The Role of Performance Management in Organizations

Updated: 2008-08-21

Performance management is a quickly maturing business discipline. Like its better known siblings—sales and
marketing, human resources, supply chain management, and accounting and finance—performance management
has a key role to play in improving the overall value of an organization. Wayne Eckerson of The Data Warehouse
Institute defines Performance Management as “a series of organizational processes and applications designed to
optimize the execution of business strategy.” The focus of this book (and its complimentary volume, The Rational
Guide to Monitoring and Analyzing with Microsoft Office PerformancePoint Server 2007) is on the application side of
the definition, but it is important to understand how the organizational process works.

This article is an excerpt from The Rational Guide to Planning with Microsoft Office PerformancePoint Server 2007,
by Adrian Downes and Nick Barclay, and is property of Mann Publishing Group (978-1-932577-42-6), copyright
January 2008, all rights reserved. No part of this chapter may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means—electronic, electrostatic, mechanical, photocopying, recording, or
otherwise—without the prior written permission of the publisher, except in the case of brief quotations embodied in
critical articles or reviews.

The fitness program described earlier outlines a strategy for following certain recommended exercises and healthy
habits, helping you to achieve your objectives (e.g., becoming stronger, lighter, etc.), and leading towards your
goal of becoming more fit. Throughout the program, there may be certain targets to strive for, such as 20 more
pushups a month, or completing that 20-minute treadmill run at a higher average rate of speed. Your trainer also
uses the program to record your progress from visit to visit, providing feedback on your overall performance and
determining whether you are on track towards meeting specific objectives.

Feedback is important to us, because it helps us to further understand why we may or may not be meeting specific
targets. Feedback can also be used to modify our expectations, and to set new objectives over the course of the
program. In business, a similar process takes place:

1. Planning what we would like to happen, based on insights from analysis of trends in our industry and
events that impact our business.

2. Executing, by making decisions and taking action, based on the outcomes of planning activities.

3. Monitoring our progress towards a certain time-limited target or objective.

4. Analyzing further to understand why we may or may not be on-track to meet a specific target or
objective.

5. Forecast what we think will happen, based on what we have analyzed. Here we build one or more
scenarios to help us predict certain outcomes. These outcomes help us to confirm or refute our choice of
tactics to meet our objectives.

Figure 1.1 illustrates this process.

Figure 1.1: The Performance Management Cycle.

Similar to our fitness program, where progress is monitored and analyzed in areas such as weight loss or number
of repetitions for a given exercise, performance management involves monitoring key performance indicators
(KPIs) that measure whether an organization is meeting its objectives and overarching strategy. A KPI in this sense
is a measure defined by a business that allows for observation of actual values, as they may emerge from line-of-
business (LOB) applications and their comparison to established targets (or budgeted values). If a KPI reveals an
actual value that deviates too far from (or in many cases, closely approaches) a pre-defined target, then further
analysis is warranted. Discoveries made during analysis should help us plan our next steps, set new (or adjust
existing) expectations, and predict what may happen based on our decisions. In larger organizations, data from
multiple LOB systems are often centralized within “a single version of the truth” business intelligence (BI) system
to optimize KPI monitoring, detailed analysis, and performance reporting. BI systems often (but not always) consist
of several layers that work together, helping businesses to:

 Integrate and refine data from a variety of applications, systems, and documents into a centralized data
mart or data warehouse.

 Analyze refined data to gain insight into current performance (monitoring KPIs), potential causes for
specific KPI variances (or deviations of actual values from target values).

 Report past, current, or forecast conditions to stakeholders.

The goal of a BI system is to ultimately help business people make better, faster decisions. Classically, such
decision-making has occurred at higher levels of an organization and been limited to a relatively small number of
individuals. However, corporate culture has changed significantly over the last decade, and themes of
transparency, accountability, and empowerment have emerged. Performance management frameworks, like Kaplan
and Norton’s Balanced Scorecard method, build on these notions by making all steps in the cycle (illustrated in
Figure 1.1) occur at executive, departmental, and operational layers of the modern organization.