Reboot your business: Beyond financials – Part I

By Cassandra Mascarenhas

Moving beyond financials and laying a heavy emphasis on the human dimensions of doing business in the world today, the CIMA Management Accountants’ Conference 2012 was aptly themed ‘Reboot your business beyond financials,’ highlighting that such aspects will be key to getting things moving again and sustaining success in the long run.

Previously known as the CIMA technical sessions, the conference has been rebranded to focus on issues relevant to management accountants and share best practices, insights tools and techniques to drive sustainable success in their organisations in the long run.

In her opening remarks, Nilanthi Sivapragasam revealed that the theme of the conference is based on CIMA’s new research conducted in collaboration with AICPA through which they surveyed over 280 CEOs online from 21 countries across the world to understand how they viewed current global challenges and what they perceived as priorities in leading their way through them.

This was then followed by in-depth interviews with 17 CEOs, chairmen and business leaders and their overwhelming response was that the human dimensions of business – such as customer and supplier relationships, talent development, as well as intellectual capital – will be the focus over the next 18-24 months.

Overview of the CIMA launch report

The keynote address was delivered by CIMA Global Corporate Relations Executive Director Emma Cunis who gave an overview of the CIMA launch report deciphering the key research findings in the context of the conference theme.

“CIMA has a long and proud tradition in Sri Lanka which is one of our most important markets. Our CEO in fact stated that there has never been a better time to be a management accountant with the current need for management accountants to drive business around the world,” she stated.

The research revealed that the 280 CEOs consider that the first challenge is to understand value – where it comes from and how much there is of it. They see people’s ideas, skills, knowledge and relationships presenting the unique value of their companies. The need to measure and manage the human dimension, although difficult, has never been greater if companies are to achieve long-term sustainable success.

“CEOs acknowledge a clear imperative to go way beyond the financials and see this as an increasingly important issue to tackle. They need people who are equipped for this task and able to develop tools that can make the difference,” Cunis said.

A survey taken showed that of the extent of value provided to the business, 68 per cent comes from non-financials and only 32 per cent from financial sectors. Overwhelmingly, more value is coming from people rather than financial and physical assets.

The most significant forces shaping the future business agenda for organisations – customers and employees – are also grounded in the human dimension. Surveys showed that CEOs considered customers to be the most influential in shaping their future business agenda with employees coming in second.

There is a clear need for companies to put more emphasis on demonstrating how the human dimension contributes value, given that the current reporting system doesn’t reflect such intangible assets fully. In terms of individual actions, it is not surprising that companies are keeping a close eye on costs, with this being the single most important action being taken.

There were also some significant regional variations with both new product development and investing in technology featuring particularly highly in the Asia-Pacific and South East Asia, maybe consistent with the emergence of the middle classes in these economies and rising consumer demand. The research also showed that the Asia-Pacific was notable for its relatively high focus on investing in research and development – recognition of the crucial role of innovation in creating future successes.

“75 per cent agreed that they need to put more emphasis on measuring and demonstrating the non-financial value of their business with only six per cent disagreeing. Simply focusing on the financials is accepted as inadequate for reflecting the true value of the company. 76 per cent also agreed that the current reporting system promotes excessive focus on the financials with only eight per cent disagreeing,” she added.

However, while 63 per cent agree that it is important to improve expertise in measuring non-financial value, only 51 per cent of CEOs say that their organisation measures non-financial value well – companies in the US are slightly further ahead of the pack here.

Biggest opportunities and obstacles

Looking at obstacles to measuring financial and non-financial value, 36 per cent cited pressure from financial markets, investor focus on short-term from 33 per cent, available tool skewed from 35 per cent, deficiencies in information from 32 per cent, regulatory challenges from 28 per cent and only seven per cent cited no obstacles.

“A majority of the respondents agreed that investor focus on short-term rewards makes it difficult to plan for the long term. This was especially the case in Asia-Pacific and South East Asia compared to the US and UK. This is surprising considering the wide perception that investor short-termism is a feature of these markets,” Cunis stated. There is also widespread feeling that investor demands are inconsistent with growing a sustainable business.

Transparency is yet another priority and an opportunity for most companies. The biggest opportunities are improved reputation with customers and decision making. The biggest obstacles are the data security and loss of competitive advantage. It can be difficult to find the right balance between being open and protecting commercially sensitive information. 87 per cent of CEOs view transparency as an opportunity and 13 per cent view is as a threat.

Within the figures were some interesting regional differences, Cunis revealed. CEOs in the Asia-Pacific stated that greater transparency results in better alignment of internal business objectives and strategies. In terms of obstacles, data security is of particular concern in the UK and the threat of losing competitive advantage notable in the US and South East Asia.

“Success will also depend on strong, cohesive teams which collaborate effectively, drawing on a diverse pool of talent and expertise. CEOs need competent people standing shoulder to shoulder with them to create long term sustainable success,” she said.

Executives have traditionally believed the drivers for competitive advantage were the cost and quality of the organisation’s products, services and technology. Skills, experience, development and job satisfaction level of employees are now emerging as major sources of competitive advantage or disadvantage, she added.

The rise of finance transformation was another trend that was observed, one that encompasses the radical change taking place within the finance function of many of the world’s top companies. This shift is allowing finance to gain efficiencies and take on a broader role. As a result, the range of management information they provide is expanding and they are becoming more influential in supporting senior management and helping to sustain the success of their organisation.

“Throughout the transformation, finance professionals must overcome inertia and seek avenues for improvements. Finance transformation is pushed by employees that express a clear desire for finance professionals who, in addition to their core accounting skills, have the commercial awareness to contribute insight and influencing leadership skills to achieve corporate impact from their expertise,” Cunis noted.

Unlocking and unleashing human value

Up next, University of Glasgow Adam Smith Business School Chair in Management Accounting Professor Danture Wickramasinghe addressed issues such as the emergence of the human dimension in management accounting and the response of the profession and industry to this trend.

He explained that 15 years ago, the university was funded by CIMA to study management accounting practices in developing countries, to research how management accounting practices could be adapted for use in such countries, taking into account the local circumstances while doing so.

“We found in developing countries, on the practices of management accounting in Sri Lanka, Ghana and Bangladesh, that management accounting practices were highly conditioned by local cultures, politics and various other traditions. Therefore the practices were different to what management accountants were actually reporting,” he said.

Wickramasinghe went on to say that people reported for the sake of doing so, but that the actual people working at grass root levels had different values and practices that drove their daily operations. The research showed that management accounting has to be understood from a broad cultural and political perspective which in turn brought in the agenda of balanced score cards.

Telekom Malaysia has been using the balanced scorecard system since 1996 and while this practice works wonderfully at the top levels of an organisation, they rarely trickle down to the lower management levels.

“As found in our research 15 years ago, even in this balanced score card practice, there is a trade union barrier. Trade union leaders did not want this – they were happy with the prevailing monetary planning system. We need to get such people into planning and discussion, empowering them but these people at grass root levels are traditionally marginalised,” he pointed out.

“The balanced scorecard could have been cascaded down to the grass root levels if the people’s voices were heard. I think the BSC is a good starting point to expand the scope of management accounting but we need to revitalise the importance of taking into account people’s perspectives when developing the balanced scorecards.”

Coercive mechanisms have been criticised and more consensual and collaborative mechanisms have been advocated. This neoliberal world cannot merely rely on coercive mechanisms, he noted and instead he encouraged looking out for alternative management accounting techniques which value and promote the human face.

In developing countries, organisations are still deploying management accounting for what might be termed ceremonial or rhetoric purposes. A plethora of management accounting techniques is being used simply for the sake of using them. Controls and decision-making functions operate through traditional hierarchies or patronage systems, where human inequality and the human face in undervalued, if not ignored.

“If organisational top managers in Sri Lanka could think and rethink how these perspectives could be accommodated, their process of BSC development will be better. This needs to be done through collaboration, empowerment and development,” Wickramasinghe asserted. “The time has now come to develop KPIs necessary to transform the kingship institutions into more democratic and pluralistic organisations.”

Sourcing strategy versus strategic sourcing

Leading Edge Change Training and Business Consulting Principal Consultant Aubrey Joachim spoke on strategic sourcing, which he explained plays a major role in the performance management of an organisation.

There is much confusion between the terminology ‘strategic sourcing’ and ‘sourcing strategy,’ he stated at the beginning of his presentation and went on to define strategic sourcing as being a strategic approach to sourcing which results in an alignment between sourcing options and strategic business objectives which leads to sustainable benefits to the organisation.

A strategic approach must align sourcing options with business objectives and organisational strategies. It does not merely relate to the realising of short-term benefits, he added, which may in fact lock in long term inefficiencies. It looks across the end-to-end process that connects suppliers and customers of an organisation such that all parties benefit.

“An effective and strategic sourcing option must provide significant and sustainable benefits. Strategic sourcing goes beyond merely identifying and addressing the non-core elements of what an organisation does and instead looks at the organisation’s aspirations and driving performance even further,” he said.

The new ‘normal’ in the world of business include the use of modern communications, globalisation, explosion of data, social media, new business models, volatile business conditions and sustainability.

Some early strategic sourcing methods that have been around for some time are just-in-time and lean production, inventory optimisation, negotiated contracts, outsourcing and private public partnerships. However, changes in business, commerce and technology have seen the emergence of rapid response retailing, business intelligence and data analytics, predictive planning, social media and networked manufacturing amongst many others.

“Three questions asked when talking about strategy: where are we, where do we want to be and how do we get there. These are fundamental questions relating to strategic sourcing. These issues must be addressed in the context of customers, suppliers and the business environment in which the organisation operates,” Joachim explained.

He then used several case studies to explain this, starting with Zara, a leading Spanish ladies fashion retailer that totally reengineered the retail delivery model, introduced the RRR (rapid response retail) concept, made significant use of digital media, shifted its manufacturing locations and significantly influenced working capital. This resulted in them being very successful financially and turned the retail sector around on its head.

The second case study was on the leading global PC manufacturer Dell that introduced an online sales model, outsourced manufacturing, distribution and service, used minimal inventory due to enhanced production scheduling and significantly influenced its cash cycle and working capital cycle which once again led to financial success.

Tesco, the third case study, was one of the first organisations to switch to an electronic point-of-sale and work with suppliers on a completely electronic basis – it came as a shock to many suppliers as many were not capable of doing it at the time. “That in turn today has added value to the suppliers – it takes leaders and thought leadership thinking to bring about change like this,” he noted.  

Strategic store locations, strategic and effective supplier interactions, customer loyalty program model, extensive use of customer/supplier analytics and inventory optimisation were all used to bring about this radical change.

Infosys BPO India: A case study

The story of Infosys which in less than a decade has sustained success by optimising value from human dimensions critical to sustaining business success, employee capability and the development and effective use of processes and systems, was shared by Infosys Managing Director and CEO D. Swaminathan.

He recalled that Infosys BPO started off in 2003, and at the time he joined was operating out of a small centre in Bangalore with just two clients. Today, it has 19 centres, 13 of which are located outside of India.

“This shows that when people talk about BPOs operating from centres like India, it really is not so. We are also extraordinarily diversified and have grown in both organic and inorganic ways. After 10 years, we are still very young and dreaming and there is just so much more to do,” he said.

Swaminathan also clarified that the business is all about leveraging global skills and not about driving cost arbitrage up. They pick up best practices and benchmarks from clients and today, through such accounting and financial systems have built up over a 1,000 benchmarks which provide agility to enter new markets.

“Some clients have come to us saying they have a product and know how they can get the best out of the market but do not know how to enter the market and go through the procedures particular to that country they want to enter. This is where we come in – we make them agile.” He added that in these days of economic uncertainty, people are constantly innovating new ideas yet sometimes overlook some of the basic ingredients that are need for business success.

“Every transaction is never about our business, it’s about our clients. It’s about delighting the stakeholders of our clients and in turn keeping our clients happy – it’s about making our clients look great in front of their stakeholders,” he explained.

He described the five reasons for their existence as being delivering at optimal cost, technology expertise, client business understanding, speed to market and scale and robust operations and delivery. “When I decided I would be in the business of improving effectiveness and driving costs down, I knew I would end up working for a BPO.”

“Business results are all about the short term. To me, machinery and plants are all in the short term – investing in people is the biggest long term decision a business can make. You can no longer tell your clients that you can make them look good in six months – today you have to make your client look good tomorrow. That is the agility people are demanding and therefore it is all about the long term when people come in and the short term when you are talking about investments in business,” he stated.

Swaminathan then spoke about a client, Philips, who had come to them a couple of years ago with some major challenge – disparate technology ecosystem, inflexible cost structure etc and Infosys’s job was to make them look better. “I promised to improve productivity by 30 per cent among other things.”

Infosys started looking into the integration of people from Philips into their own organisation and started looking at each others’ processes, implementation of must-have tools and such.  

“Today, we are able to offer careers to people who have gotten tired of working for a particular industry and they are given the opportunity to move into another industry.”

Some of the hallmarks that were incorporated into the Philips case study included the three Cs of product management – compensation, career and comfort and interestingly, Swaminathan revealed that psychological comfort is more important of physical comfort.

“Leadership is all about getting people to accomplish things they never thought they could and about taking people to places they have never been before. As people get opportunities, I think it gets even more critical that we continue to build upon those opportunities. The reason we are managing 52 different nationalities is because we honestly believe that differentiation drives growth and that people drive organisations,” he stated.

Pix by Upul Abayasekara