"Passionate” EPM and Conquering the Execution Gap

Professor Andy Neely’s research finds that the right measurements and empowered employees can move EPM from tactical to strategic benefit.

PROFIT Online: Your research starts out with a reference to a seminal paper on performance management. Can you give us some historical context for your work?

NEELY: We chose to start the report by referring to The Performance Measurement Manifesto as it is one of the classic papers on performance measurement. Written in the early ’90s by Bob Eccles and published in the Harvard Business Review, one of the most memorable quotes in the paper was, ‘Within the next five years, every organization will have to re-engineer their performance measurement system.’ When that particular piece was being written—in the late ’80s and early ’90s—there was a lot of angst in the U.S. about how well Japan was doing as a manufacturing economy. There were lots of questions about whether western countries could compete with the new Japanese manufacturing methods. One of the reasons it was difficult for the West to compete was that existing measurement and incentive schemes appeared to drive short-term behavior, which was further re-enforced by people’s perceptions of what Wall Street wanted. The result was that many firms Western failed to make the long-term and fundamental investments required to build capacity for the future.

So Bob Eccles and others argued for a radial change in the way that firm’s measure their performance. And Eccles’ position was, ‘Everyone’s going to face this. In the next five years, we’re all going to have to change the way we measure performance.’

PROFIT Online: Did your research find that the adoption happened this fast?

NEELY:Yes and no. The yes is that we can see that many organizations are trying to re-engineer and change their measurement systems. So there’s lots of interest in how do we get better measurement systems into the organization. But I would say, no, the predictions in the performance measurement manifesto haven’t come true in terms of Bob Eccles’ original time frame.

It’s almost 20 years later, and we’re still working on measurement. I think there’s a really important point that underlies this, which is that too often people see the design and deployment of an EPM system as a project. It’s got a start, it’s got a finish; when we’re done, we’re done, and we can move off to the next project.

My view on EPM systems is that they actually evolve over time. And one of the things that organizations should be doing is paying much more attention to how they manage the evolution of their EPM system, so that as the organization changes, they change the EPM system that supports them in making decisions as managers.

PROFIT Online: You also found that companies with EPM already installed are not taking full advantage of their systems. What is the ‘execution gap’?

NEELY: The execution gap is really the shorthand we use to explain why we feel it is that firms are failing to reap the full benefits of EPM. And what the data in the report suggests is that regardless of the country you look at—whether it’s Australia, China, Japan, the U.K., or the U.S.—firms have made significant investments in their EPM systems. They’re reaping some benefits from them, but there’s a lot more that they could get in terms of insight from the data and impact on decision-making.

And when we were looking at why companies aren’t reaping the benefit of their measurement systems, we found three broad categories that we grouped together under this execution gap.

The first one we called ‘creating the passion.’ That’s really concerned with issues of buy-in, trust, and advocacy. So, do people believe in what’s being measured? Do they believe in the data? Do they think that the measurement system’s being used in a sensible way inside the organization?

The second broad category is the enabling infrastructure, and that is all about issues of data quality and integrity, as well as software support. We still have a situation where Excel is the most popular software support tool for EPM systems. You kind of worry that large, complex organizations with thousands of individual managers, each with individual Excel spreadsheets, is probably the most common way of coordinating information flows. But we still seem to be in that position.

Then, the third major factor we talked about was knowing what success constitutes. That’s all about understanding what good looks like, and how close you are to being world-class. And interestingly, one of the observations we make in the report is that a lot of firms are overconfident in their own ability.

So, one of the questions we asked was about how individual firms compared with their peers. And the vast majority of people said they were above average. Well, there’s no way everyone can be above average, and you worry a little bit that too many firms are too inward-looking and not really as well aware as they should be of their real position in their industry.

PROFIT Online:‘Passion’ is not a word I expected to encounter while reading research about EPM.

NEELY:That’s an understandable comment, but we used the word passion very deliberately. Many people see measurement as a technical process. The classic view of the measurement system is, ‘We’ll set a target, we will use the measures to track how far we are from achieving the target, and we’ll take corrective action if we’re not delivering.’ That’s a fairly classic sort of control cycle inside organizations. But if you only think of measurement that way, you’re really missing a trick. What really good organizations are able to do with their measurement systems is create meaning for people inside organizations, which helps people see why their job matters.

So, a good example: If I go to somebody working on the front line in a retail bank, and I say to them, ‘Look, we’re really trying to increase shareholder value because it matters to our shareholders that we generate good economic profit,’ the person on the counter in the bank is not really going to care that much about the economic profit of the bank as a whole. They’re not really going to care that much about shareholder value unless they happen to be a shareholder themselves.

Whereas if I went to the person on the front line of the bank, and I said, ‘We’ve looked quite carefully at what we’re doing inside this organization, and we think there are five major drivers of success in this organization, and one is about how well we look after our customers.’ I can use language then that actually means something to somebody at the front line. Now, I can say to the person, ‘You particularly will influence how we deal with customers. You’re the person who touches the customer all the time. The reason your role really matters is that you are the moment of truth for the customers.’

So I think what measurement can do, when it’s presented in a sensible way, is actually give meaning to people at every different level in an organization. It allows them to see whether or not they’re doing a good job, whether or not they’re being successful, whether or not they’re helping the overall organization succeed.

And generally people in organizations want that. They want to go to work and feel like they are working as part of an organization that’s doing something that matters—something that makes some sense, that makes the world a better place. And measurement, when you get it right, gives people that understanding.

PROFIT Online: How does the tactical view of EPM contrast with the possibility of creating strategy through intelligent measurements?

NEELY: One of the biggest surprises in this research was the extent to which people are still using measurement tactically. People have been talking about the strategic role of measurement for a long time. And yet when you ask people about the role measurement plays in their organizations, the most common role is still making operational decisions. They track inventory levels, budgets, cost of goods sold. It’s important, and you need to do that to make sure the organization functions. But I was quite surprised that people weren’t more aware of or didn’t promote more the strategic use of measurement.

I think one of the reasons for that might well turn out to be an advocacy gap, one of the gaps under the ‘creating the passion’ heading that we just talked about. One of the interesting findings was that the more senior you were in the organization, the greater your level of advocacy for measurement. So, chief exec level: They were the strongest advocates. Senior management team: They were pretty strong but not quite as strong as the chief exec, and as you went down the organization, people became less and less convinced about the value of the EPM system.

And I think that may be partly, we’re still using EPM systems in the wrong way. We’re still using them to monitor operational activity; we’re still using them primarily in that engineering control type cycle I just talked about: ‘We’ll set a target, we’ll see how well we’re doing toward the target. If we’re not doing well enough, we’ll take corrective action.’ I think that’s not the way to get the most value from the measurement system.

Profit Online What are the most important next steps for businesses to tackle if we’re going to get the maximum value from EPM?

Neely I think the first thing is taking a strategic approach to EPM. You have to be really clear about what you’re measuring, why you’re measuring it, how you’re measuring it and how you’re going to use the data.

You need to be clear about how you’re going to use enterprise performance management software, investing in that which will help you drive the business forward. People spend so much time gathering and collating data from different sources that they don’t get around to analyzing and interpreting the data—and understanding the messages behind it. When you see a really skilled performance analyst at work, what you see is somebody who interprets the story behind the data and communicates the implications of their analysis in a compelling way. Good software can help with this.

Also, over the years we’ve trained lots of people to be really good at extracting data from multiple spreadsheets, integrating the data into a report and delivering that report to decision makers. What we haven’t done is given performance analysts the skills they need to explore data. I think it is crucial for senior executives to look at their organization and ask, ‘Do we have the capabilities in place to make sense of this vast amount of data that we’ve got access to?’ And of course, the amount of data is increasing all the time as organizations enhance their IT infrastructures. Learning to process and analyze vast quantities of data, extracting real business insights is going to be a core capability for the future.