by Robert D. Kugel CFA |
2/22/2008 | Article ID: V08-08 | Article Type: VentanaView
Summary
Ventana Research defines financial performance management (FPM) as the process of addressing the often overlapping issues that affect how well finance organizations support the activities and strategic objectives of their company and manage their own operations. FPM deals with the full cycle of the finance department’s functions, including corporate and strategic finance, planning, forecasting, analysis, closing and reporting. It involves a combination of people, processes, information and technology. Ventana Research sees information technology as a particular focus of FPM because we find that most finance organizations are not using these assets as fully as they could. In particular, they often focus only on efficiency and neglect opportunities to use IT to enhance their effectiveness, which can make more difference in their overall results. We believe that finance organizations can and should play more of a strategic role in managing the performance of their companies. Most people participating in our research say that Finance must do more than serve as the “bean counter.” Beyond executing the finance and accounting functions, Finance can define control metrics and handle performance reporting. It also administers the planning, budgeting and review process. Yet this leadership opportunity often goes unfulfilled. We find that while a majority of people in Finance say their department plays a leadership role in their company, most others outside the department disagree. In 2008 our research will examine the ways finance organizations can enhance their effectiveness by improving the business execution through better alignment of people, process, information and technology.
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The Financial Performance Management practice selects a research focus topic based on two key criteria: It must have pressing relevance to finance executives as a means to improve their company’s performance, and information technology plays a role in addressing the issue. There are six topics we will focus on in 2008.
Improving Finance Effectiveness through Better Use of Information Technology
Information technology can make many positive contributions, but in finance organizations we find that it frequently plays a role in preventing them from improving their performance. Just as frequently, finance and IT groups fail to see the connection between IT and Finance’s ability to execute tasks and processes. The two biggest culprits for finance organizations are spreadsheets and enterprise resource planning (ERP) systems.
Desktop spreadsheets have spurred considerable productivity in finance activities. The application and its ubiquitous workbooks appears to offer a quick and inexpensive way of handling a range of recurring processes. Yet when pushed beyond their original role as personal productivity software, spreadsheets become time-wasters. In recurring enterprise processes, the benefit of their versatility is offset by errors in manual data entries and formulas and their lack of referential and data integrity. These inherent defects lead to an increased risk of financial misstatements compared to more automated methods; people waste time struggling to find data entry errors, inaccurate formulas and mistakenly hard-coded values, among other problems.
Until recently, companies have not had many workable alternatives. But this is no longer the case. Since the spreadsheets used in enterprise processes or recurring analyses are not going away, corporations must find ways to control them and limit their negative impacts. Our research in 2008 will examine spreadsheet alternatives and ways they can improve companies’ process execution.
Similarly, ERP software is critical to the daily functioning of finance departments. Yet our research finds that only a small minority of companies have matured their use of their ERP systems to enable more effective finance processes – for example, to accelerate cash receipts or speed the accounting close. Most companies fail to capture or use information that could help them manage their business better. They can achieve substantially more with these core enterprise systems than ever before, but most are held back by outdated perceptions of what they can or should do with ERP. Our research in 2008 will examine the many ways companies can increase the return on their considerable investment in ERP by using it more effectively.
Accelerating the Closing Process
Companies have made some progress since the late 1990s in achieving a “fast, clean close,” yet our benchmark research shows that a majority still want to accelerate the completion of their accounting cycle, some by a significant amount of time. The same issues that affect how quickly they can complete the accounting cycle also influence getting accurate, useful information to executives, managers and other employees in a timely fashion. Better management of the closing process is the single most important factor to shortening the close, and information technology can play a key role in enabling process improvement. Our benchmark research shows that having the right software and limiting spreadsheet use contribute to achieving a faster close. Our research in 2008 will focus on how information technology is being used to accelerate the accounting cycle.
Raising the Bar on Management Reporting
Finance organizations can take a leadership role in corporate performance improvement by expanding the scope of information available in management reports and making this information available sooner. Our research also shows that companies need to extend the scope of reporting beyond the standard corporate and business unit reports. People need greater visibility – the ability to access relevant information quickly – into operations, not just financials; they need to know how well they are performing and want information about how competitors are doing. Moreover, finance executives must keep up with trends in financial analysis as more companies adopt activity-based costing and other analyses that sharpen their ability to manage costs and improve profitability. Here, too, IT plays a key role in making accurate, timely information readily available. Our research in 2008 will focus on the expanded needs for and techniques used in management reporting.
Improving Compensation Management
When it comes to compensation, finance executives need visibility into future commitments (especially incentive compensation) and to be able to control them. To do this, they need analytical tools to ensure that compensation is used as strategically as possible. Our research finds that in most companies compensation management is a spreadsheet-based process, which means these organizations have limited visibility, analytical scope and control. Alternatives for compensation management software have multiplied and now provide finance executives with more practical alternatives than ever. Our research in 2008 will focus on how better use of information technology can help improve visibility, ensure the best use of compensation dollars and reduce risks to the company’s reputation and regulatory compliance.
Using Planning and Budgeting More Effectively
Most companies have an immature budgeting and planning process. A majority use desktop spreadsheets, which are the single biggest obstacle to making this activity a more useful management tool. Replacing them with software dedicated to the task can make the process much more efficient and remove barriers to transforming planning and budgeting into a strategic tool for pursuing competitive advantage. Replacing spreadsheets is a good start and can make budgeting more efficient, but organizations can do more. Fully utilizing the capabilities of dedicated planning and budgeting software will enable them to plan more effectively, to drive efficiencies throughout the organization, to increase agility and to improve the performance of both individuals and business units. Our research in 2008 will focus on the alternatives to spreadsheets and how dedicated software can enable companies to increase the effectiveness of this crucial process.
Assessment
Ventana Research asserts that finance departments must improve their effectiveness. Since the early 1990s, CFOs have focused on efficiency. While gains in that decade were impressive, today they are achieving diminishing returns with this strategy. Finance executives must shift their focus to achieving greater effectiveness if they want to play more of a leadership role. They can become more effective by eliminating the root causes of defects in their financial processes. To lead, they must provide more information about how well individuals and business units are performing to key objectives. They should provide more predictive indicators to enable decision-makers to anticipate issues and should collect and disseminate more information about competitors, key customers and partners. Finance organizations also must work to make their core processes more controllable. Intelligent use of IT resources can assist all these efforts. Efficiency improvements already made should enable companies to invest more time in supporting strategic initiatives such as effective planning and profitability management.
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