Real-time Financial Corporate Performance Management – Valutrics

Corporate performance reporting is a critical CFO function. Real-time performance reporting allows top management to understand the pulse of the business from its financial and operational metrics. Real time financial and operational management seeks to reduce lag time or ‘information float’ out of core operational and managerial processes. Businesses have long understood that time is money, and speed is a competitive advantage.

Real-time business is about speed, agility, and efficiency. Businesses get visibility across the extended enterprise to be able to anticipate and capitalize on opportunities before others. This requires strategic alignment of business processes to make up-to-date information available to everyone who needs it, whenever they need it. This applies internally as well as externally to customers.

In today’s rapidly changing business environment, decision-makers cannot afford to wait for batch reports to tell them how their business is performing. Instead, managers require instantly up-to-date information to judge their business and to react to issues and conditions as they occur. The lack of visibility to changing business conditions is a big reason for lack of profitability for major corporations.
Consider the automobile manufacturer that wrote-off $1bn in inventory on precious metals because its purchasing department continued buying when it had no visibility into demand. Or the network and telecom companies that wrote off $2.5bn and $19.5bn respectively for excess inventory because they did not identify a lack of product demand during a market downturn.

Similarly, financial institutions lose millions each year to fraud when they are not able to recognize quickly exceptional transactions. And many companies disenfranchise loyal and key customers when they do not respond in a timely manner to customer complaints. Companies therefore need the ability to get a real-time, event-driven analysis of business metrics by monitoring and evaluating business activities as they happen. This provides enhanced levels of predictability, agility, and exactness to business, and helps execution effectiveness. According to Gartner Inc. IT consulting firm: “The real-time enterprise is an enterprise that competes by using up-to-date information to progressively remove delays to the management and execution of its critical business process.”

To approach the real-time enterprise where managers make decisions based on up-to-date information, you need a solution with an adaptive architecture that provides:
• a streaming cache of events tapped from the message streams and the event generation and transport mechanisms, and combined with the contextual information stored in the data warehouse, to report events in the business;
• dynamic modeling of business activities such that the models can quickly be created and changed by business managers, not programers;
• temporal processing of events and activities to identify and understand trends, not just spot threshold crossings;
• business rules engine that uses familiar business formulae to quickly process events, put them into context, and identify exceptional conditions;
• exception-driven processes that immediately send alerts to key business users by providing them with the metrics necessary to address critical business issues.

Powerful web-based executive information systems provide a consolidated real-time view of an organization’s performance, making it easy to take advantage of a balanced scorecard approach to management, and measure and understand an organization’s key performance indicators and performance metrics.

Corporate Performance Management (CPM) systems provide management tools for setting expectations for every organization at every level, with easy-to-understand reporting of the status of progress throughout the year. The executive software measurements set at each level roll up to higher indicators, creating a means for gauging the status of your organizational progress. Areas such as sales, production, efficiency, effectiveness, and product quality all affect an organization’s financial performance. However, few companies are able to capture and report their many data points, real-time, on all levels. Reasons include:
• tardy and inaccurate access to key performance indicators;
• inability to spot negative trends early;
• human errors and eliminating duplicate data entry;
• inability to generate detailed reports to show emerging trends;
• inability to pin-point operational inefficiency root-causes;
• inability to identify and proactively apply preventive measures;
• lack of specific performance goals at each level.
In fact, the move to real-time business and to real-time business analysis demands more than evolutionary improvements in older-generation systems. It demands a new level of sophistication, and new technology that can solve the dilemma of real-time visibility combined with in-depth, contextual insight.

What best performers have done is move from solely relying on periodic performance or operational reports to combining them with real-time monitoring or business intelligence systems that:
• listen to the transactions in real time, as they occur (or do not occur) across multiple business systems;
• automatically detect any user-defined exceptions, issues, or opportunities requiring immediate action;
• notify all the appropriate parties simultaneously about the issue – with real-time alerts;
• automatically take the appropriate actions or response for that issue – as defined by your business rules;
• track the issue until it is resolved on a centrally accessible website, and escalate it as needed.

According to recent research, best-in-class companies have the following characteristics:
• These companies know in near-real-time when actual performance is diverging from plan.
• These companies not only send out formal monthly or weekly plans to suppliers but also notify them, by exception, of key changes in the plan, and potentially even postpone or cancel purchase orders automatically.
• These companies know the key metrics on which their customers rate them – those that impact their customers’ costs, customer service, responsiveness – and provide early warning to them on impending violations or problems, along with collaborative capabilities to ensure rapid dialog and resolution.
• These companies agree on two-way communication with customers and suppliers – to turn uncertainty into known conditions.
• Best-in-class company execution systems support real-time enforcement of a range of business rules that work across systems, databases and enterprises – ensuring prevention of violations rather than having to rework after the fact.
• Best-in-class companies automate all routine tasks to minimize labor cost, reduce time lags, and eliminate human errors.
• Best-in-class companies track internal and external facing metrics to drive objective and target setting, and to drive behaviour.
• Best-in-class companies continually monitor performance, and flag when key metrics are trending down or below key target levels. They know of performance problems while there is still time to respond to the situation.
• These companies not only measure performance in near-real-time, they proactively monitor the business process for early warning or predictive problems. They detect and respond to problems as they arise and before they adversely impact performance.
• Best-in-class companies keep track of exceptions or problems and periodically try to eliminate the most common ones that disrupt their supply chain, with a continuous improvement program.
Examples of companies that have invested in and have transformed to real-time enterprises are Hewlett-Packard, Avnet, BP Castrol, Seagate, Dresser, Pirelli, Royal Dutch/Shell, Telecom Italia, NASDAQ, Delta Airlines, and EBAY among thousands of others.

How do leading companies identify and manage risk exposures and treasury functions in real time? They use various financial systems that capture the data at the point of transaction, and perform real-time data compilation and analysis, and provide management output.
Corporate treasurers look for a single system to manage risk and handle the varied needs of the treasury. The treasury management system suppliers are edging in on the risk system market.
Over the past few years, the unique risk management needs of corporates have increasingly been recognized by risk system providers, who have customized offerings aimed specifically at clients. But lately, the boundaries have blurred between corporate risk management and treasury management systems.

Treasury management systems suppliers are now going head-to-head with the risk management system suppliers by incorporating increasingly sophisticated risk analysis in their systems. These treasury management systems have the following capabilities:
• pricing, valuation and processing of almost any financial instrument;
• combining powerful analytical and transactional tools;
• process, monitor and rebalance holdings;
• streamline administrative and reporting functions;
• incorporate real-time valuations into multiple portfolios across the globe and in widely differing banking systems.

Such efficiencies can both cut costs and increase income through more effective investment and management of cash resources. Many of the traditional risk management systems were originally designed for financial institutions and later adjusted for corporate clients.
However, the risk management needs of corporates are on the whole very different from those of financial institutions, and some of the metrics incorporated into traditional systems do not meet corporate needs.
For the majority of corporates, cash is used to support the running of the primary business, but for financial institutions, cash is the primary business. And as corporates have become more sophisticated in their risk management strategies over the past few years, they are demanding more from system suppliers.

Typically, non-financial corporates look at a longer time horizon for purposes of risk exposure estimation and management than financial institutions. Where financial institutions look at one to ten days, manufacturing companies or utility companies will look at one month to one year. ABB and DaimlerChrysler, for example, check whether the company is within Bank for International Settlements (BIS) regulatory capital requirements. Even though the company is not a financial institution and therefore is not required to do this, they benchmark themselves against this standard.

Risk managers want to be able to look at the risk of the derivative contracts they are holding globally which need to be re-marked monthly or quarterly. The new breed of highly sophisticated treasury systems that are coming to market are aimed at multinational corporates with global subsidiaries. By incorporating risk and treasury functions, the systems help the user to effectively manage investment instruments, multi-currency cash flows and provide straight through processing (STP). In addition, they have the advantage of being a completely integrated, single treasury and risk system.

Corporates want a higher level of control over the underlying liquidity of their organization and having a centralized system allows them to get the whole picture across their business.
Once integrated, the systems allow users to see online what their total exposure is in each of the currencies they hold positions in. From that they can work out their net liquidity globally, allowing the traders and risk managers to act on that information.

Multi-dimentional systems
Many of these risk systems can input scenarios – such as interest rate movements – to see the worst case scenario. The user can monitor financial risks and limit exposures, as settlement or default risk may be monitored as needed, by deal type, portfolio, dealing entity, dealer, counterparty issuer and counterparty sector. Mark-to-market and other key figures such as duration, convexity and options may be viewed for individual deals, trial deals and hedge strategies.
Benchmarking, cost-of-funds, liquidity forecasts, and maturity and interest refixing gap reports can also be generated by these systems. Different modules offer analyses of currency risk, interest rate risk, position risk, and operational risk in terms VAR. The system will give warning signals when preset risk tolerance limits are breached.

Non-financial corporates can be more flexible than a bank, in terms of time horizon for risk exposure estimation and hedging. Typically, financial institutions tend to go for best-of- breed technology for each of their sectors, taking a product from each and bolting them together to try and create a real-time system. Any corporate treasury has to fit into its corporate environment, and therefore financial systems can vary in large proportion depending on the scale and complexity of business needs.
Many CFOs want a system that can give their executives a so-called real-time snapshot of how the company was performing. That means using the web to make the system and its information accessible to all offices. It requires linking the software with other company data, and not necessarily financial data. Although a surprisingly large number of companies are still using spreadsheets, the trend toward real-time financial reporting is a sustained one, especially in the more advanced economies, and leading multinationals.

Developing a system that actually tells executives how well the company is meeting its performance goals allows on-time optimal decision making regarding both operational and financial variables.
Multi-dimensional analysis is powerful, as it allows one to slice and dice data, understand performance and get a graphical representation of performance. You can thus pin-point the problem, and remedy the root-cause issue quickly. In recent years, planning, budgeting, and reporting software has been developing into something more comprehensive, as is evident from the new monikers that such systems are sporting, like business performance management or enterprise performance management solutions. Comshare Inc., for example, describes its system as a “corporate performance management application.”
It is necessary to understand how this new generation of integrated softwares differ from the old planning and budgeting software: the new systems have the ability to access operational and financial data like production numbers, web-enabled to get input on budgets from many employees and alert systems that warn the right executives when the company is falling behind budget.

The concept of tying together financial and non-financial data is not that new. In the early 1990s, the “balanced scorecard” approach was advocated by Robert Kaplan and David Norton. But without the web, it was difficult for companies to get a picture across the organization. Now that many companies have in place back-end applications, such as customer relationship management systems and supply chain management systems, capturing that information and analyzing what it says about the company is finally possible.

With the tighter reporting deadlines mandated by Sarbanes-Oxley in the US and its requirement that CEOs and CFOs sign off on their companies’ financial reports, and higher accountability standards for auditors, most believe the pressures are mounting to give up spreadsheets. Add to that the intolerance the equity and credit markets show these days toward errors in financial data, even honest ones, and one can easily sketch out a scenario in which spreadsheets become as outmoded as adding machines within the next couple of years.

Software systems make the process of consolidating data faster and more reliable, and dramatically slash the amount of staff time it takes to budget and report. They thus allow a remarkable improvement in organizational effectiveness and productivity. These systems also allow executives to drill down and give them, as Mark Stimpson, director of product management for Cognos Inc., puts it, “a greater degree of comfort about how the numbers have been made up.”

Financial discipline is key to corporate financial management in an increasingly information intensive new economy. CFOs of leading companies pay particular attention to advanced and sophisticated financial information systems that can provide operational and financial status in real time. JP Morgan, for example, uses its risk management system RiskMetrics™ to calculate daily earnings at risk (DEAR) at the close of business every day.

Every company has some sort of financial analysis tool that it uses to conduct business and financial planning. Excel spreadsheets are typically used for financial planning, since powerful financial analysis software add-ins use Excel as the interface. Examples of financial add-ins include RiskOptimizer, OptQuest, Crystal Ball, etc. But real-time financial systems need much more analytical capability than all-purpose spreadsheet packages. Hyperion, SAP, and PeopleSoft, for example, specialize in customized financial applications, and are essentially very large and detailed financial databases linking real-time to corporate transaction data, and assimilated to deliver financial data for decision making.
These financial systems include integrated risk management systems, the balanced scorecard performance measurement systems, as well as ERP and CRM systems. The systems are necessary for dynamic business and financial planning and execution.
Based on exception-reporting from these systems, top management can identify outlying events and adapt to changing business circumstances almost on a real-time basis. It is a source of comparative advantage for those that have these tools at their finger-tips. Without these tools, the information delivery and analysis infrastructure and business planning will be sub-optimal and unable to maximize profitability.

Fragmented IT application architectures not only greatly complicate the CRM process, but also interferes with a company’s core business operations. Operational risk is the main potential problem arising for firms whose IT infrastructures are either inadequate to support the analytical requirements of a sound financial and operational management process, or whose applications architectures are too fragmented to facilitate appropriate risk measurement, reporting, and oversight.
For treasury cash management, a complete, end-to-end, financial flow management solution can be utilized. Such solutions include integrated, on-line, real-time tools for e-banking, e-payments, security, in-house banking, netting, and front-to-back office dealing and risk management, all within one multi-company, multinational, multi-currency, multi-bank environment.
Streamlined communication management facilitates the exchange of financial flows between the corporation’s banks for continuous electronic banking and financial processing. By centralizing financial activity, companies have the ability to make bank balance and transaction information available to subsidiaries using all data exchange supports, file transfer formats, electronic mail and internet/intranet online web services.

Compliance and other global features
CFO departments with global functions need to handle a wide range of foreign exchange, money market and capital market instruments, both cash and derivative, tradable and over- the-counter, to manage positions and financial risks effectively. Transactions are securely booked to the enterprise accounting system, from transaction input to accruals, valuation, and revaluation. Market data is interfaced with the real-time corporate performance management system for direct calculation of mark-to-market and pricing information so that data are FAS133/IAS39 compliant, while an audit trail monitors all changes made to the database.
Other systems are designed to cover the complex requirements of global corporations and financial institutions for in-house banking and intercompany dealing. By setting up internal or inter-company accounts, group cash requirements can be met on a global basis. The central treasury department is able to share or distribute cash resources as required.

Risk management systems enable corporate treasury to measure and assess enterprise- wide financial risk and to act according to its enterprise policy to ensure that financial risks are maintained at an appropriate level. These systems provide real-time analytical tools to help identify, quantify, and report financial risks, apply effective hedging strategies, and monitor the effectiveness of the risk management programs. The operative term here is flexibility.

CPM systems integrate key management processes, such as strategic planning, risk management, balanced scorecard, and budgeting. These systems help create a clear understanding of corporate strategy and establish accountability, while enabling managers to proactively monitor actions and performance against company targets.
Real-time performance systems support the quality of strategy execution. Latest innovations in scorecard automation empower users to align valuable resources with strategy more effectively, thus resulting in the greatest impact on performance. Benefits include:
• alignment of organizational activities with business objectives, resulting in better strategy execution;
• no client/server administrative connections or additional systems software are required;
• complete browser-based solutions enable management of strategy for the enterprise to be conducted entirely over the web.
Executives manage risks that may prevent the effective execution of strategy. They get a strategic view of risk management while facilitating risk methodology deployment throughout all levels of the organization. Real-time information enables organizations to collaborate, integrate, and share the responsibility for risk management.

Real-time corporate performance systems support the rolling forecast beyond budgeting methodology, but provide a comprehensive financial management solution to support any business model. These systems leverage the value of data in general ledger and spreadsheet applications.
Business management is a complex task, which benefits from accurate and timely information that is useful in decision making. However, turning a profit now requires careful attention to detail that can hide beneath the business surface, often at the intersection between various departments and functions, and between distinctly different systems and applications.