Unlocking performance
Finance teams use strategic performance tools in myriad ways to steer their businesses towards strategic goals. We asked Albert Birck, the head of performance management for Danish energy company Maersk Oil, and Roger Blanken, CPA, the vice president of finance – supply chain, for International Flavors & Fragrances (IFF), to explain how technology, better planning, and communication about performance can unlock hidden potential.
The need for high-quality management information has never been greater. The increasingly volatile economic environment, coupled with a desire for greater accountability of every area of a company, has forced the finance function to deliver more insightful information to manage performance. Many progressive management accountants have taken advantage of developments in information technology to meet this business need. Ensuring the availability of the right tools, sophisticated enough to give a snapshot understanding of what is happening across the business, while at the same time straightforward enough to ensure a common understanding of what is happening, is a big challenge. We asked Birck and Blanken exactly how and why they set out about developing performance management techniques and what technology they brought into their businesses to deliver their objectives. Their answers reveal that achieving the right blend of analytical skills and processes, backed by the appropriate technology, can deliver huge benefits.
Q: To what extent have you invested in enterprise performance management technology in recent years? How has the better use of technology helped to reduce costs, allocate resources more effectively and improve efficiency during the recent economic downturn?
Birck: Before looking into how to use technology, you have to ensure you have the right technology. I’m not talking about a technical assessment, but a usage assessment. What does it take for analysts or end-users to get access to the information they need, and then to share and discuss that information with colleagues? This is what you need to study. You may find that improving analytical skills and processes can be far more rewarding than investing in technology.
Four years ago, we surveyed the market for performance solutions, and the result was, for many reasons, disappointing. Overall, solutions lacked flexibility, or they were not user-friendly. People would have these solutions imposed on them, and adoption would suffer. That was not an option.
Only recently have more mature, user-friendly solutions emerged. Adopting one of these in a recent pilot showed us that we were capable of operating by ourselves without IT assistance due to the maturity of the software, and that gives you a whole range of new opportunities.
It got people more engaged since it helped them to do their jobs better in our 54 country-clusters. We went from no transparency, and management by “gut feeling” in this area to high-quality analytical insights, providing more transparency than many other parts of the business. This meant that managers could easily spot the biggest cost items and pinpoint at which of our several thousand locations they needed to improve profitability.
Suddenly, everybody could benchmark the cost efficiency in managing our container yards within countries and clusters, but also between all locations on a global scale. That kind of transparency can drive performance in much better ways than the classical target setting. Nobody likes to be a bad performer, so everybody will seek and exploit best practices to continuously improve. When you help people do this, you don’t have to worry about adoption.
Blanken: One of the most prescient decisions we made at IFF was to invest in a single-instance enterprise system based on a global design, with common master data and supported by common processes. The design was completed in 1998, and we rolled it out to every location over the next five years.
Today, it is a mature system that works extremely well, providing high-quality data (in almost real time) for all parts of our activities – in many respects, this is the backbone of our business, providing a reliable fact base that we rely on in making decisions.
It has also provided us with a common set of master data that we use to report, forecast and analyse both financial and non-financial metrics. This has permitted us to quickly roll out common templates to report and explain variances between historical and forward-looking data with a good deal of detail. This allows us to drill down, explain the variances quickly and [make] decisions. It also makes it easier to benchmark plants and compare their performance to those that employ best practices. As a consequence, we’ve been able to react more quickly to changes in demand and increases in material costs.
Q: Can you give an example of how you’ve used performance management techniques in a particular operational area of your business to raise performance, and can you quantify the business benefits?
Birck: In a previous role at Maersk Line (the global containerised division of the A.P. Moller-Maersk Group), we carried out analysis of the value drivers of the business as part of a general strategy update. To share the learning and empower the global organisation, which has 24,500 employees in 125 countries, it was decided to roll out around 600 scorecards. Each scorecard would contain a handful of key performance indicators (KPIs) selected from a list of 110 consistent drivers and designed so that each manager would be accountable for and be able to influence the KPIs chosen.
The scorecards provided a monthly snapshot of performance at the strategic level that allowed for relevant discussions about continuous performance improvements that the traditional and lagging, accounting-based reporting did not provide. When supported by intuitive weekly performance dashboards at the tactical level and exploratory business intelligence (BI) at the operational level, it significantly increased performance awareness, understanding of current issues and allowed people to “speak with data”.
Every time we discuss or design something for performance management, we assess the options to see whether they create value, are transparent, actionable (relevant, meaningful, able to influence), timely (which is more important than “perfect”) and forward-looking. These are some of the ingredients in our dashboards. They are intuitive because they use best practice visualisation techniques devised by Stephen Few from the Perceptual Edge consultancy, and a method that I developed called VLC-analysis, covering the vertical, lateral and contextual aspects of data.
These techniques make it much easier to see and understand how, where and why we perform.
Blanken: Over the years, we have used a common metric that we call “leverage”. This compares the increase in net sales to the increase in manufacturing expenses. We take it seriously, and our supply chain managers know that we expect manufacturing expenses to increase at a rate that is less than the increase in net sales.
Conversely, should sales decline, we also expect manufacturing expenses to decline as well. Because a large amount of our expenses are fixed, this forces our managers to consider all expenses to be variable in the medium term. In many ways, it is a crude metric, but it is easy to understand, visible; and the impact on profitability is easy to quantify.
Sometimes, it is more important to use a metric that is available, of a known quality, reliable and that everyone understands, rather than a more sophisticated analysis. We supplement the high-level calculation of “leverage” with a more sophisticated analysis to understand the changes in manufacturing expenses and related activity drivers.
Q: What lessons have you learned about how to adapt and apply generic performance management tools to the particular strategic goals of your business? Could you give an example?
Birck: It’s easy coming up with 20 to 30 different performance management methodologies, but added shareholder value and the Balanced Scorecard (BSC) still seem to be some of the most popular foundations after 20 years.
However, it is important not to treat performance management as if it were a finance exercise with a narrow organisational scope. Talk to human resources, talk to sales, production or operations. You can be sure of two things: first, that they are also applying performance tools for employees and core processes for the company; and second, that they are doing it in a different way than you. Realising that “one size does not fit all” and actively tackling the hot spots between business performance, process performance and individual performance allows the organisation to use different tools for different purposes and creates positive synergies.
Blanken: We typically customise generic tools and metrics to complement our business activities. The bottom line at International Flavors & Fragrances is that tools and metrics require detail so that we can go below the surface to understand the drivers and moving parts.
One example is our use of a non-GAAP metric “economic profit” (defined as net operating profit after taxes, less a capital charge based on the weighted average cost of capital, or “WACC”) in evaluating and analysing our business, particularly in planning strategy.
At present, we use the same weighted average cost of capital target for each business unit. We’ve discussed at length internally whether we should apply a different WACC to our two business units (Flavors and Fragrances), product categories and markets in which we do business. Intuitively, we all believe that there is probably a different cost of capital for each business unit but, because they have similar profit profiles, size, and a large customer base of multinational companies, we have decided to use the same WACC. We have also given a good deal of thought to how we view our business in developing markets and whether we should consider using a higher WACC to reflect the higher risk, but again, because the historical profit profiles and customer base are similar to our business in more mature markets – as well as knowing these markets very well since we have done business in there for many years – we defaulted to the corporate cost of capital. We do review the WACC annually and will continue to seek the advice of our investment bankers on how best to develop a more sophisticated approach.
In 2010, we carried out a comprehensive review of the business that included a deep dive into profitability by business unit, product category, customer and region that used P&Ls incorporating economic profit, together with all shared/corporate expenses and the invested capital employed in the business. It gave us a much better understanding of the sources of profitability and made visible the underlying drivers of value. We then converted our forward-looking strategic plan from a traditional P&L format to one that incorporated economic profit. This exercise required us to rethink how we looked at our business from a financial perspective, moving from the P&L format used for external reporting to one that was focused on internal activities. Using economic profit principles has permitted us to make apples-to-apples internal comparisons, as well as benchmark our competition meaningfully.
Today, economic profit has become the primary measure of profitability inside IFF and has raised the quality of discussions when making investment decisions.
Q: What steps have you taken within the finance function to avoid a complexity of disparate systems, excessive numbers of spreadsheets and a multitude of different processes and controls?
Birck: It is a challenge to keep up with an ever-increasing amount of data and hundreds of global systems, especially when trying to convert this data into information, and the information into knowledge. Using spreadsheets is tempting for the individual business analyst for many good reasons. It’s available, easy to use (kind of), portable (print, email) and compatible.
However, it can be easy to make mistakes; data integrity often suffers; frequent updates are cumbersome; it is too manual; and it can be hard to construct coherent models across the organisation. This will not change until a better alternative is available, so it is important to revisit the business intelligence (BI) strategy to check whether the analytical needs are being addressed in a structured way and not simply through spreadsheets.
Dashboarding is one alternative, where analysts are given an online platform to analyse and share information that can help to visualise the issues in a much more powerful way than using a spreadsheet. This can even work without a complete enterprise data warehouse. It’s better to let people find ways to meet their information needs themselves before setting up the technical back-end to support this, not the other way around, or you will lose a valuable learning experience and risk delays later on.
Blanken: Recently, we prepared an “IT road map” for finance activities to lay out our priorities for the next few years and identify software platforms to replace the existing reporting and planning tools that sit on top of the enterprise system. Like many companies, we still use a lot of spreadsheets; and some processes, like planning, can be improved by using an integrated planning and reporting tool. Implementation of the road map is one of our priorities in 2012.
Q: Which indicators are most important to your business?
Birck: Sometimes, non-economic KPIs can help unlock the value creation in a new way, but “soft” KPIs are often downplayed in turbulent times. In 2000, Professor Donald Marchand from IMD Business School created a framework for “strategic information alignment”, describing how information can be used to create business value by reducing costs; managing risks; adding value to customers and markets; and creating a new reality, such as new products and services.
Finance people love the first two, and they are important, but the real strategic advantages are found by exploiting the last two aspects, and these need to be covered by using non-economic indicators in your performance methodology.
Let me give you two examples. In Maersk Line we have recently introduced "Daily Maersk" between the Far East and Europe. That means a fixed transportation time, absolute reliability, and [that] can only be realised by monitoring and managing on-time deliveries. That is a “new reality” for customers and adds value to their supply chains by allowing them to reduce their storage and inventory costs by up to 50%.
Furthermore, with third-party verified data on CO2 emissions, we have become leaders in the shipping industry for low-CO2 transportation. This information and these KPIs are also made available to customers who, in many cases, also have CO2 reductions as part of their strategy. We have helped many customers save thousands of tonnes of CO2 (equivalent to hundreds of thousands of dollars) by shipping their cargo with us. That transparency is a strategic advantage for us and for our customers. That is adding value.
Blanken: In general, we pay close attention to high-level indicators, like changes in gross domestic product, consumer prices, cost of living and the unemployment rate. Exchange rates are of critical importance, as are changes in commodity prices, such as oil. Because so much of our business is in developing markets, we pay close attention to credit default swap spreads as they may be a leading indicator of markets where risk is changing.
Conclusion
CIMA research suggests that many management accountants are so occupied by the financial accounting cycle that they have not yet taken on the role of providing the management information that business needs today. It’s not surprising in a constantly changing environment, where demands for quarterly or even monthly reforecasting from the finance department can be a huge drain on the function’s resources. The challenge for finance is to be able to streamline its activities in order to deliver added value through strategic performance tools, including balanced scorecards and KPIs.
The impact of getting it right can be enormous, as Birck and Blanken identify. In presenting high-value information, the finance department can move from offering not just business information, which states what is happening in the group, but also business intelligence – an explanation of why it is happening.
Bios
Albert Birck
Birck was recently named general manager for business performance management at Maersk Oil, part of the Danish transport and energy A.P. Moller-Maersk Group. Before this, he held a similar role at shipping business Maersk Line. During his career he has worked within several industries and different functional areas in order to manage performance management from top to bottom and end to end, including strategy development and M&A, optimisation projects and operational process efficiency.
Roger Blanken, CPA
Blanken is vice president of finance – supply chain for International Flavors & Fragrances. He works with the head of supply chain in developing supply chain strategies, planning capital investments and institutionalising the use of more sophisticated performance metrics. He has broad financial experience from working with multinational companies in the consumer products sector over the past 25 years, 15 of which were spent outside of the US. He was previously responsible for global financial planning and analysis and was vice president of finance for the fragrance business unit and the Europe, Africa and Middle East region. He directed the design and development of a tool set that supports comprehensive profitability reporting based on return on invested capital. This was used in establishing a far-reaching strategic review of the business in 2010.
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