CFO: Magazine for Senior Financial Executives: Corporate performance management: what finance must d

With moderate economic growth in the forecast, profit acceleration will come only from disciplined capital investment, improved productivity, and sound cost management. At a recent CFO magazine conference, we learned that's why CFOs are, once again, fascinated with the concept of CPM. Here's a summary.

Superior business performance does not happen by accident. When you look inside companies that release one great product after another, reach the right markets at the right time, delight customers, and reward shareholders along the way, you will find well-designed performance management systems. Financial, technical, and intellectual capital are marshaled with a singular focus on turning strategy into profits--and growing profits at a sustainable rate. The best-run companies are very good at spotting opportunities for growth, and they are very, very good at pursuing those opportunities without letting infrastructure costs soar.

Defining CPM

For many firms, a formal corporate performance management (CPM) model is key. But what is this really? Some observers define CPM rather narrowly in terms of software that helps the CFO analyze the underlying drivers of financial results. While that's all well and good, a broader view is useful. Put simply, CPM is a management system for translating business strategy into action. Four characteristics are common:

* Coherent business objectives expressed in the language of financial planning and budgeting,

* Continuous, factual assessment of operating processes, decisions, and results,

* Interventions, when needed, to realign operating activity with strategic aims,

* Periodic refreshing of strategic assumptions with insights gained in the field.

CPM, done right, reaches far beyond the realm of IT. It provides a framework for investing in new markets, innovation, human capital, process improvement, and, what Professor Robert Kaplan of Harvard Business School calls, "information capital." An example of information capital is a customer database that the CFO and CMO use to isolate the most profitable customers. CPM strikes the right balance between customer, employee, and shareholder value. It makes strategy continuous.

What's New About CPM?

Current conversations about CPM may sound like old wine in new bottles. After all, CFOs have been talking about the need to improve performance management for years. Today, however, this once-abstract concept is being applied in truly productive ways. The catalyst? There are many, but all sides agree that the emerging sophistication of database technology and analytical software brings CPM to life. As a result, companies gain:

* Better management visibility into operating processes,

* Ready access to relevant performance information for finance and non-finance employees,

* More accurate information to fuel situation analysis and strengthen decision support,

* The ability to correct problems without delay.

At CFO magazine's conference on "Corporate Performance Management" held earlier this year in New York, chief financial officers from large companies gathered to study these ideas and learn how best-practice companies are putting them to work. The mandates of the Sarbanes-Oxley Act, particularly the implications of Section 409, which requires near-realtime disclosure of material business changes, added a sense of urgency.

The Strategic-Focused Organization

Professor Kaplan is known widely as co-inventor of the Balanced Scorecard, a system for deploying performance metrics to ensure proper execution of business strategy. In the keynote presentation, Professor Kaplan shared his latest thinking on how companies can build on the original Balanced Scorecard model to make strategy continuous. He noted that the CFO should use budgeting and reporting processes as tools for keeping day-to-day resource allocation aligned with business strategy.

A case study presented at the conference by Charles Atwood, CFO at Harrah's Entertainment, the large casino operator, puts this in perspective. Mr. Atwood main point was that the CFO could play a significant role in creating actionable business intelligence to drive sound product positioning and corporate profitability.

Harrah's Entertainment--the only investment grade business in its industry and the sole casino company listed on the NYSE--is a leader in its field. Five years ago, when CFO Charles Atwood announced the company's plan to grow same-store sales, he recalled, "some people said, 'You really can't do that. It's not done in the casino business. You really have to build new stores because, once you open, it opens at a high level of profitability. You just can't go any further.'"

Undeterred, Mr. Atwood set out to prove that the old industry-wide assumption was too rigid. He and others in Harrah's senior management saw that the key to boosting profits lay in growing customers loyalty. And to do so, Harrah's needed to better understand its customers' preferences and wants.

First, the company built a data warehouse and began collecting data. This data included slot machine performance--slot machines generate 80 percent of Harrah's revenues--and information collected through membership cards the company gave to favored customers. Harrah's issued a "diamond card" to its high rollers--the 20 percent of customers that generate 80 percent of the casino's revenues. These high-tech cards enabled the company to track the transactions of those players.

By knowing which machines had the highest (and lowest) play, and in which areas the diamond customers tended to congregate, Harrah's was able to optimize its casino layout by tailoring the product mix according to customer preferences. This also allowed the company to schedule its staff more efficiently-assigning more service people for the times and places where the diamond customers tend to play, and fewer for lower volume times and places. This was an important change, as labor makes up approximately 25 percent of the casino's costs. Moreover, by fitting labor into a predicted demand pattern, the best employees were able to focus on the diamond customers, thus giving a higher level of customer service.

Aware that satisfied customers become loyal customers, Harrah's now regularly asks customers to rate their experience. The company also closely monitors customer satisfaction ratings and provides feedback to casino managers on what tactics work best. In addition, the company evaluates data using its general ledger. For example, the finance team compares reinvestment dollars--what the company spends to get customers to return to Harrah's--against revenues. This gives managers practical insights on how to get the most value out of their marketing and customer service spending.

Has this proactive investment paid off? Mr. Atwood said that Harrah's has succeeded in growing its net income by a 20 percent compound annual rate over the last five years.

As this case clearly shows, CPM is a management model for boosting performance by keeping strategy fresh and making sure decisions are made with strategy always in mind.

For you free copy of the full conference conclusions paper, entitled Corporate Performance Management: How Finance Can Move the Needle, please visit www.cfo-research.com