Ethan Carlson, co-host of the CFO Thought Leader Podcast, tackles our questions concerning CPM strategies and the best practices organizations are adopting to advance their performance goals.
Join us as Ethan Carlson, CEO of Carlson Management Consulting, once more answers our questions to supply you with answers and a new mindset designed to help empower your finance organization to look ahead.
Corporate performance management is a hot topic, obviously, and the definition has evolved over time. Historically, the finance function viewed corporate performance management as running a budget process, running a forecast process on the financials, perhaps the P&L results of their organization and tracking variances against that. Over time, this has really shifted as the role of the CFO and the role of finance has shifted to being a more engaged role, something that’s looked to be more a leader on both strategy as well as just accountability for financial results. — Ethan Carlson
The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, co-host of CFO Thought Leader.
CFOTL The topic that we want to explore with you in this episode is corporate performance management (CPM), and it’s fair to say that CPM may mean different things to different organizations. But what do you see as sort of becoming the widely adopted notion of CPM among Carlson’s corporate accounts today?
Ethan Corporate performance management is a hot topic, obviously, and the definition has evolved over time. Historically, the finance function viewed corporate performance management as running a budget process, running a forecast process on the financials, perhaps the P&L results of their organization and tracking variances against that. Over time, this has really shifted as the role of the CFO and the role of finance has shifted to being a more engaged role, something that’s looked to be more a leader on both strategy as well as just accountability for financial results. We’re seeing more and more companies that are forward-thinking, really taking an enterprise-like focus and thinking about corporate performance management not just managing financial results, but managing a wide range of KPIs, including both financial and nonfinancial metrics. Really making sure that the financials and measures that they’re tracking align with their company strategy and that they’re doing it in a really holistic view across all elements of the business, whether financial, internal, employee growth, customer satisfaction issues, things of that nature. Really taking a much wider view of the organization. and we’re finding that organizations that do this are really delivering a lot of value to their companies.
CFOTL What is typically the catalyst for one of these initiatives, for a CPM initiative?
Ethan It’s interesting. It can take a couple of forms. Usually in some scenarios, it’s high growth. If an organization goes through a period of high growth, there’s a lot of change in their organization, old processes and approaches to challenges don’t really work anymore, and then they start to feel the pain and inefficient processes and people are really focusing their time on manual activities that don’t drive a lot of value. Sometimes it’s a compelling event, a big forecast miss or unforeseen circumstances that resulted in a downturn in business that could have been seen if they had been doing things differently but weren’t. This then prompts an organizational to look at things differently. Another catalyst is new leadership. If you are a new CFO in an organization or a new executive, oftentimes you’re going to challenge the status quo, and we find that being the new person in an organization is often the catalyst to create great change. There are those opportunities and there are other scenarios, but those tend to be the major drivers.
CFOTL When they launch one of these initiatives, what’s the goal that they’re hoping to achieve?
Ethan The overarching goal of any CPM process and initiative is to put valuable, actionable information in a timely manner into the hands of business leaders who are making key decisions. To create transparency and visibility throughout the organization for those key measures. This is the overarching theme and usually what people are looking to accomplish.
CFOTL What is it that the role technology plays here? Specifically, what do you think are the characteristics of effective performance management systems?
Ethan This is a great question because a lot of organizations, they have their aspirations toward having corporate performance management be an initiative, but they don’t have the right technology to support it. In our opinion, you need to have a focus on creating efficient systems and processes to support this initiative. We’re a big proponent of cloud-based software and purpose-built software, whether in the corporate performance management space or any system. Really, the key reason for this is that it needs to allow your business owners to control the outcome, it needs to be easily changed, it needs to be updated or able to change with your business. Usually these types of technology allow for that.
It also needs to be acceptable and easily disseminated through your organization. An application with which all you need to do is a log in to a Web page really makes it easier to create that transparency. The key, in our opinion, to any corporate performance management initiative being successful is getting that information out into the field. You have to look for that technology to be an enabler¾otherwise, you’ll end up inevitably in a place where your team is spending large amounts of time on low-value activities, aggregating information and administrating spreadsheets or whatever it may be and not on the higher-value analytics.
CFOTL If a CFO wants to lead, say, a transformational change within their organization and CPM is a central component of that, where do you suggest is a good starting point?
Ethan We take a position that the role of finance has changed and the roles of the CFO, in particular, have really changed. We think that if you’re a CFO and you want to drive this sort of initiative through your organization, the first and most important thing to do is look at how you’re leading and how you’re perceived as leading through the organization. We kind of position it in presentations we give, the evolved finance leader. A leader who looks to seek engagement throughout the organization, promote transparency and visibility of financial results. Recognizing the data and the information that his team, or her team, has is a value-add to the business. Again, leveraging technology and really understanding your company vision and being out there as a leader in the business, and not just in finance. It’s creating that reputation and availability of yourself and the finance function, and then really getting out and promoting it, and getting buy-in through your organization through showing where you’re providing that additional value is sort of the key to success.
CFOTL When they’re midstream with these initiatives and they’re trying to measure the effectiveness, how do they know if they’re doing a good job?
Ethan Another great question. I moderated a panel on corporate performance management recently, and this question came up as one of the questions asked to the panel. I am the CFO of my organization. I am tasked to measure how well everyone else is doing. How should I measure myself? There were some different perspectives on it. One was very focused on “If the organization is hitting their numbers, if you’re meeting your goals as an organization, then you’re doing your job.” This is true to some degree. The other side is whether you’re creating a culture of collaboration and visibility and all of that, and you should see that in other metrics.
Identifying those metrics can be challenging, but making sure that you talk to people throughout your organization is key. You would ask them, “How do my goals align with the organization’s goal?” If they can articulate that, then you’re doing a good job. If you’re able to look and say, “How are we doing in an iterative perspective?" ¾ corporate performance is an iterative process ¾ you say, “Okay, we aspire to be world-class, but we started somewhere, and if you look along the way, are we doing a better job than we did last month? Are we doing a better job than we did six months ago at creating actionable information and putting that information in the hands of people who can do something with it?” It can be very powerful.
I can think of one client in particular that’s been on a three-year journey through enhancing their corporate performance management in an iterative process. I would emphasize that it’s a journey and not just to an end state in that you shouldn’t be afraid to continually rethink your approach. If you’re seeing success and you’re getting better month over month or year over year, and you continue to fine-tune it, these can really be some of the most successful clients we see in delivering that value to their organizations.
CFOTL We’re trying to understand the specific efficiencies that can be gained here. If we were to look at an organization that is correctly executing a CPM solution, what would their monthly reporting cycle look like?
Ethan There are a couple of things you should look at in this area. One would be, what’s the allocation of your team’s time? Not all finance teams track time and that’s okay. I don’t think that this necessarily means that you need to be that specific, but all right, if you could ask people what percentage of your time is going to value-add analysis, versus what percent of your time is going to administrative tasks and overhead and other things? What’s that distribution? Seeing that distribution shift more and more toward analytics is very important. We think this in measuring your self-progress and the amount of time it takes to go through a financial close and the speed at which you get reporting and information out to your organization. In a perfect world, you’re talking one or two days from the close of the month to analysis and information being available in real time to the people throughout the organization who are responsible for reviewing it. Not to say that every business can close their financials in two days, but certainly a week is viewed as world-class, and anything beyond that is starting to fall off, unless you have a real specific reason is challenging.
The other thing we promote is that you’re tracking the right metrics for success. Not that you’re just trying to track 100 metrics, because no one can keep up with that volume, so that you focus in on the fixed 10 or 12 key measures of your business and you’re focusing on those with a real laser focus. If you’re a software company, you’re looking at ROI on a customer acquisition. You’re looking at your annual recurring revenue. If you’re a SaaS company, you’re looking at customer retention rates, customer satisfaction, utilization rates. If you’re a service company, turnover of employees. These metrics are really key indicators, and they vary by industry and by organization. You as a leadership team decide where the right measures are, and you focus in on those half-dozen metrics. Not trying to measure everything you do is really a key indicator of being on the right track.
CFOTL We frequently hear that employee incentives are part of these initiatives, but can you discuss a little how performance management factors in to employee incentives?
Ethan It’s really important how you link performance to corporate goals and make sure that the individual incentive plans and individual measures and success are aligned. This can take differing measures, and knowing what the workforce cares about and knowing what your employees focus on are important. The first and foremost thing in individual performance and corporate performance management is making sure that there are clear objectives, that everyone can kind of know how they contribute to the overall company success. Think about it in the context of our business. We’re a consulting organization. We pretty much measure people on a number of key metrics: the quality of their work, customer satisfaction. We track that very, very closely. What’s the quantity of the work? What’s the utilization rate? How many billable hours do they have? Then the timeliness of the work: Are they on time at go live? Cost effectiveness: What are the margins on the project? Are they effective in that regard?
Everyone knows there are those four key things and an overarching business result that define whether they’re a successful consultant. It’s balance. It’s not all margin, it’s not all financial. It takes into account quality of work and a number of things. Being very clear on that is very important. Beyond that, it’s making sure you know how to translate that into individual views of the successes themselves. This came up in that same panel I spoke of earlier, where one HR leader who was part of the panel spoke of how employee goals really changed over time, and depending on who you were talking with, depending on the generation or the age of a person, their focus on money or financial reward themselves varied, and how much they cared about the corporate mission. Knowing this and evaluating it and how you present these things to your employees are also all very important.
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