Editor's note:
Feng Yuesi has many years of front-line financial work experience, and is deeply rooted in the management system and management practice of the world's top 500 foreign companies, and has a deep understanding of these systems. At the end of 2020, she launched her own financial media brand "Yuecai", introducing and promoting the concept of "financial BP" in China, and conducting research on related theories and practices. In 2021, Feng Yuesi published her first book, "Finance BP: The Practice of Top 500 Executives", which answered the question "What is a financial BP", which received an enthusiastic response.
"The Iron Triangle of Performance" is the second book by Feng Yuesi, which provides a valuable exploration of the problem of "how to make financial BP in China". This book presents a panoramic view of the complete performance management process of the world's top 500 companies from strategy to motivation, as well as the complete working methods of budgeting and analysis. At the same time, this book provides an in-depth discussion on the best practices of the world's top 500 companies in China, and strives to provide useful guidance for the majority of front-line personnel in mainland China to carry out budgeting, analysis and motivation.
This article excerpts some of the essence and dry information of the book, aiming to help readers understand the connotation, effectiveness and importance of the "performance triangle" model, and provide practical financial work guidelines. Hope it helps.
"The Iron Triangle of Performance"
Feng Yue thought
Published by CITIC Publishing Group in December 2023
- Let's be clear: what makes a good performance?
At present, mainland enterprises are generally facing a real dilemma: many enterprises have not really found a way to make profits, 40% of listed companies have not made profits, and the situation of other companies may not be more optimistic. Many companies have entered a new period of historical development, and the growth rate of the year is no longer the same as that year, and they cannot find endogenous new momentum. In order to solve the performance problems faced by some enterprises in the mainland, it is necessary to first clarify what good performance is and what factors fundamentally promote good performance.
- What is Performance?
The term "performance" refers to the results of the work, the performance. We can see that performance is the result and the output. In enterprises, the performance of enterprises is mainly reflected in revenue, profit, assets, cash flow and market capitalization.
- What is good performance?
Good performance refers to the long-term, stable and high performance that an enterprise can obtain. In other words, long-term, stable and high are the three characteristics of good performance.
Long-term: An important criterion for evaluating a company's performance is to see whether it can continue to innovate and evolve in 20-50 years after going through multiple cycles, multiple CEOs (CEOs), and creating multiple Nth growth curves, so as to achieve long-term success.
Stability: Stability is an important criterion for evaluating the quality of performance. Stable performance can help enterprises form organizational capacity matching. Imagine, if a company earns 500 million yuan in the first year and 200 million yuan in the second year, the company will recruit employees and build factories according to several hundred million yuan? Why? According to 500 million yuan, the income in the second year becomes 200 million yuan, and the cost of employees and plants corresponding to 300 million yuan will bring a lot of losses to the enterprise. In general, only companies with long-term and stable performance can have a truly strong core and master the secrets of performance management. If a company achieves brilliant performance in the short term and declines rapidly, it proves that its performance management system has not really been built successfully.
Gao: The company has brought great value to the society, promoted the development of the society, and is a leader in the industry and is respected. The company's revenue, profit, cash flow, market value, etc. meet and exceed internal and external expectations, and can outperform competitors and the market in medium and long-term competition. Without this company, the lives of customers would not be the same.
Some people asked: Which of the three aspects of long-term, stable, and high is the most important? For small enterprises, high is more important. But for a business of a certain size, long-term and stability are more important. A short-lived company in 10 years does not need a management system, but if you want to build a long-lasting business, you can't do without a management system.
- Good performance, what is determined
To answer this question, I summarized the performance model. This model is divided into four levels: Dao, Fa, Shu, and Instrument.
Dao: Set the right goals.
The goal of the enterprise is to provide value to stakeholders: long-term, insane, and maximized value. Performance is the effect, and value creation is the cause. Stakeholders here, including internal employees, external customers, suppliers, our communities, governments, etc. The value here can be either the direct value brought by the commodity (for example, drugs can alleviate pain) or the efficiency value (reducing transaction costs and improving transaction efficiency).
Law: The performance of an enterprise depends on the resources invested (or utilized) by the enterprise and its operational efficiency.
First of all, enterprises should invest resources reasonably. What are the resources? people, money, materials, time. Second, these resources should not be operated in a disorderly manner, and enterprises should create a good business environment, as well as a supportive system, to ensure that the elements of investment can be operated in an orderly manner and used efficiently. If a company's performance is not good, it may be because it is chasing goals upside down, or it is not effectively investing and integrating resources (limited funds, organizational chaos, etc.), or it has invested resources but has not been operating in an orderly and efficient manner.
Technology: The improvement of enterprise efficiency is due to the organic combination of strategy, organization and mechanism.
Strategy is the brain, tissues are organs, and mechanisms are blood. Strategy, organization and mechanism are closely linked to the development stage of the enterprise, and the three continue to evolve and advance with the improvement of the development stage of the enterprise.
Tools: budgeting, analysis, incentives and other tools to help enterprises form a performance management system.
In order to complete the organic coordination of strategy, organization and mechanism, we need a series of processes and tools to connect the company's strategy formulation, goal setting, organizational improvement, performance evaluation, reward distribution, etc., and the core process is budget, analysis and incentive. Together, these processes form a company's performance management system.
4. Five-step approach to performance management
Where do managers need to start and how to build a performance management system?
If you just want to achieve high performance, you don't necessarily need to build a performance management system. However, in order to achieve long-term and stable performance, it is necessary to establish an effective performance management system. So, how do you build a performance management system?
Performance management consists of 5 main processes.
Strategy: Clearly formulate corporate strategy.
Goal-setting: Determine the short-term, medium-term and long-term business goals and financial goals of the enterprise.
Take the results (do analysis): improve the implementation, and constantly analyze and solve problems in the implementation process.
Performance evaluation (meritorious): evaluate performance and provide evaluation basis for salary, promotion, etc.
Dividends: including short-term incentives and long-term incentives, and distribution of benefits.
Performance management, including strategy formulation, goal setting, resource allocation, action transformation, analysis and follow-up, performance appraisal, and incentives, is a complete management system and closed loop. There are two levels of meaning of the closed loop here: first, the budget should form its own complete closed loop, that is, it should form a closed loop of the three major budgets of strategic budget, annual budget and rolling budget. Analysis should improve the closed loop of analysis from strategy to data, from data to analysis, from analysis to action, and from action to strategy. Second, the three major tools of budget, analysis and incentive should form a closed loop of performance iron triangle. In this way, the performance management system has a solid foundation.
In the process of performance management in most enterprises today, multiple departments are involved in the work: the strategic department formulates the strategy, the business and finance departments set goals and do analysis, and the personnel and operation departments evaluate the performance and share the benefits. Colleagues in each department hold an "elephant leg" and carry out the work of "blind man touching the elephant": after the strategy is formulated, the goal cannot be connected, let alone landed, the goal formulation and incentive can not be effectively linked, and the formulation of the incentive plan is separated from the strategy and tactics, which makes the employee's personal goals deviate from the organizational goals. And so on. The reason behind this is that colleagues in various departments understand and recognize performance management separately, and they only see the trees and not the forest.
It is important to know that the five processes of performance management are not separated, they are an organic whole. When formulating a strategy, it is also necessary to consider the possibility of its implementation, formulate budget goals, and must effectively pull performance goals, and colleagues who formulate bonus plans must understand the strategy, so that bonuses reflect strategic intentions and effectively land. Only by forming an organic whole can the performance management system truly exert its effectiveness.
This is the most fundamental reason why I built the "Iron Triangle of Performance" model, I hope that this model can effectively depict the "whole forest" for everyone, so that everyone can get out of the chaotic state of "not knowing the true face of Lushan, only because of being in this mountain", first start from the whole to build a complete framework, and then enter the work in their respective fields, which will surely get twice the result with half the effort.
2. Use the "Iron Triangle of Performance" model to improve performance
The "Iron Triangle of Performance" model has three components: budgeting, analysis, and incentives. In general: three vertices, three edges, and one surface form a closed-loop use, with the purpose of improving enterprise performance.
The main functions of the "performance triangle" model are as follows: it answers the question of where to start with the construction of the performance management system; refines the complete content of budget, analysis and incentive to form their own closed loop; emphasizes that in the process of performance management, budget, analysis and incentive must work together, and strengthen the management idea of strategy, organization and mechanism.
1. Performance Iron Triangle: Three Vertices
Budget
The most important and fundamental tool for performance management is budgeting. The budget carries the strategy and is born for the formulation and implementation of the strategy, which determines the leading position of the budget. Through long-term planning (3-5 years) and short-term planning (1 year), the budget effectively plans the future direction and path of the enterprise, formulates business plans, rationally allocates resources, and leads the organization and "key battles", which is the "brain" of the company's future development planning. The purpose of the budget is not only to set goals, but also to improve the short, medium and long-term performance of the enterprise through effective planning and behavior. The steps of the budget are mainly divided into: setting goals, allocating resources, and promoting action. In practice, there are many pain points in the actual operation of the budget, mainly due to the following reasons.
The budget is future-oriented, and more than 70% of the company's senior management is doing future-oriented work, and the future is often vague and unpredictable.
Budget is the precursor process of many processes such as analysis, incentives, and expense management, so in the process of discussing the budget, a large number of processes are naturally mixed, which greatly amplifies the connotation and extension of the budget.
Budgets generally do not directly promote performance improvement, but need to be promoted through strategy, organization, and mechanism.
The understanding and Xi of budget can follow Huawei's idea of first rigidizing, then optimizing, and then solidifying. To get started, learn the overall process of Xi budgeting: what the overall planning calendar looks like for the year, and what to do each month. Xi the details of strategic budgeting, annual budgeting, and rolling budgeting. Further to the core: clarify the strategy, strengthen the organization, supporting the mechanism.
Analysis
Once the budget is established, we need to actually run it according to the plan. During the operation, we will definitely find many problems. At this time, continuous analysis and improvement are needed, and analysis comes into being.
Business analysis is to review the financial and business data after the business has occurred, find the problems and solve them, so as to help the enterprise better achieve its business goals. Business analysis is a key process in the internal dialogue with customers, and it is a powerful tool to improve the external adaptation of the enterprise.
The ultimate goal of business analytics and budgeting is the same, which is to bring about action change and improve performance. The difference is that the budget is planned and laid out in advance to achieve the purpose of action change, while analysis is the post-mortem analysis review to bring about a new round of action change. The way to bring about action change is to achieve it by allocating resources (people, money, materials, time) and improving efficiency (improving strategy, organization, and mechanism).
Analysis is generally divided into 4 steps: from strategy to data, from data to analysis, from analysis to action, and from action back to strategy. Analysis is relatively simple compared to budgeting, but getting started is a little harder: most people lack the means to analyze and can't find problems and solutions when they see the numbers. Once you get started, it's all about it. However, the analysis is very dependent on the company's underlying data quality and digital systems, which has high requirements for the company's comprehensive management level. In the process of learning Xi, we can first understand the "four-wheel eight-step method", and then adhere to the analysis and practice for a long time to gradually improve.
Motivate
One of the most important roles of the goal is to serve as the basis for assessment and as the basis for the payment of bonuses. Incentives are generally divided into short-term incentives and long-term incentives. Short-term incentives are mainly bonuses, and long-term incentives are mainly long-term equity incentives (such as options, restricted stocks, etc.).
If budgeting and analysis are related to corporate or organizational interests, then incentives are closely linked to personal interests and can effectively stimulate people's subjective initiative. Motivation is also a work that is easy to get started, but difficult to improve. Motivation is half technology, half art: if you want to do a good job in motivation, in addition to a deep understanding of strategy and operation, you must also have a deep grasp of human nature.
- Iron triangle of performance: three sides
After understanding the three vertices of the performance triangle (budget, analysis, and incentives), we must also understand its three sides: 1. the tandem of budget and incentives, 2. the tandem of budget and analysis, and 3. the tandem of analysis and incentives.
Budgets and incentives. The most critical concatenation of budget and incentive is the concatenation of the two goals. When the goal of the budget is unified with the goal of the incentive, it effectively unifies the goal of the organization and the goal of the individual, and unifies the direction of the company's resources (such as people, market expenses, etc.) and the direction of personal efforts. However, in the actual process, the disconnect between the goal of the budget and the goal of the incentive is a common pain point, and the phenomenon that the budget is the budget, the incentive is the incentive, the organization goes east, and the individual goes west. Therefore, the organic combination of budget and incentives is the key to completing the performance triangle.
Budgeting and analytics in tandem. Analysis and budgeting are "chicken-and-egg, egg-and-egg" relationships. After setting the goal, it is necessary to get the results, and in the process of getting the results, we must follow up and analyze and continue to improve. The results of the analysis were obtained, which further guided the next targeting. Therefore, budgeting and analysis are pre-process and post-process to form a complete closed loop.
Concatenation of analysis and incentives. If we analyze the problem, we must solve the problem, how to solve it? Adjusting the incentive is a good means. It's a tandem from analysis to motivation. At the same time, after the bonus is paid every quarter, we will also analyze the actual bonus to see if there is a problem with the incentive policy and whether it needs to be adjusted and improved, which is a series from incentive to analysis.
- The Iron Triangle of Performance: One Side
When the three vertices and three edges are combined, a triangular face is formed. First of all, budgeting, analysis, and incentives are interconnected to form a closed loop. Secondly, budgeting, analysis, and incentives improve corporate performance by improving corporate strategy, organization, and mechanism.
The purpose of budgeting is not to make forms, fill out forms, and use budget cards for reimbursement. The purpose of budgeting is to clarify the strategic direction, lay out the business plan, match the corresponding resources, and improve the performance of the enterprise through the budget process. In other words, budgeting, analysis, and incentives are just tools, just like a rice bowl, we eat rice, not a rice bowl. What is rice? strategy, organization, mechanism. When the corporate strategy is clear, the organization is activated, and the mechanism is effective, the performance can be improved. This is the core content of the "iron triangle of performance" theory.
4. Basic skills: profit forecasting
It can be said that profit forecasting runs through the whole process of budgeting and analysis, and is a powerful tool for financial management. Profit forecasting, in simple terms, is to forecast future income statements, cash flow statements, etc. Whether you're preparing your company's budget or business plan, you can't do without a profit forecast. Scientific budgeting is by no means a "pat on the head", let alone a language problem, it is a sophisticated mathematical problem. Colleagues from all departments work closely together to effectively forecast future revenues, expenses, and profits, and combine them into income statements and cash flow statements, which form the key elements of the budget.
Therefore, we must learn how to do this math problem. In fact, the work of a finance BP is not at all as mysterious as everyone thinks. If I only need one tool to bring with me to be a financial BP, I only need profit forecasting. Whether it's a project budget, an annual budget, or a strategic budget, as long as I make a corresponding income statement and see the return on investment, I can effectively allocate resources and formulate policies.
3. The "four-round and eight-step method" of financial analysis
1 Definition: What is business analytics
Compared to budgeting, analytics is a down-to-earth, life-oriented technology. Analytics can not only improve business performance, but also help everyone improve their performance and performance in life. So, what is business analytics?
Business analysis refers to reviewing financial business data after business has occurred, finding and solving problems, and helping enterprises better achieve their business goals. Through business analytics, decision-makers can be provided with a more transparent decision-making environment and further allocation of resources, resulting in action change, and reshaping strategy.
Business analysis is a key process in the internal dialogue with customers, and it is a powerful tool to improve the external adaptation of the enterprise. Although the budget is ex-ante and the analysis is ex-ante, the ultimate goal of both is the same, which is to control actions, change actions, and improve performance.
In general, analysis is also divided into different stages and "maturity levels". Understanding the stages of business analysis can help us move forward.
The first stage is descriptive analysis. Analytics starts with a description of what went wrong, allowing us to focus on business analytics. The second stage is diagnostic analysis. After understanding the problem, we often have to explore the root cause of the problem, which is the key to solving the problem. The third stage is predictive analytics. Next, we need to make a leap forward, that is, to learn from past experiences and Xi to predict what will happen in the future. Gao Jinhu said in his book "Military Intelligence" that "an intelligence document should describe the facts that have happened, analyze the current state of affairs, and make assessments and predictions on the further development trend of the situation." The purpose of military intelligence is to defeat the adversary in the end, and all the information obtained and the results of analysis must be transformed into predicting the adversary's behavior and further planning actions. The fourth stage is forward-looking layout. The purpose of analysis is to control the action, and without an effective layout of the action, everything will come to naught.
McKinsey has a very famous "cloud umbrella" model, which is a very apt metaphor for the analysis phase. If I wake up in the morning and I'm ready to go to work and I see dark clouds in the sky, that's descriptive analysis, which is describing what's going on. Next, I analyze that it is likely to rain, which is predictive analysis, which is predicting that it will rain today. So, I brought an umbrella, which is a forward-looking layout. Think about it, if I see clouds and I don't have an umbrella, is it useful? If I analyze that it might rain in half an hour, but I still don't have an umbrella, is it useful? Then wouldn't I waste half an hour, might as well not analyze? Therefore, analysis is essentially useless if it does not lead to action transformation (with umbrella).
2. Steps: Four rounds and eight steps
The basic steps of financial analysis are: from strategy to data, data to analysis, analysis to action, and action back to strategy. I summarize the steps of financial analysis as a "four-wheel, eight-step method".
Strategy: Strategy is where the company is going, what are the most important things for the company, and what are the "key battles" of the company. Strategy essentially guides the direction of the analysis, and the KPIs of the analysis are transformed by the strategy. Where the strategy is 047048, we will resolutely analyze and ensure that problems are found and solved in the right direction.
Data: Analysis should not be "patted on the head", but should be based on facts and data. And the quality of the data also determines the quality of the analysis.
Analysis: Analysis is the discovery of problems based on data. Focus on the key problem (positioning) through sorting, then dig deep into the cause to find the starting point to solve the problem, and at the same time fully discuss and reach an agreement through business analysis meetings and other occasions.
Action: Action is the key step of analysis, which is divided into two levels: tactical execution and strategy execution, and managers are more focused on the level of strategy implementation to formulate policies, adjust organizations, allocate resources, etc.
Return to strategy: Reshape the strategic direction through analysis and move forward in exploration.
"The Iron Triangle of Performance"
Feng Yue thought
Published by CITIC Publishing Group in December 2023