HUMAN RESOURCES
Ultimately, the success of any process improvement agenda depends on a trained, capable, and motivated staff. The following are suggestions on how to make the most of the people who support the financial reporting process:
• Organize around financial processes. For companies with larger accounting staffs, it may make sense to set up cross-functional accounting teams since many finance functions are interrelated.1By organizing the people around finan- cial processes, they gain a broader perspective on their individual role in these processes, and have a better idea to whom they should refer problems. The inte- gration of functions within teams also allows for fewer departmental barriers in getting quality issues resolved. A team approach of this kind should involve cross-training team members on each other’s tasks. This has the benefit of help- ing team members see their work in the context of a larger workflow, as well as enabling the team to compensate when members go on vacation or medical leave.
• Centralize the financial analyst job function. Consider ways to centralize the analyst function while decentralizing the tasks typically given to financial ana- lysts. Tasks such as formatting data for reports, charts, and graphs, or choosing fonts for financial presentations are best left to department managers and their staffs. Offering a standard set of front-end reporting tools capable of combining quantitative and graphical presentations facilitates this self-service approach (see Chapter 19) and allows the analysts to concentrate on more valuable tasks, such as looking at significant variances and trends and providing advice on these trends to management. Making financial analysis a shared service(versus a task each business unit does for itself) will enable you to emphasize and re- port on standard goals and measures of success and to apply them across divi- sional boundaries.
• Coordinate with the IT department. Your reporting BPI project is going be a sys- tems project, by and large. Whether this will entail the enhancement of existing systems or acquisition of new ones, IT will have to be involved in every step of the project. Perhaps the best way to ensure that this happens is, again, to cross-
train. By cross-training more technically oriented finance staff in database and report-writing applications, you become less reliant on the IT department every time subtle changes are required in the content or layout of financial reports. A more ideal arrangement is to allow sharing of staff between these departments, since increasingly the lines between finance and information technology job functions are blurred as both departments share the mandate of getting useful in- formation onto the desktops of decision makers throughout the organization.
• Share reporting responsibilities between functional departments. Resources tend to be wasted on duplicated efforts that take place due to departmental barriers.
Unless top executives assign accountability for a reporting process that spans multiple departments, this will continue to happen. For example, one area that can pose problems is counting the number of people who work for a company.
Usually, human resources counts them. But since finance doesn’t trust human resources, finance winds up counting them as well. This kind of duplication oc- curs not only with personnel data, but also to some degree with sales estimates and other key performance metrics, and frequently leads to discrepancies and misinformation. Nonfinancial departments should be consulted, included, and held accountable for the reporting of nonfinancial numbers.
• Require open access to pertinent financial data. This means giving front-line managers direct access to the information they need to do their jobs. But we want to emphasize the word “pertinent,” because we’re not advocating that you throw open the doors to the back office. In many organizations, the attitude persists that control of information is power. When finance evolves to view itself as an information service, not an information guardian, it can achieve process gains by pushing a lot of low-level decision making and variance analysis to the front lines, where it belongs. This requires not only a change in mind-set but a will- ingness to invest in infrastructure (or the deployment of resources the company already has) that will speed the delivery of information.
• Provide incentives for good transactional data. If your data is bad to begin with, new software won’t necessarily correct the problem. The people who input G/L data aren’t always given incentives to keep the data “clean.” Errors such as cod- ing of duplicate entries, entries without the appropriate offsets, or entries to the wrong account are often tolerated with the understanding that the month-end closing process will sort these problems out. Instead, why not consider avoiding discrepancies at the source, by providing training in problem areas and institut- ing a measurement program that reports quality feedback every month and rewards financial process teams with recognition and bonuses for reaching im- provement targets. These targets might include reductions in data entry errors, as well as reductions in the closing times for the general ledger and subledgers.
• Establish a communication strategy. If new software and processes are going to take hold, you should establish the means and a plan to communicate the uses and benefits of new systems. This might include a dedicated intranet site, class- room training, or online learning resources for end users. Your communication campaign should explain how to navigate the new system and provide regular
notifications to the user community when new data are available (after period closes, for example).
• Designate a financial reporting committee. Your organization has many stake- holders in the reporting process. Input from line managers, senior executives, and cost center managers is critical to understanding whether your process improve- ments are hitting their mark. In fact, interviews and discussions with this group may determine which initiatives are funded and adopted and which will be skipped for now. We suggest that you formalize this feedback loop by organiz- ing a committee that represents key beneficiaries of the process throughout the company. This will include not all but at least a representative panel of informa- tion consumers, including managers of divisions, product lines, the executive committee, and department or cost center managers. This group should comprise a metrics committee (which can be a subset of the group) that will determine the nonfinancial measures that must be included in the reporting mix. The cross- functional nature of any metrics-gathering program makes this an ideal source of specifications for that project.
TRAINING
Several job functions may be affected by process changes, so be sure to budget time and money for retraining as process improvements are implemented. Those affected may include not only “producers” but also “consumers” of financial information. As we mentioned under human resources, try to facilitate self-service access to any data required for decision making from the front lines.
Department/Cost Center Managers
Are managers trained to use financial systems and reports, or are reports just thrown in their laps with no explanation? One opportunity here, especially if you are in- vesting in new technology enablers, is to train managers on tasks such as spotting and controlling variances (even how to get ledger detail if this is available online), rather than leaving these tasks solely to the analysts.
Accounting Staff
If the period close is a source of delays, you might want to consider more frequent and standardized training on transactional systems, such as the G/L and subledgers, in order to cut down on data entry errors. A lot of the delays that emerge in the con- solidation and preparation of financial reports originate in transactional systems, where postings can easily be made to the wrong accounts. Although systems can be customized with “business rules” that prevent input errors, many G/L tasks require judgment calls on the part of the staff accountant or clerk who has to determine how an entry should be booked. Providing structured training and documentation on more troublesome procedures such as intercompany transactions, accruals, and entries to
reverse errors can go a long way to improving the reporting process. If you deal with tangible merchandise, your training initiative might include practices for isolating and reporting on those high-cost and high-volume inventory items that require more frequent cycle counting.
Analysts
Whether responsibility for financial analysis devolves to the corporate controller (as is often the case in smaller companies) or has a dedicated staff of a dozen people, analysts will need training on database systems and report-writing applications that will inevitably support your BPI efforts companywide. Once they understand how to use reporting applications to link data from various source system databases, such as the general ledger, customer relationship management (CRM), or manufacturing systems, they can take a lot of the burden off of your IT department. Analysts tend to have a better understanding of the business and can therefore concentrate on those technical reporting requirements that are most essential to management decision making.
Since a company’s financial analysts are often the ones charged with the task of producing consolidated statements, they will need training on postclose consoli- dating entries, such as currency translation adjustments and eliminations. By formu- lating a clear policy on the calculation and booking of these kinds of entries, and by training both G/L accountants and analysts to work together on the entire process, including the booking of intercompany transactions and elimination entries, a lot of errors can be avoided.
STRATEGY
Your reporting process should support the company’s strategy. Whether this strat- egy is to acquire new customers and market share, or to retrench and cut costs, the reporting process will determine whether management has the information they need to make the strategy happen. Consider the following principles as you look for ways to bring your reporting process into harmony with your organization’s strategic aims:
Review Reporting Requirements Often
Regularly review reporting routines to determine what is useful (and what is not) to strategic decision making. Your current monthly reporting run may include a num- ber of trend reports or other specialized views that developed as ad hoc or one-off requests that applied to a particular project, but no longer have any current use. The exercise of improving reporting speed will force you to examine any nonvalue- adding activity anyway. Once you have formed a financial reporting review commit- tee, this will become the group that meets to review reporting routines and determine what supports strategy and what does not.
Agree on Key Metrics
Alignment of financial and reporting systems with the company’s strategy requires not only fast delivery, but delivery of the rightmetrics. By “metrics” we mean mea- sure, whether financial or otherwise, of a company’s operational outcomes. Metrics may include statistical figures such as volume sales, headcount, or number of first- time customers. Many companies combine both financial and nonfinancial metrics to generate ratios that provide indicators of the financial impact of certain events, such as costs per new hire or acquisition costs per new customer. Companies that have done the best job in identifying the key metrics that drive their business are the ones most likely to base decisions on predictors of future performance rather than mark- ers of past performance.
Determining which metrics are needed and the method of acquisition and/or calculation of metric data can only come through a process of discussion and agree- ment. The team that meets to decide these questions will be cross-functional, con- sisting of members of diverse departments like operations, logistics, marketing, and engineering. One major barrier to faster reporting processes is the time spent handling a barrage of ad hoc requests that come from senior management looking for special information, usually for a one-time presentation or to resolve an isolated vari- ance. By agreeing on the key metrics that measure a company’s health and the strength of its future, the review team cuts down on one-offs of this kind and focuses on a set of indicators and the consistent, timely readouts from these indicators.
Many prospective metrics are tracked by various departments for their own use, even though other departments might also benefit from adopting similar metrics. In some cases, the same statistic is tracked in departments but is described and applied differently. As common metrics are discovered, it’s important to develop a common terminology to describe these metrics that will become standard across departments or divisions. While this list may change over time, it should be subject to a regular review process that evaluates it against overall strategy. Questions you should ask of your reporting metrics: Do they measure our success at achieving a strategy? Will they suggest a course of action?
Your choice of metrics will depend largely on your industry. An airline, for ex- ample, will have an interest in load factors (the percentage of seats occupied), on-time arrivals, lost bags per Xnumber of passengers, flight cancellation rates, and formal complaints per Xnumber of passengers. Strategy will also determine which metrics you choose to monitor. Companies in growth mode, that are concerned primarily with market share, will naturally concentrate on customer measures, including the number of sales to new customers, retention rates, and customer acquisition costs.
While the financial impact of such measures may not be known at the beginning of an initiative to track them, a perceived logical relationship might justify the effort of determining the existence and degree of financial impact. Depending on the degree of diversification of your company, the number of metrics you choose to monitor may range from 5 to 25. For each of the most important metrics, you may want to appoint a manager in charge of determining how the data for his or her assigned metrics will be collected. In some cases, of course, the same manager will be responsible for sev-
eral metrics. Managers of corporate functions such as human resources, plant oper- ations, engineering, and sales, as well as the administrators of the information systems that support these departments, will typically take on this metrics manager role. In some cases, this role may be shared among two or more managers if inputs from mul- tiple systems/departments are needed for a given metric, or in cases where some over- sight is needed to lessen the temptation for individual managers to “adjust” the numbers in their own favor (see Exhibit 17.1).
The reporting/metrics team should determine the frequency of metrics as part of its plan. Less frequent reporting (monthly or quarterly) may suffice for companies that have lower business volatility—for example, mature businesses with low mar- gins, such as major retailers, supermarkets, monopolies, and government agencies.
Companies that are more susceptible to changing market conditions will need to evaluate metrics more frequently, even daily.
Find a Context for Metrics
A metrics program can support a number of common strategic improvement initia- tives, such as activity-based costing (ABC) or Economic Value-Added (EVA). Some
EXHIBIT 17.1 Metrics Responsibility Chart Won/lost deals
Customer satisfaction Rate of Return (ROI, EVA, etc.) Cash conversion cycle
FTEs by department Training days per employee Average days to fill order Industry benchmarks Cost variance by product
VP Marketing
ShippingManager
PersonnelDirector
ProductionManager
Controller
VP Sales
X
X X
X
X X
X X X
X X
examples of performance measurement approaches that can provide a framework for metrics are:
• Activity-based costing. Activity-based costing is an accounting method that assigns costs to activities rather than to departments. This enables resource and overhead costs to be more accurately assigned to the products and the services that utilize them. In order to accurately associate costs with products or services, the ABC approach establishes a cost for significant activities based on their use of resources. Resources include labor, equipment, and materials; activities in- clude any business process that consumes these resources. When the cost of any activity is determined, it can be applied to a cost object, such as a product or ser- vice, based on use of activities. Knowledge of activity or process costs should enable better pricing, outsourcing, and capital spending decisions. An ABC ini- tiative will create a demand for metrics that reveal resource drivers such as cycle times or labor hours spent on such tasks as order fulfillment, resolution of prod- uct quality problems, and other key business processes.
• Economic Value-Added. EVA, which was popularized by the consulting firm Stern Stewart, uses an estimated cost of capital as a means of evaluating invest- ment opportunities and business performance. EVA is the net operating profit less a charge for the opportunity cost of the capital invested to get that profit. This cost of capital is typically a weighted average of interest rates on funds the com- pany borrows and the rate of return expected by shareholders. Value-added ap- proaches might make sense for companies that have weaker financial structures, low sales-to-asset ratios, and excess levels of working capital. Companies adopt- ing EVA or similar evaluation methods (such as internal rate of return, or IRR) will establish a metrics program for measuring operating profits at various levels in the company, as well as cost of capital calculations. The difficulty of EVA, apart from arriving at a true cost of capital, is figuring out how to measure the capital. Some EVA pundits and consultants include key business processes as part of a firm’s capital. Since traditional accounting systems tend to expense salaries, software development, training, and other recurring costs of carrying out business processes, the true capital invested in any project, product, or de- partment may not be well understood. Measuring process costs and capitalizing them will likely be central to an EVA metrics program.
• Balanced Scorecard(BSC). This approach was introduced by Robert Kaplan and David Norton in the early 1990s. According to Kaplan and Norton, the BSC was developed as an answer to the pitfalls of managing on a purely financial basis:
We introduced the Balanced Scorecard to provide a new framework for describing value-creating strategies that link intangible and tangible assets. The scorecard does not attempt to “value” an orga- nization’s intangible assets, but it does measure these assets in units other than currency. The Balanced Scorecard describes how intangible assets get mobilized and combined with intangible and tangible assets to create differentiating customer-value proposi- tions and superior financial outcomes.”2
The main premise of BSC is that financial measures report past outcomes but do not adequately explain the drivers of future performance. Thus, traditional reporting practices often fail to inform managers, in quantitative terms, of the impact that investments in intangible assets like proprietary knowledge or an innovative business model can have on a company’s financial returns. The met- rics that make up a Balanced Scorecard will therefore include measures of the strength and growth of nonmonetary assets such as process excellence, customer loyalty, and employee competencies.
A BSC typically includes 15 to 20 measures. You might link each of these to corporate strategy by using a cause-effect statement to describe each metric. For example,Xincrease in on-time order fulfillment leads to Yincrease in repeat business. Or, Xincrease in service rep training leads to Yincrease in customer sat- isfaction ratings. The idea being that the thing increased (or reduced) has an im- pact on the achievement of an organizational objective such as revenue growth or cost reductions. So wherever possible, try to express the relationship in quantita- tive terms. Apart from its usefulness as a predictor of future income, the value of tracking a given metric also depends on how clearly it cascades down to various levels of the organization, so that it can be used as a basis of evaluations and in- centives for executives, middle managers, and employees.
The Balanced Scorecard is often the performance measurement approach of choice for companies wanting to effect a major strategy change or concentrate on revenue growth. The BSC approach emphasizes a decentralized organization, in which the scorecard becomes the basis for evaluating employees at all levels, not just executives. The scorecard provides a framework for measuring performance from four perspectives: financial (ROI, ROE, and cash flow), customer (cus- tomer additions, customer satisfaction rates, etc.), internal (primarily business process factors such as number of defects and cycle time), and learning/growth (quantity of employee training, certifications, etc.). The BSC therefore combines traditional measures of financial performance with more predictive, operational measures that apply to a company’s business model and internal processes. Some common BSC items include:
• Customer satisfaction ratings
• Number of days per account activation
• Customer loss or retention rates
• Cash conversion cycle time
• Business process cycle times (such as filling orders, processing invoices, etc.)
• Operating expense per unit of sale
• Segment/market share
• Rate of return (ROI, ROC, ROE)
• Performance in any of the preceding against industry benchmarks
Of course, the contents of the scorecard may vary between industries, between divisions of a company, and over time. Most BSC consultants will emphasize that scorecard measures should cascade throughout the organization. Measures