You are currently browsing the category archive for the ‘Business Performance Management (BPM)’ category.
The topic of corporate governance received renewed attention recently after the publication of an open letter signed by 13 prominent business leaders, including Warren Buffett of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase. The first principle the group advocated in the letter is the need for a truly independent board of directors. To achieve that aim, the letter suggests having the board meet regularly without the CEO and that the members of the board should have “active and direct engagement with executives below the CEO level.” From my perspective, translating this idea into reality would be helped by a change in the dynamics of most board meetings. I would eliminate the standard presentation of results and begin the meeting with questions and observations from the board members directed to company executives related to its financial and operating results and any other matters on the agenda. This could take place with or without the CEO.
In the best of cases, a company provides board members with information about the topics to be discussed at the meeting, along with supporting data, charts and narratives. Board members are expected to have familiarized themselves with this information ahead of the meeting. But in almost all cases, in order to be sure that everyone is on the same page, there is a presentation of this information by those in charge of preparing the data and analyses. Eliminating the standard presentations would change the tone and dynamics of the board meeting, leading to more active engagement.
There may be a number of companies that dispense with the routine recital of results at board meetings, but I first heard about it from Godfrey Sullivan, chairman of Splunk, a software vendor that provides operational intelligence through analysis of machine data. He described his company’s approach to board meetings at the Adaptive Insights CFO Symposium last spring, which was part of the company’s Adaptive Live user group conference. The management discussion and analysis as well as the accompanying data are sent to Splunk’s board members far enough in advance of the meeting to ensure that they have time to study it. Members are expected to have reviewed the information and formulated their questions and thoughts ahead of time. Those in charge of preparing the analysis are present at the board meeting to answer questions, not to present the data and analysis.
The reason for structuring the process this way, Sullivan said, is that eliminating the traditional briefing saved time at the meeting that could be better spent discussing issues and opportunities as well as ways to address them. I suggest that this sort of active engagement encourages greater participation and orients review and planning more toward action. Eliminating the standard presentation portion of a board meeting is hardly a panacea. However, implementing a format that requires board members to be prepared for the meeting does set a better tone at the top that is necessary to support or develop a more actively engaged board of directors.
Technology also can play a role in such process change, even if it is not immediately obvious. Of course, using their current resources any company can provide board books (documents prepared for the board of directors that present data in graphical and tabular formats as well as the related narratives) to directors far enough in advance to eliminate the need for a performance review at the board meeting. It’s also fair to say that for some companies changing how the board operates is likely to be a far more daunting task than any addressing any technology issues. On those boards, members comfortable with the routine and those who believe they are too busy to devote enough time to corporate matters ahead of the meeting will need to be convinced or replaced.
But technology can facilitate a fundamental shift in how directors engage if it makes the necessary information available sooner and in a more easily digestible format. For example, reporting packages that automate the creation of board books can shorten the preparation time, enabling companies to get this information to the board members sooner for review. Having these books available on mobile devices (tablets or smartphones) would also streamline access to the information. Reports that enable data exploration – drilling down and around to see the numbers behind the numbers – provides readers with deeper understanding of the business.
Accelerating the accounting close also would also be helpful in getting information to the board sooner. More than half (60%) of companies in our Office of Finance benchmark research reported that it takes them more than six business days to close their books; 26 percent take 11 or more days. Almost all companies that want to accelerate their close said the main reason for doing it is to have more time for analysis of the numbers before having to prepare reports and to make financial and managerial data available. Technology can play an important role in speeding the completion of the close. Our Fast, Clean Close research shows a correlation between the degree to which companies automate their close processes – especially handling minutiae such as reconciliations – and how soon they can close their books.
All organizations can benefit from a knowledgeable and engaged board of directors. Almost every company has the capacity to provide its directors with sufficient information before a board meeting, and it’s not unreasonable to expect all directors to come prepared to discuss the agenda so there is no need to present that same information. Chairmen and CEOs ought to consider taking this approach. They should also examine whether they can improve the effectiveness of their communications to board members by making it easier for them to consume the information they provide them and – if the company takes more than a business week to close its books – to accelerate their close. The role of the board of directors is too important to be undermined by sluggish business processes.
Senior Vice President Research
Follow Me on Twitter @rdkugelVR and
Connect with me on LinkedIn.
Effective capital planning and capital investment are vital to a company’s long-term success. The choices a company makes in this regard – how much to invest and in which facilities or projects – almost always have a profound impact on its competitiveness and performance. Because they have limited financial resources, well-managed companies take pains to ensure that these decisions support their long-term strategies and are made as rationally as possible. To do this they must have a disciplined approach to assigning priorities to capital investments within the context of the company’s specific strategy and objectives, as well as the ability to easily identify and eliminate unnecessary projects or excessive spending. And since business environments are dynamic, companies must also continually review their investment portfolios to assess their performance to plan and their strategic value while they also consider new investments to support and expand the existing long-term portfolio.
Some aspects of planning are easier to handle than others. For example, large majorities of companies in our Office of Finance benchmark research said that they handle the basic functions of accounting (83%) and external financial reporting (78%) well or very well. In contrast only half (49%) said that they perform strategic and long-range planning well or very well. One reason for the discrepancy may be the tools that they use. Almost all (91%) companies said they use spreadsheets to manage their long-term planning and investment processes. Spreadsheets are the wrong choice for any repetitive, collaborative company-wide processes such as strategic and long-term planning. For example, tracking and revising projects and major company initiatives over time in desktop spreadsheets is time-consuming because they lack capabilities designed for these purposes, such as the ability to manage projects as a set of resources and activities along a time dimension. With such capabilities planners are able to see quickly the financial and operational impact of delaying or accelerating a capital project. Unlike spreadsheets, software dedicated to planning often includes built-in analytics and visualizations that help executives formulate plans and assess performance. Spreadsheets don’t make it impossible for companies to plan and manage strategic and long-range projects and investments, but doing that is so time-consuming organizations may not have time to do more valuable work – for example, comparing the impacts of different economic or business scenarios on a set of investment alternatives, or performing side-by-side assessments of existing project portfolios. Dedicated software can enable a company to gain agility in adapting its portfolio of projects and investments. By shortening planning and review cycles and being able to examine the impact of different scenarios on the fly, decision-makers can do more frequent in-depth reviews and reassessments of investment performance or priorities.
Dedicated planning software also can improve executives’ ability to do long-range planning to ensure they have the right strategy to succeed in the markets they serve and the right assets to support their strategic objectives. To achieve those goals they must allocate investments in those assets as optimally as feasible and possess sufficient resources (both financial and other, such as personnel with the appropriate skills) to support those investments. These are the key activities in the long-range planning process:
- Establish the best strategic course based on a company’s current market position, its resources, the competitive landscape and external factors such as economic and demographic trends, the legal and regulatory environment and technology trends.
- Determine the assets required to support the company’s strategy throughout the planning period.
- Identify the ongoing operating activities, such as research and development projects or brand advertising, needed to support the strategy.
- Ensure that there is adequate funding to support investments and ongoing operating activities over the planning period.
- Ascertain that the capital structure is adequate and optimized to support the needed investment.
Companies face multiple challenges in managing their long-term planning processes. These include:
- Determining the appropriate methods for assessing plans and their constituent investments
- Achieving alignment between company strategy and the long-range plans of the constituent parts
- Ensuring consistency in the preparation of long-range plans across the organization
- Optimizing investment decisions consistent with long-term strategy
- Maximizing the productivity of the long-range planning process, which means minimizing the amount of time required to execute the purely mechanical aspects (acquiring data, validating it, creating, maintaining and running the appropriate analytical model) to enable more time to be spent on the analytical and assessment aspects
- Performing comprehensive what-if scenario planning
- Reducing cycle times to allow for a more nimble process.
In capital spending decisions, project champions must make a convincing case that an investment is not only worthwhile in itself but also better than alternatives. Strangely, though, once a capital project is approved, few if any companies assess whether the projected returns were ever realized. In the decades that I have been asking this question, I have yet to find a single company that does any post-investment measurement of specific projects. As a rational numbers guy, I’ve long wondered why. One reason might be that, acknowledged or not, optimizing capital investments is not one of the main objectives of the capital spending decision-making process. Rather, it’s simply to separate the obviously bad ideas from the rest. Applying a methodology to quantify potential returns from a capital project is bound to expose most of those that have limited potential, faulty assumptions or too much risk. Yet I think this approach sets a very low bar. Having a more rigorous post-investment analytical process would enable companies to do a more effective job of allocating resources by seeing where they have wasted them before. Dedicated software can facilitate these sorts of reviews and enable companies to adjust their planned investments when business conditions and results dictate the need for changes.
Ultimately, the success of a company’s long-range planning and investment process can be measured over time in its gross return on assets relative to its competitors’ and, if it is publicly traded, partly by the company’s share price. A gross rather than net asset approach is useful because it reduces accounting distortions in cases where companies may have written off poor investments or used different reported depreciation approaches for similar asset classes.
Companies – even small businesses – should use a rigorous long-term planning and capital spending discipline to ensure that they successfully manage for the long term. Companies that already have such a process in place should re-examine it regularly to determine where it is falling short or failing to identify the right path and the appropriate investments for their strategic direction. Executives should recognize that using desktop spreadsheets to support their strategic and long-range planning processes prevents them from doing these things and support investment in more capable tools designed for the tasks.
Senior Vice President Research
Follow Me on Twitter @rdkugelVR and
Connect with me on LinkedIn.