What Is Business Performance Management?
Business Performance Management (BPM) is a systematic approach to measuring indicators for effective management. It facilitates continuous improvement through planning, checking the work and making changes to the plan as necessary.
PART 1
Why Is Business Performance Management Important?
BPM enhances the effectiveness of planning processes, such as budgeting and forecasting, by creating a feedback loop between strategy, planning and operational activities. BPM promotes tactical budgeting to allocate resources in accordance with strategic goals and reactivity to actual outcomes or changing market conditions. Measurement tools within BPM then verify if the plans are achieving their objectives.
PART 2
Business Performance Management Process
BPM starts with strategic planning, defines the activities and levels of effectiveness to achieve, and offers means to evaluate how well the company is progressing on its strategy. It involves comparing financial and operational management against predefined key performance indicators (KPIs), furnishing feedback through data aggregation, reporting, analysis (including variance analysis and modeling), and KPI monitoring. This feedback loop ensures alignment with business strategy and facilitates course correction over time.
PART 3
How to Measure Business Performance
Organizations can gauge their success and identify areas for improvement by measuring performance against other companies or industry standards (benchmarking), their goals for the year or performance from prior years. By establishing relevant KPIs and comparing performance against industry benchmarks or internal standards, businesses can gain valuable insights into their operations, identify strengths and weaknesses, and make informed decisions to drive progress.
PART 4
Measures vs. Metrics
Measures are numerical values applied to almost anything that is measured. A measure is a statement of fact. Examples of measures include number of customers and temperature.
Metrics are derived from measures, often mixing two measures from different data dimensions. Metrics may track the status of a business process or concept, begin to tell how well something is doing, or describe attributes. Examples of metrics include cost per customer acquisition (CPA), sales/quarter, and the average temperature in May in a city.
PART 5
What Are KPIs
A key performance indicator (KPI) is a measurable value that demonstrates how effectively an organization is achieving its strategy or key objectives. While a company can have many indicators, only a small number can be “key.” KPIs are typically specific, quantifiable metrics — such as those related to financial performance, customer satisfaction or operational efficiency — that reflect the critical success factors relevant to the organization's goals.
To ensure effectiveness, KPIs should adhere to the traditional SMART characteristics:
- Specific: Focusing on discrete activities or processes.
- Measurable: Utilizing quantifiable data or qualitative terms for later measurement.
- Achievable: Representing reasonable improvement considering the organization's resources.
- Relevant: Aligned with the organization's strategy and contributing directly to value, which necessitates regular review.
- Time-based: Committed to comparing actual performance to KPIs within specified time frames.
KPIs play a vital role in aligning an organization's vision, mission, strategy, tactics and operations specific to the industry and organizational strategy. For example, nonprofits might track metrics like the percentage of donations spent on mission-related activities, new donor participation rates, donation sizes, client satisfaction and partnerships with governmental agencies.
To maximize the effectiveness of KPIs, organizations need to seamlessly integrate them across different departments and carefully evaluate potential impacts and conflicts between processes.
For example, initiatives aimed at reducing post-sales costs may clash with objectives in R&D and Operations. Moreover, organizations must remain vigilant about unintended consequences associated with KPIs, such as incentivizing short-term gains at the expense of long-term goals or sacrificing quality to meet ambitious targets, which could disrupt operations and hinder overall progress.
Examples of KPIs for Internal and External Stakeholders and Business Partners
| Area | Sample KPIs |
|---|---|
| Operations | Percentage of orders filled accurately and on time, inventory turns |
| Sales | Number of calls per day, number of new accounts |
| IT | Number or frequency of network outages, repeat problem rate |
| Purchasing | Contract accuracy, audit confirmation of at least 95% compliance with policy |
| FP&A | Percentage variance from project timelines and budgets, customer satisfaction scores |
| Treasury | Attainment of target cash reserves, composition of debt portfolio |
| Banks | Portfolio risk level or score, volume of customer fees generated |
It is also important to remember that KPIs require regular reassessment to maintain alignment with the organization's value drivers. Value drivers are the actions or processes that increase the value (utility) of your product or service in the eyes of your customer.
Changes in the organization's value proposition, microeconomy (e.g., new management goals), industry practices, technology or macroeconomy can introduce new value drivers or eliminate existing ones, necessitating adjustments.
See more examples of KPIs.
PART 6
What Is Benchmarking
Benchmarking is a strategic management tool that involves comparing the performance of one entity, such as a company or organization, with another. The benchmark entity is chosen for its superior performance or best practices, such as exceeding investor expectations or mastering specific skills like cultural change or innovation. The purpose of benchmarking is to identify performance gaps, determine best practices and set targets for improvement.
Additionally, companies often compare themselves against their competitors to know where they stand and how their competitors are performing.
Benchmarking Process
The benchmarking process can be implemented across various levels and with different focal points. However, regardless of whether it employs internal or external standards of performance, the fundamental process is the same.
STEP 1: Define KPIs.
The initial step in benchmarking is for the organization to identify what it wants to benchmark. Often, organizations tend to benchmark the KPIs surrounding the specific activities that generate value.
STEP 2: Quantify performance.
Historical data is used to gain insights into the organization's current performance levels. By analyzing past performance, the organization can identify trends, strengths and weaknesses, which inform decision-making and help drive future success.
STEP 3: Quantify benchmark data.
Carefully select specific metrics or goals that directly align with the organization's objectives and mission and analyze how these chosen targets relate to the organization. Factors like strategic differences, value drivers, macroenvironmental conditions and organizational maturity can impact the accuracy and usefulness of the comparisons made.
Once the benchmarking targets are identified, organize and analyze data systematically, allowing for a comprehensive evaluation of performance metrics and facilitating informed decision-making processes.
STEP 4: Identify performance gaps.
Performance gaps refer to differences in performance metrics between the organization and selected benchmark companies, which can stem from various factors such as invested capital, process excellence, employee skill levels or maturity of the capability. To address these gaps, data analysis is conducted to identify the root causes behind them. Following this analysis, discussions are held to evaluate the organization's ability to address these disparities and close the performance gaps.
STEP 5: Set performance targets.
The process of closing performance gaps involves the organization evaluating how much improvement is feasible, or even desirable, considering the size of the gap and the resources at its disposal. Once this assessment is made, specific targets are set, which are then translated into clear and measurable performance objectives.
STEP 6: Implement necessary development initiatives.
This involves a commitment to making necessary changes within the organization and includes tasks such as communicating new performance expectations to employees, documenting any changes in policies and procedures, allocating resources for hiring and training, acquiring equipment, and monitoring progress toward achieving benchmark goals.
PART 7
Learn More About Performance Management
Read AFP FP&A Case Studies on performance management.
- Increase Performance: Create an Analytics Scorecard for the Right KPIs
- One Source of Truth: Metrics for Accurate Performance
- Tracking KPIs After an Acquisition
Read the article 9 Rules to Manage Performance Metrics.
Take an AFP self-paced course: Digital Transformation of FP&A: Enterprise Performance Management (complimentary to AFP members).