Management Practices Need to Evolve to be Data-Aware
Much of the framework of modern management practice came crashing down during the financial crisis and pandemic. Corporate titans were humbled, strategies abandoned, budgets became obsolete on a daily basis, and the only certainty about any forecast was that it would be wrong. Despite years of best practice application and technology investment, most organizations were flying blind. The promised insight, agility and flexibility proved illusory at best, managers were forced into making major decisions with little or no credible data as to their future impact. So what went wrong?
In short the world changed and our management practices didn’t. The basic assumption that underpinned all management processes, that the past is an accurate predictor of the future, was found to be fatally flawed.
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Over the last few years the world has been transformed from a series of loosely connected economies with reasonably predictable flows between them to a complex web of relationships where the global impact of local events is felt almost instantaneously. An isolated flu outbreak in China morphed into a global pandemic in weeks upending the best laid strategies, plans, budgets and forecasts.
Managers everywhere found that the traditional rules and processes that governed their actions were obsolete. The bedrock of the traditional management process is built upon multi-year strategic plans, static annual budgets, quarterly forecasts, and detailed monthly financial reports.
Creating Data-Aware Management Processes
As data becomes more prevalent and analytic tools that accommodate risk and uncertainty gain wider adoption, we need to adopt new behaviors, processes and systems that allow managers to make effective decisions. Here are ten guiding principles that can aid in the effective use of data in an uncertain and volatile world.
1. Replace calendar-based management processes (five-year strategies, annual budgets, quarterly forecasts, monthly reports) with event-driven, real time processes that adapt and respond to events and data in the marketplace as they happen.
2. Explicitly address risk in all management decision-making processes. Consumer and investor confidence are crucial in good times as well as bad. Understanding the risks to an organizations reputation and developing appropriate prevention and mitigation strategies is a key responsibility of management.
3. Embrace contingency and scenario planning techniques so that managers can continue making fast, confident decisions in volatile and uncertain times. Ask basic questions such as “What if our assumptions are wrong?” and “Under what circumstances should we abandon this strategy, plan, project or investment?”
4. Rather than focusing solely on cost reduction, organizations need to create a flexible cost structure that allows expenses to be more accurately synchronized with increasingly volatile revenue streams. For example, adopting variable cost techniques such as leasing, outsourcing, or software as a service can link expenses to the overall level of business activity.
5. Balance the desire for detail with predictive ability. Too often all future periods and line items are planned, budgeted or forecast in the same level of detail. This is both misleading and dangerous. Predictive ability varies by line item, for example, typically sales are less predictable than administrative expenses, and by time period—the further out you look the less predictable things become.
6. Develop compensation systems that balance rewards for near- and long-term performance and include measures of competitive success rather than relying on static plan or budget-based targets. This means de-coupling incentives from plans or budgets and developing systems that reward a combination of real growth with superior competitive or market performance.
7. Build a system of performance reporting, key performance measurement, tolerances and early alerts that use data to provide management with near real-time monitoring of key business trends (market demand, orders, pricing, costs, cycle times, etc.) so that positive and negative trends are identified very early in their development giving management time to react and respond.
8. Reposition the budget as a tool for determining the optimal allocation of resources under a range of possible future scenarios so that as performance reporting tracks changing conditions there is a game plan in place that can be put into action. As performance reporting solidifies the view of what is actually happening the budgets can be updated to reflect a changing set of future scenarios based upon the current reality.
9. The forecast or outlook process becomes the glue that ties reporting and budgeting together, as real time events change, the forecast is updated to reflect the latest and greatest available data.
10. Finally and most importantly, managers need to embrace uncertainty and recognize that fast, confident decision-making is much easier when you have confidence that incorrect decisions will be rapidly identified and decisive action taken.
Increasingly rich data can be a valuable resource but only if we adapt our management processes to operate in a data-rich but uncertain world. Those that adapt the best will reap rich rewards while the mediocre will whither and die. Make your choice now.
David Axson has more than 35 years of experience working with CFOs across more than 40 countries. He was a co-founder of The Hackett Group, Head of Corporate Planning at Bank of America and a partner at Accenture Strategy. For more information visit www.davidaxson.com.