The steering model is a core component of performance management and an essential basis for successful digital finance transformation. In increasingly complex and—at the same time—dynamic markets, the steering model can no longer serve as a “simple” feedback-loop between the planned and achieved strategic targets. Instead, it should provide methods and tools to facilitate the proactive identification of the company’s internal and external dynamics, assessment of risks and opportunities, and the conclusion on informed strategic decisions.
This poses specific challenges for modern corporations in defining and implementing the steering model: The concept should be broad enough to provide a comprehensive 360-degree–view of business performance, whilst also offering sufficient level of detail to evaluate specific areas of improvement and to derive appropriate actions. Additionally, it should possess the necessary flexibility to adapt to the evolving market requirements and to the heterogeneity of business models.
In practical terms, such requirements represent the core of the complexity-flexibility dilemma: Companies that aim to analyze all aspects of business at a high level of granularity, risk losing the overview and limiting adaptability. Only with a “tailor-made” steering model concept and a balanced breadth-depth-complexity-relation of performance indicators it is possible for organizations to create valuable transparency and drive sustainable growth.
Given the constantly changing market conditions and increasing competition, companies are not only re-thinking their business and operating models to remain successful. Steering models are gaining attention as companies must utilize their internal resources effectively and efficiently.
Managing performance is not just about numbers and recording endless columns of key performance indicators (KPIs); it is rather about gaining insights, fostering continuous improvements and enabling informed strategic decision-making. Hence, the following key questions must be clarified:
- What are the primary steering objects (dimensions), which allow a comprehensive insight into the company’s business areas?
- What KPIs will be used to measure success and identify the performance gap?
- How will the selected KPIs provide meaningful information and impulses for follow-up actions?
- How can a clear structure and definition of responsibilities be established along the dimensions tied to assigned performance targets? Even more importantly, is the responsible function/role capable of taking targeted optimization initiatives?
“Much do I know – but to know all is my ambition” – like characters in Goethe’s Faust, some companies go on a quest to acquire as much knowledge as possible. They strive to monitor every technically possible performance indicator. Why not track each steering dimension down to the EBIT level, along with balance sheet indicators, in real time? Because this cannot be reasonably put into practice. As complexity increases, the risk of information overload rises, while the numerous pseudo-accurate allocations lead to a decrease in the transparency and meaningfulness of the performance indicators for some steering and reporting dimensions. Additionally, it often happens that organizational structures and steering model concept requirements diverge, which affects the efficiency and plausibility of the management control processes.
Therefore, developing the target model concept for the steering model as a centerpiece of performance management is quite an intellectual challenge and change management effort for a company as it includes:
- Selection of steering-relevant dimensions maintaining the balance between the breadth of the decision basis and focus on strategy-relevant aspects
- Selection of decision-relevant performance indicators maintaining the balance between the level of detail and complexity
- Clear delimitation of responsibilities along the dimensions and value creation chain
- Technical feasibility of the model concept. The clearly defined target picture should answer the following core questions: How are the data on the performance indicators compiled at a technical level (“single source of truth”)? Having an ERP system alone is not enough. How should SAP S/4HANA be designed to ensure the flexibility of the steering model for the future?
An effective steering & performance management model is an integral part of a Target Operating Model
Cross-industry practice shows that performance management processes must be adjusted depending on the complexity of the operating model. Thus, the essential foundation for a future-proof steering model is an overall operating model that is ‘fit for future’. In addition to the steering model, the Target Operating Model of a company includes other elements such as organization and responsibilities, process models and their governance, material and value flows, legal structures including tax aspects, as well as enterprise architecture and supporting technology.
A well-defined and documented operating model is also a central requirement for digital transformation. Before structures and business processes can be operationalized in the ERP setup, the foundation is a future-oriented design.
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