Wednesday, December 28, 2011

Enterprise Governance – Internal Evaluation

 

An organisation's ability to evaluate the value of its products and customers, in terms of their contribution to the overall stakeholder and shareholder value of the business, is critical to its competitiveness and long-term success. But as the volume and value of information from these processes grow, so too does the complexity associated with managing company performance. Yet all too often, we see finance professionals resorting to self-built spreadsheet-based systems for consolidation, budgeting, and reporting and analysis, which do not deliver real-time analysis or the flexibility needed by organisations in today's economic and political climates. In effect, the finance function is failing to effectively support strategy.

Historically, financial information has been extracted from different legacy systems and spreadsheets, and then presented neatly summarised to senior executives. To achieve this, the finance function at corporate or business unit level often spends a large part of the monthly close manually cleaning the data from different operating sites and systems, invariably creating multiple versions of the truth (Figure 4.1). The information produced,clip_image002

which is often of poor quality and plagued by inconsistent data from different sources, is then supplemented with yet more information and forecast data from other sources, often outside of the organisation (Figure 4.2). Tight reporting deadlines typically lead to a situation where there is very little time for value-added analysis of business performance.

The problem is exacerbated when the executive committee requests one-off or ad hoc analysis of a particular issue such as declining sales in a particular market. This inevitably leads to additional extract programmes and spreadsheet analysis. As a result, the staff in such decision-support roles often complain about the burden of manual, menial work which incompatible systems place on them.

For an organisation to successfully achieve its objectives, management must understand where value is created and destroyed and whether its business model is operating effectively and how this can be improved. This is done by defining and evaluating the strategy, setting targets, measuring performance, forecasting and then re-evaluating the strategy. All ofthis requiresclip_image004

a vital ingredient — information. Crucially, that information must be timely, accurate and consistent across the organisation.

Unfortunately many organisations' reporting systems and decision-support capability are rooted in the 1980s. Our work with organisations around the world has highlighted a large number ofshortcomings in existing approaches and confirms that finance professionals continually struggle to provide the value-added strategic decision support which senior executives require. These shortcomings include the following:

• There is a lack of strategic focus on competitors, customers and products and the failure to address the information needs of the wider stakeholder groups.

• There is an absence of a 'balanced scorecard' or related approach for linking strategy to operational activities. This results in a focus on mainly historical financial measures of performance.

• Reporting under traditional legacy systems is cyclical in nature and often restricted to month-end reporting.

• In many cases, IT is a constraint on the firm's ability to implement new reporting processes and measures.

• Important business knowledge and understanding of the underlying processes are often embedded in poorly docu­mented, stand-alone spreadsheets.

• With business models and corporate strategies continually changing, many firms find that their reporting systems do not reflect the changing corporate strategy.

• There is too much focus on information for tracking and control purposes; poor support for planning, direction setting and forecasting.

• The strong financial accounting bias in many management reporting systems often leads to a lack offocus on the drivers of performance and in particular the customer-facing revenue creation processes.

Traditional performance measures also try to quantify perfor­mance and other improvement efforts in financial terms. However, most improvement efforts are difficult to quantify in currency (i.e. lead time reduction, adherence to delivery schedule, customer satisfaction and product quality). As a result, traditional performance measures are often ignored in practice at the 'sharp end' ofthe business — the factory shop floor or client-facing levels. Traditional financial reports are also incredibly inflexible in that they have a pre-determined format which is used across all departments. This ignores the fact that even departments within the same company have their own characteristics and priorities. Thus, performance measures that are used in one department may not be relevant for others.

As a result, corporations often find that their strategic decisions are not converted into the operational objectives ofthe business, and that the strategic decisions are not understood or optimised at all levels. Strategy, therefore, has to move out of the executive office and be integrated into the day-to-day work of each employee. The employee can then contribute to making strategy happen and can provide feedback for further optimisation of the strategy. Only then can an enterprise really align its entire activities with the value expectations of the shareholders and other stakeholders (employees, business partners, customers, public interest groups), and thus ensure long-term profitability.

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