Breathing fresh air into performance reporting

10th December 2007

In October, Professor Gregory Hackett, writing for FSN, pointed out the surprising stagnation and decline of business performance over many years. He pointed out the need for companies to be more externally focused on threats and opportunities for growth. This month the Professor looks at our measurement systems and suggests that the performance measures are too insular and one dimensional. Succinctly he says we are concentrating on "controlling the controllable." In this month's feature he highlights the importance of balance in performance measure and the need to employ ratios rather than 'point' measures.

The stagnation and decline of businesses promises to accelerate if companies persist in prosecuting work with 20 th -century practices, such as how they presently measure, report and analyse performance.

The overload in data spewing from performance reporting systems is smothering decision-making. More information is generating less insight. In addition, the data avalanche is stimulating more analysis – and diminishing dialogue and intuition. Decisions are often being made from the perspective of a single issue or point, and the deciders are missing the big picture. Indeed, companies are increasingly inwardly focused – they are concentrating upon controlling the controllable.

Finance must take the lead in radically refocusing performance reporting and analysis on relationships and linkages. Further, measures must be rebalanced in terms of leading and lagging and internal and external information.

Less is more. Companies should be more selective regarding performance measures. Measurement should be based upon exceptions, driven by materiality, triggered by events and anticipatory of the future effects of current events and trends, all filtered by technology. Only actionable data should be reviewed, and reporting should be driven by the data that is needed, not simply what can be obtained from systems.

Business information needs tend to be finite. There is a defined universe of measures of importance based around financials, markets, customers, operations, employees, suppliers, competitors, infrastructure, risk, projects and compliance. These measures provide a comprehensive framework for defining the key relationships and ratios that allow managers to understand performance and rapidly respond to opportunities and threats. Finance needs to refocus the organisation on measures that are key to its operations and reduce the focus on single-point measures that offer little insight into the true drivers of performance.

The secret is to abandon the reliance on absolutes. Recognise that a single data point cannot be a key performance indicator. Ratios are the solution, measuring linkages, relationships, interdependencies and trends.

Finance should start by helping the organisation define the critical business ratios – no more than 20 – for the corporation, such as revenue growth relative to the growth of the market, or the relationship between changes in customer satisfaction and revenue per customer. These ratios will vary by company based upon the type of business, the company's organisational structure, the external environment, the life-cycle stage of each line of business and the chosen management model. Cascading these ratios throughout the organisation, there should be no more than 10 key ratios per manager, and about 30 percent of these ratios should reflect external or market-based factors. Standard time-based reporting should be eliminated, shifting to reporting triggered by events, trends or tolerances.

Further, measures should be balanced between leading and lagging, internal and external. The astute organisation will test all reporting against seven measures of reporting value: relevance, trend, tolerance, early warning, call to action, forecast/projection and additional contextual information.

Technology plays a key role in refocusing performance reporting. Finance should develop vehicles for capturing, organising and searching unstructured data and integrating it into the reporting processes; technology should filter, select and disseminate the information. In addition, technology should be leveraged to eliminate all manual data collection, consolidation, reporting, dissemination, formatting and presentation. Time is thus freed for analysis, interpretation and discussion.

Regrettably, this not the current state of affairs with respect to technology and information in most organisations. Systems are not set up to support streamlined performance reporting, nor do companies have informational infrastructures for reinvented decision-making. Data is lodged in proprietary formats in operational applications and legacy systems. Similar data is duplicated across the many sources. Data warehouses provide a platform for analysis, but these warehouses are too static. The technology cannot readily be reprogrammed in response to business changes, often requiring six to nine months for traditional readjustment measures.

Companies find themselves in this situation largely because of the philosophy of choosing best-of-breed systems – various operational applications that help run the business efficiently. These systems usually are heterogeneous; for example, one company may have SAP ERP, Oracle Financials, Siebel CRM and PeopleSoft HR, plus some legacy systems. While these individually are quite successful in helping companies run their operations, each have their own distinct business processes and data formats. As a result, companies end up with similar, but not identical, data in numerous places. But even in single-vendor environments – for example, all SAP applications – organisations may end up with inconsistent data across application modules.

When users cannot readily obtain their desired information, they resort to spreadsheets, hardwired antiquated systems and manual calculations. To remedy this cumbersome situation, companies need a way to extract business performance information lodged in the data warehouse and to keep the warehouse up to date with market changes.

Every day, organisations are facing "bet the company" challenges. Unfortunately, most companies are unprepared to conquer such challenges – they are wanting in information to make prudent decisions. Finance must move the organisation to adopt ratio-based performance measures and the improved technology to support enhanced performance measurement and superior decision-making.

Finance has the proficiency and the power to bring about these changes. The task may seem daunting, but corporate prosperity – even mere corporate survival – is at stake.

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