Associate Professor Suresh CuganesanMacquarie Graduate School of Management, Macquarie University
Professor Andy Neely and Dr Bassil YaghiCranfield School of Management Centre for Business Performance
Nigel YouellOracle
Enterprise Performance Management:The Australian State of the Art
Enterprise Performance Management: The Australian State of the Art2
About the AuthorsAssociate Professor Suresh Cuganesan teaches at the Macquarie Graduate School ofManagement where he is also the Associate Dean (Research). Prof. Cuganesan hasworked in the areas of management consulting and finance, currently occupies aposition on CPA Australias Business Management Centre of Excellence, and is amember of the Asian Board of the American Academy of Financial Management. He haspublished 3 books and more than 50 articles, conference papers, and book chapters.
Professor Andy Neely is Director of Research at Cranfield School of Management,Deputy Director of AIM Research, the U.K.s research initiative on management, andChair of the Performance Measurement Association. He has authored more than 100books and articles on performance measurement and management and is widelyrecognised as one of the worlds leading authorities on the subject.
Dr. Bassil Yaghi is a lecturer at Cranfield School of Management. Bassil Yaghi isresearching, teaching, and consulting in strategic management with an emphasis onstrategy development and balanced scorecards. His research and academic andexecutive teaching is grounded in his extensive practical experience in the industry aspractitioner and consultant.
Nigel Youell is Director, Global Integrated Marketing for Performance Management atOracle Corporation. He has over 25 years of experience in IT covering a wide range ofsenior management roles. Organisations that Nigel has worked for include HyperionCorp, Comshare Corp, The Strathclyde Institute, Morgan Crucible plc and Marconi plc.Nigel has spoken internationally and authored a number of articles on PerformanceManagement.
Enterprise Performance Management: The Australian State of the Art 3
Executive SummaryThe field of enterprise performance management continues to grow exponentially. Newkey performance indicators (KPIs) routinely emerge and are said to provide newperformance insights and a panacea to the problems of aligning behaviours with keybusiness drivers. Somewhat paradoxically, global research indicates a level of inertia inenterprise performance management systems. While the problems of financialmeasures are well known, evidence indicates their dominance in organisationaldecision-making. Concurrently, more nonfinancial KPIs are being used, but theirproliferation is also their weakness, with executives left wondering which ones to focuson and how they influence financial performance. As a result, many organisationsextract an insufficient return on measurement from their enterprise performancemanagement systems.
In Australia, there has been a dearth of evidence on practices in the field of enterpriseperformance management. This report presents evidence on the state of the art inAustralian enterprise performance management. It is one part of a broader global studyacross five countries: the United Kingdom, United States of America, Australia, Japan,and China. The Australian study was led in Australia by Macquarie Graduate School ofManagement and was conducted in conjunction with Oracle and Cranfield School ofManagement.
Main Conclusions Overall, enterprise performance management systems in Australia reflect the
popularity of balanced scorecard approaches. This performance measurement framework and its prescribed performance perspectives featured prominently acrossthe organisations surveyed.
There is still a lack of balance in Australian enterprise performance management systems. Financial KPIs dominate these systems, and the benefits are predominantlyoperational and tactical rather than strategic. Overall, opportunities exist to enhancethe insights generated from enterprise performance management.
Barriers to effective enterprise performance management practice include:
Tactical use of enterprise performance management systems
Insufficient enterprise performance management buy-in and advocacy
Internally focused enterprise performance management and over-optimism in business performance
Quality of measures and quality of data
Enterprise performance management technology and support
A lack of causal analysis
Enterprise Performance Management: The Australian State of the Art4
Detailed FindingsReflecting the popularity of the balanced scorecard as a frameworkfor guiding the design of enterprise performance managementsystems, 65.5 percent of respondents claim to have one in place[see Figure 1]. Interestingly, no other framework for enterpriseperformance management design is prominent in Australia, with39.3 percent of respondents preferring to use their own basis fordesigning their enterprise performance management system.Reflecting the popularity of the balanced scorecard further,financial, employee, customer and internal processes (perspectivesthat align with the prescribed scorecard perspectives) feature asthe most utilised in enterprise performance management systemsamongst respondents [see Figure 2].
Irrespective of framework utilised, the majority of respondents(70 percent) have attempted to ensure that the KPIs selectedreflect their business strategy [see Figure 3]. This findingostensibly indicates that firms have made significant stepstowards both improving their use of enterprise performancemanagement and reconfiguring their KPIs into strategicperformance measurement systems. Supporting this, 58.5percent of respondents agreed or strongly agreed that theirenterprise performance management system contributed toimprovements in company performance [see Figure 4]. However,other findings of the study suggest a note of caution andopportunities for improvement when assessing enterpriseperformance management practice in Australia.
First, despite claims of a balance in KPIs, 53.7 percent ofrespondents have enterprise performance management systemswhere financial measures comprise more than half of the totalKPIs [see Figure 5]. Indeed, over a fifth of firms surveyed havesystems where financial measures represent more than 75percent of all KPIs. This is despite widespread acknowledgmentof the shortcomings of financial measures, which include:
They are lagging indicators of performance, encouraging too much emphasis on the short-term
Balancedscorecard
65.5% of respondents claim have a balancedscorecard in place.
%ofrespondents
Sixsigma
EFQM Other
70
60
50
40
30
20
10
0
Fig.1: Frameworks for EPM Systems
%reportinguse
100
90
80
70
60
50
40
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Fig.2: Range of Measurement Perspectives
Stronglydisagree
70% of respondents agree or strongly agreethat their measures reflect their strategy.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
50
45
40
35
30
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0
Fig.3: Alignment with Strategy
Stronglydisagree
58.5% of respondents agree or strongly agree that their EPMsystem contributes to improvements in company performance.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
45
40
35
30
25
20
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10
5
0
Fig.4: EPM and Company Performance
Enterprise Performance Management: The Australian State of the Art 5
They provide insufficient detail to enable diagnosis of business problems.
They do not ably communicate or drive desired behaviours throughout the organisation
This finding also casts the results presented in Figures 2 and 3 in anew light, indicating that while various perspectives are measured,the financial perspective clearly dominates, and that althoughselected KPIs may reflect business strategy, they may not do sosufficiently.
Second, the types of benefits gained from enterpriseperformance management system are predominantly operational[see Figure 6]. Enhancements to operational decision-makingwere reported by the most respondents (81.9 percent) followedclosely by improvements in the KPIs themselves (77.5 percent).Better strategic decision-making was a distant third, with only59.1 percent claiming this as a benefit from enterpriseperformance management.
Overall, there appears to be room for improvement in terms ofAustralian enterprise performance management practice. 31.4percent of respondents did not agree that their enterpriseperformance management system had delivered insights, whileonly 16.9 percent were in strong agreement [see Figure 7]. Theremainder of this report considers the barriers to effectiveenterprise performance management practice and identifies howorganisations can overcome this.
None
53.7% of respondents report that more than halfof their KPIs are financial measures.
%of
respon
dents
1 - 24% 25 - 49% 50 - 74% 75 - 99% All
40
35
30
25
20
15
10
5
0
Fig.5: Prominence of Financial Measures
Stronglydisagree
Strategic decisions
Operational decisions
Positive impact on KPIs
Stronglyagree
The main benefits of EPM systems are operational:81.9% claim better operational decision-making,
77.5% cite KPI improvement.
%ofrespondents
Disagree Neitheragree nordisagree
Agree
60
50
40
30
20
10
0
Fig.6: The Benefits of EPM
Stronglydisagree
31.4% do not agree that their EPM systemshave delivered insights.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
60
50
40
30
20
10
0
Fig.7: Insight Generation from EPM
Enterprise Performance Management: The Australian State of the Art6
Barriers to Effective EnterprisePerformance Management PracticeTactical use of enterprise performancemanagement systems Assessing firms use of enterprise performance managementsystems indicates a primarily operational or tactical purpose [seeFigure 8]. A clear top tier of enterprise performancemanagement uses is evident from the studys findings,comprising performance assessment (64.4 percent ofrespondents), aligning employee behaviours (59.8 percent ofrespondents), and operational efficiency (56.3 percent ofrespondents). A higher-level focus on extracting strategic lessonsfrom the overall enterprise performance management system isless apparent, with strategic decision-making ranking fifth,strategic planning ranking seventh and validating strategyranking last of the purposes surveyed.
Reflecting further the use of enterprise performancemanagement for operational and tactical reasons, managementsfocus on using KPI information emphasised the control of inputsover other dimensions of performance [see Figure 9]. Thusperformance appears to be assessed from a managerial mindsetfocused on the level of organisational inputs (people,premises/infrastructure, economic, etc.) and how these aredeployed across the business.
Insufficient enterprise performancemanagement buy-in and advocacyEffective use of enterprise performance management systemsrequires buy-in and advocacy at all levels of the organisation.Arguably, operational and tactical use of enterprise performancemanagement places extra demands on and a need forengagement with the organisational front line. However,enterprise performance management buy-in and advocacyclearly diminishes amongst the firms studied as one proceedsdown the organisational hierarchy [see Figure 10]. While topmanagement commitment is clearly important and is evidencedacross survey respondents (82.1 percent report the CEO as aenterprise performance management advocate, while 70.2
Nobenchmarking
More than half of respondents do not conduct anyexternal benchmarking and 17.9% do not conduct
any benchmarking at all.
%ofrespondents
Internalbenchmarking
Externalbenchmarking
Internal &external
benchmarking
40
35
30
25
20
15
10
5
0
Fig.11: Internal versus external focus of EPM
Primary reason for measurement
The clear top tier of EPM roles indicates it isprimarily operational and tactical in nature.
%ofrespondents
Assessing Performance
Financial Control
Strategic Planning
Operational Efficiency
Strategic Decision Making
Compensation/Rewarding
Aligning Employees Behaviours
External Reporting
Validating Strategy
70
60
50
40
30
20
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0
Fig.8: Purpose of EPM System
Stronglydisagree
Assessing Outputs
Controlling Inputs
Controlling Behaviours
Stronglyagree
Relatively, more focus is placed by managementon controlling inputs.
%ofrespondents
Disagree Neitheragree nordisagree
Agree
80
70
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0
Fig.9: Managerial focus when using KPI Information
%ofrespondents
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Fig.10: Buy-in and EPM Advocacy
Enterprise Performance Management: The Australian State of the Art 7
percent report their top executive team in a similar role), lessthan one-fifth of surveyed firms claim middle management to beenterprise performance management advocates, and only 6percent report full buy-in from front-line employees.
Internally focused enterprise performancemanagement and over-optimism in businessperformanceWhile business literature abounds with claims about theincreasingly demanding business environment, downwardpressures on prices, and the emergence of low-cost andglobalised competition, enterprise performance managementsystems appear not to have kept pace with pressures to beexternally focused and facilitate performance evaluation relativeto competitors. 17.9 percent of respondents do not conduct anybenchmarking of performance at all, while more than half fail toconduct any external benchmarking [see Figure 11]. The insularfocus of enterprise performance management manifests itself indangerous over-optimism [see Figure 12], with 62.5 percent ofrespondents considering their business performance to be betterthan competitors, and only 6.3 percent assessing theirperformance as relatively worse than competitors.
Quality measures and quality dataOverall, the majority of respondents were happy with thealignment of their enterprise performance management systemto business value drivers [see Figure 13] and the soundness ofthe underlying data [see Figure 14]. However, a significantproportion (approximately 20 percent in both cases) eitherdisagreed with or were neutral on the quality of measures andthe quality of data. In relation to whether their enterpriseperformance management system contained the right number ofmeasures, 45.8 percent of respondents either disagreed orstrongly disagreed, while another 27.4 percent were neutral [seeFigure 15]. Reducing the noise and potential for informationoverload from enterprise performance management systemsrepresents another opportunity for improvement.
The majority of respondents agree or strongly agreetheir performance is better than competitors and peers.
%ofrespondents
45
40
35
30
25
20
15
10
5
0Stronglydisagree
Disagree Neitheragree nordisagree
Agree Stronglyagree
Fig.12: Performance relative to peers
Stronglydisagree
Only one-fifth of respondents have concerns with orare neutral on the extent to which their EPM system
aligns to business value drivers.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
70
60
50
40
30
20
10
0
Fig.13: Are the right things being measured?
Stronglydisagree
The majority of respondents agree orstrongly agree their EPM systems are
supported by good quality data.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
60
50
40
30
20
10
0
Fig.14: EPM supported by good data quality
Stronglydisagree
More than half of respondents are concerned with or areneutral on whether they have the right number of measures.
%ofrespondents
Disagree Neitheragree nordisagree
Agree Stronglyagree
45
40
35
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Fig.15: Are the right things being measured?
Enterprise Performance Management: The Australian State of the Art8
Enterprise Performance Managementtechnology and supportDespite systems integration being at the forefront of numerousorganisational technology initiatives, it is surprising that themost-popular enterprise performance management softwaretool remains the spreadsheet, with 69 percent of respondentsusing this, compared to 48.3 percent using an enterpriseresource planning (ERP) system [see Figure 16]. Related to thisapproach is the fact that the majority of organisations have takenan in-house approach to developing their enterprise performancemanagement systems [see Figure 17].
Although the costs of a consultant led enterprise performancemanagement system implementation can appear prohibitive, thedangers of a spreadsheeting approach to enterprise performancemanagement are numerous (and potentially significantly moreexpensive):
obsolete or incorrect data.
cost and duplication of effort.
numerous rather than consolidated data holdings throughout the organisation.
potentially inconsistent data.
Larger organisations certainly need to revisit the business casefor better enterprise performance management technology,considering the significant savings in terms of less manualactivities, the reduced costs of data redundancy andinconsistency, and the benefits of faster and easier access toenterprise performance management information that can beoffset against any capital expenditure for technology upgradesand consultancy.
None
38.6% have concerns about the quality of their data.
%ofrespondents
Spreadsheet ERPsoftware
Customisedsoftware
EPMsoftware
70
60
50
40
30
20
10
0
Fig.16: Software tools used for EPM
In-house
EPM systems are typically developed in-house,with 77.4% utilising this approach.
%ofrespondents
Consultant-led Collaborative
80
70
60
50
40
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0
Fig.17: Expert support in EPM development
Indicators notstructured
Only 13.8% have indicators linked incause-and-effect models.
%o f
r es p
o nd e
n ts
Indicatorsstructured
Indicators linkedto strategicobjectives
Indicators linkedin cause effect
diagrams
60
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Fig.18: Lack of causal models
Enterprise Performance Management: The Australian State of the Art 9
A lack of causal analysisRelated to the lack of strategic use of enterprise performancemanagement, the majority of organisations surveyedunderperformed in terms of the analysis of business valuedrivers and factors that cause financial performance. Only 13.8percent of respondents framed their KPIs in terms of cause andeffect models [see Figure 18] and less than 10 percent attemptedto visualise these linkages as part of the design and operation oftheir enterprise performance management system [see Figure19]. Indeed, almost half of the firms surveyed did not attempt anyvisualisation of causal links, be they between performanceperspectives, strategic objectives, or specific KPIs. Furthermore,although testing for causality utilising an enterprise performancemanagement system can offer strategic insights on whether anexisting strategy is performing effectively and where to prioritiseimprovement efforts, less than half the firms surveyed did this[see Figure 20].
Overall, the deficiencies in designing causality into enterpriseperformance management systems by visualising linkages andtesting either implied or explicitly envisaged causal relationshipsmanifests in terms of either incomplete (23.8 percent ofrespondents) or partial understandings (56 percent ofrespondents) of what drives business performance [see Figure21]. The consequences of this are significant:
A lack of focus on resource allocation and managerial attention
Effort wasted on performance dimensions that do not offer the greatest returns
Too much time spent trying to execute a poor strategy
These factors not only diminish business clarity but create asignificant risk of competitive underperformance.
Less than half actually test for causalrelationships in their EPM system.
%ofrespondents
35
30
25
20
15
10
5
0Stronglydisagree
Disagree Neitheragree nordisagree
Agree Stronglyagree
Fig.20: Testing Cause-and-Effect Relationships
Almost 80% of respondents have an incomplete oronly partial understanding of causal relationships.
Incomplete
Partial
Complete
Fig.21: Understanding Cause-and-Effect Links
None
46.4% do not visualise causal linkages in their EPM systems,while less than 10% do so at a KPI level.
%ofrespondents
Betweenperspectives
Betweenstrategic objectives
Betweenperformance measures
50
45
40
35
30
25
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15
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0
Fig.19: Visualising links
Enterprise Performance Management: The Australian State of the Art10
What to Do?What should organisations do in response to the six challengesoutlined in this report?
Bring performance measurement into strategydiscussionsWhile 70 percent of respondents have KPIs that reflect businessstrategy, the feedback loop in which firms identify whether andhow strategy could be refined or altered is largely absent. Instead,enterprise performance management systems tend to be used forexecution only, leading to a return on performance measurementthat is largely operational and rarely strategic [see Figure 6]. Tocapture the strategy benefit, firms need to ensure that businessplanning forums and strategy days begin and end with adiscussion on what performance measures are indicators of theefficiency and effectiveness of their current business model.
Think and test cause and effectOften organisations complain that too many aspects of thebusiness are measured, with the result being informationoverload and a loss of focus. One means of moving beyond this,to an understanding of critical business drivers, is to select KPIsthat are not just considered important factors in the business, butare also related to each other in terms of cause and effect.Unfortunately, the majority of firms do not do this. Only 13.8percent of respondents framed their KPIs in terms of cause-and-effect models [see Figure 18], and less than 10 percentattempted to visualise these linkages as part of the design andoperation of their enterprise performance management system[see Figure 19]. The overall result is either incomplete (23.8percent of respondents) or partial understandings (56 percent ofrespondents) of what drives business performance [see Figure21]. Designing and testing expected relationships of causality intoand through enterprise performance management systems willnot only enhance strategic focus and learning but allow arationalisation of KPIs as firms learn which are lag and leadindicators and how to prioritise KPI measurement.
Drive organisational engagementOrganisations are often surprised that implemented enterpriseperformance management systems do not deliver expectedbenefits, or worse, result in lower levels of performance thanexisted previously. While a well-designed system is important fora firm, it is how its people use and react to measurement thatdetermines performance effects. Careful thinking and stress-testing of enterprise performance management systems in termsof the behaviours that are incentivised is required. Enterpriseperformance management systems also need to be supported bya communication strategy that both educates employees on therationale behind measurement and mitigates organisationalresistance. In this way, shared ownership of the enterpriseperformance management system throughout the organisationmay be achieved.
Enterprise Performance Management: The Australian State of the Art 11
Benchmark against peersFirms should seek to benchmark their performance against peersto the extent that data is available. While financial KPI benchmarksin an industry may be more readily available, organisations shouldseek to orient their business intelligence systems to the collectionof external nonfinancial performance information. This not onlycontextualises performance evaluation in terms of theachievements of others in a similar competitive environment, butwould also enhance the testing of causality and strategic learningfrom enterprise performance management systems.
Create integrated enterprise performancemanagement through technologyWhile the popularity of spreadsheets [see Figure 16] ensures thatorganisations avoid the systems cost of integrated and automatedenterprise performance management systems, costs are incurredin other ways. These costs are incurred through multiple andpotential inconsistent data holdings that cannot be integrated, dataerrors, and the need for a high degree of manual effort if causalityand strategy are to be designed into enterprise performancemanagement systems. Firms should seek to evaluate thesehidden costs when deciding on an appropriate level of systemsintegration and automation. Importantly, automation releasesmanagement attention away from the tasks of data collection, dataintegration, and data quality control, and focuses it on analysis andbetter decision-making. This is where enterprise performancemanagement software can be most effective.
About the ResearchFor the survey, we targeted the top 1,000 companies in Australia.We received 87 usable responses, yielding a response rate ofapproximately 9 percent. Approximately 58 percent ofrespondents reported their annual turnover to be AUD$500million and over [see Figure 22]. The overall sample comprisedall sectors of the Australian economy, with manufacturing firmsrepresenting the most-significant group in the overall sample(approximately 18 percent) [see Figure 23].
All participants were assured that all responses would be keptconfidential. The survey stated that only aggregates would beused for the research and that no individual company would belinked to specific responses.
100M - 250M
32% 15%
28%
250M - 500M
500M - 1B 1B - 5B
25%
Fig.22: Respondents by revenue
% of respondents
0 5 1 0 1 5 2 0
Telecoms
Pharmaceuticals
Agriculture
Utilities
Transportation
Services
Health
Wholesale/retail
Construction
Financial services
Other
Manufacturing
Fig.23: Respondents by sector
Oracle Corporation UK Ltd., Oracle Parkway, Thames Valley Park (TVP),Reading, Berkshire, RG6 1RA. UK
T: 0118 924 0000 | F: 0118 924 3000 | www.oracle.comTo contact Nigel Youell, email: [email protected]
Centre for Business Performance, Cranfield School of Management,Cranfield University, Cranfield, Bedford, MK43 0AL UK
T: +44 (0)1234 751122 | F: +44 (0)1234 751806 | www.som.cranfield.ac.ukTo contact Andy Neely, email: [email protected] contact Bassil Yaghi, email: [email protected]
MGSM, Macquarie University, NSW 2109. Australia
T: +61 2 9850 7800 | F: +61 2 9850 8630 | www.mgsm.edu.auTo contact Suresh Cuganesan, email: [email protected]
