Suppose you had to trim back your product line, but you didn’t know which products were most profitable.  Or maybe you’re compensated based on profitability, but aren’t clear how your decisions translate into the profits that senior management sees.
These situations aren’t unusual. Executives face them all the time. They need to make decisions, but often do not have the information they need. If you want to be a hero in your company, you could start by addressing the problem of information that business executives receive that often fails to adequately address their needs. The principle is simple: Think about the decisions that need to be made. Then work backwards to determine the information that is required to make each decision. However, getting this done can be complicated. Shadow reporting Say a business unit leader asks for a report on the profitability of one of the unit’s products. Someone pulls the raw data from the company’s system, puts it into a spreadsheet and calculates the required numbers. But what if the newly calculated numbers aren’t calculated the same way as those calculated by the internal reporting system? It’s not that they’re wrong. They’re different. Then the business unit head cites the newly calculated numbers in a meeting, but, since his numbers don’t match the numbers everyone else has, the meeting becomes a debate about whose numbers are correct. It ends with no decisions, only confusion. If only you could get people to use the “true” numbers, the problem would be solved. Right? Not quite. Shadow reporting emerges for a reason. People are always looking for ways to run their parts of the business more effectively. Perhaps their profitability numbers include overhead that they can’t control. If that’s the case, there’s no point in looking at the overhead piece of their costs. They should just focus on the costs under their control. Or perhaps they’re paying for staff services that they could get cheaper elsewhere. If staff human resource services cost them more than the market price, they need to be able to separate out those costs and do some comparison shopping. Trouble is, they can’t always put their hands on the disaggregated numbers they need. Maybe they don’t know where it is. Maybe they don’t get it fast enough. Or maybe it’s simply not available. That’s where you come in. Becoming a decision catalyst Think of the problem this way: There’s a set of decisions that needs to happen at every company. To become the catalyst for this decision making process, you should answer three questions: - What decisions need to be made to drive the business? Who are the deciders?
- How does the information need to be broken out to help them decide?
For instance, say you need to report segment profitability throughout the business. You can include or exclude all kinds of things in that definition. Before or after tax. Gross or net of allocations. And so on. But business unit leaders don’t necessarily care about taxes or allocations. They’ve got businesses to run. To them, a more important question is: What are the components of profitability that can be influenced at the operating level? Many companies pay more attention to the “overall profitability” question than to the “components of profitability” one. They spend days defining profitability at a senior management level. But, too often, the profitability information needed by the business units is inconsistently captured, late, and includes obscure or vaguely defined allocations. For instance, the corporate level might need to look at product profitability excluding the cost of selling. But for some products – big-ticket items with long sales cycles, for instance – the cost of sales is a substantial element of costs. The product manager in the business unit, who can’t divorce the two, may need to include both elements in the profitability calculation. Finance as translator It’s the job of finance to help the product manager translate profitability into something meaningful. Finance can do this by providing data – and not just financial data – in a modular format. Once employees know the pieces and how they fit together, they can come up with the metrics they need, translate them into the metrics others need, and avoid inconsistent, ad hoc solutions. Think of it this way: GAAP – just as the name implies – is a set of generally accepted principles. But it’s not relevant to everyone at your business. To help employees improve efficiency and increase revenues, you should support multiple languages. But you also have to provide a path back to GAAP. A related issue is too much information. The problem with excess information in your organization isn’t necessarily that it’s wrong or inconsistent (although it often is). It’s that the “unimportant” overwhelms the “important”. That’s why you should own all management reporting information. Not just the financial stuff, but operational, customer, and compliance, as well, i.e., the works. By owning all of it, you can divide it into the categories and streams that support your decision-makers, removing the incentive to produce gigabytes of new data that obscures the information that matters. Becoming a leaderDo you want finance to take on a leadership role? Think about these keys to information quality: - Are you consistently capturing the information needed to make decisions at the operating as well as the senior management levels?
- Can you break the information down into components linked to the decisions at the operating level that drive the business?
- Is the information available to decision-makers in a timely way? Can it be accessed easily?
It’s a tall order. But becoming a catalyst for decisions is one of the most important jobs that the finance function can do. And that you can do for your career. This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. Written in association with the Economist Intelligence Unit (EIU)
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