The CIMA Improving Decision Making in Organisations Forum, a group of major organisations represented by senior finance personnel, recently discussed the key decision-making processes of managing for shareholder value, performance management, risk management and analytics. The proceedings and case studies are summarised below.
Managing for value
In a survey of 300 leading companies conducted in 2003, PA Consulting found a strong positive correlation between companies that take a systematic approach to managing for shareholder value (MSV) and total shareholder returns over the period from 1997 to 2002. But PA Consulting also found that 68% of companies do not apply this discipline.
CIMA Forum members noted that applying the principles and processes of MSV generated only marginally lower returns than its full implementation – and a lot better than a no-MSV or a principles-only approach. This suggests that significantly improved performance could be achieved by recasting the key performance indicators and related processes to reflect value creation, without all the complication of a full-blown MSV programme.
Managing for shareholder value requires cultural change. In a business that is managed for value, finance/business partners provide much more than metrics. They provide a value-based framework for decision making. They share insights and help educate the business to be focused on value creation.
Having a greater understanding of the business and its potential, finance/business partners can challenge the business to accept ambitious but achievable goals. They determine how alternatives should be assessed and performance managed to optimise value. They also understand that the risks inherent in these stretching targets have to be assessed and managed if value is to be created.
Christopher Ittner and David Larcker have found that businesses find it difficult to make or validate linkages to value generation or to set the right targets to measure and reward performance correctly (Harvard Business Review, November 2003). Many businesses have a fundamental difficulty in performance management because they do not have this clear understanding of the drivers of value to be able to develop an effective balanced scorecard.
Identifying the causal connections of performance measures or strategic mapping necessary to develop effective dashboards or balanced scorecards is always a challenge. Performance management can be enhanced by embedded finance/business partners’ understanding of the drivers of strategy and value.
Their understanding of the business enables finance/business partners to challenge the business managers to deliver results in-line with the business’s actual potential. Thus budgets need not be agreed by negotiations based on last year’s figures as the starting point.
The ability to communicate an organisation’s core values and mission so as to engage employees depends on having this understanding. Tesco is widely recognised as a success story. Its ‘steering wheel’ is an example of a balanced scorecard that is a clear means of communication. It focuses attention on key drivers of the business’s success and is understood by management throughout the business.
Performance management at Tesco
Tesco’s ‘steering wheel’ is its own customised balanced scorecard. It communicates strategy-aligned goals and manages strategic performance. It monitors progress and measures success. The organisation’s core purpose – ‘to create value for our customers and to earn their lifetime loyalty’ – has been delivered on a clear and simple strategy of long-term growth.
Tesco’s steering wheel framework comprises four perspectives – people, customer, financial and operations. Demanding but achievable business targets underpin each perspective. Throughout Tesco’s retail operations, every store has its own individual steering wheel, to which all staff members’ objectives are linked, and which relate strategy to day-to-day work. At every organisational level, where the key performance indicators (KPIs) are not on track and targets are not being met, the steering wheel group investigates the reasons why, and plans corrective action.
Performance is reported quarterly to Tesco’s board and a summary report is sent to the top 2,000 managers in the company to pass on to staff. Further, the remuneration of senior managers is shaped by KPIs, with bonuses based on a sliding scale according to the level of achievement on the corporate steering wheel.
Tesco’s values and priorities (concerning customers, staff, business and compliance issues) are embedded in the steering wheel through appropriate KPIs. These values pervade operations and are instrumental in securing staff commitment to the steering wheel.
In recent years there have been a number of policy developments in the field of risk management and internal control, for example the Turnbull review (Internal Control: Guidance for Directors on the Combined Code) in the UK, which sets out best practices and the legal requirements of Sarbanes-Oxley.
Risk management has also focused on risk mitigation, for example the disaster recovery planning that allowed Lehman Bros to continue trading after 9/11.
Many members of the CIMA Forum feel that there is too much emphasis on compliance with risk mitigation requirements and not enough attention paid to enterprise risk management. One participant said that ‘too much time has been spent complying with the risk management requirements under Sarbanes-Oxley without enough spent on strategic risk areas which are the true, fundamental risks that can make or break an organisation’.
Jon Fundry and Mark Dixon of The Linde Group made a presentation to the CIMA Forum about the risk management practices developed at BOC, which are now applied by their new parent, The Linde Group.
The Linde Group see risk management as a tool to gain competitive advantage through being able to take on and manage risks. Their objective is not to be risk-averse but to see risks as opportunities as well as potential threats.
The Linde Group take a qualitative (based on managerial judgement) rather than quantitative approach. Advanced techniques are used for project costing but quantification is often fraught with difficulty. It is more important to put descriptions, actions and controls against risks rather than numbers.
The Linde Group’s qualitative approach has also been adopted by other members of the CIMA Forum. Ford and the DWP (Department for Work and Pensions), for example, use low, medium and high indicators to identify and track risks. They too have centralised risk management teams, although these are within their treasury function. Other CIMA Forum members, Kimberly-Clark for example, use quantitative analysis, such as Monte Carlo simulation, but this is used to provide insights to inform a similar qualitative approach.
Risk management at The Linde Group
The Linde Group, through its BOC roots, is an example of a good practice case study in how to get the right approach to risk management.
• The finance team at The Linde Group provides risk management because there is a demand from the business. Meeting corporate governance standards is a secondary but still important objective.
• Risks are owned and managed by employees throughout the organisation in their day-to-day duties.
• The central risk management team provides specialist expertise and encourages the embedding of risk management principles in day-to-day thinking. The risk framework coordinates input from a wide range of disciplines.
• Qualitative (based on managerial judgement) rather than quantitative approach for strategic risks; although advanced techniques are used for project costing.
• Harnessing the experience and judgement of management through a strategic risk process helps the company to think of the key risks facing the group and to sense-check them against current plans.
• The strategic risk process involves the use of risk workshops. On average, 80 to 100 workshops per year are organised. Specialist software supports this process.
• There is a formalised quarterly risk reporting system for material entities which looks at risks for the next three years. It provides executive board reports on a six-monthly basis.
• Tools and techniques to analyse decisions are available on the intranet to encourage the rest of the business to carry out their own day-to-day risk management responsibilities.
Companies have access to unprecedented levels of data captured by ERP and customer relationship management (CRM) systems, point of sale (PoS) scanners, loyalty cards and through business conducted over the internet.
Finance/business partners do not usually possess the technical analytical and modelling skills to conduct the analysis of this data but the analysis can usually be provided by experts or, increasingly, by analysis applications.
For example, both Unilever and DWP sometimes use economists and statisticians to conduct detailed analysis to predict market demand.
However, the combination of predictive analytics and CPM or BPM systems offers enormous potential for providing insights to improve performance.
For example, OutlookSoft, now part of SAP, offers a predictive performance management tool that includes built-in strategic planning, budgeting, forecasting and consolidation, reporting and KPI analysis. It is designed to deliver actionable information to the desktop and provide a complete view of the business.
Several software providers that offer business intelligence and corporate performance management products, including Cognos, Hyperion and SAS, have expanded into predictive analytics too.
The finance/business partner needs to combine an understanding of the analysis provided with knowledge of the underlying data and the business to communicate financial insights and frame evidence based decision making.
Through using CPM systems finance/business partners may already be able to provide more analysis than is traditionally expected by the business. Finance/business partners may have to communicate the relevance of this analysis to the business to ensure that decision-making is based on the latest evidence available.
Analytics at Unilever
Unilever can assess brand valuation and performance. They use econometrics or multivariate regression analysis. They have created sophisticated tools and techniques to improve decision making with regard to brand ROI (return on investment). These cover a range of drivers of brand health and potential value creation such as choice on pricing, media and the marketing mix.
For example, they have a keen understanding of the relative value of investing in trade incentives or advertising and promotion. They have found through analysis of empirical evidence accumulated from past campaigns that there are just a small number of key variables which will determine a campaign’s success.
Analytics at Tesco
In an interview with the CIMA periodical Financial Management in 2005, Andrew Higginson FCMA, Finance and Strategy Director, Tesco in an interview report in said: “Working out how we can differentiate ourselves is very difficult. There are no real economies of scale in this business. Take Morrisons: it was half the size of Safeway, but it still had the clout to take over its business. It’s about doing what you do better than the rest."
“But we don’t worry too much about our competitors; we worry about Tesco and what our customers are saying to us,” Higginson continued. “The club card is a huge benefit. We run the business on the club card information we obtain from how people shop in our stores. We also have monthly surveys of shoppers. One of their big bugbears was long queues at the checkout, for example, and people gave us credit for trying to improve that situation for them.”
“That’s how we work – we are out in the stores all the time."
“There are no secrets to Tesco’s success. It’s all on display."
About the Author
Andrew Harding is a chartered accountant with over twenty five years' international business across finance, business development and talent management roles.
He trained with Binder Hamlyn (now Deloitte) in London. He specialised in training and development before joining ACCA where, after leading the global business development and professional standards activities, he became managing director before joining CIMA in 2009.