Michael Smith of Gartner had a session on using performance metrics to align business processes with strategy. His area of expertise is performance management, and he’s found lately that business process improvement is a growing theme in that sector.
He started out by quashing the notion of best practice business processes: processes are so different between different types of companies that there isn’t a single best practice. [I think that there are best practices within industry verticals, but he didn’t seem to consider that.] He went on to say that business strategies are, in general, poorly defined, poorly understood and poorly executed, then went on to outline a process for developing a business strategy:
- Define strategic intent
- Define strategic objectives
- Identify performance metrics
- IT strategy and objectives
- Measures of IT performance
He thinks that the tough parts are the strategic objectives and performance metrics, and that these often end up being skipped over during strategic planning. However, there are some best practices around developing business metrics.
He organizes metrics into three levels: accounting metrics at the highest level, which are often regulated and audited; performance metrics, which are non-regulated but are key performance indicators for that industry; and analytical metrics, which are specific to the company but explain the performance metrics. It’s important to differentiate between performance metrics and analytical metrics, and not jump straight down to the fine-grained detail of the latter without considering the industry KPIs.
In order to determine the contributing factors to the financial metrics, it’s necessary to map the main business processes to line items on the financial statements; for example, the sales process maps to the revenue line, whereas the manufacturing process maps to the cost of goods sold line.
When developing metrics, it’s important to be both collectively exhaustive and mutually exclusive: have metrics that cover all areas of the business, with no overlap between metrics. Smith gave us some examples of metrics that they’ve developed that meet these criteria, showing how a business aspect (e.g., supply management) maps to a set of aggregate KPIs (e.g., operational efficiency), then each of those maps to one or more prime measures (e.g., cash-to-cash cycle time). He then went through some examples of high-level strategies and how to map them to the aggregate and prime KPIs, where each of these strategies may rely on KPIs from different business aspects. The key is to measure performance at the convergence of function and process: although most organizations establish metrics at the functional level and achieve great local optimization, it’s important to have metrics at the hand-off points between functions within a process, and on the end-to-end processes. Metrics can still be rolled up to a functional level to view departmental performance, but all can be rolled up orthogonally to a process level.
The whole process of developing these performance metrics is to recognize the relationship between strategic planning and business process management, and build the process taxonomy and performance management framework required to support that. With that, you can make a clear link between strategies and the actions required to execute the strategic plan. Gartner has some models to help get started with this, but Smith doesn’t feel that you need any complex tools to work this out.