Some companies tap the finance department mostly for raising capital, closing books, and implementing controls. And it’s true, of course, that a key function of finance is ensuring accurate reporting and preservation of capital and assets.
However, the CFO and his or her team can and should be a partner to the CEO when it comes to developing strategy — and, more importantly, executing it.
Most CEOs know how to create a strategy and are using some form of strategy map or guide. Often, the difficulty lies in the execution. Implementation breakdowns can be traced to the following challenges:
Effective strategic execution needs, first and foremost, a performance-based culture — one in which transparency and accountability are the norm, data is trusted and relied upon, and everyone in the organization is aligned to the company’s mission.
The finance department is typically the keeper of the metrics and measures, understands the value of data integrity, and is very good at “getting stuff done.” This makes finance the de-facto driving force for creating the performance-based culture, and for ensuring that the critical initiatives are completed in accordance to the timeline established.
In addition to creating a performance-based culture, companies need to look beyond the typical financial KPIs.
In the 1990s, Robert Kaplan and David Norton introduced a “Balanced Scorecard” approach to tracking and measuring the strategic success of company objectives. It complements traditional financial measures by also focusing on how success is defined in customer relationships, key internal processes, and company learning and growth.
The scorecard also integrates internal and external constituencies and focuses on leading indicators of success — as compared to financial measures, which usually are lagging indicators (the result of any given performance).
Based on the scorecard, these company objectives — and ultimately, the critical initiatives to execute — can be broken down into the following four categories, with measures, timelines, and owners responsible for each initiative’s success:
|Financial||Traditional KPIs — sales, profit, return, cash flow|
|Customer||Timeliness, customer experience, price, service level|
|Internal||Innovation pipeline, speed to market, quality defects|
|Learning & growth||Employee retention, training, knowledge, compensation tied to execution|
The concept is that within each category, there are critical initiatives for which teams and individuals are held accountable for achieving. Each initiative then has a timeline, a predetermined target value of success — and a direct causal relationship to the company strategy.
Creating that link allows employees at all levels of the organization to quickly understand where to focus their time and realize how their daily work impacts the overall company. Note that it’s important to keep to a manageable number of measures. For some that may be 7, for others 20.
To further motivate individuals, it is important to create an incentive compensation structure that is aligned with the execution of the company’s strategy.
To best align employee productivity to company performance, employees should have their own personal balanced scorecards, focused on the critical performance measures they can impact. Achievement of these targets should then serve as the basis for incentive compensation.
For the personal balanced scorecard to be most effective, employees need to buy in to the target measures and believe it’s within their control to achieve them.
Like the company’s balanced scorecard, the target measures of the personal ones must also be easy to measure objectively. That said, the nature of the personal scorecards will differ based on seniority.
An executive’s compensation may be 100% based on achievement of the company’s balanced scorecard performance. A middle manager’s incentive compensation likely will take on more of a weighted average approach in which, say, 50% to 75% of incentive compensation is based on achievement of company objectives and the balance on achieving individual objectives.
This serves to further motivate less-senior employees in that they can still retain part of their target incentive compensation if they execute their part of the strategy.
Likewise, incentive pay for rank-and-file employees will be even more concentrated in individual performance, since their daily tasks, while working toward executing the company strategy, are probably not as impactful.
After a company defines its strategy, it must determine the critical initiatives on which it wants to focus company time and resources, and then communicate those decisions to all levels of the organization.
The initiatives must be measured against pre-determined targets, and individuals held accountable for achieving them. Management can then see if the chosen initiatives are really driving the execution of the strategy.
By focusing on leading non-financial performance indicators, management can see early signals of success or failure. Positive early signals will give management confidence to continue. Negative ones may highlight areas in which change needs to occur.
That said, it’s crucial to complete the loop by again reviewing the strategy before adjusting any measures on the balanced scorecards. That should be a continuous process, with strategy reviews every 3 to 12 months, depending on the life stage of the company.
And, since the finance department is usually disciplined, it makes sense for the company to include it in the ongoing evaluation of non-financial performance measures, as well as financial ones. Such measures often provide insight on the effectiveness of strategy long before the resulting sales and profit measures do.
Lisa Kaplowitz is a professor at Rutgers Business School and a strategic adviser in the value-creation advisory practice at Caldwell Partners. She also runs her own finance consultancy, Kaplowitz Advisory Group, and is a former CFO for various consumer-products and retail companies.