FSN: Myopic in Measurement? You'll Miss the Meteor

Myopic in Measurement? You'll Miss the Meteor

22nd October 2007
Companies today have too much of what the father of modern management, Alfred P. Sloan, would consider “good management.” Business schools and their corporate employers have perfected the professional manager who excels at creating and executing a business plan and measuring with exactitude vast numbers of “key” performance indicators related to the company's actions. Unfortunately, this approach is poorly suited to handle today's uncertainty and ambiguity, says, Gregory P. Hackett, Goodyear Executive Professor, Kent State University , writing for FSN.

Companies direly need to look outside and recapture intuition as a factor in decision-making, utilizing scenarios and identifying the first signs of danger. No time could be more critical than today, as companies are failing at an unprecedented rate. According to recent research I conducted, analyzing the performance of the 1,000 largest U.S. companies over the past 40 years, about 80 percent of companies presently are stagnating or are in decline. Only 21 percent are growing. Further, companies are failing at a rate three times faster than 30 years ago.

Very often, companies stagnate, decline or die because they minimize or miss profound changes – they miss the meteor headed their way. And no one department or function is responsible for observing external and internal risk factors holistically to assess their implications on the health of the company.

Finance must take the lead in establishing a risk-based early warning system for the corporation. Finance should become the eyes on the outside of the corporation – as well as the inside – with radar up, scanning the horizons for threats and opportunities.

Issues emerge as pressure points over decades. Then they tend to behave like dominoes, cascading in causal relationships that rapidly affect multiple organizations. To prepare for and respond to such threats, finance needs to be able to identify trends and to determine materiality and probability. A starting point is to analyze drivers of external change and determine how they affect the organization, such as demographics, technology, globalization, channels, competitors and regulation.

With an examination of the key external change drivers in hand, finance first should assess what the company already knows. Information in silos throughout the corporation should be ferreted out and amassed. Using new technologies that enable the aggregation and organization of data from multiple sources can speed this process greatly. Data gathered in one part of the business could prove invaluable to another.

But to be at all effective in establishing a risk-based early-warning system, companies must get beyond the data in the ERP system. In parallel with the internal data assessment, finance must look outside, seeking those trends or events that signal opportunity or threat.

With internal data assembled and external inquiry under way, finance can begin to identify gaps in the company's intelligence and proceed to fill them. The emerging picture should then be circulated throughout the company, with orders to begin thinking about how to respond and embed the responses in business plans.

A set of risk factors will emerge that requires monitoring. Measurement could be systematic or discrete. Periodic research might be commissioned, or there could be event-triggered reviews. The point is to identify leading indicators and sources of data relative to positive or negative trends regarding a corporation's key risk factors. These leading indicators can then be programmed into the organization's performance management system to provide early warning as a prompt for management action.

Running a risk-based early-warning system is a full-time activity. Identifying the threats is relatively easy, but getting the organization to take the predictions seriously is harder. There will be more effort on changing what's inside than on the changes that are outside. Finance must educate the company on the emerging threats and what might happen. The challenge is to not just scan the horizon, but to transmit the information across the company and to drive through to planning and action and realignment of the culture. Again, appropriate use of technology to filter and focus this information can promote early recognition and action.

To ensure full leverage of data regarding risk – and to eliminate the silos of external intelligence – finance will establish an enterprise risk-management team. This team is not staffed by accountants. A small team of analysts is supported by futurists, economists, sociologists, anthropologists, former management consultants and the like, with the requisite skill sets and expertise predicated on the factors that most threaten a company. A corporation might begin with an expert in changing demographics, for example, if that is a chief area of concern. The risk management team will identify and monitor trends, build and maintain the overall risk profile and, more critically, ensure risk is factored into all decision-making, collate and disseminate information and educate the organization.

Finance will be leaders not only in conveying new information that anticipates the future, but in advising senior management, redefining the decision culture, reallocating resources and driving change. Such an effort is vital to corporate survival, permitting companies to either stay in the business and get ready for future trends – or to prepare to exit a business at the appropriate time. A risk-based early-warning system buys time to change direction – and dodge that meteor.

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