MSc BF PM Part 1 Fundamentals FS21 TN PDF

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MSc Banking & Finance: Performance Management

1. Fundamentals of performance management

Building Competence. Crossing Borders. Dr. Martin Lüthy, ZHAW Institute for Financial Management

[email protected]

Learning objectives You can…  explain the role and concepts of performance management to steer decentral organizations;  describe the difference between a target-focused performance management and past-oriented accounting;  apply management concepts based on key performance indicators;  explain the importance of evidence-based decision-processes and de-biasing techniques; and  can describe the theoretical fundamentals to influence management behavior.

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 2

Agenda

1. Management of decentralized organizations 2. Target-focused, forward-looking performance management 3. Evidence-based decision processes 4. Behavior-oriented performance management

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 3

How to steer a company?

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 4

Firm size and information flows

Straightforward information flows

Combinatory explosion of information flows: n x (n-1) / 2

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Anthony, Robert N. et al.: Management Control Systems; 2014; S. 6. Part 1: Fundamentals of performance management

Slide 5

Challenges to control a decentralized organization Why do lower level managers not automatically perform in line with the organization’s overall objectives?



Delegation of decisions requires appropriate management control systems.



Management control system: Systematic process by which the organization’s higher-level managers influence the organization’s lower-level managers to implement the organization’s strategy.

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Anthony, Robert N. et al.: Management Control Systems; 2014; S. 8 – 9. Part 1: Fundamentals of performance management

Slide 6

Top-down and bottom-up role of management control Top down

Lack of understanding

Lack of agreement

Missing resources

 Explain strategies and goals in an operational way  Support coordination across decentralized business functions

Bottom up  Report on goal achievement  Provide input when goals are unachievable  Coordination with other decentralized units

 Motivate lower-level managers to strive for organizational goals

 Facilitate higher-level managers to benefit from specialized skills and knowledge of lower-level managers

 Resource allocation

 Enable lower-level managers to acquire the support and resources to execute their responsibilities

 Develop personal skills of lowerlevel managers

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Anthony et. al.: Management Control Systems; 2014; S. 10. Part 1: Fundamentals of performance management

Slide 7

Management control systems to support strategy implementation

Strategy implementation Management control system

Strategy

Human resource management

Organization structure

Performance

Corporate culture

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

According to Anthony et. al.: Management Control Systems, S. 45 Part 1: Fundamentals of performance management

Slide 8

Increased sophistication of management control systems due to specialization and centralization Today:

Previous:

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Corporate Comm.

Marketing

Human Resources

Legal & Compliance

Risk mgmt.

Tax

Planning & Analysis

Accounting

Proprietary

Supply mgmt.

Market making

Real estate

Execution

IT

Part 1: Fundamentals of performance management

Slide 9

Investment funds

Portfolio mgmt.

Credit mgmt. Asset mgmt. Administration

Relationship mgmt.

Risk mgmt.

Payment transfers

Call Center

Front office

Securities settlement

Institutional clients

Back office

Corporate Services

Corporate clients

Trading

Portfolio mgmt.

Service Centers

Trading

Private clients

Bank branches

Corporate Communication

Logistics

Legal & Compliance Human Resources

Accounting

Treasury

Head office

Treasury

Corporate Center

Performance management: Controlling the Business Model The CIMA Business Model Framework

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

CGMA: Business Model Concepts; CGMA White Paper; 2018; p. 26. Part 1: Fundamentals of performance management

Slide 10

Elements of a controlled process Assessor

Control device Management Model Effector

Detector

Business Model / Operating Model

Controlled process Input

Process

Output

Every controlled system has at least five elements: 1. Detector: Measures what is actually happening in the process 2. Assessor: Compares measure with some standard expectation 3. Effector: Alters the system behavior if needed according to the assessor 4. Communication network: Transmits the information between detector, assessor and effector 5. Predictive model: Knowledge about the effect of behavioral changes Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Anthony et. al.: Management Control Systems; 2014; S. 36 - 37. Part 1: Fundamentals of performance management

Slide 11

Performance management as part of the management model Management model: Describes how an organization sets goals and strategy; how it motivates and rewards people; how it steers its course through plans, budgets and forecasts; how it makes decisions and allocates resources; and how it measures and controls performance.

Command & Control  Many management layers  Centralized strategic decisions  Top-down targets and control: Management by Objectives (MbO)  Absolute targets

Adaptive / Agile  Few layers of management  Strategic decisions are devolved to frontline teams  Bottom-up targets: Objectives and Key Results (OKR)

 Coordination through yearly budgets, result reporting, variance analysis and top-town corrective decisions.

 Relative targets

 Information on a «need to know» basis

 Fast, open and transparent information

 Coordination through KPIs, rolling forecasts and quarterly business reviews

«What ultimately constrains the performance of your organization is not its operating model, nor its business model, but its management model» (Gary Hamel, The Future of Management)

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Adapted from Hope, Jeremy; Bunce, Peter, Röösli, Franz: The Leader's Dilemma: How to Build an Empowered and Adaptive Organization Without Losing Control, 2011; Kindle Pos. 188. Part 1: Fundamentals of performance management Slide 12

The ‘command & control’ management model from the industrialization age Scientific management:  A corporation is like a large machine, which can be planned and controlled in detail.  Long product cycles, seller’s markets and continuous, predictable developments MOST: Mission, Objectives, Strategy, Tactics Strategy

Alignment and coordination

Mission, objectives, strategic priorities Targets, budgets, incentives

Variance analysis

Measures, projects, Implementation investments

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Corrective decisions

Hope, Jeremy; Player Steve: Beyond Performance Management, 2012, S. 21 - 22 Part 1: Fundamentals of performance management Slide 13

Reporting and forecasts

The «adaptive / agile» management model for the digital age Systems theory: 

Corporations are dynamic, adaptive, continuous learning, social systems.



The more complex and dynamic the environment is, the higher is the need for flexibility of the system.

The adaptive / agile management model: Value creation

 Strategic priorities

Executive Team

 Corporate goals  Business portfolio and resource allocation  Challenging and assessment of value centers  Support of the value centers as business partners

Support Service Teams

Business reviews Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Value Center

Clients

Value Center

Clients

Value Center

Clients

Value Center

Clients

Value Center

Clients

Rolling forecasts

Part 1: Fundamentals of performance management

 Continuously learn, adapt and improve relative to peers and markets

Trend reporting Slide 14

The 12 beyond budgeting principles for an adaptive management model

Leadership

1. Values: Bind people to a common cause, not a central plan. 2. Governance: Govern through shared values and sound judgement, not detailed rules and regulations. 3. Transparency: Make information open and transparent; don’t restrict and control it. 4. Teams: Organize around a seamless network of accountable teams, not centralized functions. 5. Trust: Trust teams to regulate and improve their performance, don’t micro-manage them. 6. Accountability: Base accountability on holistic criteria and peer reviews, not hierarchical relationships. 7. Goals: Set ambitious medium-term goals, not short-term fixed targets.

Process

8. Rewards: Base rewards on relative performance, not fixed targets. 9. Planning: Make planning a continuous inclusive process, not a top-down annual event. 10. Coordination: Coordinate interactions dynamically, not through annual budgets, e.g. with rolling forecasts. 11. Resources: Make resources available just in time, not just in case. 12. Controls: Base controls on fast, frequent feedback, not on budget variances. Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Hope, Jeremy; Bunce, Peter, Röösli, Franz: The Leader's Dilemma: How to Build an Empowered and Adaptive Organization Without Losing Control, 2011. Part 1: Fundamentals of performance management Slide 15

Performance management in agile organizations (1/3)

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Darino, Lucia; Sieber, Marcus; Vos, Arthur; Williams, Owain: Performance Management in agile organizations; McKinsey; April 2019; p. 3. Part 1: Fundamentals of performance management Slide 16

Performance management in agile organizations (2/3)

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Darino, Lucia; Sieber, Marcus; Vos, Arthur; Williams, Owain: Performance Management in agile organizations; McKinsey; April 2019; p. 4. Part 1: Fundamentals of performance management Slide 17

Performance management in agile organizations (3/3)

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Darino, Lucia; Sieber, Marcus; Vos, Arthur; Williams, Owain: Performance Management in agile organizations; McKinsey; April 2019; p. 5. Part 1: Fundamentals of performance management Slide 18

Theoretical foundations of performance management

Systems theory

Management science

Cybernetics

Strategic management Management Finance control

Complex systems Chaos theory

Economics Decision theory Agency theory Motivation crowding theory

Accounting

MIS2 Decision support systems

Behavioral economics

FP & A1

OLAP3

Behavioral psychology Motivation theory

Business Intelligence Big Data

Computer Science

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Cognitive science

Psychology

1 Financial Planning & Analysis 2 Management Information Systems 3 Online Analytical Processing Part 1: Fundamentals of performance management

Slide 19

Performance management framework according to Kaplan / Norton

Strategy Map Translate the Strategy

Balanced Scorecard Measure and Focus

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Kaplan, Robert S.; Norton, David P.: Strategy Maps; 2004; S. 33 Part 1: Fundamentals of performance management

Slide 20

The St. Galler Performance Management Model

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Möller, Klaus; Wirnsperger, Franz; Gackstatter, Thomas: Performance Management – Konzept, Erfahrung und Ausgestaltung einer neuen Disziplin; in Controlling Heft 2; 2015; S. 78. Part 1: Fundamentals of performance management Slide 21

Elements and scope of Performance Management Target-focused & forward looking

Performance Management

Valuebased

Strategic control / Corporate development

Management control

Task control

Strategy formulation

Evidencebased

Strategy implementation Effective and efficient performance of individual tasks

Behavior-oriented Performance management = Processes, methods and instruments of a target-focused, forward-looking, evidence-based, behavior-oriented and value-based steering and coordination of decentralized organizations. Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 22

Agenda

1. Management of decentralized organizations 2. Target-focused, forward-looking performance management 3. Evidence-based decision processes 4. Behavior-oriented performance management

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 23

Possibilities to control a company Objectives

Control

Managers

Decisions

Actions

Results

 Selection

 Delegation

 Instructions

 Accountability

 Management development

 Decision processes

 Checks

 Progress tracking

 Corrections

 Management style

 Management information

 Pay for Performance  Promotions

 Corporate culture

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

According to Anthony et. al.: Management Control Systems; 2014; S. 39 - 43. Part 1: Fundamentals of performance management Slide 24

If you can measure it, you can manage it. “In the past year I have been struck by how important measurement is to improving the human condition. You can achieve incredible progress if you set a clear goal and find a measure that will drive progress towards that goal ...” Bill Gates: My Plan to Fix the World Biggest Problems; The Wall Street Journal 25.1.2013

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 25

Requirements for objectives: SMART Specific:

Aligned with tasks, competencies and responsibilities

Measurable:

Objective determination of the target achievement

Attainable:

Demanding, but still achievable

Relevant:

Important to the company

Timed:

Defined time horizon for the target achievement

Goals may cause systematic problems in organizations due to narrow focus, unethical behavior, increased risk taking, decreased cooperation, and decreased intrinsic motivation. Use care when applying to your organization. Ordonez, L.D. et. al.: Goals Gone Wild; Harvard Business Review 2009; S. 26. Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Part 1: Fundamentals of performance management

Slide 26

MBO vs. OKR MBO

OKR

«What»

«What» and «How»

Annual

Quarterly or Monthly

Private and Siloed

Public and Transparent

Top-down

Bottom-up or Sideways ( 50%)

Tied to Compensation

Mostly Divorced from Compensation

Risk Averse

Aggressive and Aspirational

We don’t hire smart people to tell them what to do. We hire smart people so they can tell us what to do. Steve Jobs Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Doerr, J.: Measure What Matters; 2018; S. 26. Part 1: Fundamentals of performance management

Slide 27

Objectives & Key Results (OKR) Book

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

Video course «OKR – Get started» on Moodle

Part 1: Fundamentals of performance management

Slide 28

Forward-looking performance management vs. past-oriented accounting Example: A bank needs more office space. It is proposed to the Executive Board to tear down the current building in order to replace it by a new and lager one. However the current building is only 15 years old. The business case is based on the following assumptions:  Expenses for the new building:  Depreciation of the current building:  Present value of the future cost savings:

Module Performance Management Spring 2021 ZHAW – Institute for Financial Management

CHF 30 m CHF 20 m CHF 40 m

Part 1: Fundamentals of performance management

Slide 29

Forward-looking management information

Past

Reporting

Analysis

Present

Future

What happened? (Facts)

What happens now? (Alerts)

What wil...