A good performance management framework should align corporate vision and strategy with business and departmental objectives. As the global economy rebounds and companies begin to migrate from survival and sustaining mind-sets to one appropriate to growth, now is a good time for finance leaders to re-evaluate their finance function strategies and set their future plan.
A key component in this process is linking the finance strategy to the performance management function.
A well thought-out and executed performance management function begins with understanding the strategic plan for the organization as a whole and its impact on the finance function. While different companies use different frameworks to define their strategy, every strategy addresses the following elements:
For the finance function to have an impact and support the overall company strategy, the finance function needs to have its own vision, strategy, set of critical success factors and key performance indicators. In developing your key performance indicators, make sure you are balanced between leading and lagging indicators.
Once the finance function strategy is set, finance function team members need to set their goals against this strategy. Goal setting at the business area, department or individual level should encompass objectives or measures for results (what actions or outputs need to be produced) and skills/behaviors (how actions are to be performed).
From the perspective of an effective performance management system, measures and targets should be SMART:
- Specific: easily understood and agreed upon by managers and staff
- Measurable: able to be quantified and updated regularly
- Actionable: within the control of the business area/individual
- Realistic: be achievable
- Time-bound: i.e., within a certain time period
In addition, goals should balance financial and non-financial measures, and should link the strategic to the operational.
There are a few areas in the strategic development and goal-setting process that are specific to finance.
Organization. The primary goal for most finance functions at public companies is to align the finance function under the CFO, whose primary responsibilities are financial statement production and audit support, with secondary responsibilities being financial management support.
The organization should be measured on the drive toward common accounting policies, common accounting processes used across the business, and providing better insight into corporate performance through management reporting.
For global companies, the goal of consolidating the number of support functions and centralizing them in one cost-effective location would be appropriate. This will help to save costs, improve efficiency, standardize processes, and enforce internal control.
Measurement. Production of accurate and auditable financial statements is key. The finance function should have goals around driving common data standards through the use of a common chart of accounts, and common financial management measures.
Process. Goals here should be to improve operational KPIs in the key functional areas:
- accounts payable
- accounts receivable
- consolidation and reporting
- fixed assets
The key is to develop a list of KPIs specific to each area, to review 3-5 year operational data with the end of developing insight into trends, and to develop initiatives to improve financial management measures.
Controls. Key measures should exist around the control environment through the annual SOX certification process for public companies. If warranted, measures around the updating of internal control documentation should be developed. Controls-related measures should also include the number of controls automated and the number of controls moved from focusing on detection to preventive.
Technology. For most companies, improvement can be made without the implementation of new technology.
However, if the introduction or enhancement of technology is required, formal portfolio and project management measures should be used, such as # of projects supporting the corporate vision, # of projects on-time and on-budget, and so on. Other measures, in conjunction with the other areas above, can measure the amount of technology-enablement that will occur in the next year: # of A/P invoices accepted electronically and so forth.
Why Do Measurement Efforts Fail?
Peter Drucker famously said that “if you can’t measure it, you can’t manage it.” The corollary to that is: “You get what you measure.” In order to develop into a leading finance function, the importance of measurable goals at the group and individual level cannot be over-emphasized.
- There are several reasons why organizations fail to deliver, which CFOs have to be on the lookout for. These include:
- Lack of alignment with strategic business objectives
- Dependence on lagging, not leading, indicators
- Poor integration with other information (internal and external)
- Heavy reliance on financial measures
About the Author
Jonathan Collins writes the blog CFO Newsletter, where this article first appeared. He is a senior manager for KPMG China in Hong Kong. Combining a passion for finance and accounting, an enthusiasm for business improvement and deep experience in technology, Jonathan specializes in turnaround and improvement efforts for CFOs and CIOs. He can be reached at [email protected].