FSN: Are we heading for "Measurement Mania"?

Are we heading for "Measurement Mania"?

23rd June 2005
Ten years ago we convinced ourselves that greater automation of transaction processing would yield more time for financial analysis and decision making. Well transaction processing has become more efficient and the average cost of the finance function to organisations has been slashed but we still do not have time to analyse our businesses.

Speaking to a packed room of senior finance professionals, David Axson, President of The Sonax Group, claimed that although finance department costs have fallen more than fifty percent over the last 15 years through greater processing efficiency, this had not yielded any more time for business analysis and decision making. Finance department costs are running at around 0.75% of turnover (whereas they were about 2.2% in 1990) yet finance departments spend roughly two thirds of their time on routine transaction processing. This position was completely supported by Jeremy Hope, Research Director at the BBRT (Beyond Budgeting Round Table) who independently said that on average only 11% of finance function time was spent on decision support.

Both speakers provided interesting insights into where the apparent time savings had vanished. Axon pointed to the ever increasing burden of compliance whereas Hope concentrated on companies' obsession with measurement. "We're approaching measurement mania" he chided, "we are measuring the wrong things". Hope's findings come from a recently completed world-wide tour of interviews with CFOs in very large corporates gathering research for a new book.

Surprisingly, the research revealed that despite massive investment in ERP systems during the last decade, many companies still have far too many general ledgers from too many suppliers. Furthermore many charts of accounts are far too big. Hope quoted one source who claimed that his company has around 5,000 general ledger accounts but only 250 that have more than two entries.

"There are too many irrelevant measures and reports, too many spreadsheets and too many non-strategic projects that divert resource," said Hope. But he questioned managements' resolve to change the situation and whether they had the confidence to change even if they could overcome corporate inertia. He was also highly critical of the fixed targets mentality and measurement of variances which simply led to an excuse culture. "Managers learn very early in their career how to excuse or explain away variances. There are no learnings or insights to be gained from fixed targets. Management needs to look at trends and relative performance. We're all drowning in data yet thirsty for knowledge," he challenged.

Hope's vision for the future of finance relies on taking all of the complexity out of finance processes, particularly the annual budget process. "We need to reduce the level of detail. We need accuracy not precision", he continued and he was scornful of measurement systems that tied management incentives to fixed contracts, such as the annual budget, which could be so easily manipulated by mangers and often led to poor performance.

Hope's vision is one in which planning and decision making is devolved further down the organisation with fewer people handling information which he believed would improve the transparency of results.

David Axon similarly thought that the vision of finance as a business partner is unfulfilled. "With less than twenty percent of finance effort devoted to analysing results it is Thursday afternoon in the average week before anyone has time to think about the meaning of the previous week's performance," he said.

However, Axon struck a more sympathetic note when he pointed to the burden of compliance regulations that had been heaped on the finance department. "The problem is not going to go away he warned. The legislation is changing all of the time so the pressures are going to get worse." Cognos', David Long, who runs the planning process said that Cognos had spent an extra 42 man years in Sarbanes Oxley s404 compliance alone and audit fees had increased 100% directly as a result of compliance concerns.

However, it's not all bad news and there is a silver-lining to compliance if it can be used to improve business performance. Axon argues that compliance can be turned from an "overhead into an asset" if it is treated as a continuous process rather than a one-off event.

Managing risk according to Axon is not very different in principle to managing performance. Exception based reporting which is the mainstay of performance management is equivalent to early warning mechanisms in a risk based environment. Risk management and performance management also share other characteristics such as the need for dynamic planning, the need to reward performance rather than plans and the need to place a premium on speed and availability of relevant information rather than precision and detail for its own sake.

Technology has a pivotal role to play in all of this, for example, ensuring that systems are integrated and can deliver fast, relevant information to decision makers. Software suppliers are latching onto the pressures of compliance very quickly. Cognos realises that it has to ride two horses at once. Fortunately, "Compliance" and "Performance Management" are heading in the same direction at roughly the same speed.

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