April 15, 2024

Building Advanced Operations

Crafting Success, Building Futures

Integrated performance management: A framework to inspire success

— To comment on this episode or to suggest an idea for another episode, contact Steph Brown at [email protected].


Steph Brown: I’m Steph Brown, a news writer with AICPA & CIMA, together as the Association of International Certified Professional Accountants. Today I am joined by Peter Spence, associate technical director of management accounting at the Association, and Andy Beanland, who until recently was a consultant at the World Business Council for Sustainable Development.

Today’s episode will discuss a collaboration project between AICPA & CIMA and the WBCSD, which explores how leaders can implement a more strategic, innovative approach to process, engagement, and performance in an era of change and uncertainty.

Peter and Andy will discuss the concept of integrated performance management, what that means, and how it can be used as a framework to help businesses adopt a more holistic view of the risks and responsibilities they face today.

Andy, We’ll start with you. Can you tell us about integrated performance management, what it is, and your role in this research project?

Andy Beanland: Thanks Steph. I think the urgency of our sort of undisputed multi-crisis that we’re going through at the moment – the climate crisis, nature crisis, equity crisis – it’s really visible and tangible everywhere.

What we found is business leaders are dealing with an increasing level of complexity in their operating environment. Whether it’s price volatility, supply chain disruption, and there’s also an unprecedented pace of development in ESG disclosure frameworks, which means that mandatory reporting is really inevitable for companies on these topics.

What we really need is a recognition that people and planet need to be at the heart of both systems and business transformation. I suppose in this context, what we’re seeing at the WBCSD is that IPM is really about making the consideration of natural, social, human relationship capital into decision making.

It’s really about taking that holistic view of performance that goes beyond just financial performance. It’s about how do you ensure businesses are orientating themselves around those strategic objectives which will align with those actions that need to be taken to avert those multicrises. Basically engaging their workforce for strategic success.

What we’ve been doing alongside AICPA & CIMA is developing an IPM framework and we’ve had really great support from senior executives at 12 WBCSD companies who provided some really fantastic input and guidance. We’ve also interviewed a further 25 executives and hosted seven roundtables. I think there was around 50 participants in that. What we’ve got in the outcome of that is an IPM framework that’s really founded on what we’ve learned from business leaders who are really engaging with that to ensure the strategic success of their organisation. I’d say that’s what IPM means for us.

Brown: Peter, if you could tell us a bit about your role?

Peter Spence Thanks Steph. As Andy said, people are at the heart of business decision-making. What we found from Phase 1 of our project was that businesses are struggling to engage their workforces behind their strategies. In fact, we discovered that only about 5% of workforces even understand their business’s strategies.

Again, as Andy mentioned, about the increasing complexity of business ecosystems with the advent of heightened awareness around ESG and increasing regulations around ESG, businesses are starting to have to integrate these ESG factors into their strategies. This is only making their strategies even more complex for their workforces to try and understand and engage in. So, IPM is all about trying to truly engage workforces in their business’s strategies.

Brown: When Rebecca McCaffry was on the podcast to discuss the Future of Finance initiative, she explained that there is a consensus from leaders globally that finance needs to change, and leaders need to move away from traditional ways of working that no longer serve the profession.

Has this been a theme from your discussions, and is there anything from those conversations that stand out to you, Peter?

Spence: Steph, you mentioned finance professionals needing to adapt to new ways of working and that’s true. But in fact, I mentioned the increased complexity of running a business in our newly complex ecosystems. It’s not just finance professionals that need to change the way they’re working. It’s also the rest of business professionals, especially those in businesses that are charged with making the decisions in the best interests of businesses.

Some of the more traditional ways of working that we are accustomed to are things like top-down strategy; standardisation of products, services, and ways of delivering value; implementing strategy according to plan, regardless of the forces of change that we experience around us; and processes to keep things on track and people under control; and an expectation that there’ll be no surprises when the world around us is full of surprises.

Businesses need to cope with these new realities. We need strategies that respond to customer and societal expectations and rapidly changing market forces. We need to deal with customers who expect to be able to customise their product or service, implying that businesses need to mass customise to keep custom.

Businesses need to continuously innovate to stay relevant in this changing environment. Meeting all stakeholder needs and not just stakeholder expectations, something that Andy alluded to in the introduction. Behind this are workforces. Workforces need to be engaged and empowered. Because they’re the heart of businesses and the decisions that get taken. Now success is even more dependent on them in our new reality.

Brown: Andy, any key takeaways from the project you can share?

Beanland: I think one of the things that we discovered is that about 70% of businesses fail to execute their strategies in full. When it comes to what does finance need to change, I think it definitely does. As Peter mentioned one of the driving factors is that employees don’t really understand what they do and how it contributes to success. One other major shift in recent years is that now 90% of company value is represented by intangible assets, what does that mean?

That means value is not measured in physical assets – buildings, infrastructure, etc. – but through the thoughts, the experience, the expertise of people, and that success happens through those talented, purposeful workforces who are engaged with their work and that they are aligned with the aims of the business and their objectives.

Where finance considers itself to be siloed, that it is solely [responsible] for just financial performance and is disconnected from people performance, or performance on other capitals, nature, society, etc., it might not be setting up businesses for strategic success.

Our conversations have highlighted this need for a much more holistic approach to performance to provide the rationale for the development of the IPM framework.

Maybe just one example to put that into context: In the conversations that we’ve had with one participant, they told us how they’re placing emphasis on ensuring that climate change and decarbonisation are considered into strategy development and execution. But also ensuring that other sustainability factors – so that’s impacts on dependencies on nature, ESG issues like staff engagement, well-being, empowerment – are considered, too. Most importantly, ensuring that capital allocations reflect those commitments and potential impacts.

Brown: From this research, what are some of the key features of traditional models and philosophies that work against organisations being able to adapt to the changing demands of business? Peter, if you could tell us more.

Spence: Sure, Steph. Strategies tend to be business function-agnostic, or at least they implicitly assume that the various specialist functions within a business operate seamlessly with each other. We found that reality can be quite different. Collaboration between functional silos to coordinate the execution of strategies is one of the most consistently cited challenges in businesses that we spoke to.

Perhaps because most businesses organise themselves into functional silos of specialism, this is replicated in the composition of executive teams. Although, we did find in our research two forms of matrix management, a weak matrix and a strong matrix. A small number of businesses have adopted a matrix management concept where leaders are given both functional and strategic responsibilities.

This is a form of weak matrix management, and sometimes we refer to this as dual citizenship. Our research also surfaced some businesses, mainly in the tech sector, who are experimenting with a form of strong matrix management. This is where executive team members are given responsibility for strategic objectives only, unencumbered by functional responsibilities. Under weak matrix businesses, we found that the primary allegiance of leaders tended to be towards their own functions and not towards the strategic responsibilities that they’ve been given.

We found that except for a few key strategic initiatives in some businesses that a silo mindset predominates. This is where an executive might have dual citizenship – in other words, responsibility for both functional and strategic objectives. Even in these businesses, they tended to favour their own functions rather than the strategic objectives that they’ve been given. Plans then evolve within these functions as opposed to behind the strategies, and it’s then often left to the finance team to make connections between these functional plans and the strategies and base resourcing decisions based on these sometimes tenuous or implicit connections.

Brown: Andy?

Beanland: I think historically businesses could rely on a top-down command and control hierarchies to basically get things done. In the context of what might need to evolve, I think one thing that came up in our research was around the philosophy of control. Typically what we’ve heard is that coercive control, which might be based on compliance-oriented systems, can create a culture of fear of failure within an organisation and actually discourages people from taking on responsibility and can inhibit decision-making. We also heard instances where controls that don’t align at all with the values and purpose of the business can really cause confusion and disengagement.

People said things like “Our controls place people in boxes, but we’re told to be entrepreneurial”. There’s a real disconnect there. What we’ve highlighted in the IPM framework is to really create a performance culture by prioritising enabling controls. So, those kind of controls which allow flexibility and adaptability and can encourage innovation to tackle business challenges might be an appropriate solution in certain settings. Those obviously would need to have things like stage-gate reviews to allow innovative activities to succeed or to fail fast and fail safe. But the indications from our research really suggest that those enabling controls can really drive better performance. We’re sharing that with participants through our framework.

Brown: How can finance leaders and their teams work more effectively with decision-makers, and what areas of good practice have you observed in relation to workforce engagement? I guess, Peter, we’ll go with you first on this one.

Spence: OK, Steph. One of the notable good practices is that most businesses we spoke to have ongoing, comprehensive, multichannel communication efforts to convey their strategies to workforces. But even in those businesses, most of the leaders we spoke to said that despite the efforts that they put into these communication strategies, that they felt that the workforce didn’t fully grasp the strategies that they were trying to disseminate. Finance teams use a practice they call goal cascading, which they usually repeat annually for some reason to translate strategic objectives into functional objectives, and to link resource allocation decisions to this process.

I said that they tended to repeat this annually. I found that quite surprising because strategies are often multiyear and you would think that they wouldn’t need to repeat this on an annual basis given that usually the strategy from one year to the next is very similar. I think because they do this annually, they tell us that they struggle with the volume of work involved, and the complexity of the process, which is hardly surprising. But on paper the goal cascading process is actually logical.

The people we spoke to flagged certain challenges such as activities being based on decision-making biases rather than what might be best for strategy, and managers taking a safety-first approach, choosing initiatives that play to their strengths. Managers selecting initiatives that are most likely to reward them, or position them for advancement rather than what might be best for the strategy. We call this moral hazard. Managers having different interpretations of strategy and this can come from a misunderstanding of the communication efforts that go on within the business. Honest misunderstanding in a different interpretation of strategy resulting from that. The bureaucratic nature of the process impeding efficiency, visibility, and agility.

Brown: Andy?

Beanland: Yes. I think one of the elements that we observed is really the question around how to create a performance culture, which is obviously a critical challenge for finance executives. How to create that culture to engage employees in the business strategies and drive value creation. There’s probably two areas of good practice that I would maybe flag here that we identified through our research. The first one was around performance mindset. In companies that have established a performance mindset, we found that the purpose of the business is really succinctly articulated, that it’s memorable, and that it’s motivational to employees.

We actually came across examples of senior leaders who couldn’t recall the company’s purpose, even though it is widely used in external information, in sustainability reports, and annual reports. That suggests that purpose is not integrated to the way those individuals interact, the way they think, and how they make decisions.

One of the things we’ve proposed in the IPM framework is what we’re calling an initiative attribute table, where you actually think about how you translate the organisation’s purpose throughout all the activities, processes, projects, initiatives within the organisation to support with the translation of that purpose into the individual person involved in those initiatives.

The second point of good practice I would maybe flag is that participants who participated in our research highlighted that transparency and visibility is a vital part of performance culture, and a really important consideration in operationalising sustainability or ESG impacts. In practice, this really means providing information related to the business’s strategic objectives and performance across the whole organisation, to foster that sense of alignment and connectivity. We propose a method to do that through the IPM framework as a potential suggestion.

But our research also suggests that doing that process regularly, making that information visible on a regular basis will help create feedback loops so that employees who might have visibility of those factors – they might be front-line workers, who may be more aware of the day-to-day impacts on operations. That they will maybe observe those and will be able to identify which will impact both positively and negatively the business, and feed those into that process, and enhance the business responsibility and reactiveness.

Brown: Grand. What are some of the most efficient ways of centering strategic goals into the forefront of decision-making?

Beanland: The IPM framework that we’ve developed is designed for senior business executives involved in strategy execution, finance, sustainability, and many other roles. It’s really intended to inspire business leaders to challenge existing thinking on how they assess and manage performance, and guide them to transition their organisations to focus on performance, on strategy execution. It’s applicable to companies of all sizes and regions and sectors.

One of the points I mentioned earlier was that by identifying the data attributes for projects, processes, activities, initiatives, and showing how they’re mapped to the strategy really helps with those conversations around how individuals are contributing to strategic success.

The interesting point, I think, which we’ve tried to build into the IPM framework is providing guidance on how and the extent to which an integrated performance management approach has been adopted and the quality of its adoption. It’s a way for companies to assess where they are and how they can potentially move forward and progress to a more integrated approach. I think that side of things will really help with some of the practical implementation and progression towards this more holistic approach to managing performance.

Brown: Peter?

Spence: Steph, I mean, that’s a really good question, because the end of the day it’s people who make decisions in businesses. In fact, people make decisions in businesses everywhere, everyday, not just the senior leaders in these organisations. We’ve developed the IPM framework with this challenge front of mind. As Andy mentioned, with the integration of ESG goals into strategies, it’s become even more challenging for businesses to operationalise their strategies and to get decisions around the business made in the interests of these more complex strategies.

The IPM framework has introduced a maturity model. Andy alluded to that when he just spoke now. This will help businesses to become more strategically-focused. It enables businesses to plot their prevailing performance management practice and to plan transitions to more strategically oriented organisations. The maturity model is supported by a three-step process to help businesses adopt integrated performance management and to clarify their business and operating models. Ultimately, the aim of IPM is to help businesses transition from a performance management system centred on functions to one that’s centred on strategies.

Brown: Thanks to Peter and Andy for their time and insights. More on this research will be coming out soon. There will be a report published on these findings. It is expected to be accessible later in October. It will be freely available on both the AICPA & CIMA website, as well as on the WBCSD’s website. I’m Steph Brown. Thanks for listening.