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Companies have adopted ERP applications to automate many of their transactions and business processes. What's missing is a unified, integrated view of performance information that includes and analyzes data from ERP and other applications.
Peter Krass, CFO Research Services
February 9, 2005
While U.S. companies have spent billons on information systems in recent years, only now are they translating their IT capabilities into true performance management (PM) systems. They've discovered — the hard way — that although IT investment is essential, it is not sufficient alone. That's because while transactional systems are necessary for the important tasks of recording and reporting transactions, they do not provide knowledge. The result: companies are awash in data, but thirsty for information to manage the business.
Finance organizations have vast technology assets to assist them with day-to-day operations, regulatory compliance, and financial reporting. Such systems record transactions and manage operational processes (e.g., point-of-sale activity, customer relationships, inventory management, and distribution), automate compliance and controls, and roll up financial performance data. To varying degrees, these systems populate data warehouses that companies are beginning to tap with advanced business intelligence (BI) systems. The missing element — one that finance and IT teams are now pursuing — is the integration of these systems into a unified source of performance information and analysis capability.
"Performance management," says Connie Winkler in the winter 2004 CFO IT special issue of CFO magazine, "is to performance data what ERP is to transaction data: a broad embrace of all relevant information, fully integrated and thus providing a single view tailored in this case to the needs of finance and operating executives." The relevant information for performance management comes from both existing systems and from new measurements of operating activities; the integration, analysis, and display grow out of new applications and tighter integration of existing systems.
Senior finance executives say that to implement such systems, they are focusing on choosing the right metrics for managing performance and on improving both their processes (through regulatory certifications as well as more general process improvements) and their control over data. And they are implementing new performance management applications to deliver this new insight to finance and operating users.
Performance management implementations are well under way at several companies interviewed recently by CFO Research Services (a sister organization to CFO magazine and CFO.com). Senior finance executives identified a few broad themes that govern their implementation of performance management technology and its role in their organizations:
• Readily available, timely displays of performance information
• Close linkages between performance information, operating activities, and employee compensation
• Common, standardized databases to establish and maintain a single, unimpeachable version of the truth about company operations and performance
• Integration of unstructured text documents into performance management systems
Scorecards, Dashboards Show Performance, Not Just Data
Senior finance executives report aggregating and analyzing germane performance data into dashboards and scorecards — sometimes Web-based, sometimes client-server-based, sometimes using standard office productivity tools. Their objectives in doing so are both to analyze and to carry it to financial and operating managers to drive better decision making. Senior finance executives consistently call for PM systems that balance aggregated, analyzed data presented in a scannable, easy-to-read format, with "drill-down" capabilities that allow users to look not just at more granular information but at the analysis and assumptions that underlie performance metrics.
"We have the ability to look at profitability by product, by function, by time period, all quite easily," says Robin Norris, director of financial analysis and budgeting for Nissan Motor Co.'s North American operations. And while Nissan's PM systems are still under development, the company has a clear vision of rolling out performance management with both historical and forward-looking information. "We'd like to take it to the next step, and have it really be the place where we have reporting data, KPIs, and budget information in one place. That will allow us to have much better dashboards and benchmarking activities. We've made big strides in the last year and a half, but we still have quite a way to go."
Interactivity and display, say senior finance executives, is an important part of PM functionality — one that gives managers the ability to answer the unstructured questions required to make complex decisions. Says Norris: "I definitely think dashboarding is critical — being able to cascade that to the various levels. So pick your metrics and have people understand how they're doing against those metrics in real time. And if you have issues, maybe you want to find out, 'Why aren't we meeting our sales targets?' you have the ability to drill down and find out which region or market or dealer isn't doing what we told them to do — and then take countermeasures. And if we have financial targets and we're behind [on profit targets] — push the button, the consolidation comes out, and we have our profitability by product. Then we can spend more time analyzing [profit drivers] as opposed to consolidating data."
A Pervasive Network Connects Decisions and Performance
PM technology doesn't simply provide interactive information on performance to senior executives; it drives decision making throughout the operations of the business. "On our balanced scorecard," says Luis Miniet, director of IT finance at TIAA-CREF, "at the highest level of the company, there are two key financial objectives [growth in premiums and funding to maintain its investment grade] and several others addressing our customers, staff, and operations. But our balanced scorecard doesn't just stay at the top. It's not a corporate document that we just show to others. It's a real, working document that we use to link to lower levels of the organization, to cascade information, and to show how key objectives can be translated into work that individual team members use to deliver tangible results."
At TIAA-CREF, the scorecard consists of four areas: "customer impact, operations, people, and financial — each of which has its own measurements." Miniet reports that throughout the company, tight linkages between the scorecard and operating activities "ensure that work efforts are clearly aligned so that, for example, folks who are customer facing have the products and services that our customers need to be successful."
Norris at Nissan cites a similar example of using its core metrics — unit-sale targets, return on sales, and outstanding debt — to drive operating decision making. "There are very clear, measurable objectives," says Norris, "and everyone's activities and personal objectives need to tie into one of those three objectives. On the performance management side, it's a matter of aligning everyone's objectives and compensation with the direction of the company."
Standard Databases Yield a Single Version of the Truth
One IT element that many of the interviewees cited was the need for a common, companywide, integrated database. Disparate, incompatible systems, they complain, waste time and reduce productivity. Often, these disparate systems have been built with the best of intentions. At Washington Adventist Hospital in Tacoma Park, Maryland, for example, chief financial officer James Lee explains that IT implementations are driven by a best-of-breed mentality; each department looks to buy the best computer systems for its particular need. So far, so good. The problem, however, is that these departments need to share data. Radiology, for example, must provide Nursing with data from MRIs and CT scans so they can provide appropriate care to patients. "Most of the time," Lee explains, "these systems are not made by the same vendor. They don't talk to each other. So we need to build interfaces. It becomes very sub-optimal."
At Pep Boys, vice president of planning Tim Brokaw cites multiple sources of information as a core challenge: "We have some metrics that are coming from HR and our payroll systems. Others are coming from sales systems. There are a lot of different legacy systems we have to tie together and ensure they are all populating this one data warehouse. And then, how do you deliver it to the field in a meaningful way?" The data needs of compliance are so great, in fact, that at some companies, compliance has driven demand for standardization of systems across business units.
DuPont is in the process of implementing an ERP system that, among other things, will help standardize information needed for Sarbanes-Oxley compliance. The company operates several IT platforms for its twenty-plus strategic business units. The result, says John Shannon, managing director of finance at DuPont Performance Materials: "There was not a lot of opportunity to leverage information." Yet the company had run this way for some time; what changed, says Shannon, was a greater scrutiny in the name of Sarbanes-Oxley compliance and the need for increased efficiency. "It became very apparent to people outside of the finance function just how ineffective we were by having all these different systems environments," he explains.
Another important element of performance management is the need to handle what's known as unstructured data (e.g., e-mail messages, spreadsheet comments, text files, and administrative notes) that can be stored and managed effectively in a database. Few interviewees at present have effective solutions in place, but they also express a clear aspiration to extract and manage the truths that reside in text documents. DuPont's Shannon recalls an early disappointment in this area: "People are supposed to have documentation of the fact that controls are executed, and there was no disagreement with that need. Initially, however, the company intended us to print a physical copy of everything that supported compliance," he says. "This was viewed as excessive and now certain electronic recordkeeping is acceptable."
The Systems CFOs Dream Of
When asked to design their "dream systems" for performance management and compliance, finance officers point to simple, dashboard-like systems that would provide rapid, at-a-glance updates and alerts on key measurements. "If we were beginning this company from scratch, we'd design a more fully integrated system to accommodate our data needs," says CFO Rick Puckett of United Natural Foods. "We would piece together the enterprise solution around high-performance systems, and we'd put on top of that a really good business intelligence system."
Similarly, Norris of Nissan imagines a digital dashboard that would highlight the automaker's key performance indicators from across the company and afford a look at business dynamics as they unfold. Current systems at Nissan can look through a data warehouse to create reports on, say, profitability by product or market, but this data is largely historical, static, and not forward-looking. And while the company is currently implementing a data-warehouse reporting system for budget data, its next step would be to actually build business plans in a budgeting system; however, says Norris, "we're not quite there yet — we're still living in [Microsoft] Excel."
When asked to design his ideal system, Charles Schwab & Co.'s vice president of finance, Greg Wilson, imagines an executive information system with "drill-down" capabilities. "You'd pull up a screen and the screen would show the most recent data for my top 20 indicators, maybe even closer to 10," he says. "I'd be able to look at any one of those — let's say, its daily average revenue trades — and say, 'Gee, it looks like my trend is down. I wonder why that would be.' Then I could click on that number to drill down to maybe weekly data, or maybe I could drill down to understanding whether my weakness is in active traders or affluent clients or our core clients. It would allow me to drill down through several iterations to figure out where my trend has gotten off."
Most succinctly, Brokaw of Pep Boys says: "If we were to start from scratch, we would have one common database for everything. That is the biggest thing."
This article is excerpted and adapted from The Convergence of Compliance and Performance Management: Extending the Impact of Finance Across the Enterprise, a report that summarizes how companies are combining compliance information and business metrics with new performance management technology to support better decision making. CFO Research Services and SAS, a provider of business intelligence software and services, developed the hypotheses for the research jointly. SAS funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.
DuPont Centralizes and Standardizes Measures
in Pursuit of Performance Management
John Shannon likes to measure. In a corporate culture that reveres engineering, that works out just fine.
Shannon is managing director of finance at DuPont's Performance Materials business group, which is essentially a big company within an even bigger company: Performance Materials does business in the Americas, Europe, and Asia, and generates annual sales of nearly $7 billion. The group's best-known products are used in packaging applications, golf balls, wet suits, electrical insulation, gaskets, and magnetic recording tape.
By Shannon's own admission, measurement at Performance Materials "gets a little granular sometimes." If anything, that's an understatement. This DuPont group measures anything that moves — and some things that don't.
First, Performance Materials gets on top of the financial performance metrics: profit margins (by product and customers), sales, and cash generation — and in that order. So Shannon's team starts with a financial forecasting system that looks ahead 12 months to predict revenue, sales volume, prices, and fixed costs. Then they update the forecast on at least a monthly basis. "This affords us an opportunity to put in corrective actions or measures to stay on expectation,” Shannon explains. "Or, if we do not think that is possible, then we can signal to corporate management what might happen or what might be the consequences of not being able to get back on track."
Also, each of Performance Materials' four business units tracks revenue on a daily basis. These daily figures are compared against the monthly forecasts. Then, during a biweekly conference call, Shannon and some 20 other DuPont finance leaders review the numbers. "We add up the inputs from the different businesses to tell whether we're on track," he says.
The group tracks and measures non-financial results, too. The goal: to measure the performance of groups of employees as well as individuals — and to help set year-end performance bonuses.
One such non-financial measure is safety. In fact, DuPont measures safety even more rigorously than required by OSHA, Shannon says. Another measure for employees is their performance of critical operating tasks, or COTs. Employees are evaluated twice a year against their COTs, with a more formal and rigorous evaluation conducted at year's end. (Many managers conduct these reviews quarterly as a means of monitoring progress.) Yet another non-financial measure for employees is responsible business behavior, which, says Shannon, is a key component of the company's "four core values — ethics, people treatment, safety, and environment." These core values at Performance Materials govern how employees treat both fellow workers and the natural environment. Finally, within the group's manufacturing plants, two important non-financial measures are up-time and production yields. The first measures a plant's efficiency; the second, its effectiveness.
As part of its Sarbanes-Oxley compliance efforts, DuPont has itemized every control process performed within the company. It has then categorized some 30,000 control processes according to business unit. For each, the "owner" of the task has completed a survey describing what the task involves. The end result is an enormous catalog that organizes all processes in key areas (such as sales and revenue, or production costing), then by business units, legal entity, and other categories. "I have to admit this: I've actually read [the catalog]," says Shannon. "It's good for a long plane ride." The documentation is also good for training, IT planning, audits, and much more. As Shannon notes, "One man's compliance is another man's view of control."
Underlying all the measures is an application suite to which the company is now in the process of migrating. The goal is to standardize information systems across the group and, ultimately, the corporation. "DuPont used to be very, very decentralized," recounts Shannon. "Over the last couple of years, people have begun to realize they can't afford it. So there is going to be a movement to standard platforms and standard systems. I think that's a real positive."