Changing Of The Guard

New Analytic Approaches Can Help Business Leaders Reach Financial Goals and Objectives

By Mark Smith

Executive Summary

Mark Smith The CFO is under increasing pressure to meet shareholder expectations. In response, business intelligence technology - which has already augmented the value and efficacy of transactional systems, supply chain management, and front-office applications - is cropping up in new software that is fomenting dramatic change in financial management.

The fundamental business processes of financial operations are well established. But in the last few years, business operations have grown exponentially from these fundamentals. They have become so complex that they seriously hinder the CFO's ability to meet shareholder expectations.

The consequences, along with a lack of visibility into organizational performance and new economic conditions, have been missed earnings announcements. These missed earnings have led to last-minute layoffs, organizational restructuring, and operational expenditure freezes.

This situation is of course a rapid reversal to the last five years of great prosperity. The tightening economy has revealed that most organizations' abilities are primitive. Rather than taking financial control of their operations and efficiently managing the business day-to-day, they react at the last minute when they realize the financials are not going to meet earnings forecasts.

Rapid evolution of markets in the last five years, accelerated by the Internet, has greatly complicated the dynamic business processes for which the financial organization is held accountable. For example, new automated supply chains, shifting customer relationships, and new electronic marketplaces complicate management in our global, 2437 business environment.

On top of these difficulties, the Internet-enabled proliferation of information available both inside and outside of the enterprise has added significant pressure to meet profitability goals and associated financial earnings targets.

Fire Prevention

How does finance move from its traditional role - accounting and fiscal management - to proactively managing the financial health of the company? To reduce the time spent "putting out fires," reacting in panic and using the phone and email to negotiate solutions, finance needs to automate the interaction between people and business processes and give people the information they need to make good decisions. This goal has posed a formidable challenge until recently: Advancements in information architectures, software technology, and application solutions are now more readily available to assist finance and the entire enterprise.

To give finance its necessary speed and agility requires a new set of performance management applications. (See the sidebar, "The Bottom Line," page 38, for a definition.) Systems that optimize the financial management processes are only the first step. New financial systems need to better align with organizational business processes. These systems need the right mixture of operational and analytic functionality along with strong collaboration capabilities. These needs are spawning a new class of financial performance management systems that ultimately better equip the business to meet shareholder expectations.

The finance organization must strive for the three key goals of performance management: enabling visibility, optimizing performance, and maximizing assets. (See the sidebar, "Objectives for Success.") Although finance has the primary responsibility, the entire organization must work together because financial systems hold many of the metrics that define success and that must be integrated into systems throughout the company. (See Figure 1.)

Financial Performance Management

This quick historical recap brings us to the current environment, where businesses demand financial systems that optimize and manage financially related business processes and the finance organization. These critical "financial performance management" systems are evolving to a packaged, standardized state reminiscent of the financial operational systems of the 1990s.

This development means that fiscal budgeting, financial planning, analysis, reporting, and consolidation join together on an integrated platform and somewhat automated management of financial performance. Such packaging fulfills a dire need to streamline the financial closing process, simulate and perform scenario planning, and manage financial performance.

The last few years have yielded integrated offerings from such vendors as Cartesis, Cognos Inc., Comshare Inc., FRx Software Corp., Hyperion Solutions Corp., Longview Solutions, SAS Institute Inc., and SRC Software.

These financial performance management suites are not all created equal. They vary in capability and architecture. But they all help optimize the financial business processes and organization operations.

Also, each of them absolutely requires a platform that you can extend by building custom applications that meet your changing business needs. Comshare includes this platform by complementing Comshare MPC (management planning and control) with Comshare Decision. Hyperion accomplishes the same end with its Financial Management application and development tools. The larger ERP providers (Oracle, PeopleSoft, and SAP) have begun to leverage their enterprise data warehouse offering as the platform for building out a more complete suite of financial performance management applications.

New Extensions and Applications

Extending the reach of financial processes outside the finance organization is imperative. One key capability that is still maturing in most of these suites is distributed budgeting and planning that can provide the immediate integration of this information from across the entire enterprise. Adaytum Software Inc. raised the bar in 1999 by introducing a distributed, Web-based planning capability that is now required functionality in all financial performance management suites.

In addition, the industry veterans at OutlookSoft Corp. have introduced Web-based planning and analysis in a collaborative portal environment to further optimize the planning process.

Gaps in these systems have led to a new class of applications that bring innovation and a new level of optimization to financial processes. These applications focus on two areas:

• Providing a deeper and systematic analysis of financial processes and their associated value
• Aligning financially oriented tasks along business processes throughout an entire organization.

The first class of applications focuses on providing the ability to measure, monitor, and take action on tangible and intangible assets in an organization. Stern Stewart & Co.'s "Economic Value Added" (EVA) model, which Hyperion recently agreed to incorporate, supports these tasks. Cash flow return on investment (CFROI), from Holt Value Associates LP, is another approach to determining the value of a corporation and how to manage investments. (See Resources.)

SAP has invested in creating a broader set of application offerings related to finance and value-based management. Value-based management is the methodology that enables companies to measure, monitor, and manage business value, which may be intangible but has a direct correlation to financial earnings. SAP recently introduced the Corporate Finance Management application suite for cash flow, portfolio, risk, and treasury management. This suite complements SAP's financial operations and performance management offering and provides additional analytics for performance management applications targeted at value-based management.

The second application class lets finance align applications to the business as a continuous process of collecting, monitoring, and driving action in the organization based on an understanding of the organization's financial responsibilities. This objective requires a mixture of near-realtime operational interaction with business units and individuals, along with analysis of historical information to spur action in the organization. These applications improve the connection between actions and financial goals.

One clear example of this application type is from ClosedLoop Solutions Inc., which provides a set of "dynamic financial control" applications (TopLine Manager, SpendCap Manager, and BizPlan Manager). Its applications enable individuals across the business to manage their financials and make required changes to operational behavior, whether voluntary or mandated by corporate finance. This near-realtime "closed loop" connection between finance and business managers resultes in tighter financial control throughout the enterprise.

Moving toward a financial performance management suite and supporting platform is absolutely critical to optimizing the financial processes and is the centerpiece of a sound financial management framework. (See Figure 2.) It's also the first step toward meeting the goals of performance management highlighted earlier. Many of the current providers need a lot of improvement in the areas of application usability, distributed architectures, and integration with financial operational management systems.

Toward Financial Enterprise Management

To streamline business processes and optimize performance, it is critical to integrate the financial operations and financial performance management systems into the enterprise framework to build both business and information value chains. Business value chains are those systems that provide efficiencies across business processes - not organizational boundaries. Information value chains provide a path for information to flow along those business value chains and mature to provide insight and visibility to anyone involved.

Building a continuous set of value chains will help ensure that the business can reap value from its investment in existing applications. But more important, it will ensure optimized performance throughout the organization. To realize this goal, you have to begin by building a process to leverage financial metrics as more than just reference: as part of the enterprise information framework.

Using financial metrics to conduct financial enterprise management ensures that all business processes and organizational units base their decisions on fact rather than fiction. True optimization of business processes will require new levels of collaboration and workflow that bind decisions to organizational strategy. That optimization gives you the financial efficiencies you need for success.

Financial enterprise management, like enterprise performance management (EPM), consists of methodologies and applications that help you optimize results - but is specifically geared to the finance organization.

There are many ways to instantiate financial enterprise management, but one of the most visible is the balanced scorecard application, which uses Norton and Kaplan's methodology. Norton and Kaplan's "financial perspective" advocates use of financial metrics to align business strategy with operational execution. The integration of business metrics from across the enterprise into balanced scorecard or EPM implementations is typically one of the larger technical challenges a company faces.

Many financial performance management and EPM vendors are beginning to offer application-level integration. The major ERP providers (Oracle, PeopleSoft, and SAP) have EPM offerings that now provide integration from their financial operations management systems to inject financial metrics into their EPM offerings. DecisionPoint Applications Inc. and Informatica Corp. are building out information management platforms through their EPM offerings that integrate financial metrics as part of the ability to measure overall enterprise performance. SAS, on the other hand, has made its financial performance management offering, Total Financial Management, directly integrated with its balanced scorecard offering, Strategic Vision, easing the information integration challenges.

A Group Effort

The finance organization has been too hobbled by insufficient information about organizational activities and business processes to determine the best course of action in time. Yet the CFO has had to move from an operational function to a strategic management function. Therefore, the CFO and finance organization must be able to gain immediate insight into existing business operations and control and coordinate business activities that influence financial performance.

Although finance must participate more actively in the business strategy, it cannot make the necessary changes on its own. All the organizational groups, including IT and the various business units, should be held to benchmarks and financial metrics to optimize performance companywide. Just as customer relationship and supply chain management systems must interact to meet customer and profitability goals, financial management systems are the critical core to overall business performance and ability to deliver shareholder value.

Mark Smith, [mark.smith@fullcirclestrategies.com], is principal and founder of Full Circle Strategies and an expert in the applied use of information and analytics in the areas of business intelligence, portals, and analytic applications.