The performance ideas blog

Category: Finance

  • Governance, Risk & Compliance – An introduction by Erwin Boeren

    GUEST POST BY ERWIN BOEREN

    We have all heard the term: Governance, Risk & Compliance or simply GRC. But what exactly is Governance, Risk & Compliance and what are the challenges companies are dealing with?

    GOVERNANCE RISK & COMPLIANCE

    Let’s start from the beginning and look at the basic definitions. Governance is the overall approach for controlling the business environment and how to give direction to the organization led by our core values and ethics (voluntary boundaries). This includes the various processes, rules, policies and laws that affect the success of a business. Risk is all about the obstacles that we will have to overcome to reach our business goals and what type of  controls you have in place to prevent those obstacles from happening (controls). Compliance gives guidance on the boundaries that we have to adhere to while trying to reach our objectives. So far so good. Let’s took a look at some real life examples.

    EXAMPLES OF GRC

    Imagine that we are running a fictitious company. There are a number of things we have to do. An example of good governance is the protection of employees by labor rights (e.g. prevention of child labor). It could also be the company-wide travel expense policy that helps prevent improper spending. It could also be a company wide agreement on dealing with fair trade vendors only. In terms of risk , we might have to deal with a vendor not being able to deliver in time which might lead to claims from customers (a loss). A potential control for this risk could be a service level agreement with our suppliers to prevent this. And then there are also external regulations you have to comply with. This is the area of compliance. Regulations like Basel II for banks, the Solvency II for insurers and HIPAA for food handling belong to that category. No doubt – GRC is a broad area!

    THE GRC CHALLENGE

    The challenge organizations are faced with is the complexity of all regulations and the relationship between core values, ethics, regulations and risk management. Unfortunately, too many businesses look at GRC as separated silos. They often pay a huge price tag for this. Leading businesses are following an integrated, or enterprise approach for GRC. Doing this creates significant rewards like lower cost for external auditors due to existing and well documented proof about business controls and procedures. The benefits also include the ability to make better decisions due to deep understanding of risk which will lead to better outcomes. And I am happy to say that proper GRC will also lower the administrative burden due a significant reduction of those infamous and tedious control tests that are required to prove your compliance. Last but not least, organizations can also get loans at a better interest rate or cheaper insurance policies because they have proven to be better in control and thus a lower risk.

    GOVERNANCE SOLUTIONS

    Needless to say: IT can play a huge role in making GRC successful. It is no wonder then that IBM acquired one the leading software providers for Governance, Risk & Compliance solutions called Open Pages.

    But let’s talk about Open Pages and how Governance, Risk & Compliance can add value to Performance Management in another article next week…

    About Erwin Boeren

    Erwin Boeren, IBMErwin Boeren is Governance, Risk and Compliance Leader at IBM Southwest Europe. Erwin has over 15 years experience in the software industry, in various roles in business intelligence, performance management and Governance, Risk & Compliance. Together with his family, Erwin resides in the Netherlands.

    Twitter : @erwinboeren
    Contact : erwin.boeren@nl.ibm.com

  • How to reduce detail in your forecasts

    Rolling Forecasts are quite popular today. But to implement them properly it is usually imperative to reduce the detail in the forecasting models. Less detail speeds up the process and helps to increase the accuracy.  A recent post on this blog looked at some of the problems with too much detail. The big question though is to where and how to cut detail. While people tend to look at the chart of accounts first, many organizations actually have great success with making a few modifications to their timescale.

    THE BIG SCALE

    Take a look at the photo below. It symbolizes one of the key issues with forecasting: the further out we look the more diffuse our view gets. While we might have a good idea of what is going to happen next month, it is usually more difficult to do the same for the months after. That’s just the way it is.

    Rolling Forecasts - The time horizonUnfortunately, most forecasting templates do not reflect this fact of life. Take a look at the original time-scale from a customer that I used to work with. The organization wanted to look beyond fiscal year end. However, all months were treated equally:

    A traditional time-scale (208 data points)

    Notice how much detail is being generated. And detail requires effort. As a business person, I will have to sit down and try to provide an amazing amount of detail. This could take a while. The basic assumption of this template is that business people are able to precisely quantify when something is going to happen no matter if it’s tomorrow or next year. That is dangerous and it’s simply not possible. Here is an example: I might know that a certain customer will purchase my product next month. But I will most likely not be able to precisely identify the same thing for next year. The forecast will therefore most likely be wrong from a timing perspective. Why the detail then?

    A DIFFERENT TIMESCALE

    How about changing the timescale? Take a look at the final redesign in IBM Cognos TM1:

    Rolling Forecast Model
    Less detail. Probably more accurate (112 data points)

    The new version reduces the detail by almost 50%. And this approach pays tribute to the fact that the further out we look the more diffuse our view of the future becomes. Overall, we could argue that this template will produce more accurate forecasts while also making it easier for the business. This is a lot easier to work with! My client implemented a similar timescale with excellent results.

    YOUR MODELS

    Take a look at your current models. Is there an opportunity to alter the timescale? How much detail could you get rid of? If you want to embark on implementing a Rolling Forecast, you should most definitely look at this approach. Please let me know your thoughts and experiences.

  • Simplicity is the ultimate sophistication

    Have you ever been to a giant buffet? Try to remember what it was like. We usually get excited when we see the various options and we ‘cruise the aisles’ to identify what we want. If you are like me, you have a hard time deciding and you end up wandering around taking a little bit of everything but nothing of anything. By the time you leave, you feel bloated and promise yourself to go easy next time. Chances are you won’t even remember what you ate.

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  • A Few Thoughts About Planning

    There is an interesting discussion going on right now. Actually, it’s been going on for a few years. There are some people that argue against planning: “Why plan today? The world is so volatile! Any plan is typically rendered useless within a few weeks or months.” And then there are others who argue that planning is more important today than it’s ever been: “Planning helps us prepare for the future. It helps us consider our options.” I personally support the later opinion. Planning is a critical process today.

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  • Why improving your AQ is critical for personal and organizational success

    Do you know your AQ? AQ stands for Analytical Quotient. It is a new measure that provides you with insights about your organization’s ability to leverage business analytics. Most importantly, AQ helps you determine how to best go about improving your capabilities. I would highly recommend taking the self-assessment test on the IBM Website. It takes just a few minutes and provides you with very interesting feedback and ideas.

    FOUR STAGES & THE NOVICE

    IBM found that organizations typically go through four stages with their business analytics programs: Novice, Builder, Leader & Master. Companies that belong to the Novice category are still stuck in a spreadsheet world. And that can be a big problem. Spreadsheets are a great productivity tool, but they are not the right tool for managing your business. That raises the question: what exactly is the problem with being at the Novice stage? Let’s take a look at the Finance department as an example.

    WHAT IS THE PROBLEM WITH SPREADSHEETS?

    A few years ago, my team started conducting some surveys amongst finance professionals. For this purpose we teamed up with David Axson (co-founder of the Hackett Group, book author). We specifically went after professionals that were not using Performance Management software, yet (i.e. organizations that belong to the Novice category). One of the key things we were interested in was the type of work finance professionals do in these organizations. It quickly appeared that there were five major categories of work. The results from our survey looked like this:

    Cognos Finance Survey 2008

    The majority of the time is spent on manual tasks such as collecting data (loading data from systems into spreadsheets, copying & pasting, manually entering budgeting numbers, etc..), maintaining spreadsheets (developing worksheets, fixing formulas, aggregating spreadsheet data, Visual Basic programming etc.) and then also developing reports & presentations (creating spreadsheet reports, graphs, Powerpoints etc.). Only about 20% of the overall time is spent on the high-value tasks such as performing in-depth analysis, running what-if scenarios, personal development etc.. A shocking but not a surprising picture. When we present the results to finance professionals we get a lot of head-nods. But I often sense a certain level of resignation as well (“Oh yeah….I know….that’s just the way it is.”).

    A COMPLETELY DIFFERENT PICTURE

    Statistics are always a bit dry. So we took the data and applied the percentage distribution to a work week. The picture now looks quite interesting. What do you think?

    Cognos Finance Survey 2008 – part 2

    How does this feel? Same numbers. Just a different perspective. Two key questions come to mind: Can we live with that situation? Would we want to live with this situation? I doubt it. I have been there and didn’t necessarily like this. Sure, it’s nice to play around with spreadsheets knowing that you are indispensable. But is that what we want to get out of our professional lives? Is that why we went to business school? Is that why we spent so many hours studying for the CPA, CMA, CFA exams? This what being at the Novice stage can feel like.

    MOVING TO THE NEXT LEVEL

    Technology helps shift this picture around tremendously. Business analytics can help you make a lot more time for the important things. What do you think about these insights? Are you familiar with this situation? I would love to hear your thoughts and about your own experiences.

  • Improve your forecasts – 6 things we can learn from weather forecasters

    Back in April, I posted an interview with a master forecaster: Franz the Frog. Interestingly enough, this post is one of the most popular entries on this blog. But all jokes and irony aside: Weather forecasters are indeed world champions in forecasting and there are some lessons that we as finance professionals can learn from them. Let’s take a look:

    LESSONS FROM MASTER FORECASTERS

    1. Forecasts should be objective: Have you ever seen a subjective weather forecast? Well, it may feel like that sometimes. But weather forecasters do not publish what they think the public or the managers of the TV stations or newspapers want to hear. That would be dangerous. No, they strictly publish what their algorithms and forecasting processes show them. We can therefore rely on them (except for the obvious and inherent forecast errors that can occur).

    2. Forecast discussions should look forward not backward: Huh? Well, weather forecasts focus on the future. Have you ever seen a weather person spend 75% of his time explaining past variances, apologizing and arguing about assumptions? No. Weather forecasts are strictly forward looking. The focus is on what lies ahead and not on what happened in the past.

    3. Forecasts should be flexible: How often do we we get an updated weather forecast? Once per quarter? Once per month? No, the weather is too volatile for that. The forecast would be outdated within a few hours. People might be unprepared for a snowstorm, for example. Instead, weather forcasters continuously update their models when new information arrives. That way we can all rely on the most current and accurate forecast. We don’t have to worry too much about being caught in dangerous weather.

    4. Forecasts should speak a clear language: Weather forecasts are being presented in a simple and concise manner: “Heavy winter storms expected with up to 20cm of fresh snow.” This type of presentation allows us to quickly make decisions (stay at home). The message is not hidden in hundreds of lines of technical details.

    Today's forecast is detailed. The further out we look the less detail we have.

    5. Detail is adjusted based on the predictive ability: What is easier to forecast – the weather tomorrow or the weather in two weeks? Stupid question: the weather tomorrow. Weather forecasts acknowledge that they cannot predict weather much further out than a few days. And they adjust the level of detail based on that insight. Today’s forecast shows detail by the hour. The forecast for next week is just a general trend (‘rising temperatures expected’). This approach obviously reduces the effort involved in creating the forecast. Most importantly, this approach avoids the trap of setting wrong expectations (“I thought it would be sunny in three weeks from now!”) More detail does not mean higher accuracy.

    6. Forecasts are compiled with the help of modern technology:

    Technology drives efficiencies and increases effectiveness

    What type of instruments and tools do weather forecasters leverage? Weather frogs, old fashioned thermometers, wet fingers, flight patterns of birds? No, they rely on modern technology. They continuously push the envelope and upgrade their equipment. This tremendously speeds up their work while also reducing mistakes and increasing the accuracy. They actively look for new ways to improve their processes and techniques.

    YOUR FORECASTS?

    Think about your forecasts. How do they stack up when compared to these six characteristics? Are there areas where your forecasts can improve? If you are interested, join of of our Rolling Forecast workshops to learn more.

  • Is Working Capital Management dead (again)?

    WORKING CAPITAL MANAGEMENT

    Things come and go. One day we love a certain hobby, a few years later we are utterly bored with it. The same thing is true for management practices. What is hot today seems out of fashion tomorrow. A few days ago, I had an interesting discussion with a group of senior finance professionals. One of them argued (I won’t name the organization) that working capital management was dead – once again. Just like in the late 90s and early 2000s. And then I came across an interesting article in CFO World that seems to confirm this idea. What an interesting thought! Is working capital management really dead? Or more importantly should it be dead?

    SOUND BUSINESS PRACTICES

    working capital management
    Net Working Capital

    Working capital management is all about increasing the liquidity of an organization. We try to carefully balance our current assets with our current liabilities. To optimize net working capital, companies implement a plethora of different activities such as: lowering inventory, standardizing payment terms, improving demand forecasts, active monitoring of customers that are slow to pay, rationalizing product mixes etc.. Hmm….doesn’t sound all too complicated, right?

    THE REWARDS OF WORKING CAPITAL MANAGEMENT

    Many companies who do these things well are rewarded handsomely. One of my customers for example put a strong focus on slow-paying customers (AR > 60 days) and was able to free up over 200M USD in cash flow. Overall, I think it is fair to say that the activities that help us optimize our net working capital should belong to the category of sound and useful management practices. The CFO Magazine from September 2008 stated: “One securities analyst has called working capital his ‘microscope’ into the competence of the management team“. I fully agree with that idea.

    BAD HABITS

    Why would working capital management be dead now? Sure, a lot of the associated practices are not necessarily sexy and it can definitely be overdone (many companies got extremely harsh with their suppliers and customers during the downturn). But why would we stop doing the good things? Why would we want to have excess inventory? Why would we be lax about managing our accounts receivables? Why would we want to create lousy demand forecasts? Should we start smoking only because the government of a country that we are visiting has decided to loosen the local non-smoking regulations?

    SHOULD WORKING CAPITAL MANAGEMENT BE DEAD?

    Many countries are experiencing a solid recovery these days and it is a lot easier to obtain fresh credit and to manage cash flow. But I would strongly argue for not abandoning working capital management practices. The recovery is still fragile and there is always a good likelihood of some economies taking a turn for the worse. But apart from that, we should all strive to make our businesses more competitive. Doing that requires patience and effort. Working capital management can be extremely effective but to get the full bang for the buck, we should not treat it as a temporary initiative but rather as a standard process. It takes a while to get really good at certain practices. Business Analytics can play a big part in this. But more about that in another post.

  • Success with Forecasting – A discussion with Pieter Coens

    Please meet Pieter Coens. Pieter is the Director of Finance & Control at Landal GreenParks in the Netherlands. He started his career in public accounting and joined Landal over 16 years ago. Pieter has held various positions in finance at Landal.

    Landal GreenParks is a leader in bungalow-park management and rental. Landal has over 65 parks with a total of approximately 11,000 chalets. With 47 parks in the Netherlands, Landal leads the Dutch bungalow -park market. Outside the Netherlands, Landal has parks in Germany, Belgium, Austria, Switzerland and the Czech Republic.

    Pieter gave a great presentation about Landal’s planning and forecasting processes at the IBM Finance Forum in Amsterdam on May 24th, 2011. We were able to have a quick chat at the event.

    Christoph Papenfuss: You have implemented IBM Cognos to automate your budgeting and forecasting processes. What have you accomplished so far?

    Pieter Coens: IBM Cognos currently helps us create an annual budget along with a monthly forecast. For that purpose, we have implemented several elements including models for Rental Revenue and our P&L.

    Christoph Papenfuss: How did you manage your processes before that?

    Pieter Coens: We used to manage our processes with a myriad of Excel files. It was very difficult. We ran into various issues such as managing excessive file sizes that slowed down the network, dealing with sluggish recalculations, difficulties tracing interdependencies etc.. Aggregating the different files was extremely cumbersome and time-consuming. And of course, there are the associated audit issues with spreadsheets.

    Christoph Papenfuss: How are you benefiting from the implementation?

    Pieter Coens: IBM Cognos has allowed us to automate a lot of the steps in the process such as preparing, distributing and aggregating planning templates. We are also able to develop more intricate models that provide us with better insights. Overall, we feel that our finance team and the business users are now able to focus more on the actual planning activities rather than the administrative tasks that I described earlier. My team is much more productive.

    Christoph Papenfuss: You have an annual budget and also a monthly forecast. Who is involved in the process?

    Pieter Coens: Finance is in charge of executing the process. But the business owners have to work and develop their own budgets and forecasts. They are in charge of entering their data in the models. Finance plays the role of the coach: we help the business make sense of the numbers and we guide them through the forecasts and budget iterations. This approach provides us with several advantages: By actively involving the business we can obtain more accurate and timely data. We also feel that the business is able to gain better business insights by actively working with their budgets and forecasts and the associated monthly actuals. Last but not least, Finance has more time to focus on value-added tasks such as performing analysis.

    Christoph Papenfuss: You have a solid forecasting process. How often do you update the forecast and how far do you look into the future?

    Pieter Coens: We currently use a monthly forecast. This allows us to anticipate and react to market changes. We ask the business to perform a detailed forecast for the next two months only. The remaining months until year-end are automatically calculated as a trend of the 2-month forecast. We found that creating a detailed forecast further out than 2 months does not necessarily result in very accurate data and it also takes a lot effort. We want the business to focus their energy on the short time-horizon and only forecast the know effects throughout the Full Year.

    Christoph Papenfuss: You are proponent of driver-based models. Can you give us an example of how you have implemented this? Also, what are the benefits for the organization.

    Pieter Coens: Driver-based models allow us to increase the speed of the budgeting and forecasting exercise. Also, we are able to perform better analysis at month-end and during the planning activities: Instead of just looking at an absolute variance, drivers allow us to review this from different angles such as price or volume effects. Food & Beverage Revenue, for example, can be calculated as Number of Guestnights * Average Spend on Food & Beverage.  The associated Cost of Sales are a percentage of the Food & Beverage Revenue that has been calculated.

    Christoph Papenfuss: How did you go about implementing the IBM Cognos solution?

    Pieter Coens: We decided to follow a modular approach and started with a few smaller projects. This allowed us to build critical skills and develop success much earlier. This in turn led to a situation where the business heard about our accomplishments and they started asking for additional projects e.g. forecasting on Operational Management Information.. Change management is a lot easier if the business users ask for projects instead of us pushing them to accept

    Christoph Papenfuss: What else are you planning to do?

    Pieter Coens: We are definitely looking to reduce the level of detail in our models. More detail does not mean higher accuracy. On the contrary, more detail requires more work and it does not necessarily drive accuracy. We are also looking to implement additional models such as cash flow and predictive modeling/forecasting for our Yield department.

    Christoph Papenfuss: Thank you very much, Pieter! Good luck with your implementation.

  • What is IBM Cognos FSR?

    Back in October 2010, IBM acquired a company that Gartner used to call ‘The hottest FPM vendor’. Rightly so. Clarity Systems had developed several cool and extremely popular software products. The most well-known solution is called FSR (Financial Statements Reporting). FSR addresses a high risk area for many companies: It automates the publication of financial statements. FSR also allows companies to translate their financial statements into XBRL.

    Do you want to find out more about FSR? Take a few minutes and watch this interview with Li Ming She, Technical Manager for Continental Europe. We met in Brussels at the IBM Finance Forum 2011 and I recorded a quick interview with him on my iPad 2.


  • The ultimate rolling forecast workshop

    Having fun at the workshop

    Forecasting is a critical topic for many companies these days. No big surprise: the volatility and the speed in the world requires organizations to stay agile. About four years ago, my team and I started working with several customers and thought-leaders (David Axson, Steve Morlidge) to collect best practices for forecasting in these turbulent times. The results of the countless hours of talking, brainstorming, analyzing and reading are captured in the IBM Cognos ‘Best Practices in Rolling Forecasts’ workshop. This workshop ended up being way more successful than any one of us would have ever imagined. I have personally delivered over 100 of these events in the past three years.

    THE WORKSHOP FORMAT

    Forecasting is a complex topic and we were able to collect a full library worth of experiences. But simplicity rules and we selected the most interesting aspects

    David Axson is showing the way!

    to fill the agenda for a half-day workshop. That creates more focus and the attendees leave with just enough ideas to drive change in their organizations and without feeling overwhelmed. The overall focus is on the business process and not software. While we share a lot of best practices, the workshops are very interactive. We usually have extended and very fruitful discussions amongst the participants. Many attendees stay after the official event ends to continue their idea exchange. This is one of my favorite parts. There are always many things to learn.

    BEST PRACTICES AND MORE

    Static vs rolling forecasts?

    So, what do we cover? A lot! The focus is clearly on proven practices that were identified by our customers. But it is also important to look beyond those things. We therefore injected some thought-provoking ideas from our thought-leaders. And each workshop we run typically provides new ideas, stories and experiences that we leverage to enhance the materials.  It would be too much detail to cover in this post but here are some of the things we discuss:

    • Is a rolling forecast right for your organization?
    • What’s the right time horizon? 90-day? Four quarter? Six quarter? Three year?
    • How often should you update the forecast?
    • How do you use a rolling forecast as an early alert of threats and opportunities?
    • What is the role of scenarios?
    • What role can driver-based modeling and tools play in the forecast process?
    • How do you sell the need for a rolling forecast?
    • What does the business case look like?
    • How can you measure the efficiency and effectiveness of your process?

    IT’S YOUR TURN NOW!

    If you are considering to make changes to your forecasting processes or if you are working in the IT department supporting Finance, you should join one of these workshops. It is a great opportunity to meet other finance & IT professionals and to get solid ideas. Believe it or not, but we have had several customers attend multiple events. They simply liked the interaction with the other professionals so much and they felt that they got a lot of value out of each workshop. Check out my events page to find out about upcoming dates or simply drop me a note. Hope to see you soon!