State-of-the-art software systems can help finance become a more efficient collector and analyst of data, well-equipped to model and test the impact of changes both within and external to the organization — and able to share that power with other parts of the enterprise. These systems allow budgets and forecasts to be created and updated on-the-fly, based on a continuous inflow of both financial and non-financial data. Because such a system allows business units to feed in much of that raw data and market intelligence directly, it makes operations managers part of the planning and forecasting process.
And it frees finance to spend more time on data analysis than data collection. The best systems offer capabilities for analyzing data and modeling “what if” scenarios. In sum, today’s performance management software can bind finance and operations in a single effort and create tight links between budgeting and business strategy.
John Kurtzweil hopes this will be the case for his company, ON Semiconductor, now that it is nearly done implementing a new performance management system. Kurtzweill, the SVP, CFO, and treasurer for the global manufacturer of advanced power-management and data-management semiconductor devices, says that with actual revenue and expense data loaded into the system on an ongoing basis, he’ll be able to call up that data in a matter of minutes. While divisional controllers are, for the time being, still entering the data using worksheets given to them by the business units, he plans to turn that work over to the department managers. “They’re already preparing the worksheets, so why not have them put the data into the system themselves?” he asks. Over the first six months of this year, he says, teams from his finance group will be visiting with the department managers on site, one at a time, and training them how to do just that.
Esther Blum, SVP, controller, and chief accounting officer for Taubman Centers, a real estate investment trust that develops, owns, and operates shopping centers, has already seen improvements first-hand since implementing a new performance management software system in 2001. Not only does finance have access to data faster, but the subsequent analysis that finance is able to provide to the business units is better. “It’s higher quality because you can slice and dice the data so many ways,” says Blum. “You’re able to provide more interesting analysis that you couldn’t do so easily in the past.” (See the case study “How Taubman Centers Streamlines Financial Analysis,” at the end of this article.)
What should CFOs look for in performance management software? In a recent survey by CFO Research Services, many of the financial executives we interviewed stressed the value of having a Web-based product. The goal is to eliminate the hassles and pitfalls of trying to ensure that all users have the same current version of the software on their desktop, along with the latest version of the file they want to use. “I wanted something that was going to be fully Web-based, which means that you turn on your computer, grab your browser, and you’re in the application,” says Robert Vesely, executive VP and CFO of Advantage Sales & Marketing in Irvine, California.
In our survey, respondents said that in addition to Web-based analytical tools, they plan to have technology that provides them with the ability to automate the generation and distribution of reports, create an executive “dashboard” of key performance metrics, offer an enterprisewide portal where managers can drill down in greater detail on the company’s performance data, and automatically alert users to potential budgeting or performance problems using exception analysis techniques. Today, high technology companies are somewhat more advanced than others, but in the future these tools will be used evenly across industries.
Such tools have the potential to help resolve a number of long-standing challenges for the CFO. “If you really believe in finance transformation, the accounting side will all move on to computers, and the strategic value-adding side will reside with people,” says Kent Potter, senior VP and CFO of Chevron Phillips Chemical Co. “We will lose the finance label as we become part of the business and are able to provide input into major decision-making activities.”
Best of Breed or Single Solution?
While many companies have sought to enhance their performance management capabilities by adding additional software to their arsenal of tools, they typically have used those systems only for discrete portions of the process, with varying degrees of success. In our survey, 50 percent of respondents said they use a hodgepodge of IT applications for performance management, meaning that they use applications from different vendors for different parts of the process, without any consistency across business units. Twenty-two percent said they use best-of-breed technology (different applications for different parts of the process, but all business units use the same applications), and 28 percent use a single solution across the company.
In three years, respondents plan to move away from a hodgepodge of applications to either best of breed or single solution. According to interviewees, whether a company takes a best-of-breed or a single-solution approach is less important than whether the applications are consistent and integrated across the organization. “Clearly, planning, budgeting, forecasting, and reporting tasks all go hand-in-hand,” says John Picek, VP and corporate controller for Alliant Techsystems (ATK), a defense contractor based in Edina, Minnesota. “The systems you use to do all of those should be tied in and integrated.”
Knowing what to change and knowing how to implement change are, to be sure, entirely different propositions. Our interviews identified a number of steps necessary to improve corporate performance management processes after the proper technology has been selected. Chief among them are:
1. Identifying the Right Metrics
Getting metrics right means knowing which ones to track, making sure they are widely and readily available throughout the organization, and incorporating them into planning activities. Companies also have to determine the right number of measures. If they are too few, managers fly blind. Too many, and managers suffer from information overload, with the result that important details can be obscured or overlooked. “We try to keep them pretty straightforward,” says Carl Caputo, finance director for software maker Computer Associates, of the metrics his company follows. “It’s very important to us that people at the lowest levels of the organization understand how their performance metrics roll up to the total company, and how what they do affects the total company.” Two of the key metrics his firm tracks, at all levels of management, are simple ones: revenue and costs per employee.
Robert Wojciechowicz, CFO for J.P. Morgan Mortgage Capital, a subsidiary of J.P. Morgan Chase, says it is only with ready access to key metrics like these that managers can develop strategies that drive their businesses where they want them to go. “Sometimes you’ll hear people say, ‘We want to double sales,’ ” he explains. “Well, that doesn’t help anybody.” Why? Because it doesn’t say anything about what must be done to double sales. “Your metrics need to be very specific, by function, so that when your president says, ‘We want to double our sales but we don’t want to double our expense base,’ you can say, ‘Okay, here’s how we can do it,’ ” says Wojciechowicz.
2. Overcoming Cultural Inertia
Getting the “buy-in” of business unit executives and their front-line managers is important for two reasons. One is to ensure they will use the information the system generates. The other is to get their cooperation in entering into the system the raw data on which it feeds (this can speed up budgeting and forecasting and eliminate much of the duplicative work that occurs when finance assumes sole responsibility for those activities).
But it’s not always easy to do. Non-financial managers may prefer to receive information in the old format, or may balk at assuming a greater role in the budgeting process. In addition to obvious steps such as clearly communicating what the company wants to do and why, interviewees suggested some ways finance can smooth the path for a new performance management process.
One is to make sure business units and their managers will have access to the metrics they need. According to Rusty Hamner, VP of finance at Bank One’s National Enterprise Operations, each business group in his part of the company has helped to develop its own performance “scorecard” — a set of metrics tailored to its business that is updated and reviewed monthly with his finance team. The metrics are available to all employees, both online via their computers, and, for those who don’t have access to a computer at work, on “quality boards.” According to Hamner, this has given employees visibility into how their work affects business results. “Everyone’s working for the same goal.”
At Benco Dental, says CFO Ralph Hromisin, “the finance group sat down with all the senior managers one at a time and said, ‘Look, if you had your wish list, what type of data would you like to see? Help us challenge this [performance management] system. What kind of drivers would you want to see? What information is important to you on a weekly, monthly, quarterly basis?’ ” Having gone through that exercise, Hromisin says the company — a privately held $240 million dental products distribution company — is now selecting the 10 or 12 metrics that should be reported to senior management. “As we cascade lower and lower into the organization, the number of metrics we’re looking at will expand,” he explains. “There may be three or four metrics that flow into one metric that’s reported to a senior manager, for example, but to the manager operating his particular piece of the business day-to-day, that probably explodes into many more metrics.”
Another way to win the participation of the business units, says Blum of Taubman Centers, is to involve them in the process of selecting and installing the software. As is the case at many companies, the finance group at Taubman Centers had complete responsibility for the budgeting process prior to implementing a new performance management system. Now, Blum says, “We have pushed that down to the operational units.” The company was successful in doing so, in part, because finance involved the business units early in the process and solicited their help in selecting the software. Today, the business units feed data directly into the system and keep a closer eye on their actual results versus budget. “It’s provided them with a terrific tool to be able to monitor their performance,” Blum says, “and to make business decisions based on that.”
Kurtzweil of ON Semiconductor suggests that finance partner with the CIO and enlist the support of a co-champion for a system-implementation project from outside the finance department. At his own firm, he says, the senior VP of operations co-sponsors, with him, the installation of each new module of the performance management system his company is implementing.
3. Consider Process Changes Before Technology Changes
Finance executives who have installed new performance management software stress that it is also good practice for companies to make any necessary changes to their business processes before trying to implement a new system. “In most cases, if you don’t change your process, you have probably missed out on some opportunity to really make an improvement,” says Picek of Alliant Techsystems. “When you don’t change your process, you always end up doing custom enhancements to your software, which costs you in the long run. The more you can use off-the-shelf stuff and the more you can conform your processes to the software — assuming you can conform them to align with best practices — I think that’s the direction to go, even though it’s probably the path that will meet with the most resistance within the organization.”
Our survey found that only 30 percent of companies assess and adjust processes before implementing new technology. Most either implement technology and change processes simultaneously (44 percent) or change processes after the fact, if necessary (27 percent). High tech/telecommunications firms are more likely than others to assess processes beforehand (44 percent), perhaps reflecting greater experience with technology implementations.
4. Demonstrating Financial Benefits
Finally, there may be a need to show a business case before embarking on a significant effort to improve performance management. Despite the many tools available that claim to measure ROI, measuring an accurate return is tricky to do. Tracking headcount reduction resulting from a new software package is one thing, but measuring other, equally important benefits such as better decision-making or improved employee productivity is unlikely to be as precise. Some companies do attempt to put a dollar value on a project’s various intangible benefits, but in most cases the effort is still mostly qualitative.
For instance, Benco Dental believes the firm’s new performance management system is paying for itself just in saving the time of finance personnel who previously had to assemble budgets and forecasts using systems, procedures, and processes that were hopelessly time-consuming and didn’t produce reliable results anyway. “You spent 90 percent of your time just gathering data, and very little time analyzing it or challenging it or reacting to it,” Hromisin says. “We’re trying to make data accumulation be 10 percent and analysis be the other 90 percent.”
The cost of implementing a new performance management system, however, was not cited as a major hurdle by most of the senior financial executives in our survey. Only 29 percent said that a lack of funds poses an obstacle. And while approximately half of the financial executives we spoke with who had implemented a new system said they had to make a business case for their decision, many were not required to provide a hard ROI projection. “We did develop a business case, but we didn’t do it using a traditional ROI methodology,” says Kim Schwartz, VP of finance for the American Red Cross, talking about the organization’s decision to implement a new performance management system beginning in January 2003. “It wasn’t a particularly hard sell,” she continues. “I think everybody knew we needed something better.”
Caputo’s experience at Computer Associates was similar. “Certainly we had to justify our case, but there was a pretty obvious need and we’d decided internally, as a company, that we wanted to get more sophisticated and involve more people in the process so that we could provide better internal forecasting,” says Caputo. Hromisin notes that he wasn’t required to develop a hard ROI projection at Benco Dental, either, in part because senior management recognized that they and their front-line managers were “starved” for information — the cost of missing and incomplete information was so obvious that calculating an ROI would have been an unnecessary formality.
Still, our interviewees agreed that it is possible to demonstrate tangible non-financial benefits from implementing a new performance management system once it is up and running. “We judge our success by the fact that we’ve been able to get to more detailed information and make better decisions, and also by the fact that we’re able to compile and close our accounting periods more quickly,” says Caputo. “We’re issuing our 10-Qs on the same day we’re announcing our results and holding our investors’ calls, within 25 days following the quarter’s end.”
Case Study: How Taubman Centers Streamlines Financial Analysis
One of the biggest benefits of performance management software is the ability to analyze data in ways that otherwise wouldn’t be possible. Esther Blum, SVP, controller, and chief accounting officer for Taubman Centers, says that since installing performance management software at her firm, tasks that once took days now take minutes or hours. Prior to installing the new software, for example, comparing actual versus budgeted rents began with individual analysts entering the actual results for each of the company’s 4,000 tenants into Excel spreadsheets and then summarizing the variances. Once that was done, another person would take the files from each individual analyst and summarize them on a corporatewide basis. Now, actual rents for each tenant are uploaded in the performance management system one time when the billing system is closed monthly. “Immediately, actual versus budgeted rent is calculated and can be displayed and/or sorted,” Blum says. “You can quickly see a portfoliowide rent variance.”
The company’s new software system also makes it easy to produce an instant corporatewide summary of the budgets for every individual shopping center in the company’s portfolio, or a customized cross-section of the budgets for those centers. “Due to the size, complexity, and large number of Excel files being used, the easiest way to summarize the portfolio in the past was to take each individual center’s Excel files and manually type into a summary Excel file the main components of the individual center’s files,” Blum says. “Each time an analyst made a change to an individual Excel file, the summary file would need to be updated manually. This meant constant reconciliations between the summary file and the individual files.”
Blum says the new software system has also transformed the process of loading budget numbers into the company’s general ledger system into a 10-minute job from one that had been extremely time-consuming. In part, this is because finance can download a file from the new system in the exact format the company’s general ledger requires. The previous system required manually preparing an import file for the general ledger system from the Excel files for all of the company’s individual shopping centers. Thanks to the enhanced capabilities of its new performance management system, Blum says, Taubman Centers now updates its budget as many as five times a year rather than just once.
This article is excerpted and adapted from What CFOs Want from Performance Management Services, a report that summarizes the findings of a mail survey of 245 senior financial executives and telephone interviews with 14 more. Comshare, a provider of software that helps companies implement and execute strategy, 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.