Robert Kugel's Analyst Perspectives

Analytics Can Make Finance More Relevant

Posted by Robert Kugel on Jul 7, 2011 11:22:17 AM

Ventana Research recently completed groundbreaking benchmark research on how finance organizations use analytics these days. Of course, analytics have been a mainstay of finance organizations since people started using accounting ratios to assess the health and performance of a business. Yet perhaps because traditional analytics are so deeply entrenched, finance departments execute the basics well but don’t take the next step to fully utilize the power of information technology to use analytics more effectively. And they should: Our research finds that a majority of executives and managers outside the finance organization want the department to play a more strategic role in their company’s management.  

Finance tends to stick to the basics. The analytics research shows that when it comes to analytics, participants focus first on controlling operational expenses, managing budgets and keeping tabs on cash flow. In line with this focus, they identified operational expense (76%) and adherence to budget (65%) as the most important metrics they use, while ranking customer profitability (31%) among the least important. Yet focusing on the basics comes at the expense of using IT in innovative ways. For instance, the research finds that predictive analytics is a tool that just 13% of finance departments use but which can have a substantially positive impact on a company’s results, as I discussed in an earlier blog 

Moreover, I think finance departments can use analytics to take more of a leadership role in strategic management of corporate profitability. Some part of the organization needs to have ownership of strategic profitability management because otherwise it often falls between the cracks. A corporation usually has a strategy and almost always has profit objectives, but the two may not be well aligned. But there are challenges to doing this. One is that individual departments and business units focus on their own profit or cost objectives, but few companies have a process for systematically managing profitability across the business, which should include using a consistent analytical framework. So product organizations try to maximize product profitability, sales organizations may try to maximize revenue, and call centers may try to minimize costs. Individually, each of these moves may be rational, but collectively they can work at cross-purposes, and few companies focus on managing the sometimes conflicting objectives of individual parts of the business.  

I think Finance should take the lead in managing profitability more strategically for three main reasons. One is that the people in Finance are most likely to have the analytic and mathematic skills necessary for this role. The second is that it’s a natural extension of the department’s enterprise-wide responsibility for controlling spending. The third is that Finance will always be a neutral party when it comes to balancing the conflicting objectives of the various business units and departments that are individually trying to reach their own profit and cost objectives.  

I also believe that in a large scope finance departments need to redefine their role in the corporation to make it more strategic. Finance has spent the past two decades becoming more efficient by automating processes. It should now focus on becoming more effective, playing a more active and strategic role in the performance of the company’s operations, adding value by applying its analytic skills to the profitability of the business while spending less time on tactical “bean counting” functions. 

Analytics are the most important technology component that finance departments need in order to take a more active, strategic role in corporate management. It is also important to put the “A” back in FP&A to improve corporate activities. If you want the department to have more of an impact on the success of the business, information technology and finance analytics can be a foundation and catalyst for positive change. 


Robert Kugel – SVP Research

Topics: Predictive Analytics, SAP, SAS, Office of Finance, Operational Performance Management (OPM), Analytics, Business Intelligence, IBM, Oracle, Business Performance Management (BPM), Cognos, finance, Financial Performance Management (FPM), Sales Performance Management (SPM), Financial Performance Management

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.