On Defining Good Performance
Budgeting and planning are dreaded chores for most managers. Nevertheless, a company cannot thrive without a plan. Planning related processes are intended to answer two critical questions in managing the enterprise: Are internal resources being efficiently allocated? Do targets represent strong, efficient, but achievable goals?
For example, a bank branch can target, for a number of relationship managers, the average quarterly volume of deposits expected from each relationship manager, and average service transaction times at the branches. All of these are interrelated at the branch level. Furthermore, one can’t strike a value-maximizing balance among these items unless their impact on overall enterprise efficiency is taken into account. A balanced scorecard can’t approximate efficient targets because its targets include subjective determinations of what is achievable, and that determination is captured in a static relationship. Most businesses either end up with targets that are too low, and money is left on the table, or the targets are too high, which means demoralized managers with dysfunctional incentives, and the risk of losing them to a competitor. Let’s look at this in more detail.
In most companies, targets are set by business unit managers and are generally understood to get translated into bonus plan targets. So, managers will go through an apparently objective review of historical growth for each line of business, and then extrapolate those results with a modest upward bias. But as no one wants to fall short of their targets, they will be inclined to understate the true potential of their business, at least to some extent. Senior management can impose a global constraint by insuring that all the business unit targets add up to an earnings projection that can be sold to the investment community, but a lot of intercompany negotiations may need to take place to arrive at such a goal.
The second problem is that if there are a dozen or more key performance indicators per business unit, then these KPIs need to be weighted according to some criteria. Considering that a large number of decision making units (DMUs), which may be a branch, a sales manager, a store, etc., are all allocated target values, it is clearly unfair to apply the same standard weight for all as specific conditions may vary widely from one DMU to the other. Furthermore, if these weights are fossilized in a scorecard, then the business can lose its responsiveness to changing conditions in an attempt to look good against the embedded metrics, especially if they are tied to variable pay.
Conventional planning systems have no unified analysis around the inherent trade-offs faced by a manager trying to respond to a shifting market. Even if they agree on the trade-offs for this particular manager, they risk local optimization that may undermine overall enterprise efficiency.
Executives should aim for global optimization – accounting for the constraints of all business units at once. Such optimization can’t be done with a spreadsheet – it requires a much more advanced modeling tool.
The first problem can be solved by a mechanism that separates target setting for the budget from target setting for bonuses, but this can only be reliably done for the company as a whole. The problem remains for how to allocate an objectively set global target to the business units and decision making units below them.
This latter problem, as well as the issue of establishing local targets that are globally optimized, is solved with the Alta Bering EPO™ management technology. Alta Bering EPO™ generates targets for resource allocation and target setting in dynamic manner, enabling managers to do their local best and serve the best interest of the enterprise as a whole.