Staying on track*

It takes a lot more than blind luck to reach forecasted results. It takes constant monitoring, both of your current situation and potential future risks

By David Kane and Josée Santoni

*This is an expanded version of a summary that originally appeared in the October 2004 print edition of CAmagazine.

After the initial rush of optimism that usually follows a strategic planning exercise, managers sometimes sink into corporate hibernation. Even though the planning phase should have given them a good idea of the opportunities, threats and general uncertainty ahead, they seem to think blind luck will somehow lead them to their goals.

In business there is only one guarantee: that at one point in time mistakes will be made. A comfortable position in your industry can easily turn into chaos, where jobs disappear and careers are ruined. But by keeping your finger on the pulse of your company, you should be better prepared to react.

We see two aspects to the monitoring required to achieve forecasted results. The first is monitoring current business activities through the use of a scorecard – assessing whether you are on track as of today. The second is identifying possible future events that could have an impact on your ability to stay on track into the future.

The scorecard – Are you on track as of today?
Many articles and books have been written about scorecards -- mainly about their format, how to construct them and their benefits. A good introduction is provided in “Controllership – The professional CA in control,” a course developed by Calgary CA Gary Yamada, and offered to CAs through the provincial institutes. It promotes the balanced scorecard, developed in the early 1990s by Robert Kaplan of Harvard Business School and David Norton, a management consultant.

As Yamada explains, a scorecard is meant to complement traditional financial information by measuring performance in three additional areas: relationships with customers, efficiencies in internal operations, and acquiring what is required for growth.

We agree with all the theory surrounding the use of scorecards and find it regrettable that some organizations have reduced the exercise to the development of a mish-mash of commonly used performance indicators. In our opinion, a scorecard’s true value lies in something much more subtle: a management team’s willingness and ability to see it as a goal-alignment system, one that serves as the link between corporate strategies and the day-to-day effort of each and every one of their employees, suppliers, outsourcers and distributors. If you want people to put their hearts into reaching corporate objectives, you have to make it easy for them by spelling things out clearly.

Since all efforts need to be aligned with corporate strategies, the challenge is to develop the right performance indicators out of hundreds of possibilities.

Think of the development of a scorecard as an exercise in intelligence gathering – in interpreting data from both inside and outside the organization, with a keen eye to making some real sense out of it.

The need to monitor progress
Most managers will agree that monitoring progress is essential and that financial information does not provide the full story. It is surprising, therefore, that so many organizations, often the smaller ones, do not produce scorecards and have not implemented a structured way of assessing progress made toward corporate strategies and objectives.

Unfortunately, these organizations have failed to recognize that not measuring results is in itself a hazard – one that leaves management with an exaggerated sense of safety. Blinded managers are more than willing to ignore lurking business issues – to the detriment of their organizations.

Businesses inevitably make mistakes – in foreseeing market reactions, interpreting market conditions, or any number of other things. An unnoticed change in competitive markets always affects a wide spectrum of victims. But by knowing more about your current situation and knowing it sooner, you should be able to react more effectively.

For example, luxury goods group Gucci announced in early 2003 that net profits for the quarter had fallen a whopping 97% from the previous year. Obviously, mistakes had been made – not necessarily on the operational side, but in assessing the environment. In such a situation, regardless of who is to blame, there is only one thing to do: take corrective action – fast. Here, speed becomes your best line of defence. You cannot ignore your business ecosystem for too long. You need to find a way to learn from your mistakes, and well-constructed scorecards will feed that learning process. You are bound on occasion to make the wrong assumptions about your strengths, industry or products. In the end, it is your choice: take appropriate measures or run the risk of having outsiders, obviously less competent, arbitrarily tell you what to do.  

The link with accountability
We have been trumpeting accountability since the ’70s, and we still think we are right.

A scorecard is meant to serve as the focal point for discussions on performance. Without it, weekly or monthly management meetings become a sequence of charades consisting of what senior management wants to hear … or to tell.

But the systematic use of performance indicators specific to each employee and directly in line with corporate objectives makes it more difficult to deliver hyped-up stories of how perfect things are.

Without a forum in which results are discussed based on performance indicators, people who have promised too much are unlikely to come forward – sometimes out of fear, sometimes out of reckless vanity.

In the end, the scorecard should become an important tool in assessing employees’ performance and the extent to which they will be rewarded for their actions. However, a process that tightly links corporate results with employee payback can sometimes yield morally hazardous situations. That’s why it’s important to leave sufficient room for professional judgment and common sense.

The case for professional judgment
With business still sluggish for some industries, the temptation to make deals for short-term gain remains strong. Managers the world over are anxious to please a financial market yearning for the return of double-digit growth.

But through our collective obsession with pleasing stock market analysts, we are letting outsiders of sometimes-questionable experience indirectly dictate corporate decisions.

We have all seen organizations turning to expense reduction as a way to boost profits without considering its impact on the organization’s ability to compete. The downside is that by cutting personnel, you will lose talent and meaningful position, leaving you with the workload but without the resources or expertise to perform well.

Sometimes, when truly justified, it is perfectly fine not to stay on track. We have to value professional judgment and keep an eye on the big picture.

Recently, the head of internal audit at one of the largest Canadian corporations shared his disappointment with a senior management decision to charge the internal audit department for the cost of a write-off that became necessary following the discovery of an accounting error. Arguing that the budget of the operating department could not be in deficit is one thing, but charging some of its costs -- in this case, costs associated with an accounting error -- to another group is plain misleading. Moreover, instead of being rewarded for its vigilant work, the internal audit group had to reduce its own activities to stay on budget … a less-than-desirable situation.

At the extreme, an obsession with staying on track can lead to unethical actions. Bull-headed determination is a common – and valuable -- trait of successful managers.

But sometimes you need to avoid crossing the fine line between what is acceptable and what is not. As Lord Shawcross, chief prosecutor at the Nuremberg Nazi war crime trials, once said: “There comes a point when a man must refuse to answer to his leader if he is also to answer to his conscience.”

Professional judgment is one of the cornerstones of the CA profession and those in industry have an even greater responsibility to use it in the assessment of progress toward corporate objectives and to influence business decisions that will benefit the organization in the long run.

Business risk assessment – Can you stay on track?
Business risk management is not a new science. For years, managers have been using simple tools to assess how identified risks may affect an organization’s ability to achieve its strategic objectives. More recently, new models have been developed that are better suited to today’s fast-paced business environment. One is the CICA’s Criteria of Control (CoCo) model.

Business risk management tools, techniques and scorecards are all used with the same objective: seeing problems before they get out of hand so you don’t have to sell your soul for short-term profit objectives. Advance warnings coupled with a cold-headed evaluation should prevent those bouts of neurotic management.

Considering that on any given day, any of your employees can choose to highlight any of a number of dossiers, initiatives, discussions and projects, business risk management is in a sense a way out of the wilderness of confusion surrounding what is truly imperative and what is secondary.  

As mentioned in a recent ad from a foreign bank: “In a marathon, he who looks ahead, wins.”

Why CAs should be concerned about staying on track
Corporate life is not meant to be safe. As a manager, you have probably already realized that your organization has unlimited needs but limited resources and at some point you have had to deal with a dollar-deprived bottom line.

Considering that CAs are responsible for dealing with financial crises, it only makes sense that they are also responsible for the coordination of any activities aimed at preventing them. Rallying the management team behind a global effort to maximize the organization’s ability to reach its objectives through the use of simple tools and techniques is part of the responsibility of CAs. Ensuring you stay on track is much more than a numbers game: it is intimately linked with good corporate governance.

Once business risks and deviance from corporate goals have been identified, your organization must be ready to take action, to do whatever it takes to get back on track while constantly monitoring the level of anxiety within the organization. Let’s face it, every time you take any kind of corrective action, you expose yourself to criticism from the “gallery” – usually people who have never done anything remotely close to what you are set to accomplish. In the end, once you have mastered the art of monitoring results and identifying risk, you will need another essential ingredient: leadership.

David Kane, BCom, BA, and Josée Santoni, MBA, CA, are associates at SMCS Inc. (www.smcs-inc.com), a Montreal-based organization dedicated to business development and organizational effectiveness. They can be reached at info@smcs-inc.com.