One of the most important leadership responsibilities for finance executives and one of the most difficult to achieve on an operational basis is an ability to consistently drive insight into improving business performance.
Finance executives must move beyond the boundaries of their organizations to influence systems, decisions and actions across the enterprise. They are challenged by the range of tools and techniques used to collect, organize, understand and communicate information regarding the industry, competitive position and enterprise performance.
Leading finance organizations are implementing more sophisticated business analytic and performance management tools by establishing transaction processing, control and reporting systems capable of rapidly generating basic information about the enterprise.
Driving insight from disparate information will become critical in differentiating winning companies across industries. The impact of well-designed and deployed capabilities will become increasingly apparent, as will the focus on these capabilities.
Several trends will affect the speed of implementation and the level of sophistication of new business analytic and performance management capabilities. While the strategies and solutions adopted in a specific enterprise will vary as these markets continue to mature, common themes are already emerging among leading-edge competitors.
Analytics and Reporting Trends
The Sarbanes-Oxley Act in the United States and planned revisions to international accounting standards have put the chief executive officer (CEO) and the entire management team under increased scrutiny. Many finance organizations are placing renewed attention on their abilities to forecast and report financial performance through changes in the economic cycle, communicate effectively with investors and work across the business to manage performance.
Investors don't want managed earnings, but they don't want surprises either. The days of smoothly managed quarterly results are over, as companies struggle with an uncertain economic environment, increasing levels of sophistication among competitors and changes in accounting standards. While investors are pleased to have more transparent financial results, they demand a higher level of expertise from management in forecasting how changes in the industry or economic environment are likely to impact future earnings, future cash flows and future capital investment requirements.
Executive compensation systems designed to align management teams with shareholder value measures are under pressure as gaps between investor results and executive compensation have widened. Management teams are rethinking which high-level measures to target and how to implement appropriate performance reporting systems.
The basis of competition has shifted from individual companies to entire supply chains within industry sectors. Supply chains are being formed, modified and restructured as industry boundaries blur and competitive environments become more sophisticated. Understanding performance inside the walls of an enterprise is no longer sufficient it is expected that the performance of a supply chain comprised of multiple companies will be understood and compared to competing supply chains within an industry.
Furthermore, the pace of business has accelerated. Companies seek the ability to sense and respond to changes in the environment more rapidly than competitors. Performance reporting processes must be adapted to keep up. From the moment a business event occurs until it is reported in the consolidated financial statements, a number of stakeholders want real-time reporting related to the transaction. Finance organizations are expected to have common financial languages capable of reporting at speed across geographies, languages and currencies.
The Role of the Finance Organization
Business leaders insist that the finance organization be a source of impartial financial and management information, have the insight to analyze and understand that information, and offer a point of view based on a clear understanding of industry and company value chains. They expect finance to understand customer, product and channel profitability, and count on chief financial officers (CFOs) to put the processes and metrics in place to ensure that employees across the company can make decisions and take actions aligned with corporate strategies. Figure 1 illustrates the gap that currently exists between CEO expectations and finance's delivery. Figure 2 shows the percentage of finance employee time devoted to key activitites.
Figure 1: A gap exists between CEO expectations and finance's delivery.
Figure 2: Approximately what percentage of your finance function's time is devoted to these activities?
Competition pushes companies to collect information, assess performance and take action on shorter cycle times. Otherwise, they jeopardize losing ground, as members of their supply chain or direct competitors have insight into weaknesses before they are prepared to respond or make internal adjustments.
Many companies have shifted attention from driving revenue to optimizing growth in shareholder value. To accomplish this, they need improved:
- Business analytics to support the revised growth agenda with both increases in revenues and improvements in profitability.
- Industry analytics and value chain analytics to help make optimal decisions on where to invest resources to capture segments with high growth potential.
- Customer analytics to help identify, acquire, retain and sell to customers to drive new revenues and protect existing revenue streams.
- Related credit analytics to increase the number of customers targeted while holding credit risk and related bad debt to optimal levels.
- Product and pricing analytics to help improve the offers made to customers and improve the average price received in specific customer segments.
Working capital effectiveness and operating cost leadership goals have recently created an urgent need for improved business analytics. Analytics focused on operating cost reductions can optimize synchronization along supply chains to dramatically lower inventory levels and associated working capital. Customer analytics can identify changes in customer buying cycles and minimize the lead times required to produce for expected demand levels. Product and pricing analytics can apply the real options theory to determine the optimal mix of products to be produced from available production capacity.
Corporate and financial risk management have moved up the list of priorities as companies face continued pressure to understand and manage enterprise risk. An emerging set of analytics is being constructed to address enterprise-level risks and optimize the allocation of resources to manage those risks.
Investor Confidence Restored
As they continue to try to lower costs and raise service levels, finance organizations are looking once again to technology, utilizing the Web to connect more directly with vendors, customers and employees. Many view outsourcing as a strategy to achieve increased efficiencies more quickly and to obtain more control over back-office costs.
Companies are responding with substantial improvements to planning, budgeting and forecasting capabilities at the enterprise level and across specific operational business processes. One of the major changes being introduced is the extension of the planning and forecasting process to a broader group of people across the enterprise so that key drivers that determine revenue and cost are updated more frequently by the people on the line who actually live and breathe them. Coupled with enhanced investor relations capabilities, the improved understanding of current and future results allows companies to set market expectations more accurately and to convey their growth strategies more credibly.
To assist in delivering improved overall business performance, CFOs have reasserted their role as owners of management information and performance management processes. Concepts such as the virtual close and straight-through processing have caught on as companies continue to optimize their ability to get the most critical information to the right people in a timely manner.
Finance organizations are bringing together industry, customer, channel, competitor, product, macroeconomic and financial data into a comprehensive management information framework to enable more robust understanding of available business options across the enterprise. They have helped drive the value agenda across the business by explaining value concepts and consistently delivering analysis of management information that is financially fact-based and oriented toward shareholder value creation opportunities. The focus on value-targeting discussions and fact-based positions allows the finance organization to apply its unique competencies and focus the business discussions on moving the levers that create value.
The consequence of this increased attention to shareholder value is the trend toward use of value-based measures such as economic profit, EVA (economic value added) and ROI (return on investment). Finance organizations use these value-based measures as the basis not only for business decision making, but also as the underpinning for approaches to executive compensation, strategic planning, forecasting, budgeting and measuring ongoing performance.
CFOs are connecting forward-looking planning activities with day-to-day performance measurement. Forward-looking planning enables the CFO to see around the next turn and speak with confidence about where the company is going. Connecting planning to performance measurement increases certainty that execution aligns with business direction. Taken together, CFOs are building important capabilities for restoring the fragile confidence of today's investor.
On the Forward Path
Three factors are creating optimal conditions for an increased focus on improvements to business analytics and performance management capabilities:
- Many organizations have been successful in establishing solid transaction processing and control platforms that provide a foundation for capturing, organizing and moving information across the enterprise. The next logical step in leveraging that information is to drive insight and improve decision making across the business.
- The traditionally fragmented software markets for business analytic and performance management tools are consolidating and introducing a new generation of tools. The major enterprise resource planning (ERP) vendors have released new applications that leverage the transaction processing platforms. Meanwhile, best-of-breed boutique firms have banded together to provide broad suites of integrated applications. The technology to store, organize and navigate vast amounts of data has continued to increase in capability at an exponential rate. It is now possible to construct a set of useful tools that leverages ERP platforms without replicating prior investments.
- A combination of internal and external factors has increased the importance of having more sophisticated business analytic and performance management capabilities. Individuals within the enterprise have grown comfortable with technology and started expecting to make decisions with the help of analytic tools. Global operating models have broken many of the historical cultural barriers regarding origination, transmission and use of information from various geographies as part of an integrated business model. More advanced supply chain partners have started expecting other members of the supply chain to be as sophisticated as they are at optimizing results.
Building World-Class Capabilities
Leading companies in many industries are working to bring new innovations in applying business analytics and performance management while improving execution against business plans and new opportunities. These companies have taken advantage of the economic downturn now as they did in the early 1990s to make investments that will help them accelerate into the recovery to create a gap between them and their competitors.
Organizations focusing attention on business analytics and performance management capabilities are faced with decisions on how and where to start. Should initiatives focus on technology solutions? Are major changes in the culture required to become effective? Which new capabilities will outlast the predicted and unimaginable changes in the organization and competitive environment? How can existing capabilities be leveraged instead of replaced?
Our recommended framework for thinking through the opportunities and priorities focuses on:
- Understanding the economic model. This requires that executives and employees across the enterprise understand how the company makes money, how it is positioned within the industry and how the industry value chain is changing over time. An understanding of which value levers are controllable and which are not is critical at the local, business unit, corporate or industry levels. Additionally, this means that organizations within the enterprise must understand how they contribute to delivering strategies to improve performance within the constraints of the economic model. Without a clear understanding of the economics of the business, investments in both business analytics and performance management capabilities are likely to be suboptimized.
- Having access to appropriate information. Companies must acquire, consolidate and move economic, operating and financial information from external and internal sources to those in the company who can act on it. This can be accomplished for simple data sets to support focused business analytics within a business process or on an enterprise level to support performance management functions. It requires companies to have well defined and understood data models that allow individuals to speak the same language in discussing results. It does not require a single information technology platform, because integration architectures can leverage existing platforms to create integrated data sets. From simple management reporting solutions to more advanced scorecards and data-visualization solutions, the impact on making decisions and influencing performance can be dramatic.
- Creating appropriate incentives to act on opportunities. This is about understanding that the enterprise is flexible in taking advantage of opportunities when they arise, knowing how to quickly gain approval for decisions that change prior plans and working in a culture that values innovation and appropriate risk-taking. Many enterprises have struggled with examples where information existed and insight was gained, but no action was taken. In the most frustrating cases, the incentives in place actually forced employees to take the worst possible actions for the enterprise because those actions fit more closely with prior budgets, plans and forecasts.
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