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  • 1. IBM Business Consulting Services CFOs: Rising to the challenge of performance management deeper Executive brief
  • 2. The following article was originally published in the book “On the Up and Up” published by Hyperion Solutions Corporation, 2004.
  • 3. Contents CFOs: Rising to the challenge of performance management 1 CFOs: Rising to the challenge The role of the corporate CFO is rapidly expanding. It is extending beyond a of performance management traditional focus on external and regulatory reporting, and “enforcing” of financial 2 Tough challenges and new policy and process. CFOs are increasingly being called upon to act as a business opportunities for CFOs partner to help guide and improve business performance across their organiza- 7 Delivering the on tions. To this end, in the next three years it is anticipated that we will see a dramatic demand performance and progressive transformation as the finance function expands its emphasis management solution and resources from transactional activities, which, while necessary to comply 10 Fusing process, people, with regulatory requirements, provide limited differentiation for the business. This technology and information represents a fundamental shift in focus for the CFO from efficiently “running the 11 Conclusion business” to effectively “managing and optimizing the business.” These resources 12 About the author will be redirected to decision support and performance management related 13 About IBM Business activities required to enable an adaptive, on demand business, which is necessary to Consulting Services compete in an increasingly volatile economy. Figure 1. Finance’s evolution to an on demand future. Finance efficiency + Finance effectiveness Past Current Future: On demand Business units Central CFO finance Decision support Shared Specialist finance services services/ Transaction processing outsourcing Source: IBM Business Consulting Services analysis, 2003. An on demand business is adaptive in that it has the ability to quickly sense and respond to change, both internal and external. It does this by aligning and integrating people, technology and information with the core business processes across its entire value chain. The on demand business model is focused on measures of success, responsive to change, variable in its cost structures and resilient in dynamically managing risk. 1 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 4. CFOs will play a very important role in enabling these new on demand business models. As the traditional stewards and caretakers of a company’s financial information, going forward they will be counted upon to assume a similar role for all of the key information assets (e.g., customer, supply chain, employee, etc.) of their organizations. This is important in helping to ensure the consistency, accuracy and timeliness of the information that is key to monitoring and improving business performance. This includes financial and nonfinancial information about past performance, as well as predictive and planning information to enable better decision-making. As the nexus of business strategy, process and information, CFOs and their finance organizations must take a leadership role in standardizing, central- izing and governing the definition, analysis, and dissemination of the information that measures the drivers of corporate performance. In the Fourth Quarter of 2003, IBM Business Consulting Services conducted a global survey to better understand the state of finance today and where CFOs believe they are headed in the next three years. We surveyed 450 CFOs from 35 countries. They represented global enterprises with average annual revenues of US$8.4 billion. More than 77 percent of the interviewees were enterprise-level CFOs. The rest represented large business units, regional and country perspectives. Recent research by IBM Business Consulting Services indicates that CFOs and finance organizations are poised to deliver this new level of sophistication, competence and value to their companies. However, despite the significant oppor- tunities this presents for CFOs and companies overall, many challenges remain. This paper summarizes the results of this CFO Survey, along with an approach and set of best practices to address these challenges developed with some of the leading and most innovative financial executives and companies in the world. Tough challenges and new opportunities for CFOs CFOs and their finance departments have made significant progress in managing financial data and adopting adequate controls to verify the accuracy of this data for their organization. While confirming the importance of compliance and controls as related to Sarbanes-Oxley and other regulations, CFOs ranked “improving performance management” as their top opportunity and challenge. 2 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 5. Figure 2. Top five challenges in delivering objectives and meeting the needs of the business, by percent. Improving performance management 52 Improving governance, controls, 43 risk management Improving competencies/skills 42 Improving planning/forecasting 42 and budgeting Improving access to appropriate information 38 0 10 20 30 40 50 60 70 80 Source: IBM Business Consulting Services 2003 Global CFO Survey. Also a significant concern for CFOs is improving access to information, which is tightly linked to improving performance management. Further, the survey results show that CFOs overwhelmingly view information as a critical, yet underutilized, corporate asset. Nearly 70 percent of CFOs view information as a major asset justifying significant investment, and nearly as many, 64 percent, believe that they could manage information better. Thus, it is no surprise that 65 percent of CFOs say that measuring and monitoring business performance is one of their highest priorities for allocating time and resources in support of shareholder value creation. Commensurate with their shift in role, the survey finds a shift in focus from “back-office” to “front-office” activities when compared to previous surveys. Figure 3. Top areas of focus, in percent. Supporting CEO in creating 68 shareholder value Measuring/Monitoring 65 business performance Managing governance/Controls/Risk 54 Driving cost reduction/Continuous 52 process improvement Managing the balance sheet 39 0 10 20 30 40 50 60 70 80 Source: IBM Business Consulting Services 2003 Global CFO Survey. 3 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 6. Further, over the next three years, CFOs expect to continue to shift their workload away from transactional activities, which will be more automated or outsourced, toward decision support and performance management, thus providing much greater value to their organizations. Figure 4. Finance workload distribution, by percent. 50 Transactional activities 34 26 Today Control activities 29 In 3 years Decision support/Performance 24 management activities 37 0 10 20 30 40 50 60 Source: IBM Business Consulting Services 2003 Global CFO Survey. In basic terms, the goal of performance management in an on demand environment is to provide leading organizations with the ability to make better decisions faster. By better decisions, we mean decisions that are fact-based and lead to better results for the company overall, resulting in increased shareholder value. This ranges from setting corporate strategy to day-to-day decision-making by individuals at all levels of the organization. The key to making better decisions faster is having the right information available when decision-makers need it. There are a few important dimensions to improving the quality and timeliness of decision-support information. One is broadening the type of information that is typically available to managers, moving from an over- reliance on monthly financial information to a better balance of “realtime,” or what we refer to as “right-time” financial and nonfinancial information. According to the survey, CFOs see significant value in having and providing information about a broad set of business dimensions, especially customer and product management information. At the same time, they recognize that there is a large gap in their ability to effectively deliver this information. 4 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 7. Figure 5. Information needs and effectiveness, by percent. Customer management 75 30 61 Product management 24 50 Cash/Working capital management 33 46 Channel management Areas that benefit most from 9 good information 41 Supply chain management Organizational information 21 framework rated highly effective 38 Workforce management 15 34 Supplier management 18 0 10 20 30 40 50 60 70 80 Source: IBM Business Consulting Services 2003 Global CFO Survey. The survey data supports the need for management to receive a comprehensive set of measures reflecting performance across the entire value chain. For those organi- zations that do capture and integrate financial and nonfinancial measures today, there is still a worrisome gap relative to the decision-makers’ ability to easily access this information. Fewer than a third of CFOs are confident that their information frameworks are highly effective across these business dimensions, indicating that there is significant room for improvement. For example, CFOs report that 75 percent of managers receive monthly reports showing variances between plans and actuals. However, fewer than half have access to the tools, reports or information necessary to analyze and support their specific decisions. Even fewer managers receive frequent operational metrics regarding processes under their control. Rarely do managers have self-service tools to obtain integrated information across functions, processes, and geographies, and the value network required to make better, “right-time” decisions. 5 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 8. Figure 6. Percentage information used in decision support. Managers receive monthly reports highlighting 75 deviations from plan 62 41 Managers receive frequent operational metrics in 52 respect of processes under their control 36 29 Managers have ready access to information to 42 support ad hoc decisions 33 24 Managers have access to analysts to investigate 40 information for complex decisions 39 26 Managers have tools to allow them to obtain any 30 information they need to support decisions 26 Department/Plant 19 Managers have ready access to integrated Country/Division/Function 21 information across functions, processes, 21 Individual geographies etc. to make better decisions 12 Managers have access to integrated information 14 across the value network of which their company 14 is a part 9 0 10 20 30 40 50 60 70 80 Source: IBM Business Consulting Services 2003 Global CFO Survey. The survey finds that CFOs are confident about the accuracy and timeliness of the financial information consistent with their traditional role in external and regulatory reporting. Yet the results imply that roughly two-thirds believe that information is not tailored, cost-effective, easy-to-use, or integrated across the organization. These facets of decision support information must be addressed aggressively to reach the goal of enabling improved business performance management and making better decisions faster. 6 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 9. Figure 7. Percentage of organizations’ view of information adequacy. Reliable/Accurate 79 Timely 71 Consistent 64 Highly relevant 53 Accessible 48 Tailored/Customized 36 Cost-effective 35 Easy to use 33 Integrated 32 0 10 20 30 40 50 60 70 80 Source: IBM Business Consulting Services 2003 Global CFO Survey. Delivering the on demand performance management solution Clearly, providing more “relevant” and “action-oriented” information is a pivotal issue for CFOs as they step up to a more strategic leadership role at the center of performance management for the entire organization. One of the keys to improving the quality and timeliness of information is to implement a holistic, on demand performance management framework that is designed to enhance decision-making across the entire value chain and at all levels of the organization. By doing so, CFOs provide tremendous tangible value throughout the company. A successful blueprint for business performance management has five key attributes: 1. It is enterprisewide in its scope and its impact. As noted earlier, the CFO has long had responsibility for centrally organizing and managing financial information and providing a consolidated view on the financial “health” of the entire corporation. So, just as these consolidated financial reports include the results for the company, performance management must embrace and help align the entire organization or it cannot adequately affect overall business results. Business performance management can be instrumental in assisting Executives align the goals and related measures of the individual business units and functions with the strategies of the organization. Further, it also helps identify and rationalize measures that may actually conflict across business units. 7 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 10. 2. It incorporates nonfinancial as well as financial key performance indicators. Financial measures, income statements, balance sheets, etc. are the way most of the world measures a company’s success. However, it’s the dynamic factors impacting those numbers – such as; new customers, customer profitability and satisfaction, supply chain optimization, inventory levels, employee turnover, or product reliability – that performance management seeks to measure and influence as the root causes of profit or loss. As noted in the survey, most companies are at a very rudimentary level in their understanding of these key performance indicators (KPIs) and business drivers as compared to their understanding of traditional financial measures. Capturing, analyzing and providing visibility to a balanced set of measures is essential to a robust performance management framework. The right performance measures should be directly aligned to the organization’s strategic objectives. While 54 percent of CFOs indicated that their companies use a limited set of high-level KPIs, fewer have linked those metrics to the true drivers of economic value, or to performance targets, so that they can be effectively cascaded through the organization to support decision-making and accountability consistent with corporate strategy. 3. It is “right-time” and predictive in nature. One of the primary attributes of the on demand business model is the ability to sense and respond to important business events as they occur, or in some cases before they happen. We recognize that companies will continue to produce monthly, quarterly and annual reports. However, we also know that the latency of these reports make them ineffective for supporting many decisions made every day. Therefore, leading finance organizations are using this historical information, combined with other internal and external metrics, to perform more advanced predictive analysis. A robust performance management framework must also deliver the results of this analysis to the appropriate decision-maker when it is required so that companies can both “sense” and “respond” as events occur – as opposed to waiting until after the end of the month to receive their management reports, at which time it is usually too late to take corrective action. Some refer to this concept as “zero latency” or “realtime” decision-making. 8 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 11. 4. It includes integrated analytics. As discussed, performance management by definition must encompass the entire organization and includes measures that provide insight into past, present and future events. The next generation of performance management and business intelligence will provide even tighter linkage and integration between the business processes and their respective performance measures. However, capturing, aggregating and disseminating this multidimensional data is not enough. The value in this data is directly related to the organization’s ability to effectively analyze it to uncover those insights that positively impact decision-making. An example that combines advanced analytics with the predictive, realtime concepts covered in the previous point might include performing customer analytics that predict propensity to buy for an individual customer based on their demographics, preferences, past buying habits, etc. This allows the use of this information to make a very personalized offer of a product or service while the customer is on the phone with your call center or visiting your Web site. 5. It delivers role-based decision support information tightly aligned with the workflow of key decision makers. One of the keys to effectively managing performance is the personalization of role-based information delivered to decision-makers and other information consumers who can use this information to positively affect company performance. Embedding the analysis within the systems and workflow of decision-makers is key to seizing opportunities to add clear value. For example, if you work for an airline, and your primary responsibility is scheduling flights, you may want to track specific information, such as average fares by route and occupancy rates, and how they compare to last year, current capacity and to forecasts. If, on the other hand, you work in ground operations, you would be more concerned with fuel costs, predictive maintenance, and staffing. The point being that performance management systems must reflect the specific workflows and processes for each function, while also being consistent and aligned with the overall corporate measures. Examples include CFO dashboards, supply chain dashboards, and so on. The success of role-based information systems depends largely on accessibility and ease of use. As long as decision support systems are used primarily by a small group of analysts, they will never reach their full potential. Easy access – such as via a Web interface, portals, and more intuitive tools – is an absolute prerequisite for making performance management solutions mainstream and operational. 9 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 12. Business performance results are a function of the ability to empower employees to become decision-makers to add value when the opportunity arises. To this end, a business performance management framework must deliver a work environment that is focused, relevant, aligned with strategy, action oriented and enabled, all in order to support the employee in making sound decisions and taking positive action. This is the essence of a productive workforce. Fusing process, people, technology and information Creating a successful on demand business performance management architecture depends on more than just technology. It requires a close integration of processes, people, technology and information. Although 92 percent of CFOs indicate that they have largely automated their processes, only about one third indicate that their systems and processes are standardized, representing a critical barrier to improving efficiency and gaining enter- prisewide visibility into performance measures. At the same time, these companies are increasingly looking to business performance management as the fastest and most cost-effective way to integrate these processes and information across the enterprise, as they continue to operate disparate transactional systems, such as enterprise resource planning (ERP). Figure 8. Percent implementation of underlying data and systems. Business unit standardized processes/COA 36 15 Global standardized processes/COA 35 23 Today In 3 years Single instance ERP 29 27 Single data warehouse 20 34 0 10 20 30 40 50 60 Source: IBM Business Consulting Services 2003 Global CFO Survey. 10 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 13. By standardizing their data and measurement definitions and analytical systems, companies can reduce operating and information costs, as well as make it possible to disseminate accurate, consistent and timely performance management information throughout the enterprise. In addition, new competencies within the finance function are becoming increasingly important because of the changing skill set required of CFOs and finance professionals. A deep understanding of the business combined with performance management and analytical skills is critical, as finance must understand and design processes and measurement systems as a critical enabler corporate strategy. Change management and program management skills are also required to help implement these performance management programs across the organization. Finally, better process analysis and technology skills are needed in working with IT and the business units to fuse process and technology into performance-enhancing initiatives. Conclusion There is no question that the pace and complexity of business is increasing at an accelerated rate. Periods of change and uncertainty can be especially trying, but they also present great opportunities to those involved in planning and executing the transformations necessary to deal with these uncertainties. There is no question that business performance management is an integral part of monitoring and improving performance through an integrated framework. That integrated framework helps in identifying which measures are important, planning how to achieve these measures, constantly forecasting and anticipating likely outcomes, monitoring progress against plans and goals, and communicating role-specific information about that progress to decision-makers across the enterprise and then measuring the results of these decisions. We are at an interesting inflection point within finance. Much progress has been made, and yet much remains to be accomplished. We fully expect that CFOs and their finance organizations will rise to the occasion and take a leadership role, leveraging solutions such as business performance management to develop the roadmap that will guide their organizations to a higher level of competency, clarity and competitiveness. 11 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 14. About the author Michael Schroeck serves as a Partner and Global/Americas Business Intelligence Leader, IBM Business Consulting Services. He has more than 20 years’ experience providing global clients with management consulting solutions in the areas of data warehousing, decision support, analytics, enterprise information systems, customer relationship management solutions, and financial reporting and analysis. Mr. Schroeck has been a featured keynote speaker at numerous data-warehousing and business intelligence conferences around the world, and is a frequent contributor of business intelligence and analytics articles to various trade publica- tions. Additionally, in July 2002, Consulting Magazine named him one of the Top 25 Most Influential Consultants in the World. In April 2003, he was recognized as a Distinguished Engineer, one of the top technical honors within IBM. Mr. Schroeck earned a BA in accounting from the University of Cincinnati and an MBA in accounting and finance from Xavier University. Mr. Schroeck can be reached at mike.schroeck@us.ibm.com. Contributors Valerie Brown, Global Business Intelligence Business Adviser, IBM Business Consulting Services Stephen B. Rogers, Financial Management Lead, IBM Institute for Business Value 12 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 15. About IBM Business Consulting Services With consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world’s largest consulting services organi- zation. IBM Business Consulting Services provides clients with business process and industry expertise, a deep understanding of technology solutions that address specific industry issues and the ability to design, build and run those solutions in a way that delivers bottom-line business value. 13 CFOs: Rising to the challenge of performance management IBM Business Consulting Services
  • 16. © Copyright IBM Corporation 2004 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America 05-04 All Rights Reserved IBM and the IBM logo are registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. G510-3618-00

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