I had the pleasure this morning of moderating a panel discussion on the topic of Rethinking Performance Management. The event was hosted by the CFO Leadership Council as part of their monthly meeting of finance executives. Based on today’s large attendance numbers, the topic of performance management is clearly top of mind for many CFOs. The three other panel members came from diverse backgrounds and included a CFO, a CEO and an HR leader.
I would like to share some of the key topics and themes we explored during our discussion and Q&A with the audience.
Role of the CFO Continues to Change
It is clear that today’s CFO is no longer expected to just have fiduciary responsibility for delivering financial projections and reporting based on sound accounting principles. Rather, CFOs are being asked to be true business leaders for their organizations - partners in setting strategy and being catalysts for change. A fundamental element to success is re-examining the information systems and processes you are sharing with stakeholders within your business. Producing an annual budget and monthly actuals vs. budget variance analysis on standard financials (such as revenues, EBITDA, etc) is no longer considered a complete approach to corporate performance management (CPM). Today CPM entails a holistic approach to the business and includes not only financial metrics but also operations, employee satisfaction, and customer success. Key to fulfilling these expanded responsibilities is having the CPM systems and processes that enable this approach.
Align Strategy, Objectives and Measures
It’s surprising how many companies have a disconnect between the three or four key strategic objectives for the year and how they run their budget process. This is primarily addressed by having the relevant stakeholders inside an organization understand how their actions, budgets, and financial resources impact strategy. As such, getting strategic alignment can involve a cultural shift as it requires increased inclusion and accountability. It also includes having the appropriate metrics to measure the effectiveness of tactical activities against strategy. For example, if there are any net new hires, capital purchases, or other financial objectives tracked as KPIs, the relevant stakeholder should be able to say, “That change in this line item is related to this activity, which is a tactic to achieve the following strategic result we wish to achieve.” If you have that inclusive process and can demonstrate the linkage between spend and desired outcome, then you have strategic alignment.
CPM is an Iterative Process
Panelist Ralph Fargnoli, CEO of Beacon Partners, made a number of insightful points about CPM. In particular, he believes that achieving alignment between strategy and corporate performance objectives requires a continual evaluation of your plan with periodic adjustments. Panelist Steve Wasserman, CFO of InfoBionic, took this even further with a full endorsement of rolling forecasts as critical to the usefulness of planning and aligning budgets, metrics and strategy. As a firm, we at Carlson Management Consulting agree that CPM requires an iterative approach and that a continuous ‘cycle-vs- annual plan’ approach is the best way to ensure the usefulness and validity of your reporting and analysis.
Define the Right Metrics
|Ethan Carlson diving into CPM topics with the executive panel.|
There was a lot of discussion about metrics - which ones matter and what are the implications of choosing the wrong ones. One panelist gave some great examples of how tracking the wrong metrics can lead to people gaming the system to meet metrics that don’t matter. It was also mentioned that too much data can lead to “analysis paralysis”. During the Q&A with the audience, the question of how to select the right metrics was further explored and the entire panel agreed that a phased approach where you focus on getting consensus on a few key metrics first is the way to begin a performance management initiative .
Take a Holistic View of your Business
It came up frequently throughout the discussion that just looking at financials is not CPM. To be successful you need to make sure you are getting full view of your business including looking at metrics like employee engagement, customer retention, turn-over rates and many other non-financial metrics. This necessitates working with other areas of the business to get the data and incorporate in your CPM system. The bottom line from the panel was to take the time to get a full picture of your business.
Understand the Alignment of Incentives and Performance Management
There was some debate among the panel as to the importance of aligning pay to employee performance in influencing employee behavior and productivity. Panelist Ed Hurley-Wales, VP of Market Diversity and Inclusion at ADP, made some great points about making sure you really understand what motivates your employees. He also noted that with changes in generational attitudes, what worked for the baby-boomer generation may not work for millennials. For example, the issue of corporate responsibility may be more of a driving influence on employee satisfaction than compensation. Overall, it was agreed that clear objectives and regular engagement were key to driving maximum employee performance.
Technology as an Enabler
Today, more than ever, the office of the CFO is benefiting from advancements in Cloud technology. For those CFOs who have yet to embrace a performance management approach, cloud technology is the great enabler. There is a reason that leading companies embrace Cloud software – it creates competitive advantage. Finance leaders have been slow to adopt Cloud solutions for a variety of reasons but recent surveys indicate that 80% of CFOs see Cloud solutions as contributing to their companies’ long-term success. The Cloud has made it possible for organizations of all sizes to implement CPM systems. Previously, this type of enterprise technology was reserved only for the largest companies with significant IT budgets. By making the investment and integrating with other core technology infrastructure, finance teams work with a unified data set and spend less time on administrative tasks such as copying and pasting data or assembling reports. They can reallocate their time on value-added analysis and decision-making and, once again, focus on executing company strategy.
The Culture Shift
As finance leaders, we have been accustomed to having full ownership of processes like the budget from input to analysis. None of our colleagues outside of finance touched our models yet we held them accountable to meet the projected targets we established. Now there is a shift towards transparency and inclusiveness as CPM culture takes greater hold. The ideal approach now has finance operating as the quarterback of CPM activities such as forecasting but directly engaging as broad a set of participants as possible. This gives organizations the ability to truly align strategy to budgets, and include all the relevant stakeholders in the process for the most meaningful results.
As illustrated in today’s panel discussion, performance management has expanded outside the realm of pure finance to touch all areas of the business. As testament to the fact that CPM is a cross functional exercise, one need merely look at the diversity of our panel. As CPM systems continue to evolve and add new capabilities, we will see performance management increasingly take center stage as organizations seek to cultivate a culture of high performance and accountability.