Seeing the Big Picture
November 1 2003 by Russ Banham
For much of its existence, Harrah’s Entertainment was a loose compilation of casinos operated autonomously by well-intentioned general managers, each of whom had his own ideas of how to separate customers from their wallets. The managers knew their local customers and built marketing campaigns around this knowledge.
But when Gary Loveman took over as Harrah’s chief executive officer in January 2003 and tried to start running the company as a unified enterprise, he was obstructed by what were, in effect, several different companies, each with different information technology systems, business processes and ways of measuring performance.
So Loveman decided to implement a new management discipline-Business Performance Management, or BPM. A former marketing professor at Harvard Business School, Loveman had the academic know-how to guide the strategy. He also had consulted to Harrah’s over the years and later served as its chief operating officer and president. His goal was to rebuild Harrah’s organizational and IT structure to give him tools to measure key indicators for the whole company. “My ability to manage our performance was undermined by my inability to measure it,” Loveman says. The Las Vegas-based company had $4.1 billion in 2002 revenues.
BPM is touted as the next hot management discipline. Ironically, despite its emphasis on a common language and common definitions to describe performance, BPM also is known as Enterprise Performance Management, or EPM, and Corporate Performance Management, or CPM. Blame the alphabet soup on consultants and technology analysts who put different spins on the same concept. International Data Corp., for example, prefers the term BPM, while Gartner coined CPM. Suffice it to say that BPM is EPM is CPM.
The simple definition of BPM (let’s agree to use that acronym) is that it’s a methodology for understanding what an organization is, where it wants to go, how it will arrive there and, most importantly, how it can measure its progress along the way (see table, below). While CEOs always have sought to understand their companies’ performance, what’s new are the analytics tools to collect, collate, measure and report performance statistics. Among the leading providers of these tools are Hyperion Solutions, Cognos, BusinessObjects and Informatica. Moreover, large enterprise resource planning software vendors, such as SAP and PeopleSoft, have added analytics functions to their offerings.
Leading-edge companies such as Cisco Systems, Dell and General Electric have long used reporting systems that enable top executives to view a “dashboard” of performance indicators. Now those BPM techniques appear to be gaining much broader acceptance. A survey of 500 large organizations by Stamford, Conn.-based researcher Meta Group indicates that most companies are “fully dedicated to it,” with the remainder “seriously pondering it.”
A simple reason for the increased interest is stricter corporate governance. CEOs are now personally liable for financial statements. In the United States, the Sarbanes-Oxley Act, and in Europe and parts of Asia, mandated adoption of the International Accounting Standards by 2005, require more detailed disclosure of enterprise-wide information. Meeting these dictates will not be easy. Many CEOs grumble about their inability to cull raw data to assess spending and performance from separate stovepipes of business information.
CEOs also complain about the shortcomings of enterprise IT software and supply-chain and customer-relationship-management systems. While these software programs produce data, it is difficult to integrate, collate and analyze the data on an enterprise-wide basis. “They’re great for collecting data, not so great for analyzing it into meaningful information,” explains David Folger, a vice president of enterprise analytics strategy at Meta.
Although BPM is touted as the solution, it is not a panacea. It requires tough decisions to obtain a level of visibility into financial and operational information across the enterprise, including management reorganization (risk: cultural upheaval), process change (risk: resistance) and new technology (risk: cost). The technology must be able to pull relevant data from transactional systems, data warehouses and business unit applications, gauge this data against key performance metrics and then deliver all this information to managers for examination and action.
The goal: customer loyalty
The first phase of BPM involves organizational and business process changes. After defining Harrah’s core strategy of creating an extraordinary customer experience, Loveman reined in the autonomous management practices that had made measuring customer data virtually impossible. “We had all this great customer data, but it was locked up in our separate casino systems,” he says. “If a high roller from our Chicago casino came to our casino in Las Vegas, we had no way of identifying this person to understand his or her spending preferences and, thereby, cater the best gaming experience to them. The goal is to maximize our revenue by taking profitable customers and turning them into more loyal customers.”
The managers of the casinos had run their local operations attuned to local needs using local IT for years, resulting in myriad business processes and even different definitions of business terms. “Before you can start to focus on performance, you need a common language and measurement system,” Loveman says.
To create this framework, Loveman required casino managers to input specific customer-related data into their management systems, such as how much a customer spent on certain games, food and other entertainment. Tim Stanley, Harrah’s Chief Information Officer, then installed a data warehouse and business intelligence software tools to pull out the right nuggets of wisdom. “Gary wanted to be able to measure the percentage of a customer’s gaming budget-the cents on each dollar they spend at our casinos versus what they might be spending at other casinos,” Stanley says. “This way, we can determine how much someone is spending at our casinos and if this amount is growing or not.”
The strategy has worked. “When I started here in 1998, the percentage of a customer’s gaming budget going to Harrah’s was 36 percent; it’s now 42 percent,” Loveman boasts. “Last year, we derived $1 billion in revenues from customers who visited our casinos outside their home markets.”
Common definitions of performance indicators also helped Coty, a $1.7 billion New York-based beauty products company. Coty made more than a dozen acquisitions, including six large ones, over the past 10 years. “Many of these companies had their own organizational structures, different source transaction systems, different business practices and processes and various ways of doing things from a technology, people and process flow perspective,” says Jim Shiah, Coty’s senior vice president and controller. “Simple things like viewing a P&L the same way across the company were virtually impossible.” Individual managers still influenced how reporting was done and what metrics were important. “Rolling that up into meaningful measures of performance was an exercise in futility,” Shiah recalls.
Three years ago, Shiah led a BPM effort at Coty that began with a definition of performance metrics, a “common template of key performance indicators, so when we get together to talk about business we talk in a common language,” he says. “Our CEO needed to see things like, €˜Are we spending the appropriate amount of marketing expenditures to support a brand across the enterprise?’ Too much or too little means we’re not maximizing our revenue.”
Coty’s CEO, Bernd Beetz, also wanted metrics by product category across the enterprise, which were either unavailable or took so long to report on that the information was outdated. The solution was to require individual managers and department heads to collect certain types of data that would be collated by an analytic tool and translated into information for decision-making purposes.
So far, the BPM effort has yielded dividends on the spend side. “Three years ago, capital expenditures involved sending a wish list out to managers asking them what projects they had in mind and what it would cost,” Shiah says. “We’d get a list of a couple hundred projects that added up to twice what we could spend. So there was this iterative process where the corporation would beat the numbers down to a reasonable allocation. That’s no way to plan or budget.”
Coty now provides managers with the enterprise’s five strategic imperatives over the next two years and the amount the company has in total for capital expenditures. Says Shiah, “We ask managers, €˜Based on your prioritization, what projects should we be spending it on?’ We now have budgets in line with strategy and planning, and systems that can measure performance of strategy and plans going forward.”
Reining in rogue managers to support BPM objectives can backfire, unless there is organizational buy-in of the strategy. “A huge cultural shift in an organization must occur to do a BPM implementation,” says Nazhin Zarghamee, chief marketing officer at Hyperion, a Sunnyvale, Calif.-based BPM vendor with $500 million in 2002 revenues. “Resistance to doing things for enterprise purposes must be overcome.”
As part of its BPM plan, Erickson Retirement Communities achieved manager buy-in by linking compensation to various performance data. It needed a methodology to drive down costs and maximize revenues. Erickson is a $550 million Catonsville, Md.-based private company comprised of 10 retirement communities and 6,000 employees. With the aging of the baby boomers, the company expects to double in size in the next five years.
Like Harrah’s and Coty, before adopting BPM Erickson was a collection of companies rather than a unified whole. Beset by some 30 separate accounting systems, two general ledgers and an enterprise-wide system that could not consolidate and analyze data across the organization, Erickson launched its BPM strategy in 2002.
When Jeff Ferguson, formerly the CEO of Marriott Senior Living Services, signed on as Erickson’s new president of management and operations in mid-2003, he requested additional measurements of performance and a way to evaluate more levels of data. “I was looking for a dashboard that would group key performance indicators and give me the ability to double-click on a key metric and drill down to see where the problem areas are, as opposed to wading through a sea of data,” says Ferguson. He can now track costs and performance across the company. “On any given day,” he says, “I can take the pulse of this company or do a checkup of its parts.”
Technology is the last stage of a BPM strategy. The important caveat, say analysts, is to buy technology that addresses business process needs and data requirements, rather than technology that merely holds the company hostage to its limitations. “The main work is the organizational commitment, getting the business processes squared away,” says Henry Morris, group vice president of applications and information access at IDC.
And when things flow well, as Loveman says they now do at Harrah’s, sharper decisions can result. “We know so much about individual customers and their gaming preferences, guiding us to treat them to the best experience possible,” Loveman says. “BPM is helping us generate incremental increases in revenue from individual gaming budgets. And if we’re wrong about something, we can always measure why.” Whether they know it yet, more and more CEOs are bound to follow suit.