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The finance department of one Fortune 200 global manufacturing company regularly generates more than 10,000 internal management reports — roughly one for every 25 employees.
William Heitman, managing director, The Lab Consulting
That company is hardly unique. I know of a global financial services provider where the situation is even worse: nearly 50,000 regularly scheduled reports equate to roughly one report per employee. Things are pretty much the same at a third company, a global refiner.
Among more than 200 Fortune 500 business units surveyed by The Lab Consulting, 85% said no one in the finance department keeps track of how many reports are produced or if they are even used. Interviews with the internal customers of these reports revealed that many are not used at all. More than half are used only partially.
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Finance executives would be appalled if their colleagues in the business units ran their operations this way. Imagine a company that doesn’t know how many products it manufactures, or how many units it sells by region, or whether customers are even using its products.
Hidden Costs
There is a direct cost of this behavior, but it is rarely tracked. While the average annual production cost hovers around $8,000 per report, some can run as much as 10 times that amount. An awareness of these unit costs might prove helpful for slowing the growth in demand for new reports. One finance executive estimated that her group would have to expand by roughly 40% to deliver the wish list of reports desired by the business lines she serves.
And there are indirect costs. For example, extensive overlap and contradiction across reports often give rise to a largely unnoticed coterie of workers who reconcile and reprocess the data, which drives the high cost of each report even higher.
Finally, there is the opportunity cost: the lost financial benefits that could come from allocating the dollars and human resources spent on creating reports to more fruitful investments.
Dysfunction of Roles
When CFOs merely produce the reports that business units demand, they transfer their strategic responsibility for conceiving and designing reports (i.e., identifying the most valuable performance metrics) to business-line executives. Consequently, their finance groups in effect become “workrooms” that simply build to order, without regard to whether the orders make sense or whether the orders are redundant, conflicting or low value.
In surveys, users of management reports routinely score poorly in their ability to identify and prioritize the most effective performance metrics. Stated differently, report users need help from the finance group to improve the designs of their reports. Rather than risk embarrassment and ask for help, however, users are more likely to just request more reports.
Under this interpretation of roles, the finance group is accountable for responsiveness, but absolved from managing the costly proliferation of reports or tracking their usefulness to end users. Any CFO of a manufacturing company who identified such an inefficient “factory” within its business would lobby the CEO to shutter or divest it.
Toward a Solution
Correcting these problems will resemble any change-management effort. You’ll uncover redundant and wasteful work, and people will feel threatened.
Start with this: Your office furniture is probably better managed than your internal financial reporting. Each piece is numbered, inventoried, cataloged and monitored for its functionality and usefulness. Recreating this management discipline for your finance group’s report inventory is the goal.
Second, pull out some management reports and take a critical look. Almost three quarters of the reports we analyzed lacked a cover page and title, and their names were so unclear that only someone already familiar with them could find their place in the files. Three representative examples:
None of the surveyed companies used identification numbers or bar codes for the reports. No catalogs or lists of report descriptions were available. In other words, far too many reports were one-offs designed to serve a particular purpose on a need-to-know basis.
To fix this, be guided by the most basic practices of conventional factories. For example, almost any plant manager can describe the range of models produced, the number of units, the cost per unit and the plant’s utilization rate. They also know how customers use their product, including its strengths and weaknesses.
Common business sense suggests that management reports deserve the same attention: standard names, clear descriptions and a centralized, well-managed inventory.
Put controls in place. Few controls, aside from budget and capacity constraints, exist to limit report creation or requests for one-off, ad hoc analysis. Often these one-time requests become institutionalized and live on in perpetuity, especially if the requester is a senior executive.
Compare the management of existing reporting methods to your company’s management of office furniture: Do your reports have useful, identifying names or numbers? Do you have an inventory of reports? Is it organized by user? Do you know how many reports exist? Is there a central “warehouse” for reports? Is there a catalog that helps users select the reports they need?
We have found that as many as half of a typical large company’s reports can be eliminated, allowing finance to spend more time in a consultative role. And by investing more in understanding the business, finance team members can select better performance metrics and improve the remaining management reports.
This change “leans” the finance “factory,” just as production lines were leaned years ago. And in the process, the finance group, the repository of intelligence about how the business is doing, becomes even smarter.
William Heitman is managing director at The Lab Consulting, which advises companies on non-technology business-improvement efforts.
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