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The analysis for the last question may result in another budget pass. This would require communication of new pass objectives and any changes made to KPIs and top-down targets.
The Strategy Gap
Threshold Planning. Although operational managers may work with only one tactical plan, the consolidated plan should store a range of threshold values for KPIs and other key metrics. These threshold values, whether good or bad, are used to trigger an alternative process if they are exceeded. For example, the cost of goods sold (COGS) may be budgeted at 15 percent. A lower threshold value of 13 percent and an upper value of 15.5 percent may be set. If these are exceeded, an alert is generated that causes the rebudgeting of those items affected by the measure. If a budget is not being achieved, there may be a case for reallocating resources from tactics that are not working to those that are. If a budget is being overachieved, the organization should question whether targets were too low (or market assumptions were incorrect) and should be set higher to maximize the plan’s return.
The purpose of this process is to transform strategy into reality. The communication process is unique in that it does not rely on systems, methodology, or metrics, although they can support the process. Putting strategy into action involves changing organizational behavior. Communication is the key.
Employees need to know what their role is in putting tactical plans into action and how they will be measured. Employees want to do a good job. When they have clearly defined goals and a clear line of sight to strategy, they will do a better job of setting priorities and making decisions in support of strategy.
Communication is made easier when employees have access to a company intranet on which plans and results can be published and updated. Some organizations arrange informative and motivational kick-off meetings at which plans are presented and employees are shown that CPM is a management system, not a stick with which to beat them. Whatever method is chosen, strategies and plans do not automatically become actions. To accomplish this transformation, managers must change and guide employee behavior.
Typically, performance measurement and other types of control systems are used to determine whether resources are being properly allocated—
Corporate Performance Management Processes
based on a comparison of actual to planned expenditures—and whether objectives and targets are being met—based on a comparison of actual results to planned results. However, organizations also should use these systems to determine the reasonableness of their resource allocations (the budget) and the ongoing validity of their strategic assumptions. Consider for a moment the two paths depicted in Exhibit 3.6. In this figure the dashed line from point A to point B represents planned results over a specified period of time. Recognizing that there will be minor deviations from plan, one might expect the actual results to deviate slightly from the targeted results. A deviation that is larger than expected typically is viewed as an operational error that needs to be corrected. However, what happens if the strategic assumptions are wrong, not the operations? What if the organization needs to change strategic direction toward point C, which could be a more effective alternative? The only way to make this sort of determination is to continually monitor the strategic assumptions on which the plan is based.
With CPM, monitoring consists of activities that review the financial plan, the tactical plan, and assumptions. Traditionally, the frequency of these reviews has depended on the industry and the organization’s needs. For example, many companies adopt a monthly process for monitoring the financial plan, while those involved in high-volume manufacturing elect to monitor the tactical plan on a weekly or even daily basis.
Exhibit 3.6 Operational error, or bad assumption?
The Strategy Gap
Corporate performance management systems support these regular reviews. However, they also support the automated monitoring of transactions and other business activities on an ongoing, real-time basis. When an exception occurs that threatens the implementation of strategy, the appropriate users are alerted. The system user can then conduct a full investigation.
As with any review, it is very easy for users to wander unguided through summary results, missing exceptions and opportunities hidden in the details. Efficient and effective monitoring requires focusing on the few significant variances rather than trailing through every exception for every customer, product, and market combination. A review methodology for monitoring actual variances, similar to the one set up for reviewing a budget pass, is important to the process. Analysis of variances, particularly those outside of the thresholds set during the budgeting process, may trigger other CPM processes.