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Variances can indicate that the tactical plan has not been fully implemented or that some tactics either are not working or are costing more than planned. It also may be that the assumptions made during the plan and budget process are no longer true. Triggering the process for the affected areas may be able to correct this imbalance by reallocating resources.
Chapter 1 illustrated how issues arising out of traditional processes contribute to the strategy gap. As shown in this chapter, CPM processes overcome these issues by:
• Providing clear linkage to the strategic plan. Each CPM process supports the implementation of strategy. These processes describe how strategy and associated tactics are to be put into action by
Corporate Performance Management Processes
operational managers. They also measure the success of those tactics in achieving strategic goals.
• Introducing clarity and purpose. Each process within CPM has a defined purpose. This purpose is clearly communicated to participants so that the right level of resources, time, and effort can be focused on achieving the desired results.
• Using events to trigger change. The implementation of strategy is a continuous activity. Exceptions encountered over time are used as the triggers for change to ensure tactical plans deliver the right strategic goals.
• Presenting a market-based view. The formation of strategy is greatly affected by external events. CPM processes capture external information and combine it with internal data to give an essential, holistic view of organizational performance in context of the market rather than just an internal perspective.
• Focusing strategically instead of just tactically. Financial measures based on the chart of accounts provide a focused view of performance that by themselves do not relate to activities required for strategy implementation. All CPM processes provide a broader view that looks at the performance of strategy and the resulting impact on financial results.
• Providing early warnings. Corporate performance management provides sophisticated forecasting capabilities that give an early warning of exceptions. This early warning allows users to evaluate possible corrective actions or to select alternative scenarios as required.
1. Nigel Rayner, Frank Buytendijk, and Lee Geishecker, The Processes That
Drive CPM, Research Note COM-16-2849, Gartner, Inc., May 8, 2002, 1.
2. Ibid., 2.
3. Daniel H. Gray, “Uses and Misuses of Strategic Planning,” Harvard
Business Review, no. 86105 (January-February 1986): 89-97.
4. Gerry Johnson and Kevan Scholes, Exploring Corporate Strategy, 5th ed.
(London: Prentice-Hall Europe, 1999), 104.
5. Ibid., 215.
6. Adrian J. Slywotzky, David Morrison, Ted Moser, Kevin Mundt, and
James Quella, Profit Patterns: 30 Ways to Anticipate and Profit from Strategic Forces Reshaping Your Business (New York: Random House, 1999).
Measurement and Methodologies
DOES MEASUREMENT MAKE A DIFFERENCE?
Cisco Systems is a worldwide leader in networking for the Internet. It provides networking solutions that connect the computing devices and computing networks making up the Internet and most of the corporate, education, and government networks around the globe. Cisco has been in business since 1984. In 1995 Larry Carter became Cisco’s chief financial officer (CFO). At the time, Cisco took 14 days to close its books. By most measures this was considered better than average, but not to Carter. Cisco’s revenue was growing at a compound annual rate of better than 60 percent. Worried that in 14 days a company with that rate of growth could “spin out of control,” Carter set out to reengineer Cisco’s financial processes.1 By 1999 he had succeeded. The result was the “virtual close”—the ability to close the financial books within an hour’s notice and to disseminate information instantly across their intranet. The system was highly touted not only by Cisco’s senior management but also by the press and a variety of pundits, including the “big five” consulting firms. The system worked well until 2001. In the first few months of that year, Cisco failed to meet investor expectations. Its inventories doubled. In the third quarter of 2001, Cisco reported a loss of $2.69 billion. As their chief executive officer (CEO), John Chambers, noted, “This may be the fastest deceleration of any company of our size has ever experienced.”2
What happened to the virtual close? It was supposed to give Cisco the ability to react instantly to changing market conditions. Chambers
Measurement and Methodologies
Exhibit 4.1 Changes in financial performance before and after implementing a structured performance management system.
Financial Ratio Average Before Average After Average Change
Total shareholder return -5.1% 19.7% 24.8%
Stock return -0.13% 0.18% 0.31%
Price/book value of total capital 0.03% 0.26% 0.23%
Real value/cost -0.06 0.13 0.19