A recent study by Meta Group reveals that approximately 80% Performance Metric Systems fail or are discontinued within two years. With all the buzz around measurement programs such as Six Sigma, Benchmarking, and Activity Based Management, this statistic is pretty surprising. Add the complexity and challenges of an ERP implementation to the mix, and suddenly you may be looking at a pretty daunting task. This may help explain why most companies don’t adequately address performance measurement, post-implementation audits, or benefits realization as part of their ERP projects. But first, what is performance management? In short, it is a way to measure and benchmark performance to identify areas for continuous improvement. It is also a powerful tool to ensure benefits realization and return on investment for large capital investments such as IT projects or acquisitions.
The only problem with Performance Management programs, however, is that most companies fail to implement them correctly. Most business cases for large investments such as IT projects or mergers focus only on high-level measures, which can be difficult to track against and drive employee accountability. One of our recent posts from last month addressed how to establish performance measures as part of an ERP benefits realization program, but in that posting we did not discuss the appropriate level of detail that performance measures should address.
For example, a business case for a large IT project may indicate that headcount can be reduced by 10% across the company because of increased efficiencies enabled by an ERP system. This may very well be an accurate quantification of the benefits, but the benefits will not be realized unless they are cascaded to a more operational level that will drive accountability and visibility to the benefits. This requires a more detailed analysis of processes to understand with more accuracy where exactly the process inefficiencies lie and where the benefits will be achieved.
On the other end of the spectrum, many performance measurement and management programs fail because of their complexity and cost. The advent of Six Sigma and Activity Based Management has encouraged many companies to go overboard with costly and time-consuming data collection efforts that are not cost justified and lack focus. While performance management is extremely beneficial, there is a point of diminishing returns when organizations go too far in their efforts. In light of today’s pressures to reduce short-term costs and headcounts, it is far more cost effective to focus performance measurement efforts on the areas that will produce the most significant results; managers need not measure and overanalyze every minute aspect of their operations to achieve significant improvements.
To be successful in their performance management pursuits, managers need to maintain a balance between “operationalizing” performance measures and keeping the approach simple. This balanced approach will ensure a proper focus on business areas that can provide measurable improvements without spreading costs and resources too thin. This ultimately helps lead to effective ERP benefits realization and a healthy ROI.