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Corporate Performance Management:

How Finance Can Implement a Winning Strategy June 3-5, 2007 New York, New York Conference Conclusions Paper

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Corporate Performance Management:

How Finance Can Implement a Winning Strategy June 3-5, 2007 New York, New York Conference Conclusions Paper

CFO Conferences
For more than ten years, CFO executive conferences and expositions have been the premier educational and networking events for senior finance executives at large and mid-size companies in the United States. CFO Conferences is a unit of CFO Publishing, the publisher of CFO magazine. CFO Publishing is an Economist Group business. CFO Conferences 253 Summer Street Boston, MA 02210 USA Telephone: 617-345-9700 Fax: 617-345-0037 www.cfoconferences.com Copyright September 2007 The CFO Publishing Corp. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission of CFO Publishing Corp.

Corporate Performance Management: How Finance Can Implement a Winning Strategy

Contents
Opening Remarks A Straight Story of CPM Success: Building Senior Leadership Support and a Strong IT/Finance Team Performance Management 2.0: The Next Wave for Improved Business Performance What Could Be Hidden in Your Occupancy Costs? The Path to Better Performance Gaining Traction with CPM Change ManagementInitiating and Leading Change in Your Organization Competing on Analytics: How Fact-Based Decisions and Business Intelligence Drive Performance Integrated Best in Class Finance Process at American Express Panel Presentation: Using Financial Intelligence to Drive Stronger Performance and Reduce Risk in Your Business Plan Proactively Managing Performance on the High Seas BCBS of Minnesotas Journey to Enterprise Performance Management Strategy Execution and the CFO in 2010Based on New Research from Dr. Kaplan and Dr. Nortons Balanced Scorecard Collaborative Sponsors Perspective 2 3 4 5 6 7 8 9 10

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2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

Corporate Performance Management: How Finance Can Implement a Winning Strategy

Opening Remarks
Mary Driscoll, President and Editorial Director CFO Conferences and CFO Research Services Corporate Performance Management is evolving in a new direction that can be termed CPM 2.0, observed Mary Driscoll, President and Editorial Director, CFO Conferences and CFO Research Services, in her opening remarks. Initially, CPM was about business processes: creating management processes and concepts that fit a complex organization, in order to get everyone working toward the same set of goals. In CPM 2.0, by contrast, the CFOs role is expanding well beyond the established performance management tasks of reporting, measuring, and forecasting returns. Thanks in part to the application of new technologies, Companies have reached the point where CPM has created greater efficiencies. The cost of finance is much lower today than it used to be, Ms. Driscoll said. Now, the objective is to make finance more effective and to influence outcomes. Increasingly, this means partnering with the business units to help them better understand the drivers of performance and make strategic decisions that will boost performance in the future. The catalysts of this shift include mounting regulatory pressure in the post-Sarbanes-Oxley era and competitive pressures stemming from globalizationall of which have expanded the responsibilities of the finance function.

In particular, finance is being called upon to help senior management and the business units analyze and understand external business information relating to the companys suppliers, customers, and trends in the industry. Traditionally, this is an ad hoc process, as opposed to the internal reporting process, which is very formal and detailed because it must adhere to statutory requirements, Ms. Driscoll noted. Finance is now bringing more discipline to performance management activities, she said. For instance, a lot of CFOs today are talking about including risk assessments in their formal plans. But manyif not mostcompanies still have a long way to go, however, to meet these new expectations. Citing recent surveys by CFO Research Services, Ms. Driscoll noted that less than 50 percent of senior finance executives who responded to a recent survey agreed that they were doing an excellent job at meeting their performance objectives. And 44 percent said their information technology systems still rely mostly on spreadsheets that require manual input of data. CFOs and the finance function expect to focus much more on making improvements that will bring them in line with the CPM 2.0 model. Over 60 percent of senior finance executives say they will make improvements over the next 12 months in financial reporting, planning, and analysis, while about 50 percent say they expect to invest in improving CPM functions.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

A Straight Story of CPM Success: Building Senior Leadership Support and a Strong IT/Finance Team
Tony Mitchell CFO Morrison Management Specialists Successful CPM requires teamwork among senior management, finance, IT, and operations, said Tony Mitchell, CFO of Morrison Management Specialists, a division of Compass Group and one of the worlds largest food services companies. Mitchell discussed the factors that have contributed to the success of Morrison Managements ongoing CPM efforts, as well as the range of solutionshigh-tech, low-tech, and no-techthat have emerged from the process. Senior management is responsible for providing the vision for CPM, and for reinforcing this aspiration by continually reviewing progress and providing encouragement and validation at the end of each specific project. But this is not senior management saying, Here are the targets, explained Mr. Mitchell. Instead, we go through a healthy negotiation process, which we think is crucial for making CPM a longterm success that promotes long-term thinking. The internal drive for Morrison Managements CPM initiative came from operations, Mr. Mitchell noted. Performance management efforts, he stressed, support operational initiativesthey arent an end in themselves. Planning at Morrison Management begins with operations telling finance and IT what they need to achieve in the next year. Finance and IT develop an overall plan that they introduce to senior management. Senior managers set targets regarding, for example, DSO or inventory turnsbased on the plan. Targets are tied to a bonus schedule, created at the beginning of the year. Both targets and bonuses are subject to change as business conditions change. Companies approach to performance management changes as their business models change, Mr. Mitchell

noted. Five years ago, Morrison Management observed that its business model was shifting from a fee-based model in which the company was paid a fee to manage food service for an accountto a model in which the company took P&L responsibility for its accounts. The P&L-based approach required the company to analyze and respond to a far more complex set of performance information for each account than the fee-based approach. The companys IT systems werent quite up to the task, so the company designed an e-finance system to track account performance. Operations, Mr. Mitchell said, detailed requirements and designed the system. Finance and IT executed the design according to operational needs. The result was an e-targets system that can generate what-if scenarios and estimates well before the books close. Later, this solution was expanded to include a budget module. In contrast to the high-tech e-finance system, Labor Tracker was a low-tech tool that addressed the companys need to measure labor costs at each of its divisions. This relatively simple toolwhich the company is gradually introducing to all of its divisionshelps managers track metrics, such as number of worker hours, which the regional directors review in a weekly conference call. Gaining better knowledge of its labor spending enabled Morrison to set a target for reduction in worker hours. Once the targets were set, the company was able to meet its reduction objectives in short orderin part by relying more on contract temporary workers. But performance management efforts are ongoing and, Mr. Mitchell pointed out, often iterative; now, the company has incorporated contract labor hours into its reduction targets. A similarly collaborative effort helped the company to achieve better cash flow delivery. A cross-functional team gathered lessons about what works from each division of Morrison Management as well as from its sister companies. The team then decided to convert each divisions measurement of cash flow to ROCE, with DSO and inventory turns acting as the key metrics. Only a simple Excel spreadsheet was needed to accomplish this. Crucial to success, however, was engaging senior management to pay attention and participate in a monthly review process, said Mr. Mitchell.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

Corporate Performance Management: How Finance Can Implement a Winning Strategy

Performance Management 2.0: The Next Wave for Improved Business Performance
Craig Schiff President and CEO BPM Partners Business Performance Management (BPM) is a set of technology-supported management and analytic processes that enable a business to define its strategic goals, then measure and manage performance against them. Craig Schiff, President and CEO of BPM Partners, offered an overview of the current status of BPM, examples of companies that have used it to improve their processes and reduce costs, and a prediction of what the next generation of BPM 2.0 practices is likely to yield. Core BPM processes include financial and operational planning, consolidation and reporting, modeling, analysis, and monitoring of key performance indicators linked to organization strategy. BPM can be applied to many areas of the enterprise, including sales, marketing, services, R&D, IT, and human resources. Adoption of BPM processes is growing, according to a recent survey of North American companies across various industries, with 50 percent of respondents indicating they have applied some aspect of BPM to the enterprise. Only a small number of respondents, however, say that they have adopted the business performance management in all its facets. Most users aspire to apply BPM to create a more streamlined budget process; budgeting and forecasting is the most widely used BPM component, and the balanced scorecard is the most widely adopted BPM methodology. Finance executives who took the survey praised the benefits of BPM, which include greater confluence of strategy to actual results, faster and better translation of data into actionable information, and greater ability to synthesize data from various sources into a single version

of the truth. All of these benefits, said Mr. Schiff, translate into improvements to the bottom line. For some large companies, the results of BPM adoption have been dramatic, he continued. For example, a telecom company where finance previously devoted 85 percent of its time to gathering information and only 15 percent to analysis was able to reverse that ratio. This helped the company to spot a $3.6 million spending problem in time to make the necessary adjustments and meet its budget. BPM 2.0 extends the original performance management model by leveraging technologyincluding data visualization, open source, and mobile accessto enhance ease of use and distribution. With these tools, companies can adopt applications that enable deeper and more forward-looking analysis, including predictive analytics, profitability analysis and activity-based costing, and external benchmarking. This helps companies bring Business Process Management to their BPM projects, achieving greater vertical depth by making implementation quicker and shortening the learning curve both for finance and the business units. Making better use of business intelligence tools enhances the companys predictive capabilities, Mr. Schiff said, and encourages a shift to more pre-built functionality, including driver-based, workforce, and capital planning, and budget creation wizards. The result is less need for consulting and the ability to more easily roll out new processes to more people. Mr. Schiff noted several potential barriers to success for companies attempting to adopt next-generation BPM, however. These include failure to designate an executive sponsor for the program and inadequate due diligence in selecting a consultant or vendor. Staff members need to understand the importance of confidentiality regarding the data that the system pulls together, Mr. Schiff said. More broadly, the initiatives executive sponsor must gain organization-wide participation to create both a single chart of accounts and the organizational structure thats required to achieve BPM goals.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

What Could Be Hidden in Your Occupancy Costs? The Path to Better Performance
Lauralee Martin COO, CFO, and Director Jones Lang LaSalle Building occupancy is a major cost for virtually every business enterprise, said Lauralee Martin, COO, CFO, and Director at real estate company Jones Lang LaSalle. Buildings consume 37 percent of all energy used in the US and 68 percent of all electricity, according to the US Department of Energy. Not only do these energy costs impact companies financial performance, said Ms. Martin, but they also underscore how businesses affect global environmental sustainability. The sustainability issue is now a major concern for companies, Ms. Martin noted, as governments threaten to tighten environmental standards and large investors such as JPMorganChase, TIAA-CREF, CalPERS, and CalSTRS adopt investment policies geared to promote more efficient energy use and less polluting energy sources. In response to pressures for a more environmentally friendly approach, most companies will focus on one environmental strategy that has the biggest impact on the bottom line, Ms. Martin said. This means that occupancy costs are the most likely focal point. By cutting occupancy costs through more efficient energy use and sustainable energy sourcing companies are able to substantially reduce their environmental impact: Reducing greenhouse gases, for most companies, means reducing electricity use, said Ms. Martin. Currently, electricity costs $2 to $2.50 per square foot on average, she continued. Companies can save $.10 to $.15 per square foot through better energy management.

At least 113 companies including Bank of America, Goldman Sachs, Bristol-Myers Squibb, Pfizer, and HSBC have set specific long-term goals that will result in elimination of 11 million tons of carbon emissions each year, said Ms. Martin. Companies that make these types of commitments and follow through on them can garner positive public attention as a result of their efforts, she noted. For example, Clean Air Countsa Chicago-based regional environmental grouprecently sponsored billboards highlighting Hewitt Associates and Jones Lang LaSalles successful efforts in reducing their yearly carbon emissions in the region by more than 15,000 pounds. And Bank of Americas One Bryant Place in New York City was recently honored when it announced a goal of reducing emissions by 9 percent between 2004 and 2009. BofA expects electricity savings of $.17 per square foot as a result of these reductions. Achieving these results requires strong organizational buy-in, Ms. Martin stressed. Sustainability initiatives require firm senior-management commitment to reducing energy expense, a clearly identified manager to run the program, and an established (and publicized) set of goals for energy conservation. Program implementation requires an effective energy supply purchase program, supported by the ability to measure and report progress and to benchmark performance. Thus far, only a few companies have figured out how to track their results. What is needed, however, Ms. Martin said, is a complete programnot something scattershot. That way, you wont miss opportunities for savingsand you will get full credit from customers and the community for your efforts.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

Corporate Performance Management: How Finance Can Implement a Winning Strategy

Gaining Traction with CPM

Jack Alexander Former CFO; Founder and President Value Advisory Group Why do some CPM projects fail, and how can the finance function ensure that they will succeed? Jack Alexander, President of Value Advisory Group, presented steps companies can take to develop their CPM processes and create value. Finance should focus on improving rather than simply measuring performance, Mr. Alexander said. Competition, innovation, and customer satisfaction are all areas that finance should seek to improve through performance analysis, he continued. To facilitate this, Mr. Alexander said, the CFO should educate all members of the finance function about the ways they can affect financial performance. Creating a robust dashboard is key to this effort. The dashboard should include a mix of leading and lagging indicators and non-financial as well as financial measurements. Including leading indicators and non-financial metrics allows companies to link the data emerging from the dashboard more closely to the actual activities of the business units, he said. But Mr. Alexander also noted a common mistake: treating all items on the dashboard as if they are equally important. Instead, said Mr. Alexander, the CFO and finance staff should focus on two or three key measures and merely scan the rest. These key measures will not necessarily be traditional or easy-to-obtain numbers: Overall, finance should seek to measure total return to shareholders and CAGR, he said; specific key measures might include percentage of revenue from new products or time to market. Dashboards created specifically for new product development should focus on milestone completion, not just expenditures: Underspending on a project doesnt mean its well-managed, Mr. Alexander noted.

Benchmarking should also aim to improve performance, not just track competitors results. Study how performance relates to value, Mr. Alexander advised. Look at companies that have done a great job, and look at how they have achieved that result. Companies to benchmark against should include industry peers and competitors, customers, and some unrelated organizations that are recognized as following best practiceseven an appropriate index such as the S&P 500. Your goal should be to understand how these other companies achieved their results, and, in doing so, help your company be top-quartile in return to the investor, Mr. Alexander said. One key measure is days sales outstanding: Finance needs to understand the impact of revenue linearity on DSOyet most companies do not have a plan for improvement. Enterprise-wide distribution of the insights gained from the dashboard and benchmarking requires active support from the C-suite and engagement of the operating units in the project. Its very important for this not to just be a finance or IT project, Mr. Alexander stressed. The dashboard doesnt replace direct conversation on the shop floor. Once first-line supervisors understand the impact of the analysis that finance producesand how it traces back to their operationstheyll become extremely engaged.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

Change Management Initiating and Leading Change in Your Organization

Theresa Moulton CEO Performance Change Initiatives Increasingly, finance and the CFO are taking the lead in change management. But they should not confuse a change management project with a numbers exercise like the budget cycle, or fantasize about the power of data to convince other people in your organization that they dont have a choice but to support it wholeheartedly, warned Theresa Moulton, CEO of Performance Change Initiatives. Change management is completely different from those kinds of exercises. Ms. Moulton offered a menu of precautions and practical suggestions to help CFOs keep their companies performance management efforts from joining the gloomy statistic of 70 percent of all business initiatives that fail. Senior-level buy-in is critical, she said, noting that 90 percent of failed initiatives are caused by lack of senior management support. This support, she said, must include not only on-the-record endorsement of the project, but also active CEO involvement. Finance should also engage other stakeholders in the process early on and inform them of the consequencesto themselves as well as the organizationif the initiative fails, Ms. Moulton continued. Finance, she noted, should also assume accountability for the success or failure of the initiative, where appropriate.

For a change initiative to succeed, its champion within the organization must be able to answer five questions, according to Ms. Moulton: Has the impact of the initiative been anticipated before implementation? How can we ensure and test that the right level of senior-level buy-in exists? How do we assure that all stakeholders are involved? How do we get end users to own their roles in data validity and accuracy? What is needed to formalize our approach to change management? To provide effective leadership, finance should sharpen its skills at building networks throughout the organization, Ms. Moulton saidtaking care, for instance, to ask for suggestions along the way from the business and operating units. Change management is about letting the different stakeholders know about the project, so that the right set of expectations are set at the beginning, she said. Scenario planning at the commencement of any project is one way to create realistic expectations, as well as to anticipate mid-course corrections that could otherwise damage commitment to the project. Finance should also continually develop and update change management practices and activities, in order to evolve a robust set of procedures that can be applied to new projects as they come along. In the cause of achieving buy-in, the CFO should take care not to oversell the project to the CEO based on finances status as keeper of the money, since change management is a distinctly different responsibility. And finance should also avoid the trap of assuming that other participants, such as human resources, can take on certain responsibilities when they may not have the resources to do so, Ms. Moulton said.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

Corporate Performance Management: How Finance Can Implement a Winning Strategy

Competing on Analytics: How Fact-Based Decisions and Business Intelligence Drive Performance
Tom Davenport Presidents Distinguished Professor in Information Technology and Management, Babson College Author of Competing on Analytics After playing a marginal role for decades, analytics are playing an increasingly prominent role in corporate decision-making. One reason for the rise of analytics, said Tom Davenport, Presidents Distinguished Professor in Information Technology and Management at Babson College, may be that the technology for processing data and generating analyses has greatly improved. But a gradual shift in corporate culture may also play a role, he noted: Weve been trying for decades to create quantitatively oriented executives. Maybe weve finally succeeded. Business analytics are being refined to yield more competitive advice that can provide a cause-and-effect understanding of how specific business units and projects contribute toor take away fromthe bottom line, said Mr. Davenport. Companies that derive their primary competitive advantage from using such analytics include: Marriott, where new revenue management practices that address, for example, room-rate pricing optimizationhelped foster an 8 percent revenue advantage over the hotel chains competitors. Progressive, where a new focus on the pricing of risk helped the automobile insurer to shape a more profitable customer base. RBC, which developed a sophisticated set of customer analytics, including family relationship research, that provides the company a more complete picture of how its customers make decisions and the risk profiles presented by individual customers.

Proctor & Gamble, which realized substantial savings by using analytics to revamp its supply chain a year ago.

Harrahs, which used the analytics generated by its customer loyalty program to raise revenues at its casinos without losing customers. A minority of companies today are clearly competing on their analytical capabilities, Mr. Davenport said. But many others are advancing by stages toward that status, by consistently detecting logical and statistical relationships among non-financial and financial measures. The good news, he said, is that theres a strong correlation between how far along you are in this process and your companys performance. Well-developed competitive analytics, he said, enable the company to detect intangible capabilities that it may have, relate them to key performance drivers, and then relate those drivers to the financial metrics that determine value creation. Accomplishing this level of alignment requires strong leadership as well as an enterprise orientation: Obtaining the full benefit of a robust analytical capability is not possible unless it consolidates data across the organization, Mr. Davenport said. At the same time, finance must take the lead in educating managers at the business-unit level on how to use competitive analytics, and when to use analytics instead of traditional, more subjective methods for making decisions.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

Integrated Best in Class Finance Process at American Express

Alan Gallo, SVP, Corporate Planning and Analysis American Express The goal of CPM is to provide meaningful metrics and analyses that link company strategy to core processes and activities. Alan Gallo, SVP of Corporate Planning and Analysis at American Express, described how his company optimizes financial forecasting to achieve this goal over both the short and long terms. American Express has determined that it will sustain annual revenue growth in excess of eight percent, 12-15 percent annual earnings growth, and 33-36 percent annual ROE growth. Studies show that it is challenging for even the largest companies to reach these targets over a sustained, multi-year period. American Express has now done so for five straight years. The finance functions contribution to this record falls into three areas, Mr. Gallo said: Helping the company make the best possible investment decisions, Helping the company improve margins and returns, and Creating best-in-class planning, reengineering, and forecasting processes. Typically, corporate planning processes forecast to a wallthat is, they are driven by the budget and by reporting calendars. This shortens the companys time horizon for planning and often causes companies to neglect the link between company performance and economic and business conditions. And while significant cycle times are required to produce plans and forecasts, corporate planning functions often lack the tools they need to gather and process information in a timely way.

By adopting rolling forecasts, Mr. Gallo said, American Express was able to give greater visibility to changes in metrics that are crucial for the company to meet its targets. Monthly results reviews and risk/opportunity assessments are subject to ongoing investment optimization exercises that generate quarterly forecasts. Results validate the business strategy, and in turn help finance generate a long-range plan and targets that are revised annually. Six years ago, American Express also began a reengineering program aimed at improving margins. Now, every business unit and operating group within the company has targets for doing so that feed directly into their compensation management. Cost, revenue, and business model initiatives generate ideas for new initiatives and improvements. These new initiatives are linked to incentive compensation targets. An R6 system tracks the quarterly performance of the entire initiative. Making sure everyone within the organization uses the same standard metrics and methodology to evaluate performance is critical for success, Mr. Gallo said. In the context of software systems adoption, for example, this means achieving complete familiarity with manual processes and a disciplined approach to them prior to implementing the new system. This disciplined approach also ensures that the company will be capable of weeding out investments that should not be fundedmaking sure the process is a funnel, not a tunnel, for new initiatives. Making a promising new initiative work requires leadershipparticularly from the CEOand the ability to demonstrate progress along the way: A quick win in six months ensures progress, Mr. Gallo said. For the finance function itself, teamwork is important. American Express optimizes teamwork in finance by making sure that its finance professionals acquire experience in all major areas of the finance function, as well as experience in business-unit line jobs. Everyone in the finance function is expected to develop essential capabilities in four foundational areas: quality management, managing a global team, market experience, and managing large teams.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

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Corporate Performance Management: How Finance Can Implement a Winning Strategy

Panel Presentation: Using Financial Intelligence to Drive Stronger Performance and Reduce Risk in Your Business Plan
Scott Leibs, Senior EditorIT, CFO Magazine (Panel Moderator) Tim Reed, VP, Enterprise Systems, McGraw Hill Delbert Krause, Director, Product Marketing Performance Management Solutions, Cognos Phil Strand, General Manager, Financial Intelligence Practice, SAS Stephen Lukens, Partner, Global and Americas Financial Management leader, IBM Global Business Services Scott Leibs, Senior EditorIT at CFO magazine, led a panel discussing how finance intelligence can best be used to generate better decisions and more forward management of the business. The panelists, including finance executives at major companies as well as technology vendors, agreed that the finance function is best suited to lead the implementation of an organizationwide CPM effort, in part because of the breadth of its vision, but also because finance has the strongest motivation to get the metrics right. Finance is the only organization in the company where executives have gone to jail if the numbers are wrong, noted Phil Strand, General Manager of Financial Intelligence Practice at SAS. The CIO can architect the system, but the responsibility for certifying the results rests with the CFO and the controller.

What sets CPM apart from business intelligence is the motivation behind the data gathering and analysis, noted Delbert Krause, Director of Product Marketing Performance Management Solutions at Cognos. This motivation is twofold: making quality decisions faster, based on an understanding and assessment of future performance gaps; and improving visibility of analysis. SASs clients are concerned about the impact on their other businesses if something goes wrong in one of them, said Mr. Strand. For them, what we want to get from CPM is analytical performance management. For CPM implementation to succeed, the CFO needs the systems and processes created under the CPM umbrella to provide three things, said Stephen Lukens, Partner and Global and Americas Financial Management leader at IBM Global Business Services: insight on the performance of the business, insight into how to grow the business, and insight into risk. Business growth insight, in particular, requires moving from CPM to business performance management, and spotting upside opportunities as well as downside risks for senior management and the business units. Differences arise between companies that have implemented a CPM process (or are in the process of doing so), based on the level of centralization in the organization whether the initiative emerged from the top, down or from the bottom, up. While the project can work either way, panel members agreed that each approach requires a different emphasis to make it successful. A top-down initiative benefits from senior-management buy-in. But the projects champion then must work to build pockets of enthusiasm further down in the organization, said Mr. Lukens. Bottom-up CPM initiatives often are motivated by a desire to stop the pain caused by a specific problem, Mr. Strand pointed out. After that immediate problem is solved, he noted, you can then go to the CEO to gain a mandate for a broader effort.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

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In either case, senior management support is crucial, the panelists agreed, and this requires early evidence that the CPM project is meeting its goals. Youve got to get a win at the beginning so that you can be an articulate champion, said Mr. Reed. Another challenge to CPM success is getting the right internal resources to deliver the project. When initiatives come from below the senior-management level, proponents may be tempted to think about solutions in a more traditional framework, Mr. Lukens said. Other key staff may take a great deal of time to become familiar with the concepts behind the new systems and processes. Another critical component of any CPM transformation is shutting down legacy systems, said Mr. Reed. The point is not to introduce new systems, but to change the culture, he noted. You have to shut down the old systems as quickly as you bring on the new ones. If you dont, youll have to support your staffs use of the old systemand a lot of people will return to what theyre familiar with.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

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Corporate Performance Management: How Finance Can Implement a Winning Strategy

Proactively Managing Performance on the High Seas

Greg Bozigian former Director of Financial Planning Princess Cruises; Senior Solutions Architect, CBH When Princess Cruises was purchased in 2004 by Carnival Corporation, senior management decided to implement a new CPM system for the company, which offers land-based Alaskan tours as well as high-seas cruises. One motivation was the complexity of the operation, explained Greg Bozigian, former Director of Financial Planning at Princess Cruises and now Senior Solutions Architect at CBH. Operating the cruise line required a complex rotation schedule for crew members, and the company had to pay the crew in their home currencies. The company also had extensive purchasing requirements as it stocked food and other supplies for its floating resorts. At the same time, anti-terrorism measures rendered some ports off-limits for long periods of time, fuel prices were soaring, and the company was working swiftly to comply with Sarbanes-Oxley requirements. Princess wanted to make its metrics and analysis more forward-looking, more visible to a senior management concerned about controlling costs, and much less time consuming. It also wanted to change its culture, freeing up staff in finance and the business units to spend less time on aggregation and more on analysis. We couldnt rely on 500 spreadsheets anymore, said Mr. Bozigian. Princess picked Cognos to supply its new CPM systems. Especially important to management was improved forecasting. Fuel rates, for example, can have an immediate and drastic effect on Princess Cruises costs. With the new CPM systems, finance can supply detailed forecasts outward to the end of the month and project any changes in the direction of fuel rates as soon as they appear, without relying on IT to execute the work. Consolidating its entire budgeting and forecasting operations on a secure Web site eliminated the security headaches associated with gathering spreadsheets from different parts of the company.

Pitfalls in adopting a new CPM architecture can include scope creep. Mr. Bozigan suggested a phased-in approach, rather than attempting to roll out too much of the new structure on an overly ambitious schedule. Anticipate having to assist some staff members as they adjust to the new system, he added, and work closely with IT to correct problems with the architecture at each step of implementation. The challenges of CPM implementation can actually work to bring different areas of the business into closer alignment, noted Mr. Bozigan. At Princess Cruises, the CPM implementation project fostered closer ties between finance and the business units, as they worked together to plan the overall structure of the new system. The adoption of performance management methods has also encouraged key staff to develop a sense of ownership and accountability for the data they generate and fostered more interaction between shoreside personnel and those on ships. And it has enabled Princess Cruises to improve its staffing levels, even as it delivers more robust data and analyses. A few years ago, we had twice the number of analysts, Mr. Bozigian said. The performance management effort at Princess Cruises has been so successful, he said, that corporate parent Carnival has extended the Princesss CPM structure to another business unit, Cunard Cruise Lines.

SEPTEMBER 2007

2007 CFO PUBLISHING CORP.

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BCBS of Minnesotas Journey to Enterprise Performance Management

Rochelle Myers Director of Business Architecture and Performance Management Blue Cross and Blue Shield of Minnesota Enterprise Project Management enables companies to monitor and manage their various projects and the processes, methods, and application packages they use to execute them. Rochelle Myers, Director of Business Architecture and Performance Management at Blue Cross and Blue Shield of Minnesota, discussed BCBSs recent performance management implementation and the resulting improvements. As a health care company, we are focused on managing costs and claims adjudication, said Ms. Myers. We also need to organize interaction of our client groups and members to make the best, most cost-effective decisions. Performance management allowed BCBS to bring its resources to bear more intelligently and efficiently on three areas: IT projects Process management HR managementparticularly employee satisfaction, engagement, turnover, and attrition

Incompatible legacy systems once constrained BCBS from making these improvements. BCBSs performance management program, which it implemented using the Performance Power Grid methodology, offered a way to integrate BCBSs information collection, delivery, and analysis. This helped the company to lower costs, maximize its IT investments, and improve the level of service and information it provides to customers. At the same time, performance management facilitates communication and information sharing with BCBSs operations around the country. This concentrates knowledge and expertise in the corporate center and helps to make the enterprise more forward-looking, said Ms. Myers. Performance management enables BCBS to make factbased decisions in a timely manner, not just month-tomonth but day-to-day if needed, Ms. Myers said. Performance Power Grid allows management to measure the companys performance in executing its strategy, drilling down and focusing on specific transactions. It then cascades the results to the operational level, where they become immediately useful in running the business. Network management, contracting with purchasers, design of customer-directed solutions, claims processing, and customer service all benefit from this timely dissemination of information. With performance management systems in place, BCBS is now moving into a second phase of performance management improvement, The next phase will focus on IT processes, including product management and value delivery, security management, and the help desk, Ms. Myers said.

2007 CFO PUBLISHING CORP.

SEPTEMBER 2007

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Corporate Performance Management: How Finance Can Implement a Winning Strategy

Strategy Execution and the CFO in 2010Based on New Research from Drs Kaplan and Nortons Balanced Scorecard Collaborative
Philip Peck, Director Financial Management Practice Palladium Group Michael Contrada Executive Vice President Palladium Group How can the finance function increase its contribution to strategy execution? Philip Peck, Director of Financial Management Practice and Michael Contrada, Executive Vice President at Palladium Group, offered a look at how the CFO can most effectively act as a business partner, based on a decade of work with the Balanced Scorecard Collaborative. Finance can make a vital difference in enterprise success by leading the development of a strategy map and balanced scorecard for the company. First, finance should clearly articulate its own strategy and align it with the overall enterprise strategy, Mr. Contrada said. Finance should then allocate resources within finance to be consistent with that strategy. Strategy maps and the balanced scorecard tie all of these elements together, linking leadership to management of initiatives, process improvements, and employees' everyday actions. This process helps the company to identify its big ideas the major items that drive revenuesand focus on how to allocate resources to maximize profitability.

On average, companies only realize about 60 percent of the potential financial performance their strategies promise, said Mr. Peck. This suggests the crucial opportunity to close the strategy/execution gap: understanding your performance gaps, and understanding what your customers requirements are, he said. This understanding can then be translated into operating terms using the strategy map and the balanced scorecard. The principal reasons for the failure to make these connections are inadequate or unavailable resources, failure to clearly define actions required to execute the strategy, unclear accountability, and inadequate performance monitoring. Companies must commit the resources needed to make the strategy work, said Mr. Peck, and the planning process is the glue that keeps operations in line with overall objectives. Proper resource allocation requires distinguishing between forecasting and target-setting. Rolling forecasts, for example, can improve visibility and increase capacity to predict performance. They require an integrated planning model that can impart a deeper understanding of the companys underlying business, highlighting causal relationships and not just correlations or gut-instinct hypotheses. Finance should develop the tools necessary to enable such planning, Mr. Peck said. One consumer products company cited by Mr. Peck developed mathematical models based on data it gathered about the users of its products. The company used these models to assess key elements that determine market share, including sales promotion, elements of the distribution channel, and advertising spending. This modeling helped the company identify the elements like customer service, for examplethat make the greatest overall contribution to its profits.

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Sustaining this performance management process requires periodic review and analysis of key drivers of performance, quantification of the impact of the companys major strategic bets, and optimization and alignment of key process components. Throughout, the key assumptions behind the planning model must remain transparent. Mr. Contrada also advised holding separate meetings for strategy and operations, to ensure that day-to-day matters do not dominate the strategic review process. A robust technology platform is also critical to enabling an integrated planning process, Mr. Contrada said. Such a platform would include data integration and data management functionality, along with powerful analytic capabilities. Another essential component to change, said Mr. Peck, is a human capital platform that ensures employee readiness and goal alignment. Finance can create a map that links strategic processes with job families and the competencies that each job family must cultivate to play its strategic role. Finance can also hire, train, and develop professionals equipped with the critical thinking abilities needed to support planning and decision making. These efforts may well have the effect of turning finance into a seedbed of managerial talent for the entire company, the presenters notedand these professionals in turn can help others in the organization to internalize the language and awareness of its strategic model.

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Sponsors Perspective

Corporate performance management 2.0

The next wave for understanding and improving future performance No one seems to dispute the idea that corporate performance management (CPM) done well is worth it. Organizations with effective CPM get results. They align and collaborate for collective success. They build mutual value for customers and shareholders. They make decisions in holistic context, based on one credible version of the truth. They quickly identify threats or opportunities, and respond with agility. For most organizations, though, this vision has been elusive. Spending on CPM initiatives is expected to exceed US$24 billion this year. Expectations are high, but payback is often disappointing. On average, companies reap about 60 percent of the returns they anticipated from their strategies, said Philip Peck, Director of the Financial Management Practice at Palladium Group. Inadequate resources, muddy strategies, unclear accountability, lack of information and weak buy-in threaten to thwart even the best intentions. Successful organizations are overcoming these limitations by embracing a new model of CPM, with three main phases: See it.Create a single version of the truth, as Craig Schiff, President and CEO of BPM Partners, put it. The technologies are readily available to integrate, cleanse and validate mountains of disparate data with speed and accuracy. Manage it. Focus on how to allocate resources to maximize profitability, said Michael Contrada, EVP at Palladium Group. Optimize outcomes from people, technology and money. Activity-based costing, profitability analysis and other focused applicationsas part of a unified CPM platformdeliver new management insights from traditional information sources.

Improve it. Dont just report the past and control the present; proactively improve the future. This is CPM 2.0, said Mary Driscoll, President and Editorial Director of CFO Conferences and CFO Research Services. Where the old model of CPM focused on measuring, reporting and forecasting returns, CPM 2.0 brings finance and business units together with predictive analytics to better understand the drivers of performance and strategic decisions that will boost future performance. Granted, what organizations do with that information is another matter. Presenters at the CPM conference agreed that CPM is vulnerable to a host of cultural constraints, such as executive passivity, misguided incentive programs, internal turf wars and an us versus them mentality. Those cultural issues must be addressed with change management processes, but the technology exists today to help ease or erase these cultural barriers. SAS and corporate performance management SAS softwareused at 43,000 customer sites worldwideprovides the broadest, deepest range of solutions for CPM 2.0. Our software is built on a unified platform that integrates all the necessary elements: quality data from across the enterprise, advanced analytics to transform that data into valuable insight, predictive foresight and the means to share this information with decision makers at all levels. SAS is the only vendor that completely integrates leading data warehousing, analytics and business intelligence applications in a unified platform. Since 1976, SAS has been giving customers around the world THE POWER TO KNOW. To find out more about SAS for performance management, visit www.sas.com/solutions/pm. For more about SAS Financial Intelligence, visit www.sas.com/solutions/financial/.

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2007 CFO PUBLISHING CORP.