With common information architecture, organisations will be able to “integrate the underlying transaction engine with a data warehouse and decision support engine that enable analytics, and deliver the information through a portal to specific roles.”

The linking of objectives to specific roles within the organisation will make it easier for managements to execute and monitor strategy globally, adds Jeby, in the course of a recent e-mail interaction with Business Line.

“Globalisation has dramatically shifted the competitive landscape in which today’s corporations operate,” he reasons. “Reporting frameworks that were developed in a less globally integrated competitive environment do not provide information or insight into how to be successful in today’s hyper-competitive environment. We need an alternative framework that links strategy formulation to strategy execution.”

Excerpts from the interview:

You contend that the management-reporting framework must serve as an integrating mechanism.

Exactly. It should link the core elements of a strategy to execution and operational excellence. As a result, an integrated management reporting framework should provide information to the management on how to constantly monitor execution and make mid-course corrections wherever necessary.

Moreover, instant and continuous feedback on strategy execution enables management to improve strategy formulation by improving the quality of inputs that are required for strategy formulation.

Can you give an example?

Take the case of financial institutions that are going through a severe stress caused by the collapse of the housing market. A market-facing management reporting framework that is integrated with the execution model would have highlighted the impact of rising interest rates on sub-prime borrowers and their ability to stay solvent. This would have given the management enough time to change its strategy and made it better prepared to face the fallout in the market.

What is the common reporting framework that you find around?

Most organisations today rely on an “Actual vs Budget” variance reporting. This reporting paradigm has several disadvantages including the absence of a coherent link to business strategy.

The first disadvantage is that variance reporting, which focuses on variances between a budget and actual, does not show how the budget links with the strategy of the organisation, or the impact of variance between the budget and the actual on strategy.

Second, there is a time lag between the results and availability of the information, which precludes management’s ability to take any proactive corrective action.

Third, variance reporting has a financial orientation and very often does not measure critical indicators such as customer retention, market traction and employee satisfaction. As in the example I mentioned, variance reporting in financial institutions that are going through the turmoil of sub-prime crisis would have shown a very rosy picture of revenues but failed to forecast the plunge in the market.

And fourth, a crucial disadvantage is the lack of direct link between the business value drivers and reporting. Variance reporting focuses on aggregates and ignores the drivers that influence the final result.

For example, value-driver-based reporting would have clearly shown the linkages between the drivers of mortgage payments such as interest rates, and unemployment rates. This would have given insights to the management on the impact of rising interest rates on mortgage payments and helped in taking mitigating action.

Performance measures are also widely used, aren’t they?

True. As the business environment became more competitive, businesses began to migrate to reporting based on performance measures. However, the move was not without its issues.

Such as?

Issues have been many, including the following:

Isolated performance measures that were not linked to the strategy;

Derivation of performance measures without understanding the underlying value drivers;

Lack of enabling technology to collect the data required to calculate the performance measures;

Lack of standardisation in the data and measures leading to dysfunctional use of performance measures; and

Predominance of financial measures over other equally important measures.

The ‘balanced scorecard’ or BSC was created to cure the issue of the dominance of financial measures. Further evolutions of the concept led to strategy mapping where the measures were linked to strategies.

While the balanced scorecard helped to monitor the execution of the strategy it did not drive a role-based execution of strategy.

What, according to you, are the characteristics of an effective management-reporting framework?

The first characteristic is that performance measures are derived from strategy. An organisation can use different strategies to grow market share, including product differentiation and cost differentiation.

Both of these strategies depend on innovation. While product differentiation focuses on innovation in products, cost differentiation will focus on innovating in reducing costs.

Apple is a good example of focusing on innovation to differentiate in the product space. Tata with its recent introduction of Nano is a good example of focusing on innovating in design and processes to reduce cost.

Whatever be the strategy of the organisation, performance measures should be tightly linked to strategy to provide information on how the organisation is executing on its own strategy.

Second, the framework links performance measures to the critical drivers of value. Most organisations use revenue growth as an indicator of how successful the organisation is growing.

To be effective, revenue growth should be tied closely to drivers that impact revenue — such as price, volume, and customer satisfaction. A revenue growth that is led by price increases but declining volumes and lowering customer satisfaction scores will provide early warnings signals to the management team that will help it take mitigating actions.

More Stories on : Interview | Accountancy | Account Speak

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page