Study by KPMG and ACCA finds that companies are not leveraging on technology to drive profitability, with strategic plans not backed up effectively by how performance is measured.
A GLOBAL study involving over 2,600 finance professionals from 129 countries has found most businesses to be operating inefficiently due to a serious disconnect between strategic plans that are put in place and how performance is measured.
The research, jointly commissioned by KPMG and ACCA (the Association of Chartered Certified Accountants), highlighted how companies are facing challenges across four main areas: organisation structure, operating model, quality of data and use of technology.
As a result, many key business issues continue to go unaddressed, affecting stakeholders across the business and not just within the finance function.
“Organisations leading the way have a clearly defined performance management framework that provides a seamless link between the company’s strategic objectives, measurement of performance against such objectives, and operational decision-making,” says ACCA’s head of corporate sector, Jamie Lyon.
“However, our study shows that most companies are not practising this, which is a concern,” he adds.
Enterprise Performance Management (EPM) comprise three core propositions: 1) planning, budgeting and forecasting, 2) performance reporting, and 3) profitability and cost analysis.
Done properly, EPM can dynamically drive performance improvement of a business and delivery of its strategy. The study revealed current practices to be quite removed from this model.Many enterprise remain locked in a spreadsheet world; 40% have not yet invested in a specific planning application outside of Excel. A higher percentage (45%) said their company had not invested in software application for profitability and cost analysis.
And 56% agreed that the budget ceased to be relevant at some point during the year. Budgeting was found to have very little integration between finance and other functions, resulting in output that had limited use for the company.
Almost 40% of respondents believed decisions were grounded not on information based on insight, but on “gut instinct” of business leaders. About one-third suggest external data was not used in the forecasting process or that its application had limited use.
Quality of data was seen to be the key impediment to the use of external data in the planning process, and the prevalent barrier to the use of data analytics.
While more than 72% reported their company had invested in a specific performance reporting tool, almost two-thirds of those declared the application didn’t deliver the expected results.
Companies still shy away from cloud technology, with 50% stating that the information used in their reports were too sensitive to risk utilising cloud solutions.
Less than half of businesses knew who their most profitable customers were, while two-third admitted to not measuring the profitability of their sales channels.
Chan Siew Mei, head of advisory and partner of KPMG in Malaysia, said: “It appears that, in most companies, the responsibility of the EPM processes has been pushed to the finance function when it should be owned by the business as a whole.
“Unless this organisational culture is corrected, companies will continue to waste precious resources while reaping only a fraction of potential returns.“Traditional performance measures only serve to reinforce short-termism in organisations because they are rarely, if ever, aligned to strategic goals. If strategic goals are to be achieved, then business functions across the organisation should have equal involvement in the EPM framework, with finance being the facilitator,” Chan added.
The study also reinforced the need for companies to refocus on defined value drivers.
“When the core components of EPM are not practised effectively, the result is predictably a company that reacts too slowly to emerging threats as well as missed business opportunities,” explained Lyon.
“A fully integrated EPM framework provides corporate visibility of the activities that deliver growth, thus enabling the company to determine how to continuously allocate resources to support the strategy.”
Companies wishing to drive value through EPM are advised to:
1) Ensure the EPM framework is flexible, aligned and relevant to all parts of the organisation.
2) Gain the buy-in from senior executives, from the CEO down, to act as resilient advocates in such an investment.
3) Invest in defining, deploying and maintaining clear and consistent data models.
4) Make decision support requirements part of key review events.
5) Place an emphasis on achieving timely, accurate and forward-looking insights.
6) Focus on analytical insight using a clearly defined understanding of the drivers of performance.
7) And take an integrated approach to planning, using rolling forecasts and with moving targets that reflect real-time changes in external factors.