For further information:
Frank Tortorici
(212) 339-0231
The Conference Board
For Release Thursday, December 30, 1999 Release #4529A
CEO-LED STRATEGIC PERFORMANCE MEASUREMENT SYSTEMS LINKED WITH SUPERIOR STOCK PERFORMANCE
Communicating Feedback to Managers and Corporate Boards Is Important Part of the Programs
Companies whose stock price outperforms their competitors are more likely to have a formal strategic performance measurement system, according to a new report from The Conference Board.
Aligning Strategic Performance Measures and Results, sponsored by the global management consulting firm A.T. Kearney, the high-value management consulting subsidiary of EDS, is based on a survey of corporate strategists and CFOs of 113 major companies. According to the study, 52 percent of the companies surveyed with formal strategic performance measurement systems had stock prices that outperformed their competitors; 30 percent had stock prices equal to their competitors; and 18 percent had stock that fared worse than their competing companies. The data supported this association with 95 percent certainty.
A strategic performance measurement system translates business strategies into deliverable results. SPM systems combine financial, strategic, and operating business measures to gauge how well a company meets its targets. A SPM system's four stages are: identifying and selecting measures; implementing plans and review systems; setting individual targets; and designing a supporting information technology system.
"Companies whose stock price outperforms their competitors are likely to use strategic performance measurement to communicate feedback to managers and their board," says Stephen Gates, principal researcher at The Conference Board and author of the report. "SPM systems can gauge progress on goals for management and assist the board in making difficult divestment or restructuring decisions."
The study found that companies that discuss performance with investors and analysts in terms of strategic performance measures are likely to have stock prices that outperform their peers. This interaction opens new channels of communication with those professionals who value strategic information highly. For example, Royal Bank of Canada, as reported in the study, publishes annual and medium-term SPM targets in its annual report, recording progress against the prior year's targets in a "corporate report card."
During the next three years, the majority of companies surveyed expect to publish SPM targets and results in their annual reports. Also, the most frequently cited financial SPMs will be cash flow, return on capital employed, and economic profit. The most frequently cited non-financial SPMs will be customer satisfaction, market share, and new product development.
CEOs VERY CONCERNED WITH STRATEGIC PERFORMANCE MEASUREMENT
Strategic performance measurement is a key issue for CEOs. Seventy-seven percent of responding companies say that it is very important to the CEO and that in half of the companies CEOs lead the process. At National Power, as reported in the study, the CEO and leadership team championed the "Investors in People" program, agreeing from the outset that sponsorship must come from the most senior levels of the organization.
Seventy-four percent of surveyed companies characterize SPM as important to chief financial officers, while 56% view it as important to corporate strategists. While the CEO usually takes a leadership role in developing an SPM system, implementing and maintaining the system is typically done by the CFO or corporate strategy director.
Forty-four percent of survey participants indicate a lack of focus in their organization as the reason for having developed a formal SPM system. This lack of focus is also reflected in the 30 percent of respondents who cite frustrated strategy implementation as a main reason for having a SPM system.
Much of the senior management interest in SPMs is driven by the need to respond to a fast-paced business environment. An effective response requires communicating strategic shifts and aligning organizational thinking within the company. The importance of creating SPMs is also linked to shareholder accountability -- the need to provide shareholders with fact-based information on corporate performance.
THE FUTURE OF STRATEGIC PERFORMANCE MEASUREMENT
An overwhelming majority of companies will link their SPM system to business unit strategy plans and incentive compensation during the next three years. The report cites as major barriers to overcome in implementing strategic performance measurement programs in the future the following factors:
-- Cascading SPMs throughout the organization,
-- Deficient information technology capabilities, and
-- Cultural and political resistance.
"The challenge is to translate corporate vision and strategic objectives into performance measures that are relevant to activities at the business unit level," says Larry R. Hitchcock, vice president, Strategic Services, A.T. Kearney. "This challenge is particularly pronounced when leaders are managing traditional business lines as well as emerging e-commerce capabilities that require unique measures and business models."
Some companies, such as Caterpillar, already have taken major steps in this direction:
"To improve focus and performance, we created business units and put accountability for the measures, primarily return on assets, at the unit level," says F. Lynn McPheeters, Caterpillar CFO. "We reorganized our company structure from functional to profit and service centers and put the performance measures in at the same time. We had a lot of systems work to do: changing to a culture that had financial accountability at virtually all levels; changing the entire focus of what people were responsible for getting accomplished; and measuring totally different activities from virtually one day to the next -- all in a very short time frame."
ABOUT A.T. KEARNEY
A.T. Kearney is one of the world's largest and fastest-growing management consulting firms, with 1998 annual revenues of more than $1.23 billion. With a global presence that includes offices in nearly 60 cities, spanning major and emerging markets, A.T. Kearney provides strategic, operational, organizational and information technology consulting and executive search services to the world's leading companies.
A.T. Kearney (http://www.atkearney.com) is the high-value management consulting subsidiary of global information technology services leader EDS (NYSE: EDS).
ABOUT THE CONFERENCE BOARD
The Conference Board is the world's leading business membership and research organization. More than 3,000 companies in 66 nations are members of The Conference Board's global network. The Conference Board produces the Leading Economic Indicators, the Consumer Confidence Index, the Help-Wanted Index and other major indicators that have an impact on both business and financial markets. It also produces the most definitive source of information about worldwide institutional investment trends and is a leading source of knowledge about corporate governance, corporate performance, human resources management and global corporate citizenship.
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Source: Aligning Strategic Performance Measures and Results
Report #1261-99-RR, The Conference Board
Information on ordering this publication can be obtained by calling The Conference Board's Customer Service Department at 212-339-0345. Media, please call Frank Tortorici at 212-339-0231 or email [email protected].
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