The Art of Finance
Long before the advent of the term corporate performance management (CPM) — an
umbrella
term that describes methodologies to monitor and manage an enterprises business
performance — there were processes in place to create an environment of
enterprise awareness and control.
However, economic globalization added complexity to this already aggressive challenge with an enterprise conducting business around the clock and around the world with multiple currencies, languages, and business rules, all of which are increasingly dynamic. The business boom of the 1990s found many companies struggling to achieve the basic foundation of control, or truth, thereby eroding the value and viability of perceived opportunities. That raised the risk on what they dared, and ultimately diminished the value of the companies as they overspent. And that shook shareholder confidence.
Today, a growing number of large global companies rely on CPM solutions to control the processes that make it possible to achieve success. The Aberdeen Group projects that CPM-related spending will approach $5 billion by 2005. CPM provides the essential reporting tools needed by executives to know which areas of their company are performing well, to track business trends, and to know what opportunities to pursue.
With the effective implementation of CPM as an essential competitive enterprise advantage, the issue of control or truth can be resolved. However, an interesting debate emerges. The 80/20 rule, which has been applied to everything from the philosophy of life to finance, says 80 percent of finances time is spent on control and producing the truth and 20 percent is spent on its opportunities. That just isnt a competitive reality within a CPM-based enterprise. Whats the new ratio? The new ratio of control to opportunity, suited for todays business environment, is 20/80.
Corporate culture and industry sector will undoubtedly impact the mix. But there is one certainty in relation to weighing control against opportunity: igniting the power of finance and the enterprise begins with the quality of your numbers — the precise detail of your data and your ability to generate them quickly within the 20 percent. To dare to attack opportunity from a position other than absolute financial truth is perilous and risk-laden.
Control Supports Opportunity
In his book Its Not About the Bike, Lance Armstrong talks about the importance of making tactical, well-informed decisions at a moments notice. To accomplish the goal of victory, Armstrong built his personal structure to a point of maximum strength well before the race. Armstrong doesnt just seize opportunity, he attacks it. But it is only through teamwork and endless preparation that he can create the separation from his competition.
At a corporate level, controlled fiscal policy provides the foundation and freedom to take similar risks: to shift direction when needed; to dare to take advantage of an opportunity; to separate from the competition before they can react.
In the case of one high-tech manufacturer, opportunity spawned when it was acquired by a large, global company. With the right controls in place, the acquired company, now positioned with the capital to take advantage of opportunity, grew through its own acquisitions from two locations and 2,500 employees to more than 40 locations and 40,000 employees worldwide within two years.
Using a scalable CPM application, the high-tech firm consolidated and easily converted its financial information and other data using a single integrated solution. Finance overtime was reduced, and newly acquired companies using different accounting application software were easily integrated. With control in place, this high-tech diamond in the rough realized its full potential by being ready to seize opportunity when opportunity was presented. It used CPM to flip the ratio to its advantage.
Control and Credibility
What results when the control-to-opportunity ratio is out of proportion? An answer can be found by analyzing the financial boom of the 1990s, which ended, in part, because companies under-invested in the need for control and put 100 percent of their effort into opportunity without the truth. In a post-Enron business environment, companies face new regulations such as the Sarbanes-Oxley Act, which mandates quicker filing deadlines. Companies are also striving to regain or enhance their credibility with various stakeholders, including investors, customers, partners, and employees.
While there are obvious differences between Armstrongs competitive philosophy and strategic finance, there is also a common thread: there are no shortcuts to the amount of discipline, preparation, and teamwork that is required to succeed. Discipline and control create a level of freedom and the reserves necessary for seizing a goal.
CPM delivers corporate information to executives and enables current accurate information to be exposed far and wide across an enterprise with great speed. In many cases, corporations rely on siloed software to handle one function that is otherwise useless when applied to another key area of the company. Software used for budgeting wont work for public reporting; software designed to manage cost structuring is ineffective when applied to manage the demand planning side of the business. A good CPM solution bridges the entireegic process.
Leading multinationals turn to CPM solutions to tie initiatives to strategic objectives, thus closely monitoring and controlling activities critical to achieving their business goals. CPM enables executives, managers, and employees to measure progress, track vital business trends, and focus on areas of great opportunity.
Blending Discipline and Freedom
An executive can put the right values in place and instill the right qualities. But there is also a need to loosen control without losing control. Allowing flexibility leads to creativity, passion, energy, and organizational speed.
For example, an executive in the U.S. telling a division in London or a group in Australia how to run their business poses a threat to success. But having the right structures and models in place, and allowing those divisions to be part of the process while also retaining their own unique approach to business, leads to an impassioned organization that is not fighting the system.
Conversely, corporate self-help approaches to success such as Six Sigma, a discipline that follows a very rigid process to attain a goal of near perfection, may promise lofty goals. But they can also impose bureaucracy. And when it comes to strategic finance, attaining zero mistakes is impossible. But those mistakes are greatly reduced when the necessary information is exposed across the company and trusted with the entire enterprise. The whole is greater than the silos.
Competitive Advantage
A major distraction within a company is noise, that nonproductive tendency to argue about what constitutes the right information, the truth. The goal in strategic finance is to provide the enterprise with the most accurate information. It requires meeting generally accepted accounting principles. And its based on trust. CFOs put enormous energy into making sure the information gathered is correct before they share it with the executives and board members, which can eliminate the noise.
Getting the right information quickly enables the enterprise to:
- React before the competition;
- Make the right acquisition;
- Determine whether to enter a new market;
- Analyze the success of a new product launch or a strategic redirect;
- Be flexible about shifting the manufacturing process; and
- Attack its opportunities.
Financial Architecture
Having a strong financial architecture in place is important for any company. There is a need to report information in a common, understandable, transparent way so that executives can really understand the performance of the company and also look to the future to fulfill their vision.
A corporation with the right control infrastructure in place is able to turn its attention to the added value of the art of finance: evaluating cash management strategies and tax strategies, how to improve the bottom line, use assets more effectively, and not get lost in the whole control process. Done effectively, the enterprise can spend more time on the opportunity side of the control/opportunity equation.
New World, New Rule
Business and economic pundits claim the new ratio for the new business world is now a magic blend of 20/80, with 20 percent of effort applied to control by having the right tools, technology, and processes in place, and the remaining 80 percent focused on opportunity. Initially, a company may need to focus nearly all of its effort on developing the right control processes and implementing the right infrastructure. Invest well and attention can shift to focus on opportunity.
The 20-80 rule ensures companies will avoid some of the reporting and accounting scandals that rocked the business world in recent years, while experiencing competitive growth. It involves teamwork and a financial truth and trust that place even more responsibility on a CFO. Its a business version of Lance Armstrongs approach to competitive cycling.
Not to be underestimated is the value of the right CPM application with the ability to address a number of different business issues in a company. It has to provide CFOs with the confidence that the strategic financial data being provided to a CEO is the most current, is accurate, has been validated, and meets all statutory reporting requirements. It is the underlying foundation of an enterprise.
The way to achieve this is by having the tools in place that make it possible to attain the right balance of control and opportunity. Once a company is able to gather financial data quickly and accurately and has expenditures under control, it can attack its opportunities and create separation from the competition.
