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Today’s CFO must step up and command an evolving leadership position in developing, managing, and measuring the company’s information management strategy. The CFO, and not just the CIO, is becoming a central figure for information management as the accountability of the finance organization is increasing.

Introduction

“If you don’t know where you’re going, you’ll end up somewhere else.”

— Alfred Adler, Austrian Physicist

If performance is the measure of corporate success and information is critical to its attainment, the CFO’s role will need once more to evolve. Knowledge is the currency of today. Look at the billions of dollars changing hands every day in the stock market because of a simple balance (or imbalance) of knowledge. The difference between the savvy investor and the sorry investor is a thin line of knowledge, which is in turn generated from information.

A similar scenario can be painted for business today. Many organizations have sound business strategies in place, but what separates the strong from the weak? To execute strategies properly an organization must know the paths to success versus the paths to destruction. Illuminating these separate paths is the basic concept of knowledge.

But where does knowledge come from and who assumes responsibility for it? Knowledge comes from information – business data that is being generated today at a magnitude never seen before. The CFO is at its epicenter. Every single activity, event, and transaction that occurs in a company is eventually recorded, recognized, and reported in a financial statement. Moreover market, regulatory, and organizational forces are driving the finance organization to accept greater accountability and responsibility for information management, inside and outside the company.

Some of the CFO’s many roles have included: chief accounting officer, chief risk officer, chief investment officer, and chief performance officer. Given these numerous, encompassing roles and responsibilities, the CFO must be completely comfortable, knowledgeable, and conversant to the company’s business information. Consequently, today’s CFO must be prepared to step up and command a leadership position in developing, managing, and measuring the company’s information management strategy.

So why is the CFO, and not just the CIO, a central figure for information management? First, the accountability and responsibility of the finance leader is increasing. The CFO and often the top lieutenants in the finance organization are directly in the line of fire for the accuracy of financial reports. Secondly, finance is truly an independent, analytical observer of the operation of the business. This quasiconsultative role empowers finance to view the business objectively and to suggest and mediate the best course of action among conflicting agendas within the organization. For example, sales and marketing traditionally have a top-line focus, purchasing and production often have a bottom-line focus, but finance must be focused on sustaining both growth and profitability. Finally, the tremendous analytical skills and healthy dose of skepticism possessed by most financial professionals enables finance to translate raw data into information that is usable within the business operations.

Finance is traditionally the first place where key IT initiatives are deployed, going back to the influx of enterprise resource planning (ERP) systems implemented during the course of the last 10 years. Many CFOs of today have earned their technology stripes translating business requirements into advanced software systems. Furthermore, finance has a long-standing and strident role in measuring financial performance, ever since the initial concept of bookkeeping began. These traditional financial models, which represent the original performance management model, have made way for more advanced and sophisticated methods for measuring not just financial performance, but overall business performance throughout the enterprise. In a recent study conducted by CFO Research Services, CFOs said they’re spending more time on technology matters than ever before and are expecting to spend nearly one-fifth of their time on technology matters in the years ahead.¹

The CFO as the CIO

The Situation Today

According to a recent study entitled, “What CEOs Want From Their CFOs,” prepared by CFO Research Services, strategic planning and performance management are at the top of the CEO’s wish list of priorities for the CFO.² Ultimately, per the study, the CFO must help the CEO use technology to achieve “best practice” in as many business processes as possible.

However, today’s financial manager faces a number of realities in business today: market, regulatory, and organizational, to name a few. Market realities for companies include a heightened need for better business performance, either through identifying areas to streamline the business or in identifying opportunities for value creation.

Regulatory realities for finance focus much on external financial reporting; however, the same principles and mechanisms apply to internal management reporting. For example, the need to report financial results quicker and in a more comprehensive, detailed fashion translates to basic business performance needs as well. Operations managers need up-to-the-moment information that impacts the business today, not just 12 months from now.

Finally, in terms of organizational realities, finance is thrust in the middle of the information management process. Think of finance as a funnel in which data from across the enterprise is collected from daily business operations and distilled into meaningful nuggets of information. These nuggets are then passed back to business operations management to incorporate into operational strategy and tactics when dealing with external partners, such as customers and suppliers.

An Evolving Role

As illustrated in Figure 1, the finance function is evolving from an agenda that is focused on being a “guard of the assets” to one that is aimed at being a “guard of the economics.” Specifically, on the agendas of many of today’s CFOs are the following initiatives:

• Identify opportunities for capital utilization
• Support the business in decision-making
• Reduce the costs of finance and overall business operations
• Streamline collaboration with partners (customers and suppliers)
• Identify and manage risks

Many of these initiatives are aligned directly with performance measurement and performance management, either in identifying opportunities or minimizing risks – financial and otherwise.

Information Defined

What is “information”? What may seem like a pedestrian question must be answered precisely for that reason. Is information data? Is it knowledge? Is it the summarization of transactions? Is it a financial report? Too many of us take information for granted. Catch phases heard in the corporate workplace today include: “I need information, not data;”  “I’ve got too much information, but not enough knowledge;” and “transform information into insight.”

Regardless of who has the ultimate responsibility for corporate information management, the focus should be on the business, not the technology. Too often, the chief information officer title is synonymous with technology. Precisely to the point, the title isn’t chief technology officer, it’s chief information officer; too often the ‘I’ is simply translated to mean technology, which is often an indicator of disjointed business operations and execution.

Much like we, as human beings, interact in the world, business information is all around us and must be acted upon accordingly. Information is not the end result, but rather a mechanism to enable organizations to reach their goals. Simply reviewing financial data is like waiting until the ball is in the catcher’s mitt to determine whether a pitch was good enough to hit. Financial metrics, such as sales revenue, operating margins, profitability, etc., only prove to the business what many already know. However, managing the operational, leading indicators, can be quite helpful to managing business performance – it provides information about the pitch while it’s still in the air.

Case in point: Today, most companies are in a position to estimate revenue one quarter out simply based on sales pipeline as a leading indicator. However, how many organizations are using commonly available information, such as inbound and outbound sales call volume, to gain insight into future pipeline and revenue? Such an indicator can provide insight into future financial performance long before traditional metrics. Financial managers should not be blind to these and other operational measures.

What it Means

The Big Three: Integrating Strategy, Finance, and Technology

To succeed in integrating strategy and people with technology, we must first recognize the relationship and interdependencies of business strategy, finance, and technology. Although there are some businesses with solely altruistic motives, most for-profit businesses are established with a clear financial purpose in mind: to generate profits and cash. Therefore, this base fiscal strategy will drive the business strategy. In turn, the business strategy will subsequently drive the information management (technology) strategy.

From a performance management perspective, organizations must translate this requirement into integrated strategic, operational, and financial planning. But how do financial managers accomplish this?

Leaders in business performance management recommend establishing a closed-loop, end-to-end performance measurement and management system that empowers finance to plan, measure, analyze, and, most importantly, act.

Measuring financial corporate performance sometimes can be an imprecise discipline, but any system should focus on the true drivers of growth and return on investment (ROI). Companies should start with a simple, directionally correct measurement with figures from standard financial statements, as those are typically more useful than complex, theoretically correct systems. Further, companies should use only one system and language for budgeting, performance measurement, capital budgeting, and incentive compensation to avoid sending conflicting signals to managers.

Empowering Employees

Financial processes, key figures, cost management reports, and financial statements traditionally make up the substantial body of information upon which companies base their business decisions. These elements have substantial informational content and are relevant to a wide range of people within an organization. However, many organizations are now favoring business models that enable and empower the business line manager directly, thus thrusting decision-making powers onto individual employees. Consequently, there is a growing need for efficient information systems, applications, and services that are quick to learn and easy to operate.

As a result, today’s employees have to deal with unprecedented volumes of information.

Yet, they are often expected to make their decisions in double-quick time as well. Against this background, it is essential for data to be accessible to a large circle of users within a company in a straightforward, no-nonsense format.

The Process of Managing by Insight, Not Instinct

Finance needs to drive the discipline of management through performance measurement; a practice not widely adhered to. In fact, many organizations could benefit by employing a fact-based approach to business performance management. As an analogy, think of the manner in which a scientist operates. She first forms a hypothesis, from which she plans an experiment to test the hypothesis. Once planned, the experiment is conducted, observations and results are recorded, and analysis is performed comparing actual results to the expected outcomes of the hypothesis. Finally, assuming that our scientist isn’t perfect on the first try, she will affirm or adjust the hypothesis, retest, remeasure, reanalyze, and act upon the outcome.

This iterative approach employed by scientists enables them to narrow the reasons for success and identify reasons for failure through the process of elimination. This is exactly the approach taken by Steven John, vice president of strategic finance for Avnet, a global distributor in the electronics industry. According to Mr. John, “Great strategy is not that rare; great strategy is fairly common. However, what really matters is execution. And the key to sound performance management is to test your assumptions quickly.”

Similarly in business, such a fact-based approach to performance measurement and management could produce results that are superior to those achieved through the undisciplined, highly subjective methods in place today. Analogously, the CFO can take the business strategy, create a financial and operating plan, monitor business execution, record and measure business results, compare and analyze results to plan, and further refine business strategy or operations to confirm or adjust overall corporate goals. With some discipline and perseverance, perhaps today’s financial manager will discover the breakthrough strategy to boost corporate performance. This is where finance needs to step up and lead the business performance management process.

Additionally, many organizations do not dig down to the cause of business performance. For example, a gap in sales revenue targets could be the result of a number of separate and distinct issues, such as:

• Pricing pressures in the market resulting in lower prices
• Lower market demand
• Not enough salespeople to meet sales quotas
• Competitors gaining market share through superior products or superior marketing
• Delays in product releases or availability, slowing new orders
• Currency fluctuations if operating in a global economy

In this case, how could any organization react to seeing a simple shortfall in sales on an income statement without further drilling down to the root cause? Each of these distinct scenarios would impact different organizations in the company, whether in sales, manufacturing, product development, marketing, or finance. In short, a proper business performance management system makes the results actionable both in plan and practice.

This is only achieved through a closed-loop business performance management (BPM) solution, that not only integrates the information, but integrates people and processes as well so companies can plan, measure, analyze, and act.

Becoming an Information Architect

Delivering on the Promise of Information

Yes, finance must concentrate more closely on accounting control and financial compliance, which are simply necessary elements of the finance function. However, to truly make a difference and add or create value for the company, finance must lead the efforts in adopting and implementing a corporate business performance management system.

To achieve this, finance must go beyond simply generating last year’s report with this year’s numbers and employ the analytical skills to enable better decision-making in the company. Therefore, think of finance as a tool to enact better performance measurement and management. Think of finance as the information architect and statistician in the business, essentially laying out decision options for business managers across the enterprise.

Much like a baseball coach analyzes batters’ hitting tendencies, finance must “feed” the statistics to the business to make the most informed decision at the time. According to Tom Nehila, director of business planning and forecasting for Avaya, a global communications provider, finance is in a unique position to lead performance management initiatives. “My intent is to drive a process that helps Avaya see its future. We need to bring together information both from a strategic perspective and a tactical perspective so that operational managers can make the types of decisions that will help us be profitable in local and global markets.”

Employing this approach enables Avaya’s business managers to execute fact-based, not fiction-based, business strategies and plans. This is a wonderful example of how finance is leading the planning to performance management cycle. Mr. Nehila adds, “Holding people accountable, having them make commitments, and understanding their commitments in the current as well as the future year is what makes me tick. It’s driving that commitment and bringing forth a set of financial and operational tools to bring it all together that makes us all successful.”

The Roadmap

So how do you get started? First of all, establish a clear set of objectives that support the overall company mission. Secondly, identify the business drivers and processes critical to achieving those objectives and squarely define the set of metrics to measure. Next, either through internal or external benchmarking, establish stretch targets for each business metric. Establishing this framework allows the corporate strategy to be pushed down to the objectives of each function, department, and employee so that everyone’s actions are “on strategy.”

On the back end, the ideal situation is to employ an integrated consolidation and scorecard system to track actual performance. Scorecards can exist at any level of the organization and can form a chain of performance metrics that link employees, departments, and divisions not only to each other, but also to the corporate strategy. This enables executive management to better understand the root causes of performance as well.

• Additionally, keep the following factors in mind, for even better results:
• Balance the measures between nonfinancial and financial, leading and lagging, and externally- versus internally-facing measures.
• Align strategy to action through causal objectives and measures, and focus on those that are critical to business success.
• Look beyond traditional budgeting and financial reporting techniques.
• Promulgate not only the definition of the metrics, but the measurement results as well.
• Create a closed-loop performance management environment: planning, measuring, analyzing, and acting.
• Use the performance measurements as a facilitator for discussion and not as the final result.

Conclusion

This paper is not meant to suggest that all CFOs should go out and assume the CIO’s job. Rather, the argument is that the function of information management as it relates to making business decisions and reporting information (externally and internally) is part and parcel to the role of finance.

Avaya’s Mr. Nehila drives the point home, “I look at the performance management process as a contract between the CEO, the operational world, and finance to determine where we need to focus to drive our company forward.”

Today’s reality offers tremendous opportunity and mandate for finance to take a leadership position to drive improved business results through better business performance. Being “tech-savvy” is not enough; financial managers must apply technology to meet business and financial goals. At the end of the day, fiscal strategy drives business strategy, which in turn drives the information strategy. 

Endnotes

¹ Goff, John, “What CFOs Really Think About Technology,” CFO.com, January 29, 2002.

² CFO Research Services, “What CEOs Want From Their CFOs,” CFO Enterprises, 2001.