Financial Performance Management for the Empowered CFO (using IBM Cognos TM1, IBM Cognos Controller & IBM Cognos BI for Scorecarding)

The evolution of the CFO from cost extractor and compliance enforcer whose primary concern had been to ‘manage the numbers’ into providing strategic support and organizational leadership helping drive profitability and growth for the enterprise certainly didn’t happen overnight. There’s been a series of events over the years driving this change, including the advent of Sarbanes-Oxley (Think Enron/Arthur Andersen/Worldcom) to today’s Dodd-Frank as well as greater internal and external demand for performance data. In addition, there’s increased CEO and board interest and oversight into the ‘World of the CFO’ where board members require more than just a simple view of the annual operating plan; They want it all now given that they have to put their John Hancock on documents like no time before. (The threat of a little jail time for malfeasance has a way of getting people to sit up straight and pay closer attention too.)

Given the CFO’s more strategic role and influence in companies today it’s no surprise that the entire finance function’s visibility and criticality requires more demands on it too. In an ideal world, the CFO’s finance department has its eye on implementing best practices to streamline inefficiencies and error-prone efforts. Yes, implementing best practices sounds good on paper but the common response I hear from finance departments concerning why they’re not being adopted right now makes me think of the Beach Boys’ tune, “Wouldn’t it be nice…if we only had the time.” (Note: Click that link if you want the actual Beach Boys song playing in the background while you read this post.)

Still, I’m consistently hearing that the goals for CFO’s and their finance departments remain the same. They are:

• Linking financial to operational plans
• Guaranteeing the quality and accuracy of financial numbers for timely, sustainable compliance
• Tracking individual performance against strategic objectives
• Performing “what if” scenario modeling and creating flexible rolling forecasts
• Replacing their rigid budgets with continuous planning

These still seem far off from their radar because of everything else for which they’re responsible that demands all of their time. According to the 2010 IBM Global CFO Study, which surveyed over 1,900 CFOs and senior finance executives from around the world, the following was learned:

• 40% of companies produce financial metrics manually
• 50% of their time is still spent on transactional activities
• 35% lack a common reporting platform
• 50% lack a common planning platform
• 55% not satisfied with their operational planning and forecasting analytical capability
• 25% lack the necessary common data definitions and processes
• 44% are poor to average at anticipating external forces

What to do?

Enter Financial Performance Management.

Financial Performance Management is designed to address a few of the performance impacting areas of responsibility for the CFO enabling its related finance function to focus on higher value added activities like analysis of performance results, scenario planning, and predictive analytics. This is intended to free them up to get away from low value activities like managing transactional activities, validating data, and creating regulatory- and compliance-related reports for external reporting requirements. With the right platform in place any of these tasks could be very simply automated and centrally managed end-to-end.

FPM includes the following 3 practice areas: 1) planning, analytics and forecasting; 2) financial management and control; and, 3) strategy management and scorecarding. Let’s take a quick look at each of them.

I. Planning, Analytics & Forecasting

Finance has forever been the keepers of the financial plan or annual budget. However, with the increased scrutiny of this process, given it’s low value-add to the organization, budgets have grown wings and evolved further into additional demands on finance to produce forecasts, which, unlike budgets and their top-down ideology, are entirely bottom-up drive exercises providing business managers throughout the company with figures that show what’s most likely to happen based on their honest feedback without top-down expectations. Finance is being asked to help facilitate the linkage between the strategic, financial, and operational plans so that a full breadth and integrated picture can be painted when running scenarios through operational and strategic plans to see what their financial effects will be — on the fly, not weeks later. Integrating these processes has become priority one for finance because of the obvious insight that can be gleaned from such an aligned set of processes where expedited decision making translates into a more nimble enterprise that can more react to changes in the marketplace. It does take a technology to manage these processes in total.

(Please take a look here at IBM Cognos TM1 for your planning, analytics, and forecasting needs.)

Financial Management & Control

With finance at the helm many steps are required to get from the time of the financial close to delivery of management and regulatory reports. The clock starts ticking the minute the close takes place where managers company-wide wait and wait to see the final results to begin making decisions on it – not to mention regulators. With so many groups reliant on this information it’s no wonder the CFO is becoming a bigger player at the corporate board table. Owning the consolidation rules and related processes is at the heart of finance. Lacking an integrated platform to accomplish this process in its entirety can wreak havoc on finance and lead to reporting misstatements, delays, and inadequate reporting unless finance gets a handle on this financial management and control process end-to-end. Yes, it can cause early retirement for finance executives because the process with many manual inputs is ripe for data error throughout.

Lacking a technology that can perform the following can wreak havoc on finance. Some of these consolidation- and reporting-related issues are:

1. consolidate thousands of accounts into a common chart of account structure,
2. maintain control throughout including all the data inputs, reconciliations, and journal changes
3. manage the global and local consolidation and reporting requirements (Think IFRS & GAAP), F/X effects, different legal/tax entities, Inter-company eliminations, prior period adjustments, changing entity rollups,
4. support the corporate planning & forecasting capabilities

These are reasons finance is struggling with the increased visibility they’re getting because the demands on them are growing but there department isn’t. If anything, Finance continues to shrink in size.

(Please take a look at IBM Cognos FSR and IBM Cognos Controller.)

Strategy Management & Scorecarding

This helps organizations automate the strategy management process enabling organizations to manager, monitor and measure their business metrics against strategic and operational objectives for the organization. You’ll want to be able to align strategy with operations, communicate strategy and track progress, ensure accountability for performance, and share with more user communities.

Align strategy with execution is something every organization tries to accomplish but with little success. Some are good at it. Many more are not.

• 9 of 10 companies fail to execute strategy
• Only 40% of companies link budgets to strategy
• 70% of middle managers do not have incentive compensation linked to strategy
• Only 5% of the workforce understands the strategy

Given these statistics how can an organization be successful executing strategy when its intentions are lost beyond the isolated strategy planning committee?

CFOs sit as the owner of this as they’re being asked to own performance results as well as the planning, analytics and forecasting processes. Seems logical. The only problem is that clearly a technology is needed to facilitate all of this that’s tightly integrated to include past performance with forecasting capabilities embedded together. In this instance, when each individual’s forecast and plan is compiled, including each company-wide contributor, finance then has an integrated platform to look at how each individual, department, function, and business unit is tracking against their key performance indicators via a scorecard. The individuals would also be able to through this platform analyze why they’re on or off track by drilling through their scorecard-based metric to investigate the detail behind any of their metrics in question. Once they’ve identified the metric that they want to drill through to investigate further the forecast might then need to be updated to reflect the changes learned since the last forecast update was made.

Since finance sits at the center of financial close-to-report process as well as enterprise forecasting and budgeting it’s no surprise that strategy management is a part of a financial performance management system.

(Please take a look at IBM’s Strategy Management & Scorecarding solutions.)

For more on Financial Performance Management at IBM, please click here to take a look at the FPM resources we have available for your use.