The current economic challenge is honing and shaping how organizations will run for years to come. Those business leaders who are meeting today's challenges by cutting costs and conserving cash are certainly gaining valuable experience. Will that experience help them to lead their companies through future business cycles, when unforeseen challenges once more emerge?
In today's world of information everywhere, business decision-making is often burdened with too much information. In fact, in a recent IBM Corp. survey of more than 225 business leaders, more than one-third said that they have significant challenges in extracting relevant information, using it predictively, and using it to understand risk. One in two business leaders indicated that they do not have sufficient information from across their organization to do their jobs.
Nowhere perhaps is this more true than within the ranks of financial executives. Four in ten of finance respondents admitted that they frequently made major decisions with incomplete or untrusted information. Meanwhile, six in ten said that finance and accounting would benefit from more accurate information and seven in ten said that predictive information would drive better decision-making. There's little question that financial leaders, like their line of business peers, are looking for ways to close frustrating gaps and optimize performance -- both financial and operational.
Bringing Greater Insight to Decision-Making
In a business environment that has little resemblance to the past, old ways of decision-making and management are breaking down. Business leaders sense an inflection point, an opportunity to revisit their use of information, or analytics, and fundamentally alter the way in which they conduct business. While analytic methods have been available for some time, today's tools and techniques are designed to bring greater insight and predictability to decision-making. Statistical methods, including complex algorithms previously the domain of academics, are now being routinely used to solve formerly intractable or overlooked business challenges.
A prominent mutual funds company, for example, looking at low profitability scores on a particular product -- a fund of funds -- decided to stop offering it. When the firm looked at its information another way, the score changed: Their most profitable customers had a striking predisposition to include this fund of funds in their portfolios. Product management was able to tweak the offering to improve profitability rather than put customer loyalty -- and the future acquisition of top customers -- at risk by dropping the product in question. Had a multivariate analysis of both product and customer information not been conducted, the wrong decision would have been made.
For the intelligent enterprise, the new reality is this: Personal experience and insight are no longer sufficient. New capabilities are needed for better decisions. Innovative solutions, in various stages of pilot or deployment, are providing just that. Finance leaders have a key role in bringing financial and performance information together in unprecedented ways like these:
- Workforce optimization. Staffing objectives are being set on the basis of strategic business plan, historical trends, and future scenarios. Analytically based decisions are put into action to achieve these goals.
- Risk assessment. The operational risks of IT infrastructure are being quantified and evaluated based on potential impact to the underlying business processes. Decision-makers then objectively select appropriate actions to mitigate this risk.
- Customer service. Unstructured data such as customer emails and phone calls are being analyzed to identify trends, improve customer care, and provide more targeted marketing based on new insights culled from previously unmanageable information.
- Marketing. Significant correlations have been established between customer loyalty; specific products and channels; and the bottom line. Based on mathematical modeling and simulations, business leaders develop and prioritize new programs to improve customer experience.
Best Practices for Reaping the Benefits of Analytics
- Lead by example in the finance function. Build a common trusted source of financial information that allows you to manage financial processes automatically and predictively. Assign process leaders to work with financial staff in every unit and function to establish consistency in financial information. Apply analytical tools and methods to optimize financial operations and provide strategic insight and foresight for the business.
- Reach out across the enterprise. Use your experience to help chart an enterprise course for managing financial and operational metrics for maximum synergy. Obtain the requirements of stakeholders and prioritize them against enterprise business objectives. Keep in mind that IT, Marketing, HR, Procurement, and lines of business all have their own convictions about best information practices. Successful collaboration requires understanding the nuances of each approach and incorporating preferences where it makes sense. At the same time, the creation of an enterprise analytics charter will be needed to drive and manage common definitions and processes -- everything that comes under the domain of data governance -- that support business direction.
- Explain the value of analytics -- don't assume that others understand. Finance professionals are steeped in a quantitative view of the business world and intuitively understand the power of metrics in making business decisions. Take time to help nonfinancial colleagues understand the benefits you've experienced. Vividly present the business value that an analytics approach, consistent with a single, validated charter, will bring to all stakeholders -- and, above all, to the intelligent enterprise.
Finance Transformation at IBM More than Doubles Efficiency
When cash is scarce, everyone agrees that it pays to plug every leak -- from fraud and theft, for example, to payments and receivables. An organization without adequate controls and policies can easily suffer "a death by a thousand cuts" when liquidity is low. But even when organizations are flush, the beneficial impact of analytically driven controls on profit can be high -- as long as underlying information is consistent, accurate, and useful.
IBM, for example, created a single chart of accounts with trusted information that has allowed the finance organization worldwide to flip its focus from data gathering to analysis. "Before our information was standardized and integrated, the finance function spent approximately 70 percent of its time collecting, verifying, and reconciling information. Now it spends about 70 percent of its time on analysis and decision support, more than a twofold improvement," says Ed Lovely, VP, finance IT, at IBM. Every finance specialist in the company can view numbers through a single portal connected to trusted, enterprise information and use it for both strategic and tactical decision-making.
Detection and analysis of spending patterns is automatic and predictive. Does travel policy need to be revisited? With real-time information coming in from its travel service providers, upcoming expenses can be anticipated and managed. Has a shipment or service gone unpaid after 90 days? The commission on that account gets reversed automatically. Analytics based on a single source of truth enable IBM to automatically inspect and predictively manage its control processes.
The Big Challenge: Operational Metrics for the Business Lines
Beyond expenses and claw-backs, the financial system provides strategic headlights as well. Analysis of the services pipeline quickly reveals the peaks and valleys in upcoming client engagements so that action can be taken to close gaps. Speeding time to value of strategic investments, financial processes, and systems are integrated within 6 months of a company acquisition. Visibility to underlying values is clear -- no mapping from one chart of accounts to another, no black boxes. Is there an issue about margins on a particular product? It's easy to drill down from top line financials to underlying factors.
The CFO dashboard at IBM features key performance indicators for finance as well as individual lines of business. Among the most challenging work today for IBM finance IT experts: collaborating with business units to develop indicators specific to their needs. Once developed, these are placed side-by-side with financial information on customized dashboards. Consistency and veracity of all information make it possible to view information, financial and operational, in multiple dimensions for quick decision-making.
What Our Clients Are Doing with Analytics and Optimization
Great strides are being made in the use of analytics by a number of companies, including:
- A major equipment manufacturer. With an extraordinary amount of time being spent to conduct periodic audit and analysis of controls, this multinational company needed a global standard for finance, accounting, and enterprise supply chain processes. By automating 75 percent of all controls, it was able to switch to a preventive rather than detective mode. A major part of the new approach involved integrating improved risk profiles of customers and vendors into the automated processes. One positive indicator of successful optimization: The number of reports generated for decision support and risk assessment went down by 90 percent.
- A major tax authority. A more effective way was needed to manage tax and debt collection in light of complex business, legal, and resource constraints. Advanced mathematical modeling of data was able to maximize overall return while factoring in critical constraints (e.g., issuing a warrant and instituting must be sequentially linked). Optimized collection decision based on automated analytics is expected to provide significant revenue boost.
- A leading consumer products brand. With surprisingly limited reporting capabilities, this company had limited access to end-to-end information for making key business decisions. By consolidating its information warehouses and implementing new analytics capabilities, it was able to optimize performance on a number of levels. It gained visibility to current customer demand through numerous statistical modeling techniques that improved forecast accuracy. It gained seamless integration in the supply chain process -- from forecasting through to shop floor planning and scheduling.
- A global pharmaceuticals company. In a turbulent industry, a two-pronged approach was needed to drive down the cost of sales while increasing customer loyalty. Integrating strategy into daily operations required optimizing business processes and a new approach to supply chain and customer relationship analytics. The company developed a scientific method for sales forecasting based on information on consumer trends, customer information, and sales and product information. It integrated supply chain planning across eight strategic markets and nine products, which resulted in a 60 percent reduction in the supply chain planning cycle time.
Envisioning the Intelligent Enterprise
Analytics leaders need to articulate a vision of where new capabilities lead for their organizations. By embracing advanced analytics across the enterprise, intelligent enterprises will optimize three interdependent business dimensions:
- Intelligent, profitable growth -- more opportunities for growing customers, improving relationships, identifying new markets, and developing new products and services.
- Cost takeout and efficiency -- the ability to optimize the allocation and deployment of resources and capital to create more efficiency and manage costs in a way that aligns to their business strategies and objectives.
- Proactive risk management -- less vulnerability and greater certainty in outcomes as a result of their enhanced ability to predict and identify risk events, coupled with their ability to prepare and respond to them.
Each of these dimensions is a critical part of optimization -- the impact of a decision or action along any one of them will have repercussions for the others.
A Leading Role for Financial Management
Based on our ongoing work with clients and our own finance transformation, we know that business leaders today, above all else, are in need of headlights (leading indicators, such as market share) rather than taillights (such as quarterly sales results). The most successful companies understand the value of analytics in developing insight and acting with foresight. Our study showed that companies that outperformed competitors were eight times more likely than underperformers to have analytic programs under way on an enterprise-wide basis.
Financial leaders can help to establish the best balance between common drivers across the enterprise and business-specific ones: margin and share, for example, on the one hand and the number of deals for a commercial unit or the number of new checking accounts for a retail one on the other. Have the marketing leader and strategic planner identified the right drivers for growth? Has the general manager identified the right ones for profit? Financial leaders, by using business analytics and optimization capabilities available today to address these issues, can serve as trusted advisers.
Another major area of collaboration between finance and the business: determining which business activities are core and then locating the line between fixed and variable expenses. Answers based on detailed scenario planning inform tough decisions on cost-saving measures for immediate survival as well as long-term growth. In industries where technology infrastructure is a leading cost area, such as financial services or telecommunications, the financial impact of IT virtualization for variable, end-to-end capacity requires thorough knowledge and analysis of operational drivers in every area of the enterprise.
Information Everywhere
More than 25 years ago, PC-based spreadsheets made every employee a data jockey. It fell to financial management to obtain the right information, from the right source at the right time, and to make this information comply with standards. Now, powerful new tools using advanced mathematics in combination with more robust and efficient computing power provide a foundation to integrate finance numbers with enterprise information about customers, supply chain, and workforce capabilities.
As trusted information becomes increasingly available to decision-makers in all areas of the business, and as analytic capabilities proliferate, the business of making decisions shifts from being intuitive and experiential to being fact-based. The proliferation of unstructured data and real-time information creates new challenges in creating common definitions and efficient, replicable processes for integrating them. How does this change the role of financial management? Deep collaboration with counterparts in IT, strategy, supply chain, and other functions will be required to evaluate the operational analysis of risk and performance across the business.
Our modern information environment is unlike any preceding it. Information is voluminous, its velocity is extreme, and its formats are widely varied. Information comes structured and unstructured -- in GPS logs, blogs, videos, podcasts, and tweets. From within and outside the enterprise, information arrives on a daily, hourly, and real-time basis. Sources include the Internet, automated processes, and sensor-equipped objects. This combination of volume, speed, and diversity makes using information well (or even using it at all) an increasingly daunting task.
Mastering New Information Sets
As if volume, velocity, and variety weren't enough, greater granularity makes information even harder to fathom. For example, individuals can now be identified by GPS position and genotype. And, in the world of intelligent objects, it's not only containers and pallets that are tagged for traceability -- medicine bottles, poultry, melons, and wine bottles are adding deeper levels of detail to the information ecosystem. This is a lot of information coming into to your marketing and supply chain operations. Are financial leaders prepared to help integrate, standardize, and analyze all of the new sets of information flooding the enterprise?
Expertise in the strategic use of financial analytics can provide a solid foundation for bringing information from extended ecosystems -- physical, economic, and social -- into strategic and operational business decisions. With the right alignment of analytic strategy, processes, and operations across the enterprise, analytics will create businesses optimized for today's economic climate ... and future ones as well.