Managers develop a budget, which is communicated to all responsible parties. The traditional definition of "performance" is clear and simple -- "make your numbers" becomes the corporate mantra. Those who do are corporate stars; those who do not have failed.
Seems solid enough in theory, and certainly this is a popular approach to business management, but what are the consequences? It is easy to understand and measure performance vs. budget, so we tend to ignore the consequences.
Performance vs. budget
The adage "underpromise and overdeliver" is the first stop in our cultural assessment tied to this version of a performance management system.
Managers understand this inherent culture. Time and effort are focused on making the underpromise seem sensible, knowing that the promise can easily be beaten. Little or no effort is invested in designing a measurement system that creates organizational learning and accountability to good decision-making.
Many organizations reward the underpromise behavior. They make the numbers and declare themselves successful, yet they have institutionally limited their true potential.
Within the underpromise culture, a company achieves mediocre or perhaps even good results, yet it will never be great because the budgeting process focuses on the numbers. It does not incorporate or even envision organizational learning. It does not support the development of leaders. The budget is a box that has little room for:
* Experimentation, which increases the risk of failure. In this environment, it is not safe for managers to pursue or even submit strategies that stray from conventional methods. The chance for success is lost.
* Innovation, since pursuing innovation implies change (risk) and usually requires some form of investment in either people or process (cost), which is not accommodated in the numbers.
* Freedom to make mistakes, which is prerequisite to both experimentation and innovation.
Businesses that are willing to think outside of the budget box find that a well-designed performance system focuses on innovation and creativity; investment pools that are set aside for managers to access during the financial period based on the submission of new and better ways of doing business, leading to a culture in which managers are continuously striving to change the playing field; and using the budget as a simple tracking device rather than a performance measure
A performance management system is customized to a company's core business activities and goals, yet certain considerations should be incorporated in all well-designed systems. The system should keep it simple, with activity/results delivered on a one-page scorecard. It should also identify the core competencies that drive revenue and define the business cost drivers, segmented by how and which customers drive costs; how suppliers create costs; and what costs are inherent due to strategic decisions.
The measurement system now focuses on revenue or growth competencies (demand performance) rather than on how well cost drivers are managed. This approach will:
* Link with clearly defined financial outcomes
* Integrate with how people are rewarded
* Form an integral part of how decisions are made
* Be creative -- the measure must tell a story
* Be forward-looking and proactive rather than simply reporting a prior period
* Use history as a learning tool to improve future decisions
* Combine financial and nonfinancial drivers to those measures
* Be the prime enabler to your competitive advantage
You may find that if you change the way you look at things, the things you look at change. Even if your business is a steady performer, I challenge you to critically review your budget process.
Does your budget enhance the culture and results that you want from your organization? Remember, success can be the outcome of how you define performance. Andre Gien is a chartered accountant and director of strategic consulting services, CBIZ Accounting, Tax & Advisory Services, specializing in the CBIZ Business Health Test and Quarterly Performance Management. CBIZ, a publicly traded company and the 10th largest accounting firm nationally (Accounting Today), provides a wide range of assurance, tax and consulting services to small and mid-sized companies. Reach Gien at firstname.lastname@example.org, via cell phone at (925) 323-2802 or by calling the CBIZ Philadelphia office at (610) 862-2200.