Corporate Performance Management and a Report from CFO.com’s Conference

September 21, 2011
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Many organizations allegedly claim that they are currently “doing” corporate performance management (CPM). However, there is little consensus about what CPM is.

Before I clarify what CPM is, I recently attended CFO.com’s Corporate Performance Management conference September 11-13, 2011 in Dallas at www.cfocpm.com . It had a terrific line-up of speakers and I summarize several of the key presentations below.

Clarifying what CPM is

Many organizations allegedly claim that they are currently “doing” corporate performance management (CPM). However, there is little consensus about what CPM is.

Before I clarify what CPM is, I recently attended CFO.com’s Corporate Performance Management conference September 11-13, 2011 in Dallas at www.cfocpm.com . It had a terrific line-up of speakers and I summarize several of the key presentations below.

Clarifying what CPM is

Just because organizations may have converted their tabular performance measures into a visual scorecard with dials does not mean they have implemented the full vision of integrating all of CPM’s integrated methodologies. There are many methodologies such as customer profitability analysis (using activity-based costing principles), rolling driver-based financial forecasts, business analytics, strategy maps and its companion balanced scorecard.

These CPM methodologies are collectively intended to align manager and employee behavior and limited resources to focus on the organization’s strategic priorities and objectives. Interest in integrating these embedded-analytics methodologies is resulting from pressures on CEOs and executive managers whose major frustration today is not formulating a good strategy but rather their failure to execute it. Further interest results from the shift in focus from products to customers – and especially to relatively more valuable customers. Enterprise performance management focuses on execution – both strategic and operational. 

CFO.com’s Corporate Performance Management conference provided clarification about the broad scope of CPM. Here are summaries of key presentations:

Tom Davenport on Business Analytics

I have attended speeches and read books co-authored by Professor Tom Davenport. So I was interested in what is new in his message. Plenty. Since this is a CFO conference, Tom focused on applying analytics to the finance and accounting function.  He covered five areas:

  • Rejuvenating financial reporting – with XBRL rising, mobile apps on smartphones can provide timely performance reporting.
  • Analytical cost management – customer profitability analysis using activity-based costing principles typically produces surprises that due to special and extra services the largest customers can be less profitable than smaller ones. Better actions for profit lift come with fact-based information.
  • Risk and forensic analytics – risk analytics are moving from financial services to other industries. Single point estimates expand to probabilistic scenarios. Forensic analytics identify, predict, and reduce fraud.
  • Analytical performance management – enterprise performance management methods (e.g., strategy maps, strategic scorecards with KPIs) traditionally report information. They only answer the “what?” question. With analytics, such as correlation analysis, imbedded in the methods “why?” questions can be answered. That is insights to what cause results can be explained. With advanced forecasts, “what then?” decisions can be validated before decisions are made.
  • Overall leadership of analytics – somebody has to take the lead in improving an organization’s overall analytical capability and embedding it into decision-making and the finance function seems to be an obvious candidate. They are quantitative by nature.

Tom concluded by saying, “This not business as usual—there is an historic opportunity to transform your industry and function!”

Wayne Eckerson on the Future of Business Intelligence

Wayne has been the head of The Data Warehouse Institute and a popular author and speaker on converting data into information.

In Wayne’s talk he expands his idea to what he refers to as the “Insight Factory” consisting of six steps. In a sequence it begins with “information processing” that converts raw data into information (storage) to delivery (desktop, mobile). It then takes this to “insight processing” that continues with analysis, expands to insights (alerts, trends, patterns), and results in actions (decisions, plans, offers).

He simplifies this with “get the data”, “use the data”. “improve the business”, and “drive the business (with analytics)”.  He concluded that there needs to be collaboration between the IT function and the user. It can no longer be a gatekeeper who “owns” the data. Analysts want easy and flexible access to data and the ability to manipulate it. IT is a set of technologies with standards, but analytics is set of capabilities needing exploration and discovery. 

Steve Player on Forecasting and Reforming the Broken Budgeting Process

Steve Player, North American Program Director of the Beyond Budgeting Round Table (BBRT) and founder of The Player Group, presented a provocative and stimulating workshop. Steve provided an overview of the CPM methodologies as being collectively intended to align manager and employee behavior and limited resources to focus on the organization’s strategic priorities and objectives. Interest in integrating these embedded-analytics methodologies is resulting from pressures on CEOs and executive managers whose major frustration today is not formulating a good strategy but rather their failure to execute it. Enterprise performance management focuses on execution – both strategic and operational.

The origin of BBRT came from the book Beyond Budgeting written by two UK consultants, Robin Fraser and Jeremy Hope. An oversimplified description of their message is that the annual budgeting process is so broken that rather than fix it, an organization should abandon doing it!

This is of course shocking advice to financial CFOs and controllers who are steeped in tradition. However, Steve defined what the original purposes of a budget once were and how progressive managerial methods can achieve those same purposes. He explained that the annual budget is a fiscal exercise done by accountants that is disconnected from the executive team’s strategy and is usually insensitive to forecasted volume and product / customer mix. Typically the budget simply increments or decrement’s each department’s line-item expense (e.g., 3% for inflation) without considering the interdependencies of cross-departmental process flows. Worse yet, the annual budget is typically obsolete in a few months after it is published!

The BBRT solution acknowledges that budgeting line-item expense limits are more like shackling handcuffs for managers who may need to justifiably spend more than was planned and approved many months ago in the past in order to capture benefits from newly emerged opportunities. BBRT replaces budget controls by giving managers the freedom of decision rights. BBRT does invoke controls, but it does so by monitoring non-financial key performance indicators (KPIs) against targets. Managers do not escape the need to be held accountable.

BBRT does not leave the accountants empty-handed. Treasury cash flow management, periodic interval rolling financial forecasts, and probabilistic what-if marginal/incremental expense scenarios (e.g., make versus buy decisions) are enabled with activity-based costing and its powerful calibrated cost consumption rates.

Testimonial Success Stories from CFOs

The final day of the conference was like grade school “show and tell” – but for CFOs ! What impressed me is how these finance practitioners are successfully driving change by adapting and integrating corporate performance management (CPM) methodologies including non-financial measurements and analytics.

  • Gilead Sciences, Inc. – Robin L. Williams, SVP and CFO, described how this research-based biopharmaceutical company is optimizing the commercialization of innovative medicines for illnesses. She emphasized the need to get buy-in from managers.
  • International Flavors & Fragrances, Inc. – Roger Blanken, Director of Finance, described how this specialty chemicals company with customers like P&G and Avon manages complexity. With 35,000 products made in dozens of global locations, Roger said, “We focus on key metrics to monitor performance.”
  • Dallas/Fort Worth (DFW) International Airport – Christopher Poinsatte, EVP & CFO, described how they operate the airport as a business. Two-thirds of the airports revenues do not come from the airlines (runways) but rather from concessions, parking, car rental, hotel, and other operations. He explained how they apply key performance measures with targets to incent all employees with pay-for-performance bonuses.
  • Showtime Networks – Christina Spade, SVP of affiliate finance and business operations, described how this television show provider (part of CBS) optimizes pricing and costs at the individual subscriber customer level.
  • AT&T – Curtis Neumann, Associate Director of Financial Planning and Analysis, described how this telecommunications company applies activity-based costing for driver-based projections and customer profitability analysis. Their goal is to retain customers and grow profits from each one.

A common thread was of all of the presentations was how essential it is to move from spreadsheet tools like Excel to advanced analytics and CPM technologies plus to address cultural and behavioral change management issues such as resistance to change.

CPM is not about monitoring the dials on a scorecard but rather moving the dials. This conference provides understanding on how to integrate CPM’s methodologies for “improving business analysis and bottom-line performance.”