One of the 'hot buttons' in enterprise performance management is 'operational/financial integration', making sure that operational plans and performance indicators match the way financial results are measured. In most cases the rationale for such an exercise is to provide financial and executive management with additional insight into the business, helping them predict financial results better. And better predictability leads to better internal decisions and external guidance. Areas for operational/financial integration that are often explored are sales pipeline -- representing the value drivers -- or workforce planning and IT as cost drivers. However, the 'opposite' business case, sharing financial information with operational managers is less often explored, while this is equally interesting, at least. This is peculiar, as there are many reasons why financial information is crucial for operational managers.
Here are just a few reasons:
- To be able to implement methodologies such as EVA, making sure capital should be deployed in operations where the return is highest.
- Financial results are the bottom line for every business function. Every business manager therefore needs financial-specific feedback.
- Financial results make departments and regions comparable.
- Benchmarking business functions also has an indirect financial contribution, on what they achieve for other business functions.
- Bonus plans are directly connected to financial results.
Unfortunately, due to the focus of financial reporting on executive and financial management, financial reporting is often a one-way street. Financial data is collected, aggregated, consumed by top management and on the consolidated level externally reported. It is hard for operational managers to recognize their contributions on this level. This doesn't mean there is no specific feedback at all. Most organizations do share financial data with their operational managers. It usually consists of their 'slice' of cost/profit centers. Unfortunately, given the structure of financial information, the account structure is often more optimized for financial data processing (journals) and technical financial reporting, instead of operational insight. I wouldn't say it is useless, but this type of information is not optimized for consumption by operational managers.
Most operational managers have an intuitive understanding of a profit and loss statement. However, this is not the case for balance sheets. There may be a theoretical understanding, but insight into how business dynamics impact a balance sheet is often limited. Lastly, operational managers are often not exposed to cashflow statements. It is clear that the standard financial reports are only partly useful for operational management. Organizations that wish to create operational/financial integration should pay specific attention to how to construct financial information for operational management.
Financial reporting for operational managers needs more attention. The financial consolidation system should not only be producing external information aimed at financial experts, but should be shared broadly throughout the organization with specific, actionable information.
--frank
Comments (1)
Frank,
Thoughtful discussion.
I agree that enablement of operational manages with the department level cost and revenue/value contribution information is critical to the alignment of operations to the corporate bottom-line. Without this value insight, the justification for the spend is often a vocal battle between departments without the quantitative basis, resulting in diminishing returns.
I also see that the cost-value insight is critical for IT departments where demonstrating the value and ROI based decisions are critical.
Posted by Gopi Padakandla | June 1, 2008 1:04 PM
Posted on June 1, 2008 13:04