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Vietnamese Corporate performance outstripped many people’s expectations in 2010 and, as a consequence, senior executives have been given oversized 2011 growth goals that are consistent with a recovering business cycle. The problem is that we are not yet in the midst of a runaway recovery.
Companies may have achieved 95% of prior peak sales in Q3 2010 and five-year highs in gross margins but 2011 performance doesn’t yet look like it will bring such good news. Analysts forecast that S&P 500 non-financial firms will grow by 7.6% this year, down from an earlier forecast of 10.2% (see chart 1) and eurozone GDP forecasts are also down to 1.3% for the coming year.
Chart 1: Decelerating Growth Forecasts for Key Industries in the S&P 500 2010-2011 Forecasted Year-Over-Year Change in Revenue Growth Rate
Slackening performance, coupled with the rise of emerging market competitors in western economies, means that more capital is chasing fewer growth opportunities at home and abroad than was the case in previous periods of economic recovery, and this makes capital deployment decisions harder and more important than they’ve been for a while. Further to this, concerns about long-term shifts in customer demand and a disengaged workforce bruised and battered by the recession, are making executives worry that their corporate performance management processes will not help them hit their growth goals.
To better understand the performance management challenge, we surveyed almost 100 CFOs and heads of FP&A (contact me if you would like your firm to take part in the survey and receive a customized set of benchmarking results) to understand what aspects of performance management (PM) executives found the most important and which aspects they were most dissatisfied with. Finance managers told us that their priorities for PM are to: help them deliver insightful and relevant information to line managers about their business; help them correct strategic course when risks or opportunities arise; and identify which parts of the business are doing the most to drive overall performance.
However there is wide dissatisfaction with what current PM frameworks achieve. Finance heads told us that their PM systems don’t help them hit the right levels of revenue growth, profit growth, and shareholder value creation that they believe their firms are capable of. For example, despite finance managers and line managers collaborating frequently to create performance dashboards, 16% of CFOs believe their dashboards contain the right amount of data for decision makers, and only 19% say that they have perfect visibility into the firm’s (or the business unit’s) drivers of performance.
Where to Focus for Good Performance Management
From our work with CFOs, we see those with the best PM systems focusing on four parts of the process in particular:
- Target setting: Ensuring that “stretch targets” are relevant in volatile markets, and segregating controllable from uncontrollable drivers of performance.
- Metric selection: Analyzing and encouraging business performance that doesn’t damage corporate performance, and developing dashboards that encourage an appropriate level of risk taking and reward good decision making.
- Use of finance IT to provide visibility: Identifying the point of diminishing returns in the cost/benefit trade-off of using IT-based PM systems, and automating and standardizing those processes.
- Creation of a ”performance management culture”: Developing a collaborative atmosphere based on objective appraisal of performance metrics, and helping teams focus on uncovering new sources of value and sustainable innovation.
We’ll touch on some early findings of what progressive firms are doing in the first two of these areas in this post and cover the second two in a later post. Also, be on the lookout for additional case profiles and insights from the survey results as we complete our research across the next several weeks.
Target Setting
We see leading companies doing three things in particular:
- Move from playing the role of negotiator to facilitator in setting targets: Set unambiguous senior ownership of long- and short-term targets and facilitate negotiations between the advocates of differing goals to generate the right amount of “stretch” performance. CFO Executive Board (CFO) clients should see this case study from Nestle, clients from the Finance Leadership Exchange Elite (FLEx-E) should use this version
- Include peer benchmarks to set targets: Set a portion of their incentive payouts to staff contingent on outperforming the firm’s industry peer group (we covered the importance of this in an earlier post) to encourage competitive and realistic performance. CFO clients should see this case study from Millipore Corporation for more information, as should FLEx-E clients; Controllers’ Leadership Roundtable (CTLR) clients should use this version, and Finance Leadership Exchange (FLEx) clients should use this version.
- Define variance from goal in terms of controllable and uncontrollable drivers: Separate drivers of performance that are down to the economic environment from those that managers can control to evaluate performance properly. CFO clients should use this case study; FLEx-E clients should use this version.
Metric Selection
- Tailor their approach to each individual business: Adjust performance measures and targets to accommodate the specific characteristics of each business unit, but use templates to avoid having to customize incentive plans. CFO clients should use this case study from Cargill, as should FLEx-E clients.
- Encourage good management behavior: Evaluate manager behavior not just on the achievement of certain targets but also on decision-making effectiveness. CFO clients should read this case study for more detail, as should FLEx-E clients, CTLR clients, and FLEx clients.
As large firms grow ever larger and their dispersed workforces generate significant amounts of revenue from unfamiliar markets, Finance’s role in coordinating and conducting this increasingly complex orchestra will only become more important, and good performance management is at the heart of those efforts.
Source:Research & Technology Executive Council Author:
