We need to talk.

We need to talk.
Before management reporting can work as it should –
as a jumping off point for real conversations about the
business – companies should break some bad habits.
Did your last financial results meeting go
something like this?
Two weeks ago, the new product hit the grocery shelves,
albeit a bit late and to disappointing results. What went
wrong? Sales say they made their revenue numbers, but
with its slotting fees and chargebacks marketing tells a
different story. Production blames supply chain for not
providing enough raw materials; supply chain reports
insufficient lead time to meet a revised forecast from
sales. Logistics expects a lot of returns because of quality
problems, but QA doesn’t mention any outstanding
issues. After a few hours, nothing’s resolved.
It’s surprising how many CFOs of consumer products companies do not get the reports they need to solve problems
and make more effective decisions. They certainly get a lot
of reports, many fat and bristling with statistics; but often
these turn out to be full of facts, short on insights. Perhaps
most deadly to the perspective the CFO wants is the
“silo” approach to reporting, where each function tallies
up its own debits and credits without anyone providing
a moderating view of the big picture. But the whole is
greater than (or at least different from) the parts, and it’s
the whole that matters.
How could management reporting be improved to make it
a true exchange of valuable information?
In many consumer products companies, the answer is
found not in the reports themselves but in the practices
and processes surrounding the reporting process — in
other words, in corporate and individual behavior.
Getting the conversation on track
Management reporting should focus on the trends that
affect performance (whether that’s measured in sales,
margins, revenue, production volume, on-time delivery, or
any other appropriate and important metric) and on the
business drivers that affect value creation (as defined by
strategies and objectives). In doing that, reports would
answer these questions: “How did we do? What did we
do right or wrong? Where and why did we fail to perform
to plan? What does the future look like? How can we
affect that?”
Getting that kind of reporting quality can start with these
five steps.
We need to talk
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1. Set a good example
Many times, the complexity in today’s reporting — when
reports are too many, too long, too detailed, and too
broad in their scope — comes directly from the leader’s
own management style.
For example, if a CEO says one thing but does another,
management teams will sometimes over-report to cover
most possibilities. Or if a leader confuses chaos with
creativity, managers may have no choice but to pile on
detailed reports. Here are a few other, common potential
scenarios:
• When CEOs or CFOs don’t trust the quality of
information they’re getting, they’ll keep asking for more
reports. Or when managing executives don’t have a
shared understanding of the performance objectives
of the business (or of their role in achieving those
objectives), they’ll produce more reports to justify their
focus and performance.
• Executives who “manage to reports” instead of
“managing to value” encourage the generation and
churn of huge amounts of information; but this
information is not necessarily relevant.
• In companies where people work in silos, or where
business units and departments have to compete for
attention, management reports tend to focus on a
narrow set of activities without “connecting the dots”
to other areas. The CFO can see the trees, but not the
forest.
• Sometimes, a CEO or CFO will ask for a lot of ad hoc
reports, which then continue to get produced long past
the occasion that prompted them.
The CEO and CFO should set the tone for more effective
reporting with their own behavior— by measuring the
right stuff, rewarding the desired behavior, establishing
clear lines of accountability, and communicating values
and responsibilities.
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We need to talk
Effective practice: A good rule of thumb is to
encourage reporting that’s directionally correct
instead of precise and overly detailed. Of course,
that’s possible only if accountability is aligned with
responsibility and if cross-functional collaboration is
rewarded.
A new conversation
Once a week, the VP of operations in a consumer
products company reviewed sales and volume in a
meeting that included the leaders of each business
function and their finance staff — more than 70
attendees! In fact, he liked that the meetings were
“events,” that the agenda each week was “open,”
and that presentations and conversations during the
meetings were random and aggressive.
Then, in a cost saving initiative, the CFO rationalized
the company’s management reporting practices.
Everything changed — for the better. When
each management report had to address a critical
metric, the number and lengths of reports dropped
dramatically. The VP’s meetings included only four
key people; its topics were limited and relevant, as
attendees were expected to come up with an action
plan for closing any gaps between past performance
and growth targets.
2. Measure the right stuff
If a company has the wrong key performance indicators
(KPIs), it will most likely get the wrong behavior.
All the dashboards, spreadsheets, and reports imaginable
won’t move the business one step closer to its objectives
unless the measurement system encourages behavior that
adds value. When KPIs are wrong or missing, meetings to
solve big problems end in requests for more information;
analysts spend dozens of hours preparing reports for the
next iteration, only to find that the ground once again
shifts beneath their feet.
Getting the right KPIs in place starts with an understanding of value drivers (and it’s surprising how many leaders
don’t know what these are for their businesses). Then,
activities not contributing to value can be identified and
cancelled. With the right KPIs, the CEO or CFO can determine a shared understanding of what should be done
and who should do it. (Of course, as business objectives
change, so should KPIs; managing behavior is a constant
and continuous process.)
An effective performance management system should
align the goals of the company and the behavior of employees. Such a system has three components (Figure 1):
• Planning (where do you want to be?)
• Monitoring (how are you doing against objectives?)
• Improving (how can you change behavior to achieve
more effective results?)
Figure 1
Align the business to delivery on strategy
• Set strategy at the executive level
• Communicate throughout the organization
• Determine KPIs to drive strategy
s p al
us
3.Disc n d re
a
Active intervention to
realign the business
• Create an incentive
structure to represent and
reward the desired behavior
• Encourage broad dialogues
about performance
lan
a n d t a rg e t
Create
shareholder
value
er
f
ig orm
nm an
en ce
t
2
.
d Mea
ev sure
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1.P
an
Run the business and
monitor performance
• Develop management
reporting processes to
highlight KPIs
• Establish clear
performance standards
• Assign accountability of
metrics
Of these, it’s the third component that is most often lacking, as companies have plenty of performance information, but not much insight about what should get done
or be changed. The relevant KPIs close the gap between
strategy and execution by redirecting everyone to focus on
the desirable behavior. Finally, the effective KPIs can allow
a company to industrialize the gathering and compiling of
data. When processes and systems are in sync, and when
the required data is captured at the correct time, analysts
can be free for value-add, strategic activities. What’s
required are 1) an infrastructure that’s flexible enough to
keep up with changing demand and evolving business
models and 2) a data governance model that can maintain
business definitions and protect data integrity.
Effective practice: A good system of measurement
should balance complementary KPIs — effective versus
lagging, financial versus non-financial, corporate versus
business unit, strategic versus operational information,
output versus process — to help make the management reporting process dynamic and action-oriented.
What’s the score?
A consumer products company reorganized its business units to align with a new market strategy. In the
process, management realized that the KPIs were not
consistent with the new strategy. To execute against
the new strategy, the company’s leaders needed
to redefine KPIs across the business and institute a
balanced number of new metrics using a blend of
leading and lagging indicators.
Achieving the desired results in this effort depended
on getting business unit buy-in and organizational
agreement, including an understanding of why the
metrics had to change and a “business case” for the
new KPIs based on cross-organizational analyses.
Now, with the new metrics, management can view,
understand, and act on KPIs, thereby monitoring and
supporting the company’s progress against its new
market strategy objectives.
We need to talk
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3. Reward the desired behavior
Incentives and compensation drive people to perform well.
Employees want to affect results and then, ultimately, get
recognized for their actions. (One caveat: the applicable
metrics have to be in place, as discussed in step 2).
Then, why do companies so often try to establish an
integrated framework for managing performance without
addressing incentives? Employees will likely resist new
KPIs (or old ones, for that matter) if their behavior doesn’t
seem to have any tangible effects. When KPIs are set — or
changed — incentives should be evaluated.
This is where executive leadership comes into play. Too
often, incentive structures are thought of as an HR responsibility. But to achieve the desired behavior from the organization, a CEO or CFO should decide on a compensation
system based on metrics that are aligned with strategy.
While HR can have a role in designing and administrating
an appropriate and effective structure, the sponsorship for
any compensation philosophy should come from the top.
Effective practices: 1) When new KPIs are introduced to the organization, management should use a “phase in” period to allow employees time to understand
the new expectations for their performance. Only after that adjustment period
should compensation and incentive structures change. 2) Many components of a
reward system — including pay, bonuses, benefits, and recognition — should be
aligned.
Walking the talk
A consumer products company recently reviewed and revised its “future state”
vision and long-term strategic plan. Along with this change, the executives
evaluated and established a new set of metrics to define effectiveness in the
marketplace.
When introducing the new metrics, the company gave the employees one year
to absorb and adopt the changes. After that, new incentives were introduced to
enforce new behavior. By giving employees time to adjust, the company achieved
a more effective adoption of new behavior.
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We need to talk
The bad consequences of good intentions
Sure, I lowball forecasts, but what’s the harm?
I hit my targets every month.
A consumer products company set a growth target
of 12 percent, but rewarded managers against
forecasts without considering emerging trends.
Unintended consequence: Being measured by
forecast accuracy encouraged low expectations and
under-delivery.
Employees are compensated for output, period.
A food provider company had a higher-than-average number of food safety recalls. Quality was a
strategic priority; but operations management was
measuring on gross margin and inventory metrics.
Unintended consequence: By the time a recall
impacted long-term profitability targets, operations
management had already been rewarded for hitting
short-term numbers.
I’m compensated for my sales; so there’s no
upside to working together.
In a consumer products company, multiple sales
teams served the same customers. But because
the company measured employees by what they
directly controlled on their profit and loss (P&L)
statements, each team lacked visibility of others’
effects on its customers.
Unintended consequence: Customers didn’t see
a single face of the company, and multiple touch
points were confusing; competitors gained an
opportunity to steal market share.
4. Establish clear lines of accountability
If everyone is in charge of everything, no one is in charge
of anything. If everyone is held accountable for everything, no one is accountable for anything. These paradoxes trip up companies that think they’re doing the right
thing in making everyone answer to each core KPI.
Fundamental to effective performance management is
balancing individual behavior and accountability with
objectives for the whole enterprise. When assigning
accountability, executive leaders should evaluate and
decompose major KPIs into their basic building blocks,
thereby gaining an understanding of the true
responsibilities of each function and each role with
the organization.
Once responsibility is assigned, employees should be
educated on how they can directly affect outcomes, as
well as how their outcomes (plus the outcomes of other
areas) contribute to overall enterprise performance.
People who cannot affect an outcome (say, gross
margin) should not be held accountable. Incentives
should follow responsibility.
Effective practice: 1) Incentives should match accountability. 2) Collaboration
across departments, functions, and business units creates the high-quality state
where the whole is greater than the sum of the parts.
A win/win environment
In a consumer products company, one employee
has a customer-facing job of managing sales, while
another is responsible for production and distribution. The sales employee establishes and optimizes
product prices, while her colleague manages costs
in the manufacturing process. While the sales employee cannot directly impact these costs, variations
in commodities (inputs) can have a significant effect
on margin, which in turn can indirectly affect prices.
The sales employee works with the production and
distribution to understand supply chain trends and
fluctuation, so she can take these into account in
setting prices. Overall gross margin can improve. At
the same time, production can gain an understanding of price setting and should be motivated to think
about how to improve purchasing practices and
productivity. Collaboration allows both employees
to do a more effective job in the areas over which
they have true control. But it can also allow them
to influence and inform each other’s performance,
thus creating value beyond their immediate scope of
responsibility.
We need to talk
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5. Communicate values and responsibilities
New behavior begins with understanding.
Effective communication is a challenge for companies of
varying sizes. Incentives and accountability may be perfectly aligned and executives may be leading by example, but
people may still not be behaving in a way that is desired
to achieve the company’s strategic objectives. What could
be the reason?
Employees may not know either the company’s values or
the individual’s role in expressing those values in his or
her work. Sometimes, the problem is simply insufficient
or inconsistent communication. Shared identity tools and
diagnostics can be used to assess whether the employee’s
values and vision are aligned with the organization and to
understand what other factors could be incorporated to
motivate employees.
Effective practice: Change management should not be an afterthought. Instead,
change management should be discussed and planned for upfront, in parallel to
any initiative that will change how people work, so that proper communications
can take place. Recurring and meaningful communications that discuss changes
in terms of impact (What’s in it for me?) help set expectations appropriately.
Finding the agents of change
A retail company wanted to implement a strategic vision to “win the sale” and get
the organization on board, as one unified enterprise, across each channel. This
strategy was a shift from its then-current model in which sales were made and
measured within a channel (or silo, in effect).
KPIs were reviewed and revised to give employees credit for a sale regardless of
which channel the customer used. But the new wasn’t “sticking” because it was
not executed correctly; employees were comfortable with the way they’d normally
worked and the KPIs were not being enforced.
The CFO decided to run a diagnostic to see whether stakeholders understood and
shared the CEO’s vision. As a result, two things became apparent: 1) those resisting
the change were concerned for their own professional development and overall relevance to the company under the new model and 2) those supporting the change
could be enlisted to promote it effectively throughout the organization. With an
understanding of people’s motives, the CFO was able to refine the KPIs, making
them even more powerful tools of positive change.
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We need to talk
The bad consequences of good intentions,
cont.
As a good steward of financial assets, I allocate
every fixed cost.
A consumer products company wanted a fully burdened P&L — not just to direct economic decisions
(e.g., about pricing or return on investment (ROI)
on marketing) but also to be viewed as part of the
monthly management P&L. But no one understood
the allocation, and everyone resented being held accountable for costs they couldn’t influence or control. The numbers were ignored or fiercely battled.
Also, since Selling, General & Administrative (SG&A)
expenses were allocated across the organization,
the company lost sight of the fact that its SG&A-torevenue ratios are among the worst in the industry.
Unintended Consequences: 1) Time that could
have been spent on analysis and strategy development was wasted on developing, maintaining, and
explaining complex allocation models. 2) By hiding
the inefficiencies in the support functions, the
company missed an opportunity to streamline its
cost structure and become more competitive in the
marketplace.
Imagine this.
Now, your management meeting goes like this.
Contacts
For more information:
We know why the product performed poorly:
Tom Bendert
Principal
Finance Practice Leader, Consumer Products
Deloitte Consulting LLP
+1 212 618 4222
[email protected]
First, incentives for the launch focused on ‘on time’ delivery, not on any likely impacts on contribution margin or
market penetration. So, the product was rushed to market
before it was ready. Second, the sales team was late in
sending forecasts, so operations did not have enough
lead time to order the raw materials. Finally, an analysis
of the ROI of the marketing investment shows that print
ads would have been a more effective medium for marketing this product.
With a new integrated reporting tool, we’ll realign metrics
to promote shared accountability. An understanding
of significant variances (provided by analysts) can drive
action plans. And we’ll use marketing’s insights about
revenue trend by product and by region to design more
appropriate marketing campaigns and sales support. A
new contribution-margin-by-customer report shows some
of our customers are not as profitable as we thought. So,
we need a new incentive structure that will reward business unit managers for year-over-year growth in customer
contribution margin.
Elaine Liao
Senior Manager
Finance Practice
Deloitte Consulting LLP
+1 703 251 1195
[email protected]
Visit Deloitte.com
To learn more about our Consumer Products Industry
practice and our capabilities within the area of planning,
budgeting, and forecasting (PBF), visit us online at
www.deloitte.com/us/consumerproducts.
In this meeting, the conversation focuses on variances, key
business drivers, and future decisions and plans — those
management behaviors that can create more value. That’s
management reporting the way it should be.
We need to talk
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We need to talk