Accountability

For strategic CPM, finance must make itself relevant to operations

David Essex

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David Essex

For several years, analysts and software vendors have argued that finance has an essential role in strategic planning. But that potential is still largely theoretical, with CFOs remaining mired in the details and deadlines of financial disclosure and budgeting.

Technical and cultural factors are apparently to blame. Corporate performance management (CPM) software was supposed to be the platform that could unite accounting with the operations that consume financial resources, ultimately determining profit and loss. But most CFOs fail to take advantage of such strategic CPM practices, according to the Gartner research firm. That's due in large part to finance remaining in its green-eyeshade silo, its dollars and cents only now starting to mingle with the sales quotas and materials resource planning data of the people who sell and make things.

Meanwhile, financial analytics, arguably the true enabling technology of all this, is only spottily understood even in the biggest organizations. Many people aren't even sure what analytics means, despite its persistent status as a buzzword.

The cultural and knowledge gaps were evident at a cozy gathering of several dozen finance managers that IBM held this week at the New England Aquarium in Boston. Part of a multi-city tour, the event's very name, Creating an Analytics Culture, shows that IBM recognizes the problem.

Why can't CFOs be more strategic?

Before the event, SearchFinancialApplications editors sat down with the main keynote speaker, Steve Player, program director of the Beyond Budgeting Roundtable and managing partner of The Player Group, a Dallas-based consultancy. For years, Player has been trying to wean CFOs off quarterly reports and budgets and get them focused on the future by advocating rolling, or continuous forecasts in books including 2010's Future Ready: How to Master Business Forecasting, which he co-wrote with Steve Morlidge.

I had read of Player's Texas roots before meeting him, and he didn't disappoint. He's a big guy with a Texas-sized personality: outgoing, opinionated and generous with on-the-fly hospitality 1,500 miles from home.

First question: Is the meaning of analytics as vague as it seems to this observer? Player, gesturing back toward the finance managers starting to gather, nodded in the affirmative. "They're unclear, too. Everybody's unclear about analytics."

The persistence of old-school budgeting doesn't help, though he admitted that shifting from batch-oriented, start-stop modes of financial reporting is hard for most people. But it also often puts them at odds with sales and operations managers whose livelihoods depend on much more timely metrics. "Finance suffers increasingly from looking at lagging indicators," Player said. "We're seen as irrelevant bean counters. An operations guy is making daily decisions; he isn't waiting."

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Player is fond of nautical analogies. (Later, in a small function room with high glass windows overlooking pleasure boats in Boston Harbor, he showed a cartoonish slide of an ocean tanker heading toward rocks and a lighthouse.) With their current emphasis on budgeting and financial disclosure based on past events, he said, CFOs are standing in the back of the boat reporting on the size of the wake and the ship's apparent direction. Instead, by standing in the front of the boat and looking far into the distance, they'll be able to spot hazards and offer guidance on changing course. "Everything is about moving to some early warning system," he said.

To pull this off, finance must go beyond its usual forecasting of financial results -- including the quarterly guidance that most public companies give Wall Street analysts -- to better predict the drivers of those results. That's where financial analytics come in. Rather than rolling up sales forecasts into revenue projections, CFOs should try to analyze what causes a sale -- say, a sales call -- then go back further to find which marketing methods lead most often to sales calls. "I've now moved away from financial metrics to a whole bunch of physical metrics," Player said. He teaches an eight-hour forecasting course that covers the predictive logic diagrams that help to make those connections.

In one sense, this view of analytics is as old as management consulting, which reaches far back into the last century. "You understand a business by understanding what's behind the figures," he continued, citing an early book by Arthur Andersen, founder of the eponymous accounting firm where Player once worked. "That's what analytics is trying to get back to."

But Player agreed that technical integration between operations and finance systems is another major prerequisite. "The toughest challenge for finance is not to build a system that has to link to existing systems," he said. "Most of the data is already there. When the data is already there, somebody is monitoring it," and that means the data is probably clean enough to analyze.

In search of financial analytics experts

Analytics vendors are likewise scrambling to help customers close the finance-operations gap and realize the potential of strategic CPM software. Cloud technology is improving the prognosis, Player said, by lowering barriers to entry and letting innovators in. The cloud also makes it possible to centralize much of the math-heavy expertise in outsourced services that specialize in analytics so companies don't have to hire such pricey talent in-house.

Before Player's keynote, Jim Collins, IBM's financial performance management strategy executive, gave his view of the gap between old-style finance and the strategic kind -- even while pushing IBM's impressive portfolio of strategic CPM and analytics tools, notably Cognos Insight. In its own March 2010 survey of CFOs, IBM found that 46% of companies -- many of them large ones -- were still managing multi-billion-dollar budgets on spreadsheets. More recent, mid-2012 numbers from the Corporate Executive Board (CEB), found 71% admitted they sometimes or never have the ability to derive insight from data, leaving only 29% saying they could do so consistently.

As an example of finance linking to operations, Collins showed how forecasts in Cognos Insight link back to the goals for a specific salesperson stored in IBM's sales compensation management tool. It definitely looked more like strategic CPM than the older, disclosure-oriented style of tactical CPM. That's how Gartner describes the divide, naming SAP, Oracle and IBM to its leaders quadrant, and giving IBM high marks for the strong analytics technology into its CPM products.

The cocktail hour and post-keynote Q&A suggested the gap still holds strong, however. A finance director from a local insurance company said he only used a specialized risk-management tool along with Microsoft Excel; another, from a small startup, intended to stick with Intuit's QuickBooks. And people raised their hands to complain about corporate pressure to revise time-consuming budgets and close the books faster.

David Essex is executive editor of TechTarget's business application websites. You can reach him at dessex@techtarget.com and on Twitter @dessexTT.


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