yet implemented some (or any) of the EPM methods in their agency, but they may likely be aware of other agencies who have implemented such management approaches.

With EPM methods, organizations can proactively manage their risks, costs, processes, and programs by monitoring performance and exploring problems or issues that are obstacles to achieving the “Results” scale in Figure 2.1. All of this information can be used in turn to develop and justify budgets, which involves the “Resources” scale in Figure 2.1.

Government agencies can expect to improve their processes and achieve service-level expectations and overall program success by focusing on the following: communication of results, performance optimization, insight into prioritization and resource allocation, cost reduction through cost analysis and cost management, and collaboration among managers and employee teams to collectively improve performance.

The authors were tempted to call this book Enterprise Performance Management in Government. But that title does not provide a sufficient and complete description. What is needed is to place an emphasis on value: creating value for all stakeholders. Hence, “Value” is in the book's title.

Using the two terms – VBM and EPM – introduces a problem of nomenclature and semantics. The analogy of an automobile provides a way to grasp the terms. The EPM methods are like a car's engine, chassis, and tires. They are needed for motion. VBM is like the fuel, global positioning system (GPS), and the driver. The fuel represents the capacity of resources (e.g., expenses such as salaries and supplies). The GPS represents navigating the direction the government agency is headed to achieve its objectives. The driver is needed to manage, including reacting to unplanned events. The EPM method involving costs is not fuel itself. Costing and budgeting methods determine the type and quantity of the fuel needed for VBM.

Traction, direction, control, and speed: the EPM methods provide the traction and speed; VBM provides for the direction and control. As described in Chapter 2, VBM is about balancing performance (for stakeholders), costs (resources expenses consumption), and risk.

One can think of the EPM methods as a closed-loop integrated framework that spans the complete management planning and control cycle, including the processes, metrics, methods, systems, and software tools that collectively manage implementing an organization's strategy and its policies. Also, EPM methods have existed in organizations for decades, well before the term “performance management” was added to our business lexicon and arguably before there were even computer systems to support these methods. What is different in the twenty-first century is that information technologies can electronically link EPM methods into an integrated technology platform. This topic will be described in Chapter 15.

SEAMLESS INTEGRATION OF EPM METHODS AND IT SYSTEMS AS AN ASPIRATION

CFOs often view financial planning and analysis (FP&A) as synonymous with EPM. It is more appropriate to view FP&A as a subset of the EPM methods. And although better cost management and process improvements are noble goals, an organization cannot reduce its costs forever to achieve long-term prosperity.

The important message here is that EPM methods are not just about the CFO's organization. The message is that what is needed is the seamless integration of all the often siloed and self-serving functions and departments of the organization chart. Silo behavior is typical in any organization.

Look again at the five EPM components described above. Imagine if the information produced and analyzed in each of them were to be seamlessly integrated. Imagine if they were each embedded with analytics, especially predictive analytics. Then powerful decision support is provided for insight, foresight, and actions. That is the full vision of how VBM can be supported by the EPM methods to which government agencies should aspire in order to achieve the best possible performance.

Today, outstanding EPM systems are an exception despite what many executives proclaim. If organizations have effective and sound leadership and their management teams all work hard and smart enough, then in the future EPM methods as a seamlessly integrated system will be common and standard to support VBM.

THE THREE Rs OF VBM

EPM can generate significantly greater value when it serves in a role to integrate considerations of results to be achieved, resources to be allocated, and risks to be accepted, all in the pursuit of delivering the greatest possible stakeholder value. The next three chapters of this book will take the reader through a description of the balancing and integration of these components of stakeholder value. The three components that are the 3 Rs of VBM are risk, results, and resources.