Statistically speaking…

Back when I studied Statistics as the selected additional option of my Maths ‘A’ Level exam, the practical use of what I was learning was somewhat limited – most often the preserve of academics, political analysts, researchers, surveyors etc. Increasingly, however, statistics are being used in business….and ever more widely.

Several years ago, IBM acquired SPSS, which resurrected my interest in the use of statistics. SPSS (originally, Statistical Package for the Social Sciences) has a long history, dating back t0 the ’60s. These days SPSS is likely to be utilised by a variety of business users for statistical analysis, data and text mining, predictive modeling and decision optimization to help anticipate change and take action to improve outcomes.

I’m most interested these days in how it helps in various aspects of forecasting, and consequently in decision-making. A couple of examples:

1. Support for high level assumptions. One of the challenges in planning and forecasting is deriving the initial assumptions. These are often based on judgement or “gut-feel”, but in today’s ever-more complex world, this is not always the best way. The allocation of resources in a world suffering this on-going recession is a critical challenge, and thus organisations are at risk of commiting resources inefficiently if they don’t understand their environment. This can be where a statistical approach can help.  I’ve discussed previously how we run Best Practices in Forecasting round-tables, but one of the changes to the audience in recent years has been how many more public-sector attendees and charities. In talking to these attendees, it becomes clear that they are under increasing pressure to allocate their scarce resources on a more logical basis, taking statistical approach to predicting population profile and changes etc. There are some great examples – Memphis Police Department, Medway Youth Trust in the UK, City of Nuremberg among others.

2. Cross-selling. One of the key areas that we highlight in forecasting best-practices is a driver-based approach. In other words using the language of the Business rather than that of Finance. An example that we frequently use is a Call Centre manager. If asked just for a revenue forecast, he/ she will perhaps make a judgement call based on a previous period. If, however, the forecast takes a driver-based approach, then that same manager may be enabled to look at number of operators –> number of calls made –> leads created. Those leads created can then be used as a driver, via average sales per lead, to create an opportunity pipeline. This, in turn, will drive revenue via a Sales conversion rate.

This approach gives visibility to a number of decision-making opportunities, for example if opportunity level appears to be dropping, then the company may want to look at means of increasing the average sales per lead. SPSS can help in this by, for example, helping to identify cross-sell or up-sell potential. Again, there are a number of examples – take a look at Telenet, which transformed its customer care call center into a sales outlet by exactly this approach. You can actually view an webinar of IBM Cognos TM1 and SPSS being used together for this purpose in IBM’s Innovation Centre.

3. Run-rate forecasting. Successful implementation of rolling forecasts, will rely on a number of factors. Among these will be an ability to focus forecasting resource on key drivers/ products/ cost areas whilst monitoring less critical areas, perhaps using a basis such as that shown in the diagram here. Some of the less-volatile items, though, may be valuable/ material to the business, and thus deserve some significant focus. This may, for example, be the case where valuable inventory items are treated as “run-rate”. We’ve recently seen this challenge with a number of customers who take a linear extrapolation approach to forecasting run-rate items, and are looking to us for help in how to do so in a more robust way than utilising spreadsheet functionality. SPSS, of course, performs this task incredibly easily, and integrated with IBM Cognos TM1 as part of a reporting, analysis, forecast and planning solution, delivers tremendous value to a business.

It’s great to see such beneficial uses for an area of my education that I feared would be rarely used!

Sustainability – here to stay, so worth reporting!

There is a spectrum of opinion on Mother Earth’s diminishing resources, global warming – false alarm or impending armageddon! Whatever the truth turns out to be, it is clear that resources are limited and that we would be wise to take this into account, whether as individuals, governments or companies. His Royal Highness The Prince of Wales has for many years been known for his concern for the planet, and launched the Accounting for Sustainability Project (A4S) in 2004. This project has inspired a number of organisations to make changes to their reporting – take a look at the examples of “Connected Reporting”

This work to date has now inspired an exciting new initiative that is really building some considerable inertia. At the end of 2009, The Prince called for an International Integrated Reporting Council to be set up. This was done and is now well under way, and a Pilot Programme was launched last year. Over 50 companies from around the globe have joined the Programme and companies from various sectors have secured their participation, including  Microsoft Corporation (Software and Computer Services), HSBC (Banks) Gold Fields (Mining), Marks and Spencer Group Plc and The Coca-Cola Company. This is clearly an initiative that is here to stay!

Incidentally, for my UK friends who undoubtedly shop at M&S it’s worth taking a look at their Plan A initiative, which is already integrated into their Annual Reporting.

I’ve been fortunate, thanks to my role leading the European Financial Performance Management Team within IBM to meet the IIRC and a number of the organisations involved in this initiative. This is an exciting time, and I’m proud that my profession is taking such an important role in raising the importance of sustainability.

It is, of course, early days and there are many issues to be resolved. It is important that this does not just add a new report to the ever-increasing burden of reporting and compliance. I’ve been inspired so far though, by the fresh view being taken by these participants on how we should be reporting. My own view is that standing back from the myriad of reports currently issued and considering a more holistic approach has to be good news. It must be healthy for an organisation to produce an Integrated Report based on it’s business model and demonstrate how it utilises it’s various resources to produce value whilst ensuring a sustainable future.

As I began this post, no matter what your view of the issues around sustainability, we are letting down future generations if we ignore the importance of corporate social responsibility. I’m looking forward to being a part of this movement for change.

Finance – Partner in Business

I was reading the monthly AB magazine published by my accountancy board ACCA on the train last week, and was particularly struck by an article recounting a speech that Royal Dutch Shell’s CFO Simon Henry gave at the Economist CFO Summit in March 2011. Take a look at p14-17 of the digital version of the magazine at http://ab.digitaleditions.co.uk/oct11_uk/. Mr Henry discussed the broad range of challenges confronting Finance in these uncertain times, greater expectations from Finance, increased outside pressures, risk management, and the increasingly important role that Finance plays in enterprise strategy. All of these echo the findings of the IBM Global CFO Study, as well as what I’m told by so many companies that I meet. What is also striking in Mr Henry’s speech is the importance, as a first step, of a smooth running Finance function. It is often the transformation of this function’s frequently over-manual workload to enable a greater business insight that also features in the study. As Mr Henry says this will enable Finance to become “an influential voice in business units”.

My colleagues and I base much of our approach to Financial Performance Management on the findings of our IBM Global CFO Studies. The 2010 Study surveyed almost 2,000 CFOs globally. The study showed that Finance continue to increase their involvement in and importance to the business as a whole. We compared the findings of the last 3 studies, spanning 5 years, and each aspect of Finance’s Enterprise-focused activities have increased significantly. The areas of Enterprise Strategy and Risk Management highlighted in the above-mentioned article featured very prominently. If anyone wants to take a look at the Study findings – there’s even a self-assessment – then take a look at the CFO Study page on the IBM website.

We categorised companies based on their declared capabilities in Finance Efficiency and Business Insight (take a look at the study for more on these). Those companies that excel in both areas were characterised as “Value Integrators” – enabling performance optimisation, predictive insights, risk management, and smarter decisions. There are substantial benefits to be derived by successfully achieving this status – the study found that such companies outperformed their peers in measures such as EBITDA, Revenue and ROIC.

We use the diagram opposite to demonstrate how we see successful organisations develop in pursuit of Value Integrator status. This generally starts in that smoother-running, more automated Finance function. This frees up time, allowing those highly trained Finance staff to drive effective planning, reporting, analytics and risk management.

It’s always good to hear about transformation of Finance and the resulting benefits to the Enterprise. That business-partnering was what motivated me during my years in the profession and just as much now as a part of the Financial Performance Management team in IBM working with our various customers striving to gain greater business insight.

When is a Round Table not Round?

The answer?

When it’s an IBM Cognos Best Practices in Rolling Forecasts Round Table.

I know….I haven’t written for ages (a summer break albeit not with much sun in the UK), and that’s the best punchline I can produce! Please read on though…

How so?

With my colleague Christoph Papenfuss, I’ve  been running Round Tables in the UK for around three years now. At first, they were precisely that – groups of around ten attendees having an interactive discussion on challenges and our view on best practices in this subject…around a table!

Over the last year or two, however, we’ve been seeing increased numbers of attendees – certainly it would take an exceptional round table to accommodate them! I’ve now run many events with well over twenty attendees, and we’ve increased the number of events in an attempt to keep the numbers within realistic bounds. As an indication of just how popular this topic is becoming though, we’ve had to double our planned number of events in the remainder of this year (run this time in association with ACCA), and even then we look set to have around fifty people attend a number of the planned interactive seminars – that’s our new approach to these.

Why the increase in interest?

I believe that there are a number of reasons, including:

• The global nature of business these days and the current turbulent times are putting an added strain on the increasingly challenged practice of budgeting. When events and uncertainty anywhere in the world can render a budget unrealistic within a very short time, a fresh approach is necessary. That doesn’t, in my opinion, mean that the budget should necessarily be dropped – at the very least it is a formal statement of the company’s targets and plans to achieve these. It does mean, however, that a realistic means of  forecasting the business and enabling decisions to be taken on a timely basis is essential. Finance departments have realised this, and are looking for the best approach to implementing;
• The constantly increasing sources of data about a business and its environment mean that relatively static tools, such as the budget, are often inadequate in ensuring that the organisation can interpret this information and reflect it in agile decision-making.
• Business partnering – as revealed in the IBM Global CFO Study last year, Finance are more than ever partnering with the business. The business itself is looking to Finance to bring together and integrate the multitudes of data and enable it to perform effective decision-making.
• Spreadsheets – A straw poll of our events shows that around 90% of attendees are currently doing all forecasting using only spreadsheets. I’ve previously commented on the challenges associated with these and they’re no less in the area of forecasting – let alone any form of scenario modelling!

I mentioned decision-making in most of the above points – I mention it a lot in the seminars and pretty much any time that I have the opportunity! I believe that decision-making – and driving  better business outcomes (see my previous post) – is absolutely key to all performance management and forecasting in particular. The answer to almost all questions raised in these seminars should, in my opinion, be “Does it help you or the business in decision-making? If “yes”, then go ahead, if “no” then question the reason for doing it!”

I’ll discuss this further in my next post, but in the meantime I’ll leave this post with a quote from Peter Schwartz, The Art of the Long View

“The end result….is not an accurate picture of tomorrow, but better decisions about the future.”

On the road again!

Sadly not as a rock star! I’ll be embarking on the UK mini-series of IBM Finance Forums this week – I’m doing a little last-minute preparation on a horrible rainy day in. These are day-long sessions where we’ll be meeting and presenting to Finance management from a wide range of companies. I was fortunate to get the opportunity to be Keynote speaker (and present 2 additional sessions and a press conference!) at Moscow Finance Forum. It’s inspiring to see so many people truly appreciating our solutions – 350 in Moscow. Incidentally, the picture below shows one of my more interesting challenges in a press conference – referring to a presentation in Russian!

This year we’ll be sharing our vision of “Transforming Finance through Analytics”. I’m not alone as a long-standing proponent of the importance of this statement, but it has rarely been as universally applicable as it is now.

I’ve been lucky enough to have spent a substantial part of my working life with companies managing exceptional growth in new areas. In these situations, relevant history is limited, so I’ve had to develop a flexible, agile approach to performance management. When looking at business performance, history is often used as a comparative and as the basis for predicting future trends. That’s often a sound basis for making judgements, but rarely in isolation. Where a company is growing extremely fast and perhaps in new markets this can be a substantial challenge. For me, this was the case with Nintendo at the start of the games console era, and Macromedia at the beginning of the dot.com boom - rarely a better example of “Right Place, Right Time”!

These challenges – so enjoyable for me – are now being experienced throughout the business world, and sadly circumstances are not always so positive in the current climate. They also don’t look to be going away. Such challenges, however, always present opportunities to those “switched-on” enough to take advantage – back to the subject of our Finance Forums:

We are in turbulent, and uncertain times, especially for Finance, to whom the business increasingly tends to turn for guidance¹. At the same time, there are unprecedented sources of data – from ERP systems, HR records, CRM applications, and multitudes of other sources. Increasingly social media is adding to these, and whilst these may add to challenges, they also add enormously to opportunities to stay ahead if harnessed!

At the same time as this expansion of sources, there are a constantly increasing number of demands for forecasting, planning, reporting, filing (including electronic – iXBRL in the UK), and so it continues….

It is with this backdrop that we will be empathising, sharing, and offering some solutions to some of these challenges. The diagram to the left shows a systematic approach to Business Analytics. In essence, thoughtful
deployment of business analytics can support better outcomes…….connecting the relevant data into actionable insights resulting in smarter
decisions that lead to incremental value for businesses.

I’ll be co-hosting Forums in Warwick, Manchester and London, as well as running Rolling Forecast Roundtable breakouts. Interest in these roundtables has grown substantially in the last year or two. Anyone from Finance wanting to attend a Forum – there is a link on this page to the site on ibm.com. Incidentally, I’ve also included a link for anyone interested in rating their business’ AQ – Analytics Quotient!

¹ http://www-935.ibm.com/services/us/gbs/bus/html/gbs-2010cfostudy.html

What’s the difference between an Accountant and a Mechanic?

Strange question? Perhaps – but I’ll give you an example of where they may be similar!

I spend a lot of time with customers extolling the virtues of IBM Performance Management solutions, with the first stage being automation and then transformation through application of best practices to achieve Enterprise-wide Performance Management. The pinnacle of this transformation is world-class Business Intelligence enabling smarter decisions and ultimately better business outcomes. IBM Cognos 10 comprises some truly awe-inspiring capabilities, enabling communication of information to all users throughout the enterprise.

Whilst Finance clearly values this capability to communicate information throughout the organisation, it still invariably seeks to retain a capability to utilise the interface that is the spreadsheet! I know that this is a constant mystery to many, and is a part of why my team and I exist within IBM. We understand that the afinity with this tool which is recognised as having so many flaws (see my previous post) is deeply rooted within the Finance department. That understanding, of course, comes from many years with Finance ourselves and thus having specific experience of this, but it’s not always easy to explain to others.

I was with colleagues this week discussing Performance Management with a rapidly-growing customer when the subject of the spreadsheet as an interface to our Business Analytics solutions inevitably arose, and the comparison with a Mechanic came to me!

I still remember maintaining my own car many years ago – best of all my first car – a Hillman Hunter GLS – but I digress! Whilst the memories of working under an engine in the winter, and that bolt that wouldn’t shift suddenly giving way, enabling my spanner and my hand to fly off and hit the nearest sharp object are still there, the over-riding memory is of being incredibly satisfied when my work resulted in a smoother running engine….sometimes! I barely even open the bonnet to my computer-controlled car these days.

I suspect that if you were to ask a mechanic over forty whether he/she would prefer to work on an engine in which they could recognise all of the parts or a computerised mass of wires etc, the honest answer would be the former! I think that the desire for Finance to retain an ability to see information via a spreadsheet interface is for similar reasons.

Both accountants and mechanics see the benefits of the latest technology, but they are also both, at the end of the day, responsible for ensuring the nuts and bolts are in the right place!

Spreadsheet – flawed saviour

The principal reason for me starting this blog is to share my views on the challenges confronting Finance in today’s world, and some of my experience as to how these can be solved. I was sharing some of my own early challenges at a Rolling Forecasting Round Table that I ran on Tuesday with my colleague Christoph Papenfuss.

I have been fortunate to have spent much of my Finance career in exceptionally fast-growing companies. This has meant that I have had to find solutions to performance management in a constantly evolving environment, despite not having access to some of the tools that exist today.

Back in August 1990, I joined a small toy company in the UK called Bandai. At that time the company had a modest turnover, but had just begun to sell Teenage Mutant Hero Turtles and acquired the distribution rights to Nintendo – it was this, of course, that attracted me to the company!

In the remaining four months of the year annual revenue increased by a multiple of seventeen and within two years that revenue in turn became five times greater. Sounds great – and it was – but imagine the internal controls and system strain associated with such an extraordinary level of growth…and imagine the audit at the end of that first year!

Inventory and provisioning was a particular challenge. I shall never forget participating in a count of the physical inventory that involved being lifted onto the top of 20ft piles of TMHT boxes. Health & Safety – and slight increase in weight – may prevent that these days!

How did we cope with such spectacular growth? The spreadsheet of course! The power of spreadsheets was critical to being able to achieve any kind of timely accounting. There were, and of course continue to be problems with this “tool” though:

• Auditors were – as they are now – nervous of over-reliance on spreadsheets. Fortunately they were willing to spend lots of chargeable time checking those spreadsheets – including using a calculator to check sample lists of numbers totalled correctly!
• Errors were always a risk
• Individual knowledge was key to maintaining those spreadsheets, and thus reliance on those of us that had good spreadsheet skills meant many evenings and weekends were worked.

A recent Accountingweb article entitled “Excel blunders: the PwC view” shows that the problems with excel are as significant now as they ever have been. Investigating a spreadsheet from a property developer client, PwC discovered that links within that single spreadsheet actually tracked back to 857 other spreadsheets!

This will be a recurring theme of my posts. Finance relies heavily on spreadsheets and derives major benefit from their flexibility, but as highlighted above, there’s a price to pay for this. I’ll be sharing my experience of how Finance can retain the flexibility of an excel interface, but gain a robust and risk-free solution to their challenges.

In my next post, however, I’ll be sharing a few more of my experiences of Nintendo – particularly in the areas of forecasting and inventory control.