Imagine if your competitors had better performance and steering information than you. Not a pretty picture, right?
The complications of not having an effective (doing the right thing) and efficient (doing it right) performance management model and approach are often severe. There is a high risk that you will react too late, make decisions that are not fact-based and experience a lot of waste in your management processes. All of which causes frustration among your management team and employees.
And in times such as these, late responses and waste can kill off any business. So now is the perfect time to make sure that you have a fit-for-purpose steering model. One that will allow you to make fact-based decisions quickly and ensure that you have at least as much insight into your organisation as your competitors do into theirs.
How do you know if there is a problem with your performance management?
The definition of performance management used here is ‘the sum of structure, principles, processes, reporting and tools that is used to manage a company/organisation’. Some would also refer to it as ‘corporate performance management’.
As a CFO, the formidable task of monitoring performance on a continuous basis lies with you. But this is occasionally interpreted somewhat loosely. There are many symptoms of a performance management model that needs an overhaul, but there are three red flags that should make you react immediately.
1. Cannot answer important (simple) questions regarding profitability
This is actually not that unusual a phenomenon as you might think. Do you at any time have a clear overview of the actual profitability of your customers, products, sales channels, etc? And given the latest demand/sales forecast, how will that profitability develop? This is must-have information when reading the market and staying ahead of the competition. (Note: Gross margin is not sufficient to understand profitability.)
2. Financial planning is not value-adding and is poorly supported by technology
Trying to predict the future and react accordingly is one of the key tasks for a good performance management approach – and also a huge topic in itself. However, there are especially two symptoms to be aware of:
Firstly, the disconnect between the strategic, tactical and operational planning results in inefficient resource allocation and a lack of a fact-based challenge process between the management layers.
Secondly, the process itself is too cumbersome and poorly supported by technology, resulting in process waste, errors and loss of agility – e.g. the lost ability to quickly produce a forecast/play on request.
3. Management reporting is not actionable
There is a long line of issues to be aware of if you want to make sure that you are able to act on the information in your management reporting. Here are some of the key warning signs:
- Management information does not have a balance of leading and lagging indicators
- The link between key business drivers and results is too weak (poor causality)
- The number of KPIs has grown too big, and there is a lack of transparency in how KPIs are interrelated
Finally, it is also a yellow light if there are constant complaints in your organisation about the systems and poor data quality, which act as the ‘oil’ for any performance management engine. This issue also makes your organisation a less attractive workplace for analytical talents.
How to improve performance management?
If you recognise one or more of these symptoms, you need to act to avoid jeopardising the health of your company.
As with many other challenges, it is about sizing up the problem and eating the elephant in chunks. The key lies in determining whether it is the effectiveness (doing the right thing) or efficiency (doing it right) that is the most in need of fixing. And then decide on a structured approach.
My recommendation for key steps that other companies have successfully taken to optimise their performance management are:
Revisit management requirements: The strategy, chosen operating model and key measures of success are the foundation for defining the performance management model. Can you see this reflected in your performance management? Not only on the consolidated level but also further down at the levels of business units and functional areas.
Are you measuring on the segments and not legal structures? Is there a view on new business versus mature business? Is there a view on the risks of your business? Can you see whether your price strategy or other actions result in improved profitability? Is the reporting forward-looking and action-oriented?
Revisit management principles: If your key performance management principles are not crystal clear, you may end up wasting valuable time on endless discussions. Firstly, you need to make sure you have an effective and efficient financial plan. How to better connect with operational planning so it makes sense to managers? Should we reconsider the planning horizon? The level of detail? The timing and frequency? Should we consider other methods – beyond budgeting, zero-based, driver-based, etc.? Secondly, you need to have accepted principles on how to look at profitability: Which dimensions? How deep into the P&L? How often? Actual or/and plan figures?
Management reporting: If you do not have a clear overview and acceptance of the reporting, you cannot build robust processes underneath. So, ask the management team and challenge them on what they want. And reflect on the underlying data model and technology providing the information. There is typically also a format discussion here in terms of how exactly to provide management information. There can be a lot of opinions here, but you need to reach a forward-looking conclusion somewhere between interactive dashboards and printouts.
Now what?
Because our business develops continuously, our performance management model also needs to evolve continuously. We have probably all been through some experiences lately that have made us think about how we steer our company – and maybe our business has changed dramatically over the years.
One thing is for sure: we cannot continue just doing the same – it is simply too high a risk. The good news is that, as the CFO, you are in a position to make change happen. And you do not have to do it by yourself.
At Valcon, we would recommend that you gather your finance team and spend half a day discussing some of the topics above and generating ideas on how to proceed.
Maybe you could also initiate dialogues with your internal customers or get some inspiration from the outside. You could reach out to IT to discuss and align initiatives on data and technology.
My point is that, although the list of issues and warning signs regarding your performance management model is long, you cannot afford not to go through the list. You cannot afford not to evolve your performance management. And finally, you cannot afford not to involve your team and your organisation in the task.
Reach out
Are you ready to take the first step toward digitising your planning process? Whether you’re looking to build a vision, create a structured plan or simply need expert advice on where to start, Valcon is here to help.
Richard Thorsen, Partner at Valcon, is an expert in assessing financial planning needs, designing new financial planning models and implementing them successfully. Contact Richard Thorsen at [email protected] or +45 2147 0312 for expert guidance.
Together, we can ensure your planning process is future-ready and equipped to handle the unexpected.
