As business moves out of the cost-reduction era, the focus has switched to driving value. In this context, CEOs and businesses are demanding more from their finance directors (FDs) than the traditional controller or custodian role, presenting FDs with the opportunity to carve out a more strategic role.
The best way for finance to produce value is for the FD to take the lead in driving the performance management agenda, said Steve Mortimer, ACMA, CGMA, director of business consulting at Grant Thornton UK LLP. This is because performance management informs and supports decision-making throughout the organisation.
If you have a performance management framework, Mortimer said, the finance function shifts its emphasis to a more forward-looking approach. For example, budgets may be based on future strategy, rather than just starting from last year’s budgets. This ultimately influences the rest of the organisation to take a forward-looking approach.
In addition to providing benefits to the business, driving a performance management initiative can be beneficial to those FDs who aspire to a managing director, CEO, or COO role. The involvement in commercial decision-making such a project offers makes FDs better qualified to take that next step.
When an FD has a better handle on the drivers of performance in the organisation, the role becomes more fulfilling. You get the opportunity to inform the whole of the C-suite about the decisions they should be making and provide more robust challenge, Mortimer said.
Here, Mortimer describes the first steps finance professionals can take to implement a strong performance management framework.
The first building block of effective performance management is a simple, well-articulated strategy.
Rather than a sweeping vision, the strategy must be clear and easily broken down so that the leads of each department can understand exactly how they affect the organisation’s ability to achieve its overall goals, and cascade that information down to their respective teams. Sponsorship of the strategy from the leadership is another crucial element.
This may prove a challenge for some organisations; according to Grant Thornton, less than 50% of companies have a clearly articulated strategy, and less than 20% of employees are able to describe their company’s strategy.
Once the overall business strategy is clear, the performance management strategy can then be drafted and aligned to the strategic objectives.
An effective performance management system cannot be imposed or enforced. Instead, Mortimer said, employees at all levels should be involved in discussions about what the key drivers and metrics are, and what individuals are going to be assessed on.
The finance function, for example, might be asked to consider what it needs to deliver for the organisation, and suggest which elements under its control could have a more positive effect on that delivery. Engaging people in the process in this way actually helps you lay out the challenge down the organisation, and helps embed performance management in the company culture, Mortimer said.
Metrics should be linked to strategy in a way that enables meaningful analysis of current and future performance. When setting metrics, divide the business into strategic objectives and tie them to key performance indicators (KPIs). Assign accountability for each KPI to an individual. To influence desired behavioural changes, KPIs should be tied to individuals’ incentives.
Simplicity and pragmatism should be prioritised in creating the framework, Mortimer said, and it’s important to remember that good performance management systems are iterative.
“You can’t just create it once and then leave it because the external environment changes, market forces change, your own organisation changes,” Mortimer said. “It’s got to be simple enough that you can revise, refresh, and improve it all the time as you learn more. And because you are focusing on the right performance drivers rather than just generating information, you’ll notice that and revise things quicker.”
Being agile is the key.
Avoiding a silo mentality
No single function’s efforts are going to be able to fulfil the business’s strategic goals, so FDs have to ask, “How do I work together with operations, HR, and commercial to make sure our combined efforts deliver the outcome?”
By focusing on business outcomes and what drives them, rather than functional outcomes, department heads are more likely to link the metrics and drivers across the various functions.
Mortimer gave the example of an organisation that invests heavily in research and development.
If you take a siloed approach to improving the output of the R&D department, you might conclude that the team needs to work longer or harder. But a more effective solution can be found by working with HR to attract, develop, and retain talent to serve the scientific area of the business and to ensure that innovative ideas continue to flow through the R&D pipeline.
Finance can also add value by ensuring the performance data are presented in an accessible way, adding relevant context, comparators, and insights. Interactive dashboards offer an effective way to achieve this, particularly when the information to be conveyed would become unwieldy in text format.
—Samantha White (email@example.com) is a CGMA Magazine senior editor.