Performance Management for Executives
Being the Chief Balancing Officers
Executive Management bears the ultimate responsibility for the success or failure of the business. As Chief Balancing Officers, Executive Management needs to understand and manage across financial and operational systems.
This is the crux of its information challenge. And it is the most significant advantage of a performance management system.
Executive Management has two decision areas like those from other departments, and four compound decision areas that reflect their particular balancing role. The first two are:
- Risk Management
Are we managing the risks of sustaining this performance? - Compliance Management
Are we complying with regulatory requirements?
The four compound decision areas draw on information sweet spots from across your organization. The top decision area is financial, and the other three are the operational elements that underpin the financial data. A performance management system brings these four decision areas together.
This compound decision area is the operational view of Revenue Growth from the Financial Management area.
Executive Management must manage current revenue goals and find new, profitable revenue opportunities. Chief Balancing Officers look at these four areas for better performance management:
- Market Opportunity Value ($): While you may structure your business along functional lines, revenue opportunities cut across Marketing, Sales, and Product Development.
- Customer Acquisition (%): Answer questions about how effective are your customer acquisition strategies.
- Customer Retention (%): Growing business revenue is not enough if sales leak away due to poor customer retention.
- Realized Value ($): Gain an overview of the effect on profits due to efforts driving revenue.
This compound decision area is the operational view of Operating Margin from the Financial Management area.
Executive Management must manage current expenses as a core part of overall profitability. Look at these three areas for better performance management:
- Supply Chain Cost Index: Highlight the balancing act between input and output.
- Operations Cost Index: Monitor the operational backbone and see related cost implications for inefficiencies and bottlenecks.
- Overhead Cost Index: Monitor support functions to ensure the balance between cost and value.
This compound decision area is the operational view of Asset Efficiency from the Financial Management area.
Decisions in this area are Executive Management’s opportunity to influence the future direction and successful performance management of the business. This is where the right investment choice can fundamentally redefine both the revenue opportunities and cost efficiencies of an organization.
Look at these four areas for better performance management:
- Strategic Investment ROI (%): Track strategic projects and learn from past decisions.
- Staff Productivity Index: Track the effectiveness of your human capital; go beyond sales by employee and understand what drives the number.
- IT Return on Assets (%): Know where and how IT assets drive value across different business units, lines of business, and functions.
- Employee Retention (%): Retaining employees saves money on recruitment and start-up; keeping the right employees builds your most important asset—people.
Financial Management: Are we performing to shareholder expectations?
Four compound decision areas underpin Financial Management. They reflect the financial side of the equation, and are supported, as shown in the diagram above, by operational compound decision areas.
- Revenue Growth : a key component of shareholder value creation. If costs stay flat, revenue increases will directly affect earnings growth, leading to a positive change in the price to earnings ratio (P/E).
- Operating Margin : Executives and investors watch the operating margin and the associated percentage of operating margin to sales ratio.
- Asset Efficiency : More sophisticated performance measures include return on capital employed (ROCE), return on assets (ROA), and economic profit.
The fourth reflects new realities in compliance and governance:
- High-level Risk Exposure measure : the flip side of this coin, tracking various categories of risks and mitigating factors that may affect your ability to meet your performance goals. These measures line up with the investor’s perspective, indicating the risks/rewards generated by a given capital or asset base.
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