January 22nd, 2010 | Posted by In a past life I worked as a database marketing consultant, helping retailers understand how to capture, analyze, and act upon customer data in the hopes of predicting or influencing future purchasing behavior. It was a strange and exhilarating discipline, equal parts art and science. We analyzed things like “affinity maps”, which essentially relate the purchase of one item (an iPod, for example) to another (like a pair of earbud headphones, or another iPod accessory), hoping to infer which products a customer might be incented to buy after a major purchase.
If a customer purchase an iPod, and forgets to buy a pair of headphones, a retailer might send an email with a bundled offer featuring earbud headphones and another, less popular item. The customer, who we know from analyzing aggregate customer behavior probably wants those headphones, will be incented to return to the store, buy the headphones … and an incremental accessory as well. Now the store has leveraged the customer’s affinity for one thing, tied it to a less desirable thing, and increased revenue all at once.
Finance Can Learn From Database Marketers
The secret to database marketing is Key Performance Indicators (KPIs), and how they’re tracked over time. KPIs are rates, ratios or percentages that help a business optimize some process or discrete function. Never expressed as raw numbers, which tend to confuse consumers of the data, KPIs can be a powerful ally for the Office of Finance in streamlining productivity and processes – especially in the dreaded Financial Close and Financial Reporting process.
Rules of Thumb for KPIs and the Office of Finance:
- 1: Less is More: Once you understand the power of KPIs, you’ll be tempted to go KPI-crazy. Don’t. Any more than 5 or 6 KPIs and you’ll be overwhelmed.
- Example: You might track only a few KPIs about the Financial Close, including metrics like:
- Increase / Decrease in Labor Cost per Close Period =
[ (Total-Man-Hours-Period-1 x Hourl- Labor-Rate) - (Total-Man-Hours-Period-2 x Hourly-Labor-Rate) ] - Rate Of Incremental Effort Required To Close =
[ Total-Man-Hours-In-Close-Period / (Man-Hours-Per-Average-Workday * Number-Of-Days-In-Period * Number-FTEs-Involved-In-The-Close) ]
- Increase / Decrease in Labor Cost per Close Period =
- Example: You might track only a few KPIs about the Financial Close, including metrics like:
- 2: Establish Benchmarks and Thresholds for Performance: It’s important to establish baseline benchmarks with an initial read on how things are going, and then set thresholds for performance over time.
- In the example given above, you might initially determine that your team is working 4 hours per day more than usual during the financial close, as follows:
- Total-Man-Hours-In-Close-Period = 180 hours (it took 180 total man hours to complete this close)
- Man-Hours-Per-Average-Work-Day = 8 hours (assume a full work day of 8 hours)
- Number-Of-Days-In-Period = 5 days (it took you one business week to close the books)
- Number-FTEs-Involved-In-The-Close = 3 employees (each working full-time closing the books)
- Rate Of Incremental Effort Required To Close = [ 180 / (8 * 5 * 3 ) ] = 1.5
- In this scenario, 1.5 is your baseline measurement. Obviously a rate of 1.0 would be desirable to everyone: the close can be accomplished without anyone working overtime. And anything over 1.6 or 1.7 might mean that you begin to lose employees or see an increased number of task re-work due to fatigue or error.
- In the example given above, you might initially determine that your team is working 4 hours per day more than usual during the financial close, as follows:
- 3: Determine Next Steps: Now that you’ve set thresholds for performance, you should know in advance how your business will respond if a KPI does not perform up to snuff. A KPI is useless unless you’re using it to optimize your business and gain competitive advantage by doing things faster, better, or smarter.
- Let’s take the Rate of Incremental Effort KPI above. A goal of 1.0 might be unrealistic to achieve, so your team decides to set a target of 1.2 and work to optimize processes with automation in order to achieve that target. But what happens if your rates go up? What if you’re seeing a rate of 1.7 or 1.8, consistently? Have a plan to hire more resources, install software, or re-engineer processes to bring the rate down to your target goal.
Financial professionals should think about stealing a page from the playbook of database marketers when trying to transform internal business processes. With the advent of advanced technologies like XBRL, and modular, automated workflow management solutions like Trintech’s Unity Financial GRC Software Suite, businesses are uniquely poised to reap the rewards from an effective data capture, analysis, and optimization effort in the Office of Finance.
