Better corporate performance management (CPM) could help many New Zealand businesses increase their long-term profitability, according to research conducted by Ernst & Young.
Its recently published survey of 86 large New Zealand companies Unlocking the Value – perspectives and insights on corporate performance management in New Zealand, shows almost all New Zealand businesses have started building CPM capability, but only 10 percent are using their performance data in sophisticated way to drive future growth in profits and performance of their businesses.
CPM is an emerging discipline globally which moves beyond the use of traditional accounting tools as the measure of business success. It encompasses non-financial performance measures and leading, or future-looking, indicators to ensure businesses achieve their goals and lock in the value identified in their strategic plans.
“There is substantial financial upside for businesses that make CPM work effectively for them,” says Wayne Jackson, Ernst & Young business advisory services director, in that better performance management increases overall performance and means trouble spots can be addressed.
“Most New Zealand businesses have undertaken some investment in CPM, but they report mixed results to date. In many businesses, traditional financial management information still represents the entire CPM system, rather than just critical component of it. This needs to change.”
Corporates which manage performance effectively tend to have four key foundation stones:
• they create links across the strategy/planning/budgeting/forecasting and reporting cycles;
• they have limited number of focused performance measures;
• the measures are explicit to prevent ‘gaming of results’ with clear accountability assigned for defining and monitoring performance; and
• they will have common data set to provide single version of performance data, ie, no duplicate systems.
Where corporate performance management works well, it has strong, enterprise-wide, accountability at the C-suite level, says Jackson. There are two roles which usually end up as custodians – whoever has responsibility for strategy along with the CFO – as performance management has grown out of historical financial reporting.
“It’s critical that the process is seen as an amalgam of HR, financial reporting and information disciplines,” Jackson says.
The costs shouldn’t be high – as rather than continue to invest in systems to manipulate data – companies can divert the investment to addressing the issue of what to do with the information gathered.
“The investment isn’t so much in additional people as in changing the role and focus of existing people.”
Once the groundwork is completed and the systems in place, companies should expect to see some benefit with 18-24 months.
In more depth, the survey revealed:
• Fifty percent of respondents expressed low satisfaction with their performance management initiatives.
• Forty-four percent had aligned all three ‘process components’ of strategy, budgeting and business planning to measure performance.
• Many businesses may be targeting too few performance metrics – 41 percent had less than eight (leading practice suggests 10 to 15 measures).
• More than half the survey participants are underweight in non-financial measures (leading practice suggests non-financial measures should be 50 percent of measures).
• Just under half (49 percent) of participants report clear single point of accountability for CPM systems.
• Ninety-five percent of participants are exposed to the risk of poor data integrity from using multiple standalone data sources.
Jackson says the roadmap to successful CPM capability is like that required for any large-scale business transformation; articulation of clear vision, defining the measures that drive value for that organisation and garnering management support and resources. Like any lasting transformation, it also requires good project disciplines and ingraining new habits and behaviours across an organisation.
“Going on past studies, if the 25 percent of the top 200 firms with the least effective CPM capability could lift gross margins and gross profits by five percent, this would equate to approximately $1.6 billion in benefits.”
He has advice for those beginning the process: link CPM with business strategy as it’s no good measuring performance if it’s not related to where you want to take the business; limit the number of measures you have and focus them to ensure they’re not just rear-vision financial measures. Include some leading indicator measures, which could be demand, customer satisfaction or innovation; have common data set to make sure you measure like with like, across the business.
“These things sound straightforward but for lot of businesses who said they weren’t getting what they wanted out of corporate performance management, it emerged that these processes weren’t in place,” Jackson says.
“It’s all about ensuring that people are accountable for business results,” he adds.
So if it’s so simple, why haven’t more New Zealand businesses been doing it? Because, says Jackson, they are still at the learning stage with how to manage data enterprise-wide.
“Businesses have to learn to manage this new asset – all this information about their business. Many businesses are data rich and information poor so connecting the dots in the business is the first thing they need to address. That came through in the survey,” he says.
Performance review processes are seen as an HR responsibility, but Jackson says this is not the way forward.
“What we’re saying is that this is fundamental to the bottom line of the business, so it needs to be taken wider across the company.
Unwilling to identify specific companies, Jackson says the telco and banking sectors are good examples of corporate performance management theory in practice.
“They’ve got detailed information about customer behaviour embedded in their systems which they can use to make quite powerful observations. And we see significant moves around the practice of predictive modelling, so they are examples of using the data to drive innovation in the way they link to their customers.”
Jackson says increasing CPM awareness is driven partly by demand for increased accountability from shareholders, but also by companies grasping the importance of productivity.
“Everyone has to look at their bottom line growth and being able to measure performance around your business is key tool in driving that,” he says.
“And I wouldn’t discount the importance of being able to maintain the confidence of investors. Institutions, and the investing public, are becoming less tolerant of surprises, particularly negative ones, in earnings. The market is becoming more sensitive. The extent to which companies can predict the future, and better deliver on those results, means they retain investor confidence.”
The survey, which Jackson says works in parallel with triple bottom line reporting, will be repeated in 18 to 24 months.
Level 1
vast quantities of data but used to measure performance, not to manage it.
Level 2
able to provide information more efficiently but still lacking in deep insight.
Level 3
providing business-wide view with focus on proactively managing performance.
Level 4
transforming insight into wisdom and targeting the new value creation.
