Building more efficient businesses

A new research study suggests how dealing with five specific challenges can help build a more efficient and effective business 

by Hugues Boisvert, CMA, FCMA

Between March and late June, the CMA International Centre for Studies of Business Processes analyzed the organizational performance challenges many businesses must address: organizational structure, manager motivation, management information, strategy and evolution of the finance function. The way these five elements are deployed in an organization may differentiate efficient and effective organizations from those that wither and fail.

What is organizational performance?

Organizational performance illustrates how successfully an organization attains its mission and related objectives. When asked “How would you define organizational performance?” the 56 executives interviewed clearly stated that organizational performance implies beginning from a given situation and attaining a precise target, which may include several end points (market share, sales volume, employee motivation, customer satisfaction, level of quality, etc.).

Performance therefore resembles a path travelled and is measured by the distance from the departure point to the arrival point. As the starting points and strategies implemented vary among companies, together with the environments, the routes travelled are specific to each company, strategy and environment. Companies measure short-term performance by the attainment of strategic targets (associated with different activities) whereas over the long term, performance can be summarized by a single indicator: average profitability over the period. Therefore, the overall challenge for each remains the same.

Organizational structure

The first challenge for organizations is to adopt a structure that encourages managers to act as if they owned the company. Various factors influence the choice of an organizational structure: company size, market, key activities, products and services, procurement, etc.

In this study, two types of structures were analyzed: a structure decentralized into business units; and a silo structure, where activities are grouped according to functions in silos. Many organizational structures combine these two basic models, and are then called matrix structures. Each structure has its advantages and hurdles in terms of performance management. By being aware of the pros and cons, a firm can maximize the advantages and overcome the difficulties, and even adopt a matrix structure.

Our analysis revealed that a business unit structure is more conducive to effective organizational performance than a silo structure, although we observed cases of profitable organizations with silo structures. Business units more easily created a motivating environment, leading executives to take ownership of their function. These organizations favoured an entrepreneurial culture, and as they were usually closer to the field, they positioned the organization to respond better to environmental changes. However, the business unit structure had to coordinate the units through coherent policies to motivate managers to align their personal objectives with those of the organization.

Nonetheless, internal control was more problematic for business units. In a silo structure, standardization of procedures was easier to achieve, which encouraged the integrity of operations. Managers tended to exert more of an effort to show that they were contributing to company performance rather than working directly on organizational performance. In addition, silos often created a political climate that didn’t always stimulate performance, as one of the executives interviewed affirmed: “The organization of the company in silos creates a lot of politics. The information on performance is a political object.”

Manager motivation

The second challenge for organizations is to motivate executives over long periods, presenting them with an appealing career outlook. Motivating managers is essential for organizational performance. This motivation entails providing an opportunity to develop within the organization, instilling pride in belonging to the group and allocating compensation that reflects the executives’ efforts and success.

When asked “How do you motivate your managers?” the respondents replied that the opportunity to flourish within the organization comes from the challenges faced, responsibilities assigned and decision-making latitude granted. The pride of belonging to a group was mainly derived from involvement in management and the feeling of truly being a team member. This feeling was reinforced by management committee meetings and the sharing of confidential information related to the success of the organization. It was important for managers to know where the organization is heading and to be informed of its results. Performance-based compensation programs complemented manager motivation, as one manager confirmed: “For the youngest members, you have to give them action and money. For older employees, you must provide latitude and a little money. For them, the role of coach is important.”

This challenge is arguably the best understood and most analyzed by the organizations encountered. In fact, the increased mobility of managers in 2005 compelled organizations to develop motivating practices. Companies can’t afford to lose their most skilled executives.

Management information

The third challenge for organizations is to adopt an integrated management information system and produce management information that will be both useful and used by the functions. Today, it is no longer possible to manage by intuition alone. Executives must rely on high quality management information to make decisions that fuel organizational performance. Most companies have many information systems; the financial accounting system is one example. However, financial accounting systems are intended to present financial statements to third parties.

Management information, by comparison, influences the decisions of functional managers regarding implementation of plans, and therefore targets organizational performance. In addition, companies invest sizeable sums in their information systems. Sadly, at many organizations, a large portion of the management information that the finance function produces for management is neither useful nor used by functional managers.

In an ideal world, the three sets of information illustrated in Figure 1 by circles (information produced by the finance function for managing functions, information useful for managing functions and information used to manage functions) should be superimposed.

In reality, however, the financial managers in charge of producing information report that only 51% of management information produced by the finance function was both useful and used. The evaluation by the users of the information is even bleaker: general managers put the percentage at 38%, and the functional managers claim that only 37% of the information was useful, which implies that about 62% or 63% of the information produced by the finance function for management was neither useful nor used by functional managers. The estimate of general managers and that of functional managers obtained independently is nearly identical (38% and 37%), and the total number of people (14 + 18) that produced these estimates is significant. In addition, the estimates gathered indicate that 30% of the   information used was useless and that 19% of the information considered useful was not used.

These results are food for thought. A serious re-examination of the firm is required, particularly concerning integrated management information systems (ERP, or Enterprise Resource Planning). Not only are the amounts invested in these management information systems significant, but these systems also produce too much information, some of which is considered useless. As a result, many decisions are still being made by intuition. Intuition is not inherently flawed, but must be grounded in reliable and pertinent information.

Strategy

The fourth challenge for organizations is implementing the strategy through the appropriate use of tools and other means. Most executives surveyed identified formulation of a strategy as the first prerequisite for organizational performance. All respondents consider strategy to be the foundation of organizational performance. In addition, most executives surveyed have analyzed their environment and designed an effective strategy.

However, strategy implementation still poses a challenge because the business units or silos, depending on the case, must be encouraged to formulate and develop plans in harmony with the corporate strategy. The strategy was controlled and plans followed up at meetings (weekly, monthly or quarterly), and the strategy rested on a set of tools and means (information produced, analyses, practices implemented).

All companies held meetings whose frequency varied according to the perceived needs of the organization. One executive said “Performance is managed by a management committee every two weeks.” Another affirmed that “the management committees of each business unit are central to performance management.” As we mentioned, however, such meetings must be grounded in high quality management information to ensure adequate oversight of the implementation of plans and strategies. Management accounting techniques, in particular the budget, cost models and management dashboards, must be part of the implementation of plans in line with the strategy, which is not always the case.

Evolution of the finance function

The fifth challenge for organizations is to evolve the finance function into a true business partnership, or at least to the role of business advisor. The finance function is the source of financial information in the organization. It thus has privileged information that isn’t always used. Today, in a context of increased competitiveness in all sectors, resulting from globalization and opening of markets, it is increasingly important to develop management information that integrates the financial dimension.

Indeed, the idea of evolving the finance function toward the role of business partner, which is also one of performance manager of the organization, first emerged over 15 years ago. However, the contribution of the finance function to managing organizational performance is low for most of the organizations consulted, equivalent to 12.1% of their activities. Table 1 summarizes the results obtained from the 38 relevant respondents. 

Incidentally, 66% of companies that replied to the questionnaire dedicated less than 10% of their time to managing organizational performance; 13% of the respondents spend no time on this activity. Moreover, 11% of companies exhibited a noteworthy evolution of their finance function, which allocated more than 30% of its time to performance management. Note that for companies in the finance and insurance sector, the finance function allocated a large percentage of its time to organizational performance management. Could this be because their products are financial and that all projects in this sector require financial analysis? Does this explain the robust financial returns of the companies in this sector?

The evolution of the finance function tends to follow one of two models: business partner or business advisor. The business advisor carries out studies, drafts reports and prepares management information for managers, but doesn’t make decisions. The business partner is an active member of the managerial team, which implies that, in addition to conducting research, that person makes decisions related to organizational performance. Usually the business partner is found in a business unit structure whereas the advisor is found in organizations with a silo structure.

The business advisor, especially the business partner, is pivotal to management accounting practice. In organizations where the finance function contributes little or not at all to organizational performance management, so-called management accounting techniques are often limited to financial resource management as a complement to financial accounting.

How can companies become more efficient?

The five organizational challenges that we analyzed all pose challenges to companies that wish to improve their performance. They must adapt an organizational structure that encourages all managers to act as if they have an ownership stake in the company. They must offer their most efficient managers interesting career opportunities within the organization. They must make developing an integrated management information system that produces management information that integrates the financial dimension a priority, which will be useful and used by the functions. Most organizations encountered have a sound strategy, but they must find effective means of applying it. Lastly, companies must fuel the evolution of their finance function toward greater involvement in organizational performance management. Today, many companies still have a finance function dedicated nearly exclusively to the statutory activities related to financial accounting. As a result, the company is deprived of preferred information that could steer it toward better financial performance.

Hugues Boisvert, PhD, CMA, FCMA, (hugues.boisvert@hec.ca) specializes in benchmarking, accounting and activity-based management. He is head of the CMA International Centre for Studies of Business Processes and a full professor at Ecole des HEC.

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