The CIMA Improving Decision Making in Organisations Forum (the CIMA Forum) has noted that many leading companies have already seized the opportunities presented by finance transformation to improve the efficiency of their finance and accounting (F&A) operations and to engage F&A personnel as finance/business partners to improve decision-making.
High-performing companies usually have high-performing finance functions. Although the causality has not been proven with academic rigour, the correlation is clear. Surveys by leading consulting organisations support the CIMA Forum’s view. These leading companies seem to be empowered by their finance functions to improve their decision-making and financial performance.
Decision-making is becoming the basis of competitive advantage and value creation. If markets give all organisations access to similar resources globally and competition causes many routine business processes to converge on world-class standards, the quality of decision-making could become the key differentiator.
Finance transformation provides an opportunity for the F&A function to improve its operating efficiency and provide high-quality financial and management information to support decision-making. It also provides an opportunity to improve its effectiveness by engaging finance personnel, who have the skills to collaborate with the business, to contribute to improving decision-making and business’ financial performance as finance/business partners.
As finance can help improve decision-making, any company that does not transform its finance function risks putting itself at a competitive disadvantage. A summary of the report reveals the following situations:
• Most CIMA Forum members now have shared service centres (SSCs), whether in-house or outsourced, onshore or offshore. SSCs were introduced to achieve cost savings in routine activities (for example, transaction processing and standard reports) but they also allow the implementation of uniform systems and streamlined processes. They often have the scale to allow further talent development than may have been envisaged. Some CIMA Forum members are now looking for further efficiency gains in business processes and for their SSCs to also provide less-routine, higher-value services.
• Other CIMA Forum members are looking to achieve a step change more rapidly by harnessing expertise — for example, in systems implementation and business-process improvement. These services are now available offshore through business process outsourcing (BPO) providers. Although many organisations are still wary, BPO has developed and should be considered.
• Enterprise resource planning (ERP) systems have long threatened the traditional role of the management accountant. But they have actually kept accountants busy using spreadsheets to produce reports in the format required by the business, investigating discrepancies and conducting ad hoc analysis. However, ERP vendors have been acquiring corporate or enterprise performance management (CPM/EPM) systems to overcome ERP’s limitations. The experience of members of the CIMA Forum confirms that these applications can release capacity for accountants to become finance/business partners, thus improving Decision-making in organisations.
• Finance/business partnering varies in form. Credibility as a finance/business partner usually rests on the financial expertise and analytical rigour contributing to Decision-making, rather than an ability to provide expertise or leadership in other business disciplines.
• Finance is already able to provide both quantitative and qualitative management information, including accounts, analysis, balanced scorecards and narrative reporting. The challenge is to help apply financial and accounting expertise to Decision-making in the business.
• To bring F&A expertise to the business, finance/business partners must:
– Have sufficient business understanding to recognise the relevance and practical application of the information.
– Be able to communicate their insights in the business’s terms and help determine and manage actions till impact is achieved.
• Developing finance/business partners is a challenge that requires the application of change-management principles. There can be an impasse on the route to finance transformation if the business expects more of finance personnel but doubts traditional accountants’ aptitude for these new roles. Or, more often, accountants are willing and able to contribute more but feel there is no demand from the business. The starting point must be a clear, shared vision of finance’s new role.
The key messages to bring home are:
• Decision-making is becoming the basis of competitive advantage and value creation.
• Management accountants have key roles to play in the decision-making process, from strategy formulation and implementation till impact is achieved.
• The finance and accounts function must improve their efficiency in providing reliable financial and management information.
• Finance’s main challenge is to develop people who can collaborate with the business to support Decision-making till impact is achieved.
• Finance/business partners can help improve Decision-making by applying financial disciplines, such as managing for value or risk management, and by providing analytics.
• Top performing companies have this advantage. Any company not transforming its finance function is putting its business at risk.
• Change-management principles must be applied to this process.
Global markets already give businesses throughout the world access to similar resources. Competitive pressures are causing many routine business processes to converge on similar world-class standards of efficiency and quality. This means that Decision-making could become the key link in the value chain, whereby companies can still achieve superior performance Diageo, the premium brands drinks company, is an example of a global company that has applied this logic. Diageo has a keen understanding that brands are what creates value for its shareholders. These form a “moat”, which allow it to defend its competitive position and command superior returns.
Brand management is the key to Diageo’s success. It has retained manufacturing for some of its drinks products. The cachet of premium brands could be damaged if they were known to be manufactured under licence to another producer, on an unglamorous industrial estate. But it has outsourced many business processes (including accounts) that might once have been considered core activities.
Managerial Decision-making is something of a black box. Most companies have a strategic planning process and a governance process at board level that is usually formalised. But the planning process can often generate reports rather than decisions, and the board’s role in making decisions is often just to oversee or ratify. Usually, only routine operational decisions, such as credit management, have fully documented processes. Most decisions are taken by line management outside formal processes.
So what is in the management’s black box? The decision-making process is usually illustrated as a proposal being considered by participants in the context of the organisation and its strategic position. Alternatives, risks and potential outcomes are considered before a decision is reached. There may also be a post-audit and a feedback loop.
Discussion of how management accountants can improve this process with members of CIMA’s Forum contributes some important insights..
• The decision should not be shown as the end of the process. It is important that decisions are managed through implementation and follow through is given for subsequent decisions to achieve impact. The outcome of the decision-making process must be an impact on the business’s performance.
• The organisation’s enterprise-governance and strategic-planning process provide the context in which issues are framed. The organisation’s culture and leadership style are also important determinants of how decisions are framed, as is the role finance will play in the process.
• Management accountants are keen to work with the business to improve Decision-making. They can provide the metrics and analysis to support evidence-based Decision-making.
• Management accountants’ invitation to participate rests on:
– Their ability to provide timely and accurate management information efficiently.
– Their ability to work closely with the business to combine financial expertise with business understanding to inform Decision-making.
Based on discussions with the attendees of the CIMA Forum, the flow of an effective decision-making process goes through various stages of processes —from Context Mindset, Framing an Issue, Assembling Information, Selecting Alternatives, Decision, Managing Implementation, Impact and finally, Feedback. The various stages of the process flow works well within the matrix of the CIMA Strategic Scorecard™. The CIMA Strategic Scorecard™ is a business tool developed to help all boards address their individual strategic issues, and provide structure and processes to deal with them effectively. The four main process structures of the scorecard are: Strategic positioning, Strategic implementation, Strategic option and Strategic risks. It provides a process for all aspects of a strategy to be discussed, reviewed and monitored by boards. The scorecard’s framework can be easily adapted to suit any organisational structure.
A summary of the process is as follows:
• The board provides the overall enterprise governance. This means that it exercises effective oversight of both the conformance and performance aspects of the organisation. The formal planning process provides the strategic context, brand values and budgetary constraints in which decisions are taken.
• Decisions are taken in the general context of the organisation’s overall strategic direction, ethics and culture by individuals with their own prejudices in the immediate context of the issue being considered.
• Framing the decision is a key step. Issues must be properly framed to balance a broad view with an efficient focus. Appropriate parties must be engaged. Stakeholders’ interests are taken into account in determining the objectives at this stage. In businesses that are managed for value, the main criterion to be considered will be the impact on shareholder value.
• Providing insightful information to describe the business’s current financial and competitive position, the proposal(s), the propositions’ value for customers, the impact on the organisation’s value chain and the risks requires close cooperation or partnering with the business.
• Alternatives should be selected on the basis of evidence and analysis rather than personal opinions. Risks must be identified as either ‘deal-breakers’ or issues to be managed. Management accountants can facilitate unbiased, fact-based decision-making, providing consistent, quantitative and qualitative analysis of the situation and proposals.
• The decision maker(s) should have the authority to take the decision. Role clarity is important here so that decisions are reached efficiently and not delayed or swayed by other interested parties.
• Managing implementation till impact is achieved requires that the decision should be clearly communicated and the expected outcomes reflected in performance management metrics. Quantifying or describing the potential outcomes and, if appropriate, the potential next steps after each outcome, will enable implementation to be managed and appropriate action to be taken promptly, if necessary, to ensure goals are achieved.
• Feedback loop: trial–and-error may be allowed as tactical experiments within acceptable risk parameters, but repeating past mistakes should be inexcusable. The decision and matters considered should be properly documented for post-audit or learning purposes. The outcome of past decisions should be captured as part of the corporate memory to ensure lessons are learned.
About the Author
Charles Tilley is chief executive of the Chartered Institute of Management Accountants. He is a regular commentator on a range of corporate governance issues, international standards, narrative reporting and strategic management issues concerning the profession and the Institute.