Originally published in CFO Dive
The most useful metrics combine financial with operational measurements, Maine Pointe's Nate Powrie said. These often track efficiencies in procurement, operational productivity, logistics, sales and marketing. Read on...
To understand your company's operational efficiencies and future opportunities, go beyond traditional finance metrics, finance and research professionals said last week in a CFO.com webinar.
Until the 1980s, more than 80% of a company's market share could be traced through the financial statement, said Nathanael Powrie, executive vice president of data analytics at Maine Pointe, an operations consulting firm, citing data from the Association of International CPAs. Today, that figure is closer to 15% because so much company value is wrapped up in intellectual property, research and development, and other intangible assets.
In this environment, relying only on financial metrics keeps CFOs in a reactive mode, hemming in their ability to provide the CEO and other executives with strategic advice that can help the company create value, said Holly Lyke-Ho-Gland, principal research lead at APQC, a benchmarking consultancy.
"Financial metrics are always lagging," Lyke-Ho-Gland said. "[They] tend to be the output of everything that goes on in your organization, which means we're not getting a heads up on [performance] view."
To better understand important operational details, focus on key performance indicators (KPIs) that show what's happening beneath the surface. Avoid getting bogged down on metrics that provide little value creation, said Bryan Lapidus, director of financial planning and analysis (FP&A) practice at the Association for Financial Professionals.
Lapidus said he once helped a company CFO better predict future performance by reducing some 70 tracked metrics to seven. The most useful metrics combine financial with operational measurements, Powrie said. These often track efficiencies in procurement, operational productivity, logistics, sales and marketing.
A good mix of performance management KPIs include those that measure customer satisfaction. Lyke-Ho-Gland recommends CFOs collaborate with chief marketing officers (CMOs) to set up those metrics, as well as some for loyalty and customer service.
Once you establish which operational and customer-focused goals you want to measure, select reliable, practical and easily accessible metrics to accompany them.
To get from where you are to where you need to be, act with a few ideas in mind:
- The finance function should take the lead on designing and managing performance metrics.
- Harness advanced analytics, artificial intelligence, machine learning and cloud-based platforms.
- Collaborate with other business leaders in your organization, including the CMO and chief revenue officer.
- Work with human resources to attract and retain the talent you need to master the technology and data analyses.
"Finance used to be where people would come to be told no," Lapidus said. "Now, the CFO is being seen as the chief value officer."