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Corporate Performance Management means making sound decisions ...
1. Transforming Finance: The Path to Effective CPM Page 1 WHITE PAPER Transforming Finance: The Path to Effective Corporate Performance Management Dave Murray Chief Financial Officer Longview Solutions © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 2 INTRODUCTION Each move of an accomplished chess player is preceded by reflective consideration. Where am I now? Where am I headed? Am I making the right moves at the right time? Am I on track strategically? If not, how do I correct my position? If you’re a decision-maker that is actively involved in the strategic planning and direction setting for your organization, these questions should be familiar to you. It’s what you do every day – ask and answer big-picture questions. You determine where the company is; decide on a destination; chart a course; give directions; set goals; lead the troops; measure progress; and report to stakeholders. Sounds simple; but managing today’s enterprise is an extremely complex undertaking when your big- picture view is much wider and multi-dimensional than a chess board. This inherent complexity is compounded by the harsh and unforgiving nature of today’s economic and regulatory climate caused by: the slow recovery from the recent economic downturn, with all its ‘do more with less’ pressures; relentless global competition, made even more fierce by a wave of partnerships, mergers and acquisitions; ever-increasing demands from customers; and the added pressure from regulatory scrutiny of accounting and financial reporting practices, thanks to the recent transgressions of a few highly visible corporations. In response to these pressures and to the rapidly growing complexity of today’s business environment, a growing number of organizations of all sizes are implementing Corporate Performance Management solutions to achieve a better-managed and optimally performing organization. CONDITIONS RIPE FOR CPM According to industry analyst firm Gartner, who first coined the term in 2001, Corporate Performance Management (CPM) is an enterprise-wide strategy for measuring, monitoring and managing business performance, while seeking to align departmental initiatives to prevent managers from optimizing local business at the expense of overall corporate performance. CPM primarily comprises the processes used to manage corporate performance (e.g., strategy formulation, budgeting, forecasting), the methodologies that drive those processes (e.g., balanced scorecard, value-based management) and the metrics used to measure performance against strategic and operational performance goals. CPM also includes the technologies required to support these processes, methodologies and metrics.1 CPM is a critical enabler for building a performance-accountable organization, providing the management processes that enable strategic planners and decision-makers to: model possible business directions and results; identify the root-causal factors driving the financial numbers; break down localized activity silos in order to achieve strategic alignment of goal-setting, monitoring and reporting across the entire organization; respond more quickly to changing conditions in the marketplace; and deliver accountability enterprise wide. © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 3 The key benefit from CPM is improved business performance, achieved by improved capabilities for decision making and execution by management and the organization. In addition to providing the tighter controls and monitoring of performance required for the careful management of limited resources during a difficult economy, for example, CPM offers better metrics to help organizations condense the increasingly vast amounts of data into more-meaningful, actionable information. And by strengthening controls around financial reporting and disclosure processes and supporting the comprehensive reporting of business performance to shareholders, regulators and other stakeholders, CPM can play a critical role in complying with government and industry-specific business- and financial-reporting regulations such as Sarbanes-Oxley, Basell II, International Financial Reporting Standards and others. CPM application suites help automate financial reporting processes and are able to monitor and report on both financial and non-financial information, thus supporting broader disclosure of business information in a controlled and auditable manner. Gartner goes so far as to proclaim that “you have no choice but to adopt CPM because regulatory bodies simply demand insight into your corporate performance”.2 CPM A TOP IT SPENDING PRIORITY Industry analysts seem to agree that CPM has become a leading go-to technology that is helping companies deal with pressing compliance, performance and regulatory issues. According to a study by the Aberdeen Group, for example, 75 percent of respondents’ companies were already, or were planning to become, actively engaged in a program to enhance their existing CPM capabilities. Of those that had already adopted some form of CPM program, more than 70 percent reported high- impact improvements in key performance metrics.3 In its own assessment of this domain, Gartner claims that “Corporate performance management continues to be high on many management agendas, driven by the twin pressures of continuing compliance demands and the need to better understand and control what drives performance in the enterprise.” 4 Following suit, AMR Research indicates that the IT and business executives it has spoken to have ranked enterprise performance management initiatives as one of their top three priorities in the past three years. When asked what they hoped to achieve with their performance management initiatives, these decision makers responded with: • Setting strategic objectives and performance targets • Measuring actual versus targeted performance • Reacting to ongoing changes in the business environment5 AMR predicts that spending growth in performance management-related technologies will continue to outpace overall IT spending as companies strive to exploit enterprise information assets to optimize management and decision-making processes.6 © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 4 BUT IT TAKES MORE THAN JUST TECHNOLOGY After years of investing in Enterprise Resource Planning, Customer Relationship Management and Supply Chain Management systems, corporations now have the data required for effective performance management; and Internet-based tools are making it possible to access that data anywhere in the world. In addition, advancements in key infrastructure components such as server and storage technology and analytical applications and CPM suites are making it possible to collect, store and analyze all this data in real time. However, it takes more than just technology to achieve effective performance management. A CPM initiative requires a significant cultural change as well, especially since CPM is not a one-time event, but rather a continuous and evolving process that may require a significant paradigm shift in some organizations. This shift may affect how management teams are organized and operate, how processes such as budgeting, planning and forecasting work, how previously separate business units need to interrelate, what metrics are chosen as key performance indicators, how executives communicate company strategy to the rest of the organization, what new roles people play and who will be responsible for corporate performance management within the organization. One of the most profound and visible aspects of transformation that accompanies a CPM initiative occurs in the Finance organization, impacting processes, tools and the roles played by all levels of finance staff, including the CFO. Let’s consider what’s happening and what may need to happen, in a few of these finance-related areas: IMPROVE TRANSACTION-PROCESSING EFFICIENCY Historically, finance departments have spent a significantly large portion of their time on relatively straightforward financial accounting and transaction-processing tasks such as keeping the general ledger up to date, processing journals, paying invoices and so on. A 2005 global CFO survey revealed that finance departments spent 47 percent of their time on transaction processing and only 26 percent of their time on strategic activities such as decision support and performance management.7 If CFOs are serious about wanting to manage business performance enterprise wide, they will need to improve operational efficiency so that finance staff can spend less time on transaction processing, leaving more time for strategic activities that deliver higher value to their organizations. Although ERP solutions have helped to improve the efficiency of transaction processing, they have not provided much-needed support for decision-making and performance management, resulting in a continued reliance on spreadsheets and manual processes for budgeting, planning and management reporting activities. Gartner estimates that 50 to 60 percent of large organizations still use Excel spreadsheets for budgeting and planning.7 A modern financial application, on the other hand, provides a solution to efficient transaction processing; and a CPM application provides an effective platform for strategic finance activities such as complex financial consolidation or budgeting and planning. © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 5 ESCAPE FROM SPREADSHEET HELL The vast majority of financial statements prepared by corporations today are developed based on spreadsheets because of their convenience and flexibility and because most leading spreadsheet products support the development of ad hoc applications for activities such as financial data collection, consolidations, budgeting, planning and forecasting. However, research and anecdotal evidence from auditors indicate that spreadsheet applications are highly prone to errors in logic. In fact, it is claimed that spreadsheets have an error rate comparable to that encountered with software development; yet because most spreadsheet applications are developed outside the realm of the IT department, they are typically not subjected to the same rigors of development process, testing and change management geared to ensuring the quality of traditional software applications. Along with their limited capability for tracking changes or auditing usage, this also leaves spreadsheets at risk due to acts of malicious intent. As a result, spreadsheet applications, which often involve multiple, linked spreadsheets and workbooks developed by different people, pose significant business and regulatory risks that can lead to business losses, legal liability, damaged reputation, unwelcome regulatory attention and erosion of stakeholder confidence. Notwithstanding the emergence of new ‘spreadsheet control’ products – that improve spreadsheet quality and governance – and ‘spreadsheet auditing’ products – that identify errors in the logic and accuracy of spreadsheets – businesses should reduce their reliance on spreadsheets. Gartner suggests the use of CPM applications to achieve this change, especially in instances where spreadsheets are being used for activities for which they are entirely unsuited, such as budgeting and planning.8 When implementing a CPM solution, including the interests and involvement of business units other than just Finance will contribute to an enterprise-wide approach to business planning and performance management. IMPROVE DATA QUALITY, TIMELINES Sound decision-making as part of managing an organization’s performance is not a new concept, of course; but what complicates the process is the short ‘shelf life’ of a business decision in today’s economic and political environment. What used to be an annual planning decision, for example, has moved from monthly to weekly to daily and sometimes hourly. Delayed decisions mean promises may be broken and targets missed, negatively impacting stakeholders such as institutional and private investors, clients and suppliers, business partners, executives and staff and regulators such as the Securities and Exchange Commission (SEC). Gathering data in real time has become a key business imperative. For global corporations with divisions and departments in different countries, spread over various time zones and operating in a variety of currencies, this can be a significant challenge and it is vital that valuable time not be lost in translating disparate data into a common data language. To add further complexity to the situation, different divisions may operate on a variety of enterprise resource planning and customer relationship management applications. Combine this with different technology platforms and the result is communications resembling the output from the Tower of Babel, with information arriving in a variety of ‘dialects’ requiring translation into the standard business data language of the enterprise before decision-makers can analyze it and make strategic decisions. An integrated CPM solution, however, can make sense of disparate technologies, currencies and business rules, making real-time data collection, analysis and decision-making a practical reality. © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 6 Timely business decisions mean nothing, however, if the actual data is incorrect; and with corporate performance management, the impact of bad decisions is elevated to a more significant and strategic level than in narrower, operational decisions. Gartner research has shown that the quality of 25 percent of all data used for management information is poor enough to create problems. The data is incomplete, contains factual errors or is unfit for the particular purpose for which it is being used.9 Data quality is a real challenge, especially since many organizations have silos of information: inconsistent, inaccurate and conflicting sources with no ‘single version of the truth’. In November 2005, a Deloitte survey showed that nearly 80 percent of organizations found that their decision making was adversely affected by having multiple versions of the truth.7 As part of their evolution into corporate performance management, organizations must pay closer attention to data quality; and by addressing data quality issues during the early stages of a CPM implementation, organizations can minimize deployment cost and increase user acceptance and benefits. Although data quality tools are maturing and a growing number of organizations are introducing ‘data stewardship’ type programs – that include data quality audits – to bring greater management attention and resources to data quality issues, further shifts in corporate thinking are required. CFOs need to work closer with CIOs, for example, to create a strategy that builds consistency between financial and non-financial data. Gartner's own survey of 600 organizations showed that the CFO was responsible for data quality in only 10 percent of organizations.7 CPM applications can help create this consistency because they provide the functionality needed by the finance team to support strategic activities but sit outside the core financial applications, which means they can access data not only from finance systems, but also from other data sources to create a consistent view of financial and non-financial data. THINK ‘BEYOND THE NUMBERS’ It is a natural tendency in most corporations for performance management to be dominated by financial processes and metrics, as opposed to non-financial factors that relate more directly to operations, such as sales volume, market share, staff turnover and so on. First, the CFO and Finance department typically own many aspects of performance reporting and management, such as financial consolidation and reporting for example. Even budgeting, planning and forecasting, which are supposed to be enterprise-wide activities, are often dominated by Finance, which is typically responsible for rolling-up individual operational budgets and plans into a consolidated corporate view. This focus on financial processes is compounded by increased regulatory pressures, which are resulting in significant management attention being paid to financial reporting and processes, possibly at the expense of broader, company-wide considerations. Financial metrics also tend to dominate performance management because they comprise the bulk of what corporations report externally to regulators and shareholders, for example. According to Gartner, a survey of information published by companies listed on stock exchanges confirms this – 71 percent of the key high-level metrics disclosed by a sample of Global 2000 companies were pure financial metrics, with most of the remainder being share-price-related or simple demographic metrics, such as number of employees.10 For the most part, financial metrics tend to be ‘lagging’ indicators, representing the results of an organization’s activities – thus inherently backward-looking – while non-financial metrics are ‘leading’ indicators that typically foretell an organization’s future success. In support of the importance of building an enterprise-wide perspective that integrates both financial and non-financial performance indicators, Gartner predicts that organizations that focus performance management solely on financial reporting and budgeting will fail to become high-performance organizations. Instead, they will remain dominated by a near-term focus on the numbers, without understanding what is actually influencing their performance.10 © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 7 In addition to those ‘tangible’ examples cited above, non-financial indicators include ‘intangible assets’ – attributes that are hard to put a financial value on – such as customer satisfaction, employee loyalty, the value of partnerships, brand equity, innovation, intellectual property and more. CPM applications, through the use of scorecards, can play a valuable role in managing non-tangible asset performance indicators; and as important drivers of corporate performance, non-financial factors – both tangible and intangible – need to be linked to resulting financial measures. “By 2009, more than 60 percent of Global 1000 companies will make the management of intangible assets an explicit component in their CPM strategies.”11 This supports the need for Finance executives and staff to change their view of their roles in the organization from focusing on the needs of the Finance department and dominating the requirements of the CPM initiative to coordinating an enterprise-wide approach. Gartner goes so far as to say that “a finance organization maturing into CPM must learn to allow [business unit] management to have responsibility for activities such as planning and budgeting, while Finance retains the position of coordinator for the whole process because it possess valuable expertise in handling this task.”12 CPM TOOLS SUPPORT DECISION-MAKING LIFESTYLE The automation tools for effective enterprise-wide decision-making may be likened to an Air Traffic Control Center. The destination and precise flight path for every division and department should come from a unified source, allowing a strategy and direction for the organization that make sense, given the current fiscal location of divisions and past performances. As precise as your flight paths may be, your traffic controllers, or strategic decision-makers in the tower must be able to quickly and efficiently analyze volumes of incoming data and rapidly communicate directional changes. And the pilots – the divisional and department leaders and managers – must understand and implement these changes quickly if the corporation is to reach its destination. However, the pilots also need to be armed with sensors that allow them to pick up information that might slip under the Air Traffic Control Center radar. They must be able to communicate this information to the control tower so that rapid, collaborative decisions can be made as required. The decision-making ‘flight path’ must also take into consideration the fact that it won’t always be clear flying. The business skies are crowded with competitors who may cut margins or unexpectedly launch new products or services. They may even merge with or acquire other competitors. The decision to make changes in direction or speed must be based on the sound analysis of accurate, timely information. Otherwise, you are flying by the seat of your pants; and you don’t want to be flying without navigation tools when making crucial business decisions. In the digital age, too many corporations still use spreadsheets and manual processes. Even if the raw data arrives over internal networks, intranets, or the Internet, it is moving too slowly if it has to be massaged and translated before it can be analyzed, before the implications can be understood and before decisions can be made. In partnership with a growing client list comprising the world’s most respected businesses, Longview Solutions continues to refine and enhance its CPM application to give Finance executives and staff best-in-class automated enterprise-wide performance management technology. In a professional chess game, every move can bring you closer to your goal and put more distance between you and your competitor. So it is with the global enterprise; but every move requires a precise, strategic decision that leads to optimum corporate performance. © 2006 Longview Solutions www.longview.com
Transforming Finance: The Path to Effective CPM Page 8 ABOUT LONGVIEW SOLUTIONS Longview Solutions makes Corporate Performance Management software that leading companies use to drive performance with speed, visibility and financial integrity. Since 1995, many of the world's most respected companies have been using our technology platform to support the diverse needs of their complex finance organizations. The Longview Performance Management Platform is highly scalable, providing a single repository of financial truth from which Statutory Consolidation, Management Reporting, Planning, Modeling, Analysis, Budgeting, Forecasting, Strategic Tax and related Learning, Compliance and Knowledge Management processes can be performed quickly and accurately, enterprise wide. Longview Solutions has a focus on finance and expertise that covers all industry sectors including energy, entertainment, financial services, health care, higher education, manufacturing, pharmaceutical and retail. www.longview.com ENDNOTES 1 Gartner Research: “CPM Applications Explained”, October 2005 2 Gartner Research: “CPM: Connecting the Dots”, January 2004 3 Aberdeen Group: “CPM Benchmark Report: Improving Corporate Decision Making Through Proactive Analysis”, September 2004 4 Gartner Research: “Magic Quadrant for CPM Suites, 2005”, November 2005 5 AMR Research: “EPM Spending Will Top $22B This Year”, June 2005 6 AMR Research: “Trends in Enterprise Performance Management, 2005”, June 2005 7 Gartner Research: “CFO Finance System Priorities Through 2009”, August 2006 8 Gartner Research: “Recognize the Risks of Uncontrolled Spreadsheets”, November 2005 9 Gartner Research: “CPM Helps Build the High-Performance Corporation”, August 2005 10 Gartner Research: “CPM Must Move Beyond Finance”, December 2005 11 Gartner Research: “Intangible Assets in CPM”, January 2004 12 Gartner Research: “Mapping the Road to CPM”, January 2004 © 2006 Longview Solutions www.longview.com
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