The ability to take a rational, data-driven view on resource allocation decisions is critical in optimizing growth.
To optimize revenue growth and maximize profit, CFOs need to focus on understanding how to allocate the organization's limited resources to the right areas of the business to drive marginal contribution.
As an economic advisor to the business, Finance will require a performance management capability that:
- Provides visibility and analysis of information to support the allocation of scarce resources
- Supplies the right information to the right people at the right points in the decision-making process, on both an annual and operational basis
- Is able to demonstrate the financial impacts of different decisions and scenarios to enable the organization to predict and compare outcomes against a range of alternative options
- Incentivizes executives and managers to make decisions that maximize marginal contribution, assuming this to be a sound strategic objective linked to maximizing shareholder returns
Enabling better economic decision-making
As we have observed, the ability to take a rational, data-driven view on resource allocation decisions is critical in optimizing sustainable and profitable growth.
Decision-makers want to be confident that the actions they are taking will deliver their economic objectives, or that investment strategies can be pursued without the fear that a greater opportunity is being missed elsewhere.
With organizations making thousands of resource allocation decisions a day, there is a clear dependency on timely access to targeted, relevant information by means of a fit-for-purpose performance management framework.
This framework should identify the most important decisions, and be consistently used as the mechanism for communicating decisions and measuring progress against targets.
However, numerous barriers can make it difficult to achieve this clarity.
Barriers to clarity
These barriers include systems and organizational deficiencies; but, perhaps more fundamentally, the restricted structure of performance management frameworks means that important decision points do not have the right data to support fact-based decision-making.
This is largely because many organizations still rely on traditional, accounting-focused management reporting, which frequently lacks the required business or operational context to drive informed decisions: variance analysis without this becomes a blunt instrument, susceptible to either generalized high-level explanations, or little more than guesswork.
How can this situation be improved?
Any review or transformation of performance management capabilities should also consider the framework through which data is captured and analyzed.
Economic insight can only be properly enabled through developing this wider viewpoint. In our work with leading business, we have found that the enterprise value chain is a very intuitive and helpful way to examine the full range of decisions a business needs to make.
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