Throw Away Your Financial Statements: Managing by Metrics

Accounting systems have always had two primary goals: track information in detail and generate financial and operational reports. Until recently it has not been technologically possible to do anything else., except process information, create invoices, pay invoices, pay employees, track costs, and generate financial statements at the end of the month. That's fine, but the problem is that financial reports are sometimes generated forty-five or more days after a fiscal period begins and the information they present must, out of necessity, start at the highest, most general level. If the results are below or even above expectations, additional reports may need to be generated and studied in an attempt to determine what went wrong or right. In addition, the factors contributing to poor financial results may have started their downward trend at the beginning of the fiscal period and will therefore still be creating problems forty-five or more days later. I use the word "later" because the drill-down analysis will require several days if not weeks to complete, once the financial statements have been published.

This style of after-the-fact management may have been the only way to conduct business in the past, but technological and more specifically, reporting advances now make it possible to identify these problem areas as they develop.

Management by Metrics

Technology can currently support the concept of digital dashboards that can display information in a graphical format, with whatever level of detail may be required. Rather than starting with the highest level of information analysis and presentation (which are the standard financial statement) users can "flip" their priorities by identifying these critical KPIs, track these values on whatever time frame is best suited, isolate those KPIs that require attention, take steps to improve the KPIs, and then track the results to confirm that the steps taken have the desired effects.

The key to this proactive management style is that if the correct set of KPIs is identified, closely monitored, and effectively managed, the financial statements will take care of themselves. In essence management by metrics eliminates the need to publish financial statements and their underlying operational analysis reports. Managers no longer have to wait for periodic reports and then invest additional time trying to determine what went wrong (or right).

Naturally there is one significant proviso. While the concept of management by metrics will improve efficiency and effectiveness, it will do so only if the correct set of KPIs is identified, responsibility assigned to the correct set of managers, and managers react quickly to an ever-changing set of business imperatives.

To some extent it has always been possible to identify and publish KPIs. Most accounting systems support some form of report writer that allows users to extract the information required and publish that information in report format. In addition most products supports some form of export whereby information can be exported to a spreadsheet and KPI graphs can be created.

The advantage of a digital dashboard is that users do not have to rely on static reports that display a single value or even that value over x number of weeks or months. Presenting graphical information in a spreadsheet is almost the same as a digital dashboard but users do not have to export/import the information or flip from on spreadsheet to another to view multiple KPIs.

Putting Management by Metrics into Practice

Digital dashboards present constantly refreshed information to users and only the information of interest to that user is presented. Unfortunately most accounting software vendors have not yet taken the concept to its most effective potential so we cannot really cite specific systems as examples. I suspect or hope that vendors or resellers will develop their systems further or begin to really understand what Management by Metrics is all about.

Confronting Core Global Trade Problems: Order, Shipment, and Financial Settlement

To reach its aspirations of creating an end-to-end global trade management (GTM) solution, TradeBeam, a leading provider of global trade solutions, has designed several so-called "solution blueprints" for solving specific global trade issues. Solutions range from providing import shipment visibility and trade compliance to eliminating financial discrepancies while managing letters of credit (LC). TradeBeam's Solution Blueprints begin with the key pain points of global trade and identify tools and strategies available to corporations seeking the advantages of optimized GTM. They include a non-prescriptive set of GTM applications that, individually, may add significant value to a user corporation while solving specific export management problems. The idea is to align strategies with finance and logistics organizations and to establish a beachhead with a relatively quick proof of concept that starts automating a defined set of processes and provides payback in several months. Given that the GTM market is still relatively new, TradeBeam has done an impressive job establishing itself as a pioneer.

Part Four of the TradeBeam Keeps on Rounding Out Its GTM Set series.

To broaden its offering, TradeBeam has embarked on a series of careful acquisitions. Its acquisition of SupplySolution has helped TradeBeam produce its collaborative inventory management (CIM) solution blueprint, which shares and communicate parts levels, shipment data, and forecast to anticipate and manage shortages and schedule changes through event driven alerts. In doing so, the solution solves business problems like poor inventory visibility through the networked supply chain, excessive buffer inventories, and costly impact of shortages and schedule changes. TradeBeam also has other acquisitions bundled with its in-house, organic development.. Export management, import management, trade finance, legalization, global trade content, insurance and claims management, letter of credit, and supply chain electronic management are other solution blueprints that TradeBeam has developed or is in the process of releasing. TradeBeam's Letter of Credit Solution Blueprint and SCEM Solution Blueprint are two that are particularly noteworthy because both their core functionality came from acquisitions and lead to significant advances in the field of global trade settlement solutions

TradeBeam Letter of Credit Solution Blueprint

TradeBeam aimed to reduce discrepancies and improve efficiencies in the financial supply chain through automated document preparation and collections, managed LC creation, and issuance expiry and draws. Thus it acquired LC Express in 2003, IFR, and eTime Capital in 2002, which has allowed TradeBeam to develop its impressive LC methodology. The transactions were stock and cash deals, where TradeBeam acquired the companies out of bankruptcy. eTime Capital had spent over $45 million (USD) developing solutions for its customers to helped them optimize their cash flow cycle by applying a groundbreaking technology and a differentiated capability linking financial settlement to the global trade logistics business processes through reconciliation, exception management and real-time reporting. These capabilities have meanwhile provided an excellent complement to TradeBeam's global trade business process and document management solution. Automating the overall letters of credit (LC) process to ensure accuracy and reduce the discrepancy rate is not simply a matter of automating LC issuance. The process if far more complicated because automation is a necessary precursor to integrating the entire supply chain. LC are one of the most important payment and financing vehicles for international trade, because they offer security and risk mitigation. However, in exchange for this security, there are additional costs and challenges. For example, up to 70 percent of all LC documents submitted to the bank for payment are rejected upon first presentation because the documentation has been issued incorrectly. This leads to payment delays, additional fees, and in some cases, non-payment of the drawing. Other LC-related challenges are complicated and lengthy application process, delays in conducting the transaction due to the long issuance process, the strict and often complex documentary requirements, associated secondary and penalty fees, and the high susceptibility to errors because multiple parties must produce documentation.

The result was TradeBeam's Letter of Credit Solution Blueprint, which manages existing LC use and relationships for over one hundred and fifty corporate clients. It synchronizes payment terms and critical supporting documents to enable both electronic LC creation and bank presentation. Part of the secret to TradeBeam's success lies in its document management and reconciliation capability that generates documents based on the LC terms, making use of business partner profiles, electronic data transmission, and templates to minimize data entry. Paper and electronic distribution of LC documentation can be made to banks, trading partners, or any service provider. All documents created and managed by TradeBeam are compliant with Uniform Customs and Practice for Documentary Credits (UCP500) and Electronic Uniform Customs and Practice (eUCP).

People or Resources: The Financial Sector in a Crossroads

Ten years ago, in the mid-nineties, the financial sector faced four main challenges: market globalization, financial freedom, non-intermediation, and the importance of new technologies in business practices. Today, the first three challenges have been met, while the fourth is still being grappled with.

The fourth challenge, technology, is the main obstacle facing every financial entity—from banks, savings banks, and rural banks, to credit unions, insurance companies, and other financial intermediaries. How technology can be harnessed in the case of human resources is particularly challenging. Specifically, how can human resources be efficiently managed through knowledge-supporting technical tools.

Generally speaking, technology solutions must be used by organizations seeking to maximize human resources. Moreover management has also become more complex, or, at least larger due to the growing number of people that comprise an organization. The old concept of personnel cards, for example, has paved the road for "people management" tools. They have become necessary, particularly in an environment such as the financial sector, where resources have become global, and more complex management methods are needed to administer people.

Making functionality more professional

Also, compared to a decade ago, human resources function has become more professional and technical. Old personnel management methods evolved into human resource management and has now emerged as a modern, people management concept. This evolution is due to three decisive factors, present since the mid-nineties: the diminishing number of jobs in the market and the battle for talent; the idea that human resources are the most important asset in a company; and, the need to introduce technology with technical support. Together with the need to organize and manage knowledge about and for people, tools and solutions have been created with varying degrees of success. Most of the solutions use an extensive approach, which can be applied to every functional area in non-specialized organizations or companies. Additionally, only a few of the larger software companies have intensively focused on classical management functionalities.

Technology-based solutions that help companies to efficiently manage their resources are defined by sector. A specific activity sector, such as finances, demands solutions that have a good fit and are customizable. Solutions should be as flexible as the business is, changing with the sector, and adapting to the evolution of an activity's parameters. The financial sector also demands that implementators be responsive, innovative, and creative. In the case of human resource function, it has had to overcome an crucial obstacle: how to create joint value. This is essential for its consolidation as a core part of a business. Human resources has gone from being perceived as a secondary activity, as described by Michael Porter in Competitive Advantage, to becoming a primary activity that needs to improve to avoid being outsourced. Human resource function has reached high efficiency and effectiveness due to its professionalism. It has also been helped greatly by management tools.

Getting Strategic Planning and Financial Planning in the Same Bailiwick

By partnering with operations on balanced scorecard initiatives, financial managers are helping their companies focus on critical business processes and gain consensus on the critical set of measures to help drive desired business results. In addition, with the explosion of Enterprise Resource Planning (ERP) and e-Commerce systems, financial executives are leading the charge in going from theory to practice by developing a cascading measurement architecture and providing the key linkages to other relevant information (e.g., products, projects, performance plans, and organizational data).

Certainly, the financial community has responded to the 'relevance' challenge that was laid down over a decade ago1. In fact, relevance has been contagious. Already companies are tying balanced scorecard initiatives to leadership and strategy; making sure operating managers are focusing on the right issues and priorities, and coordinating the actions of the company as a whole in implementing those strategies2.

While the role for today's financial managers is quickly moving upstream in the strategic planning domain, the challenge becomes even greater in light of the accelerating pace of change. This reality is quickly rendering obsolete the traditional approaches to corporate governance, such as 3-5 year strategic plans, annual planning and static budgets. In this new environment, financial managers can play a key role in driving the corporate agenda through their sponsorship and support of projects and investments that deliver critical business capabilities. To provide useful financial insight, sooner rather than later, financial managers need to think about business strategy as a process of continuous course corrections, evaluated more like a series of 'real options' than a single projected cash flow3. While the concepts behind real options are certainly familiar to most executives, the trick to identifying, valuing and making strategic choices lies in the complex and often overwhelming task of understanding the linkage between initiatives and changing corporate goals and managing the interaction among projects.

This article provides a breakthrough planning approach for rapidly realizing the business capabilities dictated by strategy and then through the financial lens of 'real options' shows how to time strategic choices

Financial Reporting, Planning, and Budgeting As Necessary Pieces of EPM

Naturally, financial reporting and forecasting analytic solutions will have weaknesses. For one, they are still limited to only the data within general ledgers. Optimizing financial management processes is only a first step on the road to their better alignment with other organizational business processes. Hence, various enterprise business intelligence (BI) solutions enable organizations to track, understand, and manage enterprise-wide performance, and they leverage the information that is stored in an array of corporate databases/data-warehouses, legacy systems, enterprise resource planning (ERP), supply chain management (SCM) or customer relationship management (CRM) applications.

Once limited to the finance department of large companies, BI/analytics has expanded across departments and now even addresses the needs of customers, suppliers, and partners outside of the firm, given that if BI can help any department understand and serve customers better, that should in turn lead to better financial results. Companies have become adept at storing huge quantities of data on customers, products, and employees. However, this valuable data is often wasted, because it is analyzed in pockets, thus preventing valuable insight throughout the enterprise and beyond. To that end, nowadays, popular uses of BI include management dashboards and scorecards, collaborative applications, workflow, analytics, enterprise reporting, financial reporting, and both customer and partner extranets, to name some. These solutions enable companies to, for example, gain visibility into their business, acquire and retain profitable customers, reduce costs, detect patterns, optimize the supply chain, analyze project/product portfolio, increase productivity, and improve financial performance.