At its core, corporate performance management (CPM) is a conceptual framework that defines how the finance group should collaborate with business unit leaders to collectively understand, plan for and drive desired impacts; make sound decisions about investing shareholder capital; and manage both opportunities and risks. CPM tools have been evolving for some time and will continue to do so as long as business people keep marching toward the frontiers of decision sciences. Surely, the rapid pace of IT innovation will be providing a big push.
To see where this may lead, it helps to remember that CPM software had its genesis in the traditional role of the chief financial officer (CFO). That role involved three stewardship activities:
1. Monitoring the progress of efforts to achieve budgeted financial targets
2. Ensuring the integrity of accounting controls
3. Releasing information about the company’s recent performance to external users
In this early incarnation, the primary performance management tool was the rearview mirror. It was screwed into accounting processes, protocols and systems that were meant to support the old role of the CFO, and finance people wielded this blunt instrument thing at monthly or quarterly review meetings. Operating managers who had failed to meet lofty growth targets grew defensive. The atmosphere was not always congenial.
A necessary progression: CPM software evolves with the times
CPM has come a long way over the past decade. Tumultuous economic times, before and after the global financial crisis of 2008, underscored the need to upgrade its core purpose and strategy. Over time, people developed operating and governance models to suit their unique corporate cultures. They clarified roles and responsibilities; improved processes and systems for gathering, analyzing, and disseminating information; and hired financial analysts who knew as much about the business as they knew about accounting. Today, financial planning and analysis (FP&A) professionals at companies that genuinely embrace process excellence now work elbow-to-elbow with operating managers. The idea is to continually refresh the view of “the course we are on relative to our desired destination” and come up with a new plan whenever the existing one must be discarded.
Here are a few examples of the questions that FP&A teams tackle in collaboration with operating managers:
- What have we learned about crafting successful promotional campaigns in certain regions or customer markets?
- What price points make sense for new products in emerging markets?
- How fast can we cut the cost of a complex product line so that we can offer it at a significant discount and win a price war if necessary?
- If our forecasts call for a sales decline of 4% across the European theater, how can we soften the impact on the bottom line?
And so it goes.
Much has been written by respected business technologists about using so-called predictive analytics to anticipate the challenges a business is likely to face as it seeks to reach its destination each month, quarter or year. We hear about the need for a clear information management strategy based on a common, enterprise-wide data model, user-friendly data-access tools and a sound approach to data governance. We hear about standardized global platforms to support standardized processes. We also hear about common metrics, reports, scorecards, dashboards and planning systems.
New CPM tools -- but tread carefully
Now we’re hearing about how far CPM tools can go when mobile devices such as smartphones and tablets are introduced into the mix, as well as talk of using social networks such as Twitter to give the FP&A team a leg up.
In the normal course of things, you don’t need a mobility platform to do sensitivity analysis. Consider the current the economic crisis in Europe. Maybe you want to look at the potential impact of swings in the value of the Euro on your projected sales. Maybe you want to test various percentage swings in the Euro over the next month, three months and six months. You can do that quite effectively with your standard desktop system.
But what about using social media tools and mobile devices to strengthen your performance forecasting and better manage risk? That question came up in a recent conversation I had with a prominent software company executive. “Imagine if you, the FP&A director, had a proprietary Twitter-like feed that pulled in on-the-spot observations by your European sales people,” he said. “The sales people obviously can’t help you predict the future value of the Euro, but they surely can provide very valuable information about the mood and body language of important clients during big sales meetings,” he suggested.
Beyond that, if the sales people are equipped with the right kind of mobile devices, they can keep track of key blogs and other listening posts. If this is done with care, so that you (the FP&A director) receive the right amount of good intelligence at the right times, you have what war-game enthusiasts call an “effective early warning system.” Instead of learning toward the end of the month or quarter that the quality of the sales pipeline has deteriorated badly, you will have a more immediate and reliable sense of what’s happening on the ground. That will help you be more confident when the CEO asks if the company is going to meet the growth targets he already gave to Wall Street.
Brian Kalish, director of the finance practice at the Association of Financial Professionals, which is based in Bethesda, Md., is also hearing talk about "big data" and mobility platforms. And while he echoes the software company executive’s call for early alert systems, he sounds a note of caution about designing FP&A’s path to progress.
“There is a big push now to leverage tremendous amounts of data and put it on smart mobile devices that fit in people’s pockets. You can also have an instantaneous flow of data from the field to a central repository,” Kalish said. “But part of the challenge as you embrace these ideas is to keep your footprint as small as possible. You have to be very stringent in your rollout.”
“The technology is changing so fast that it is outpacing your ability to build proprietary apps and models,” Kalish explained. You don’t want to spend time and money building a private mobility platform only to find out down the road that the apps you like won’t work on an external mobile platform, he said. In the end, he said, “FP&A ought to be able to access data or generate information in a mode that is relatively universal. So, there’s no need for a proprietary approach.”
A final word
We are on the verge of an entertaining mashup of CPM, FP&A, mobility, big data, social media, decision theory. What have I left out? Game theory, behavioral economics and “thinking, fast and slow,,” to borrow the title of the 2011 book by Daniel Kahneman. And let’s not forget the back-and-forth prognostications about the impending collapse of the global economy. Only one thing is certain: The purveyors and practitioners of CPM will be right in the middle of it all for the foreseeable future.
ABOUT THE AUTHOR
Mary Driscoll is senior research fellow at APQC, a Houston-based non-profit that provides expertise on business benchmarking and best practices. Formerly a senior editor at CFO magazine, she is the author of Cash Management—Corporate Strategies for Profit, published by John Wiley & Sons. Click here for APQC’s coverage of financial management.