performance reporting to boards

Performance Reporting to Boards: A Guide to Good Practice

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1 Preface 4

2 Who should read this report 4

3 Introduction 5

4 The principles of financial and business reporting 6

5 The characteristics of good information 6

6 Transparency 9

7 Key performance indicators 11

8 Information systems 11

9 The CIMA SEM initiative 12

10 Applying the principles 12

11 Performance reporting – a checklist 13

12 Case study 1: extracting value from data – supporting 14the board at DHL UK

13 Case study 2: Metapraxis – an early-warning support 17system for directors at Tomkins plc

References/further reading 19

Writer: Danka Starovic Production editor: Neil ColeDesigner: Adrian TaylorPublisher: the Chartered Institute of Management AccountantsInquiries: [email protected] (tel: 020 8849 2275)Other executive guides are available at www.cimaglobal.com

Many post-Enron discussions aboutcorporate governance have focusedalmost exclusively on theresponsibilities of directors and thestructure of boards. This is hardlysurprising – after all, a company’ssurvival ultimately depends on theeffectiveness of its board’sdecision-making processes. But boardsdon’t exist in a vacuum. In order tomake the right decisions, directors mustbase them on good-quality, timelyinformation on how their businessesare performing. The quality ofperformance reporting to boards istherefore one of the key factorsaffecting companies’ competitiveness.

This report sets out principles for theeffective reporting of financial andnon-financial information to boards.It’s meant to guide both directors andthose preparing board reports. We hopethat finance professionals will find ituseful in considering how they engageexecutives and senior managers.

It’s not meant to be prescriptive;the intention is that the summary tablesof good practice and the case studieswill act as a springboard for newthinking and give you useful ideas formaking improvements in yourorganisation. Ultimately, board structuresand decision-making cultures will dependon a company’s unique circumstances.Large companies may also operatedifferent levels of boards throughouttheir businesses. The complexity of largeinternational organisations with manysubsidiaries makes the issue ofmanagement information anddecision-making more complex, and theneed for directors of such vastorganisations to have early-warningsystems is a must.

This guide isn’t about the latestmanagement techniques and reportingtechnologies either. Although manysuch tools exist (and some are provinguseful), recent cases of corporate failurehave underlined the importance ofperformance reporting – an area that

many firms assume is simple but findhard to get right. The case of Marconi,for example, raised questions abouthow timely the board’s information was,whether it was of good enough qualityto support high-level decision-makingand whether it was conveyed in theright manner.

CIMA is concerned with the boardreporting practice that’s necessary forgood market performance and soundcorporate governance. The case studiesat the end broaden this perspective byrevealing two innovative approaches toimproving performance reporting.The first case study describes howlogistics company DHL changed thefocus and structure of its performancereviews with a view to improvingdecision-making at board level. Theresult was the appointment of a teamof business performance analystsdedicated to supporting the directors.The second case study, frommanagement consultancy Metapraxis,focuses on the implementation of anearly-warning support system fordirectors at Tomkins plc. The approachwas designed to help the group’s financeteams support their boards with relevantand forward-looking information. �

This report will be particularlyuseful for:� Board members – to reassess the

reports they receive to ensure thatthey are being given the right type ofinformation by which to steer theorganisation towards its key objectives.In a business environment dominatedby fear of liability, knowing that yourdecisions are based on the mostrelevant facts can be reassuring. Forindividual directors it represents a wayof limiting their exposure to anyallegations that they are failing todischarge their duties to shareholders.The onus is on them to ensure thatthey are getting the information theyneed, rather than passively consumingwhat they are fed.

� Finance directors and preparers offinancial and business performanceinformation – to gain a source of ideason reporting. The information withintheir control will be financial andnon-financial, and both need to bepresented clearly if they are to reflectthe performance of a company.Finance professionals must understandhow to deliver performanceinformation in the context of decisionsthat need to be made by the board.This is especially true for largeinternational organisations with manysubsidiaries, where the layers ofmanagement and the number ofboards may obscure the relevantfigures and breed a lack of commonunderstanding of what the keyperformance drivers are.

� Managers – to gain an understandingof the information needs of theboard and to see the performancereport as a strategic extension ofday-to-day information-gathering.The information and decisionsupport that board members receiveenables them to discharge theirduties in an appropriate fashion. It canalso be a good indication of therelationship that exists between theboard and the management. �

Performance Reporting to Boards

1 Preface

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2 Who shouldread this report

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The board of directors in anyorganisation is responsible for itsoperational, strategic and financialperformance, as well as its conduct.

Boards exercise their responsibilities byclearly setting out the policy guidelineswithin which they expect themanagement to operate. They will setout the short- and long-term objectivesof the organisation and a system forensuring that the management acts inaccordance with these directions.They will also put procedures in placefor measuring progress towardscorporate objectives.

There is therefore a clear differencebetween the main responsibilities ofdirectors and managers. In his recentbook, Corporate Governance andChairmanship: A Personal View, SirAdrian Cadbury distinguishes betweendirection and management: “It is the jobof the board to set the ends – that is tosay, to define what the company is inbusiness for – and it is the job of theexecutive to decide the means by whichthose ends are best achieved. They mustdo so, however, within rules of conductand limits of risk that have been set bythe board. The board is ultimatelyaccountable for both the company’s

3 Introduction

purpose and for the means of achievingit. The task, however, for which theboard alone is responsible is thedetermination of corporate ends.”

Provision A1.1 of the CombinedCode states that the board should have aformal schedule of matters specificallyreserved to it for decision-making andthat the annual report should include astatement of how the board operates,including a high-level statement of whichtypes of decisions are to be taken by theboard and which are to be delegated tomanagement. It is generally acceptedthat the former should cover:� business strategy, including

operating, financing, dividend andrisk management policy;

� the annual operating plan and budget;� acquisitions and disposals that are

material to the business;� authority levels;� the broad framework and cost of

directors’ remuneration (on the adviceof the remuneration committee);

� the appointment and removal of thecompany secretary;

� approval of financial statements. (TheCorporate Governance Handbook, GeePublishing, 1996).Having sound information on which

to act is key to this process. Any attemptto formulate business strategy or settactical plans without it is bound tomisfire – the board runs the risk offailing to discharge its responsibilitieseffectively. This will ultimately result inpoor decision-making and, at worst,increased liability for directors.

It is worth remembering that boardsrequire both financial and non-financialinformation. The pressure formulti-dimensional reporting is likely toincrease with the proposed legislativechanges such as the mandatoryoperating and financial review (OFR). Thisrequires directors to give a qualitative, aswell as financial, evaluation ofperformance on a wider range of issues,including policies and performance onenvironmental, community, social, ethical

and reputational matters. Although thedetailed content of the OFR itself will notbe audited, the process of preparing itand its consistency with the financialfigures will be. The OFR means that thedisclosure of non-financial informationwill no longer be an optional extra forlarge public organisations and very largeprivate companies.

The scope of information flowingthrough the company to the board,and then from the board to theinvestors, will have to be broadened.Companies need to ensure that theyhave systems in place that cangenerate and collect such data, as wellas processes and people capable ofanalysing and presenting it to theboard, and then to the markets, in ameaningful form. �

The board should:� Set aims, policy constraints and

guidelines, objectives and broadstrategy, and then confirm these tothe executive management team.

� Agree defined performance indicators.� Ensure that it is receiving all the key

information to enable it to probeand question; focus on critical successareas and key performanceindicators; and identify appropriatemanagement actions where there arepositive or negative variances fromprojected performance.

� Periodically review the information itreceives to ensure that it is gettingwhat it needs and that all boardmembers fully understand it. Theboard should guard against beinginundated with an unnecessaryamount of data that provides little orno information and which mayprevent it from taking action.

� Ensure that the performance reportingprocess links objectives, principles andpractices to its needs. �

Performance reporting is a meansto an end, never an end in itself. Thepurpose of information is to promoteaction. The board report is thereforethe document that pulls together allthe relevant information with balanceand objectivity.

A good report should contain all theinformation necessary to facilitatedecision-making at board level. Itshould lead directors to ask the rightquestions and initiate a chain of actionsthat will enhance the ability of theenterprise to achieve its short- andlong-term aims and create sustainableshareholder value. Finance departmentsare particularly important in this context,since the information they providereflects the overall health of a company.Finance directors have a critical role toplay in ensuring that the informationreceived by the board is unbiased,even-handed and multi-dimensional.

Having robust systems for collecting,storing and analysing financial andnon-financial information is important,but the value of integrity andtransparency should not be overlooked.There is always a risk that informationcould be distorted on its way up to theboard. In some companies, financedirectors may face pressure from thechief executive to restrict the amount ofnegative information that’s provided toother directors and investors. Working atthe heart of shareholder-value-managedcompanies and the decision-makingprocess, a CFO is in a position to givethe board a more prudent view of thestate of the business.

Good-quality information should be:Relevant. Information presented tothe board should be sharply focusedand reflect the defined objectives andthe overall strategy of an organisation.It must not obscure the overall picturewith irrelevant detail.

The board should be able to drill downand access further supplementary reportswhere necessary. The information shouldbe sufficient to allow the exploration of

as many alternatives as are necessary forimpartial decisions to be taken.

If the board is to exercise its strategic,long-term planning function fully, itneeds to focus on more than the currentperformance indicators. They may saysomething about historical performance– ie, how it measures up to pastobjectives – but they can be a poorpredictor of the future. The board shouldtherefore have some forward-lookinginformation at its disposal, includingtrends, projections and forecasts, butthese should be based on more than asimple extrapolation of past data.

It’s often hard for those who preparethe information to know what level ofdetail they should go into whencompiling board reports. Non-executivedirectors may not know the ins andouts of the operational side of thebusiness. Executive directors, on theother hand, need to balance the taskof running the company with that ofsetting its strategic direction – whathave been called their conformance(past- and present-orientated) andperformance (future-orientated) roles.The right balance must be struckbetween too much and too little detail.As thought leaders and providers ofdecision information, financeprofessionals should be making thisbalance their goal.Integrated. Organisations are obligedto produce information for a range ofinternal and external purposes. CIMAthinks that the systems and processesused to provide this information should,as far as possible, be integrated. In otherwords, the data collected internallyshould be managed in a way thatsatisfies both internal and externalreporting needs. We believe that theinformation needs of directors arebroadly similar to those of investors,except in the level of detail required.

Some of the information that boardsrequire – eg, benchmarking competitordata – cannot be generated internallybut will have to be collected from


4 The principles offinancial andbusiness reporting

5 The characteristics ofgood information

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The climate of fear and uncertainty that the Enron scandal createdmay mean that some managers are tempted to increase the amountof information they provide to the board for fear of omittingsomething relevant. But boards should not be burdened with anexcessive amount of operational detail. Micro-management won’tultimately lead to improved business performance. If anything, it willweaken the organisation’s strategic focus. Something is wrong in acompany where directors spend much of their time sifting throughhuge management reports. The question to ask is how muchknowledge has been lost in the information?

The information provided should always be tailored to theboard’s needs and relevant to the current strategy and businessmodel. It’s up to the management to distil this day-to-dayinformation and focus the directors’ minds on potential problemsand discrepancies. Of course, there needs to be a great deal oftrust between the board and the management so that the directorsaren’t in doubt that they’re being told what they need to be told.

Finance professionals need to do more than simply put the rightnumbers on the boardroom table. If they are to add value, theymust also act as strategic advisers, explaining what’s behind theinformation and pointing out possible solutions to any problems.In the words of Sir Adrian Cadbury, they must give their own “bestjudgment on the company’s financial position”. In order to do this,accountants in business need to have a real understanding of thebusiness model and the value-adding processes that underpin it.

Where they do have this knowledge and understanding,accountants in business are also in a position to challenge otherparts of the organisation to determine what kind of information isrequired for better decision-making. (See the section on the CIMAstrategic enterprise initiative on page 12 for a view on how thefinance function and an SEM approach can help an organisation toimprove its decision-making.) But it is worth remembering that,although accountants need to add value and enhance their role asstrategic advisers, they mustn’t lose sight of their basic financialcontrol responsibilities.

In some companies, internal reporting can be completely divorcedfrom the decisions that need to be taken and the strategy it’s meantto be supporting. It has simply evolved over time and containsworthless information. Not only can this result in informationoverload; it also may mean that directors are not making decisionsbased on facts. Reliance on intuition and gut feeling has always beena crucial element of decision-making, but it’s best to have all thefacts available and an agreement about the key performance drivers.

How the information is summarised and salient points extracteddepends on the skills of the management and the ability of theboard to define what it needs. Responsibility for good-quality andtimely reporting is therefore a joint one. Directors must play a partin determining the right measures of performance and ensuring thatthey are effectively monitored. They can also add value by beingproactive – for example, by asking for clarification, additionalinformation and so on.

At the heart of the whole process is a culture of trust andopenness. Directors – especially non-executive directors who will lackthe detailed knowledge of the business – must be able to trust thatexecutive directors and managers will tell them all they need toknow. If this is not the case, the system is built on shaky foundationsand only good fortune will prevent it from failing.

Quality, not quantity

external sources. The same principle ofconciseness should apply. The overallobjective should be to have informationthat maps the business entirely.In perspective. Information should bepresented in relevant time context.Estimates of the projected time situationshould always be plotted over time.This acts as an internal benchmark forthe performance of each aspect of theinformation. Where, for example,historical, current and projectedscenarios are presented, operationalproblems are brought to light whereverthe variances are significant. This appliesas much to the monitoring of contractsand projects as it does to the profit andloss account and balance sheet. Timely. It’s better that the boardreceives information that’s imperfect(but within acceptable tolerances ofprecision) in good time than completelyaccurate information too late.

Marconi is often cited as an exampleof a company that failed partly becauseits board didn’t receive timelyinformation. In other words, it wasn’tsimply a case of incompetence or flawedrisk assessment, as is often stated. Thesimple truth is that the company’sdirectors may not have had the chanceto act, because they didn’t find out whatwas going on until it was too late.

Information should, as far as possible,be available in parallel with the activitiesto which it relates. The report should beavailable promptly enough to plan fromit and/or take action to consolidate gainsand recover shortfalls.

Monthly board reports should containperformance information relating to keyoperational issues as defined by theboard: the critical success factors (CSFs)and key performance indicators (KPIs).Quarterly board reports should containa broader coverage of organisationalactivities and should also addressqualitative areas of the business.

It’s important that only the key piecesof information are presented monthly toenable a succinct and useful report to be

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produced. But recent research sponsoredby KPMG has highlighted the dangerof reporting KPIs by exception only.Many non-executive directors in itssurvey blamed this for their limitedunderstanding of business processes,value creation and customer satisfaction– crucial strategic areas for any company.Reliable. Information should be of goodenough quality for the board to beconfident in it. This will depend on itssource, integrity and comprehensiveness.

The pack supplied by the managementbefore the board meeting will be thekey source of information for boardmembers – especially non-executivedirectors. But there are other channelsavailable, including business publications,formal and informal contacts with staffbelow board level and so on. Last, butnot least, the extra information andanalysis delivered orally by the CEO orother executives with different areas ofresponsibility will probably be the mostuseful in terms of decision-making.Comparable. The board report is theperformance report for the organisation

and it covers both financial andnon-financial aspects of performance.For financial performance, comparingwhat happens (actual) with what shouldhave happened (budget/plan/rollingforecast), or in some cases whatdid happen previously (last month/year),will be valuable. Presenting a forecastyear-end position will focus minds onthe effectiveness of an organisation,rather than just its economy andefficiency. Comparison with budgetshould be one of the key managementtools, but the emphasis should be onthe future, which can be influenced,rather than the past, which cannot.

Clear. Reports should always be writtenclearly and simply. Everyday languageshould be used wherever possible andjargon or acronyms should be avoided.Used judiciously, graphs and charts canbe an effective communication mediumfor key indicators. They also enabletrends to be identified more easily.

Apart from the information theyreceive at the start of their tenure,directors would normally expect to see:� monthly consolidated profit and loss

accounts, balance sheets and cashflow reported against budget;

� a further breakdown of results bystrategic business unit, where theyare of a size material to the overallperformance of the company;

� a quarterly update of forecast resultsfor the trading year;

� specific papers on new investmentprojects above an agreed size;

� updates, as appropriate, on majorexpenditure, such as acquisitions orlarge building projects;

� a six-monthly review of progresson the implementation of thestrategic plan.The value of informal information

should not be underestimated, as GoodGovernance, a CIMA-commissionedresearch report states: “Genuine boardmember access to an organisation’s staff,premises, clients and operations cansometimes reveal far more than theboard papers. It is also qualitative as wellas quantitative – copying for the boardall of the documents and figures thatmanagers use in their work does notnecessarily mean that the board is wellinformed. Its members may beswamped, or the board-level implicationsmay be unclear, thereby preventing thedevelopment of a well-formed overviewof the key trends and issues affectingthe organisation.”

Again, it’s worth repeating that there’sa danger that the amount of informalinformation provided can becomeexcessive, leading the board to focus toomuch on operational matters. �

Performance Reporting to Boards The characteristics of good information

Even when a company has a well-structured internal reportingsystem, the targets and objectives it relates to must be realistic,achievable and aligned with the culture of the organisation. If thisis not the case and the system is not ‘owned’ by staff, there remainsa temptation to try to get around its constraints.

The recent case of a FTSE 100 company with a reputation forexcellent internal reporting illustrates the danger. As it issuedanother production warning, analysts speculated that the reason forthe company’s sudden panic was that subordinates had failed toreveal the extent of its troubles to senior managers. The FTspeculated that the cause of the problem may have been that theperformance targets were so stretched that staff felt under pressurenot to reveal the real results to their superiors.

Playing the system

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Internal reporting has implicationsthat go beyond board level. If directorsare committed to telling investors aboutthe key value drivers of businessperformance – which will enable themto value the company more accurately– it follows that the information used tomanage the company should not beradically different from that which isreported externally.

The problem is that many firms spendmore time trying to get the right figureto satisfy market expectations. Thestruggle to meet quarterly targets cancause them to lose focus on long-termvalue generation in favour of makingshort-term decisions that give them theright numbers to report. These ultimatelydestroy shareholder value. The failures ofEnron and WorldCom are only theextreme examples of this practice.

CIMA has been calling for greatertransparency in reporting as the only wayto restore the trust in capital marketsthat was lost after the recent accountingscandals. Investors are still hypersensitiveto the possibility of inflated earnings,so transparency has become a matter ofsurvival rather than choice. Theinvestment community does not wantto see a sanitised version of theinformation used to run the business.

In essence, greater transparencymeans improved disclosure. By this wedon’t mean that companies shouldstart reporting more; it’s simply thatwhat they report should be theinformation the market needs. If enoughcompanies start reporting this way, thefear of being held hostage to fortunewill diminish. But it’s not only companiesthat have a responsibility to ensure thatthe highest-quality information isprovided to capital markets. TheFédération des Experts ComptablesEuropéens (FEE) has sketched out anetwork of participants who mustcontribute to this goal:� Preparation of true and fair financial

information by an effective companyaccounting function.

According to the Institute of Chartered Accountants in Englandand Wales in its draft guidance for UK directors (July 2002), usefulfinancial information has the following characteristics:Material.� It comprises only items of information whose size or nature mean

that their misstatement or omission might reasonably be expectedto influence the economic decisions of investors.

Relevant.� It has the ability to influence economic decisions of investors.� It is provided in time to influence economic decisions of investors.� It has predictive value or, by helping to confirm or correct past

evaluations or assessments, it has confirmatory value.Reliable.� It can be depended upon by investors as a faithful representation

of what it purports to represent – or what it could reasonably beexpected to represent.

� It is neutral, because it is free from deliberate or systematicbias intended to influence a decision or judgment to achieve apredetermined result.

� It is free from material error.� It is complete within the bounds of what is material.� It is prudent in that a degree of caution is applied in making

judgments under conditions of uncertainty.Comparable.� It can be compared with similar information for other periods

and other entities so that similarities and differences can bediscerned and evaluated.

� It reflects consistency of preparation and presentation, providingthat this is not an impediment to improvements in practice.

� It is supported by the disclosure of the accounting policies used inits preparation.

Understandable.� It involves the characterisation, aggregation and classification of

transactions and other events in accordance with their substanceand their presentation in ways that enable the significance ofinformation to be understood by users.

� It presumes that users have a reasonable knowledge of businessand economic activities and accounting, and have a willingness tostudy information with reasonable diligence.

According to management consultancy Metapraxis, board membersshould consider the following questions about the information theyare receiving:� Accuracy. Can I trust the data?� Relevance. Does it cover the critical issues?� Timeliness. Is it sufficiently up to date?� Clarity. Is it presented in such a way that I can digest it quickly?� Risk assessment. Is the information purely historic or does it

assess future risks?� Depth. Do I receive only summaries or can I access

individual subsidiaries?� Provision. Can I access the data via a secure internet connection?

What makes financial information useful

6 Transparency

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� Informed review by directors, auditcommittees or supervisory boards.

� Internal audit.� Proper approval procedures for

financial information by the bodyresponsible within the company.

� External audit and external reviewsubject to quality-assurance systemsthat inspire public confidence.

� Effective enforcement bodies.� Stock exchanges with supportive

listing requirements.� Sponsors, advisers and investment

bankers committed to high-qualityfinancial reporting, particularly inrespect of complex transactions.

� Investors, analysts, rating agencies andthe financial press, all of whom shouldhave clear ethical obligations to raiseissues of dubious financial reporting. In their book Building Public Trust,

Samuel DiPiazza and Robert Eccles drawup a similar corporate reporting supplychain. They assert: “If management isnot transparent with its own board, howcan it practice external transparency?If management is not willing to be heldaccountable by the board, how can ithave the legitimacy to hold accountableothers in the company?”*

In the KPMG survey, non-executivedirectors (Neds) were asked whetherthey had sufficient knowledge in anumber of specified areas. Where theanswer was negative, one of the mainreasons quoted was the lack ofappropriate reporting by management.Similarly, in a survey of Neds conductedby Mori for the Higgs review, two ofthe top three items cited as barriers togreater effectiveness were “executivedirectors holding back information”and “a lack of knowledge/understandingof the company”.

The case of ABB illustrates this point.Until recently, the Swiss engineeringgroup was one of Europe’s most admiredcompanies, gaining plaudits fromeminent publications such as HarvardBusiness Review, which praised itsmodel of “individualised corporation”.

Jürgen Dormann, ABB’s chiefexecutive, admitted that many managershad been exaggerating the performanceof their divisions to hide problems.This is partly why the company is nowstruggling to retain investors’ confidencewhile trying to cut its debt burden.

One of the attributes of ABB’s modelof management was the idea thatdependence on information systemsshould be replaced by developing goodpersonal communications with thosewho have access to vital intelligence.The imperative was to “lighten theburden of control systems by developingpersonal values and interpersonalrelationships that encourageself-monitoring” (Harvard BusinessReview, May/June 1995). It is now clearthat such endeavours have largely failed.

Percy Barnevik, one of ABB’s previouschief executives, implemented anaccounting and communication systemthat was meant to generate companyreports from a single database. Therationalisation of information systemsfor internal and external reporting isundoubtedly helpful, because it preventsmanagers from debating the accuracyand relevance of data. But an underlying

culture in which managers embellish theirresults can undermine the whole model.

A culture of openness may be aprerequisite for effective internalreporting, but it can’t exist without asufficient level of control. In a recentCIMA executive briefing on businesstransparency (www.cimaglobal.com/downloads/enron.pdf), David Phillips,head of PwC’s ValueReporting™ initiativein Europe, predicted that we would soonbe in a world where a single databasewould be used both to run the businessand to communicate with stakeholders.The only real external reporting issuewould be where to draw the line oftransparency across the information,since some of it would inevitably becommercially sensitive.

As CIMA sees it, transparency – as anoverarching concept guiding thereporting process in a company – shouldbecome the cornerstone of goodcorporate governance. As long ago as1990, we argued that there should bebetter disclosure of information (whilepreserving commercially sensitive data,if necessary). A CIMA publication entitledCorporate Reporting: The ManagementInterface called for companies to makeboardroom information publicly available.

It said: “One function of financialreporting is for management to explainits progress towards meeting itsstrategic objectives. It follows that theremust be benefit in publicly reporting thesort of information that managementuses internally.”

A more recent CIMA research report,External Reporting and ManagementDecisions, examined the influence ofexternal reporting on managementaccounting in companies. It concludedthat the requirements of externalreporting didn’t have a major impacton internal decision-making in the firmsit examined. It said that the traditionaldistinction between management andfinancial accounting didn’t provide auseful framework for understandingthe impact of external reporting on

Performance Reporting to Boards Transparency

internal reporting. Instead, it was betterto think of it as a single generic processcomprising several layers ofinformation-gathering, reporting anduse. As far as most managers in theresearch were concerned, there wasonly one mainstream accounting processin a company.

In the companies surveyed there was aclear overlap between internal andexternal reporting – for example,monthly management accounts wereoften in the same format and structureas the external ones. The researchersfound that the common thread was infact the framework of accountability andthe assessment of financial performance.

This research clearly shows thatday-to-day management decision-makingis based on much more than financialinformation alone. Although manyfirms tend to report only their financialinformation, in reality it comprises onlyone part of the total informationsystem that’s available to managers –and that investors are interested in.In fact, the finance function alreadyserves as a repository for a lot ofnon-financial information in manycompanies. But there needs to be asystematic approach to what is collectedand how it is reported upwards.

This convergence of internal andexternal reporting clearly has implicationsfor both management and financialaccountants, since it erodes some of thedifference between the two. It doesn’tmean that their roles will becomeredundant, but it does mean that theywill need to understand better how eachaffects the other and how they can bebrought into line to achieve betterdecision-making and a simplified systemof external reporting. For managementaccountants in particular, theircommercial awareness and ability toevaluate business performance is thebasis of ensuring such convergence. �

* © 2002 S DiPiazza and R Eccles. This material is used

by permission of John Wiley & Sons Inc

Performance information should befocused, with key elements highlighted.Where appropriate, all problems,explanations and solutions suggestedby those who prepare the reportsshould be laid out in front of the board.The directors can then assess, adviseand initiate appropriate courses of actionfor the management to take.

The board and management shouldagree the high-level KPIs to be covered inthe report. These should:� draw together and integrate

management information;� reflect the critical success factors of

the organisation and provide ahigh-level aggregate overview;

� be part of a normal business routine;� be comprehensive;� provide a reliable and easy-to-use base

through which to provide informationthat the board finds meaningful;

� be appropriate to a challengingmanagement environment and bereviewed regularly.Management should be able to drill

down from high-level indicators toexamine the underlying cause of aproblem and identify appropriate action.Subordinate details should always besummarised. (See the CIMA technicalbriefing entitled Latest Trends inCorporate Performance Measurement– visit www.cimaglobal.com/downloads/tech_brief_perf_man_160702.pdfto download a copy.) �

Management should set up systemsto process data into information onthe performance of specific areas ofthe organisation. A good informationsystem should:� be defined by the company’s operating

profile, not the other way round.� distinguish between the critical

success factors and those that aremerely desirable;

� have an architecture that’s flexibleenough to survive technological andbusiness changes over time;

� be scalable, offering key informationdown to detailed analysis;

� be thoroughly integrated with theboard’s reporting process. The integration of information for

internal and external reporting meansthat the quality of data generated,collected and analysed internallybecomes critical for the successfulrunning of a company. This may soundobvious, but in many firms thisinformation simply isn’t available or thereis a lack of understanding about whatthe relevant numbers are. This hampersdecision-making, because too much timeis spent on reconciling figures or gettinginformation out of different systems.For example, many companies wouldn’tknow which of their customers aredelivering the bulk of their profits orwhy, or which parts of the business arecreating the most shareholder value.

In a survey last year by the EconomistIntelligence Unit, technologicalconstraints that made it hard to get anintegrated picture of the financialaccounts were among the top eightmost serious barriers to theimplementation of proper corporategovernance policies in companies. Morethan a fifth of respondents, includingsenior executives and leading corporateand regulatory figures worldwide, citedit as the highest or second-highestbarrier. Getting the right informationand getting it on time affects both thebusiness operations and strategicdecision-making of many companies. �

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7 Key performanceindicators

8 Informationsystems

The CIMA strategic enterprisemanagement initiative (SEM) is abouttreating decision-making as adistinguishing competence. Althougha separate executive report on CIMASEM and improving decision-makingin your organisation is now availablefrom the institute’s website(www.cimaglobal.com/sem), it’s notpossible to discuss better performancereporting without mentioning theinitiative in this guide.

CIMA SEM aims to enablemanagement accountants to add valueconstantly as part of the managementteam by integrating advancedaccounting techniques and their enablingtechnologies into the business. At theCIMA SEM round-table, a selection ofcompanies discussed their approaches togetting the right information andanalysis to the right people at the righttime. In formulating and deliveringstrategic objectives and improvingdata analysis, the leading companieshad, in effect, decentralised theirmanagement accounting function.This modified role should involve sellingideas and options to both strategic andoperational decision-makers.

The report considers the progress ofSEM in organisations and why there isoften a difference between the rhetoricof software vendors and the reality. Formany companies the ERP or SEMtechnology has not necessarily led to improved decision making andincreased transparency.

The SEM debate is much wider thanjust leveraging the benefits of ERPsystems. CIMA is focused on enhancingthe role of the finance function andmanagement accounting to add value bytaking the value creation perspective andproperly integrating advancedmanagement accounting techniquessuch as shareholder value management,activity-based management and balanced scorecard �

Figure 1, below, highlights examplesof good and bad practice based on thecharacteristics set out in part 5,focusing on the financial section of theperformance report.

It should be remembered thatmanagement will provide a lot of otherinformation to the board on an ad hocbasis in addition to the main boardpack. The board pack, in that sense, isabout the organisation’s ongoing

performance rather than exceptionalevents. In order for the board to giveappropriate weight to the mostimportant issues of policy and strategicdirection, key exceptions and variancesmust be highlighted. The action plansprepared by management must beclearly stated.

Figure 2, opposite, highlights goodand bad practice for key elements ofthe report. �


9 The CIMASEMinitiative

10 Applying the principles

12

Principle Good practice

Relevant Focused financial report of three to six

pages in length. A good report will

summarise the issues and highlight the

overall position, making use of graphs

and charts to replace lengthy tabular

information where appropriate.

Integrated Activity data linked to financial

performance. Variances calculated and

explained. The report should integrate

non-financial and financial reporting.

In perspective Abbreviated P&L account shows period

and cumulative positions with

highlighted variances against budget.

Major variances adequately explained.

Trend analysis included. Full-year

projections updated.

Timely Report available within five working

days of period end.

Reliable Every key issue identified with

sufficient explanation.

Comparable Consistent style across reports.

Performance indicators used to illustrate

trends in liquidity, asset utilisation, etc.

Comparison with budget/previous year.

Clear Appropriate use of graphs, colour-coding

and clear chapter headings.

Poor practice

Detailed analysis of income and

expenditure and variances for all

directorates in 32-page report.

Limited narrative. No corrective

action identified.

No activity data presented in the

financial report. No balance

between qualitative factors and

quantitative ones.

Massively detailed P&L account.

Insufficient detail to support issues

identified in the narrative report.

Information presented 28 days

after period end.

No key issues identified, or no

explanation offered.

Inconsistent format and style

of report. No use of

performance indicators.

Copious financial tables at the

beginning of the report. No title or

contents pages. Information

presented in complex spreadsheets.

Figure 1 The financial section of the performance report

13

Element Good practice

Executive summary All key issues identified in an

introductory executive summary

with a synopsis of performance

provided by key indicators.

Supporting documentation and

appendices clearly referenced.

Action plan Corrective action specified

with contingencies and

sensitivity analysis showing

best- and worst-case scenarios.

Profit and loss P&L account showing period

and cumulative positions with

highlighted variances against

budget. Major variances

highlighted and adequately

explained. Trend analysis

shown graphically. Full-year

projections updated.

Projected outturn Projected outturns recalculated

on the basis of actual

performance and action plans.

Cash flow Profiled cash flow summarising

actual and projected receipts,

payments and balances on a

regular basis to year end.

Capital programme Analysis of progress of major

capital schemes showing

percentage completion, current

and projected expenditure,

completion cost and timescale.

Balance sheet Indication of working capital

position presented in tabular

form or using performance

indicators – eg, debtor and

creditor days.

11 Performancereporting – a checklist

Poor practice

No simple overview. Information

is there, but in a confusing order

with no cross-referencing.

Typically excessive use of data or

unrefined information.

No action plan.

Summarised cumulative income

and expenditure account.

Insufficient detail to support issues

identified in the narrative report.

No projected outturn plan.

No cash flow information, or

only history.

No data provided, or only that

on under/overspend.

No working capital information.

� A monthly performance reportshould be between 10 and 20 pagesin length.

� Board members must have enoughtime to digest it before the meeting.

� Performance reports should:– be readily understandable for allmembers of the board;– convey key strategic and operationalinformation clearly and concisely;– give an accurate picture of events;– present a view of the future, withprojections and scenarios for nextmonth, year or longer, as appropriate;– prompt a discussion of the options; – focus on critical success factors.

� Style should be consistent. This appliesto the overall structure of the reportand page layout, as well as to thecomparators used for KPIs.

� The report should be easy toassimilate, containing graphs,charts, colour-coding, clear headingsand selective highlighting;supplementing written reports withpresentations; and using externalbenchmarks and commentary.

� Supplementary information should beannexed only if considered vital to theboard’s understanding of the report.

� Overall, the report should allow theboard to discharge its responsibilitiesto investors, suppliers, customers,employees and other stakeholders.

� Information should be presented asoften as is useful. Some facts are likelyto be acceptable quarterly, half-yearlyor even annually, but it’s up to theboard and management to decide onthe frequency.

� The report should present the salientstrategic and operational informationclearly and concisely. It’s not theboard’s responsibility to review rawdata. This should be filtered anddistilled by management intoinformation to aid the board in itsdecision-making. The role of the FDand the finance department as awhole is crucial in ensuring integrity,transparency and impartiality. �


Figure 2 Key elements of the performance report

14

With a 34 per cent share of the globalinternational express market, DHL isone of the world’s most successfulcourier companies, write Andy Neely andYasar Jarrar. It employs 64,000 peopleworldwide, serving more than one millioncustomers in 228 countries daily.

The volume and variety of transactionsat DHL meant that its UK executive teamcould easily get engrossed in detailedreviews of the division’s operationalperformance at their monthly meetingsand risk overlooking strategic issues. Itrecognised this issue and started askingwhether the focus of the reviews wasappropriate. In 1999 DHL UK designedand built its performance measurementsystem according to the PerformancePrism framework (see “The PerformancePrism perspective”, Journal of CostManagement, Vol 15, No 1, 2001).

Building and implementing thePerformance PrismTo start the design process, the executivesparticipated in workshops where theyexplored their understanding of the firm’sstrategy by addressing the five questionsembodied in the Performance Prism: � Stakeholder satisfaction. Who are the

key stakeholders and what do theywant and need?

� Strategies. Which strategies must weput in place to satisfy the wants andneeds of these key stakeholders?

� Processes. Which key processes do weneed in order to effect these strategies?

� Capabilities. Which capabilities do weneed in order to effect these processes?

� Stakeholder contribution. What kindof contribution do we require from ourstakeholders if we are to maintain anddevelop these capabilities?Each of these resulted in a “success

map” for the specific stakeholder.Having identified the links between thesestakeholders, the maps were integratedinto one success map for the business.

The next step was to identify what tomeasure to monitor how these strategies

were being implemented. The trick wasto encourage the executives to considerthe questions they wanted to be able toanswer in the light of what was on thesuccess map. Fundamentally, they werebeing asked: what do you need to knowto decide whether the business is movingin the right direction or not? This couldbe addressed simply by asking whatperformance measures are needed, butthe problem is that measures are only asource of data. As an executive, youdon’t necessarily want to know theminutiae of such operations; you wantanswers to questions. The measures aremerely a means of accessing data thatallows you to answer questions.

The next workshops encouraged theexecutives to consider the questions theywould like to be able to answer at thequarterly performance reviews (QPRs),given the structure of the success map.Once the right questions were identified,it became relatively simple to work outwhat should be measured. The finalworkshops focused on what data wasneeded, and hence which measureswere required, to answer the questionsthey identified. These sessions alsoinvolved DHL’s performance analysts. Themeasures design template (see Measuring

Business Performance, The EconomistBooks, 1998), was used, as were the10 “tests of a good measure”. The resultwas a set of measures that mapped onto the questions that the executives hadidentified (see figure 3, below, for thetreatment of a sample question).

DHL UK was fortunate in that it alreadyhad much of the required data-captureinfrastructure, so there was little need todevelop new reporting capabilities.But it did invest a significant amount ineducation and process facilitation, whichturned out to be fundamental.

The next step was to restructure theQPR agenda so that the discussions atthe review would reflect the keyquestions that the executive team haddecided they should be addressing. Aftera year of operation, the QPR agendaevolved and was structured as shown inthe sample subset in figure 4, opposite.

Developing the businessanalyst communityThe second major investment that DHLUK made to redesign its performancemeasurement system was to enhancethe skills of the business performanceanalysts. The firm had deliberatelyadopted a structure where each member


12 Case study 1: extracting value from data – supporting theboard at DHL UK

Question

What

are our

customers

doing?

Figure 3 Subset of questions and measures – regular DHL customers

Responsible forproviding info

Customers, annually

Area analyst

Area analyst

Area analyst

Measure

Customer

satisfaction

Number

of active

accounts

SPD of

active

accounts

BSI

Data source

‘Smart’ research

(annually)

Business unit

revenue report

Business unit

revenue report

Loyalty data

Target

Customers satisfied or

very satisfied: >88%

Accounts shipping

versus previous

year: +4%

Volumes in

shipments versus

previous year: +4%

>50%

of the senior team – in effect, the UKboard – had one or more performanceanalyst reporting to him or her. The roleof these analysts was to brief the boardmember before the QPR on the issuesthat they felt needed to be raised and toprepare accompanying documentation.

Clearly, if the structure of the QPRswas to be modified in line with thePerformance Prism framework, there wasalso a need to develop a way of enablinganalysts to move from working with datato handling information and turning itinto value-adding knowledge. To facilitatethis process, the board, in co-operationwith Cranfield School of Management’sCentre for Business Performance,decided to set up a cross-functionalanalyst community. Its structure wouldbe beneficial in two key aspects. First,all the analysts would have the sameskills, which would eradicate anyinconsistencies in presentation. Second,the structure would allow the analysts tomeet and discuss their analysis within theoverall context of the business, takingthem out of their functional silos.

The community was developed andmanaged through various initiatives. The

main one was the quarterly businessanalyst workshop, which was a place to:� Share best practice in terms of

business analyst skills. This included apresentation by one of the analysts onthe tools and thinking processes usedin his team to conduct an analysis.

� Share information on DHL issues as awhole. Not only did this provide aforum for analysts to share ideas;it also gave them a chance to sharetheir respective analyses before theboard meeting and often allowedcross-functional issues to be identified.

� Develop further skills by invitingexternal speakers to presentgood-practice cases from other firmsand/or disciplines. Speakers in 2001included a detective, a journalist andbusiness analysts from other industries.One training programme, which was

attended by everyone in DHL’s analystcommunity, emphasised the key analogyof the detective. When detectives areinvestigating a crime they don’t rely on asingle piece of data. Instead they gatherall of the available evidence and try topiece together the sequence of events.So it should be with performance

analysis. When DHL’s analysts areconstructing a case they should use all ofthe available data to answer a specificquestion. Only then will they enable theboard to have the right level of debate.

The course covered techniques forextracting value from data within theframework of the performance planningvalue chain (see figure 5, next page). Thisoffered a method of transforming data –often disorganised in its original form –into high-quality information. It alsoprovided a way to bring together acombination of skills for analysing andinterpreting complex information froma variety of sources and the ability topresent technical information tonon-specialists in an insightful way.

The performance planning value chainframework covers various steps forextracting value from data, including:� Develop a hypothesis – which

questions need answering? This is acrucial step before data collection,requiring the analyst to identify theissues that the analysis will try tounravel. It is about finding theperformance gaps that needinvestigation and about the preliminaryareas of focus in terms of the potentialproblems and possible solutions. Toolsused in this process include successmaps, process maps and gap analysis.

� Gather data – what data do we needto collect? Do we collect it already?How can we gather it more effectively?Although most companies collect tonsof data, few of them trust it, but thetools used in this process ensure thatthey follow a structured approach.These include sampling plans and datacollection plans.

� Data analysis – what is the data tellingus? At this point the analysts wouldstart transforming data to informationby using tools for quantitative andqualitative analysis. They include,among others, the basic seven tools ofquality management.

� Interpretation – what insights can weextract from the data? How will the

15


Day one,

9am

9.30am

10am

Figure 4 Sample subset of quarterly performance review agenda

Setting the scene – top-line NR results and forecasts Financial

GCC NR and cost – will we deliver NR target for the year? analysis

Customers Commercial

How are our customers feeling and what are they doing? overview

What are our competitors doing?

Are we positioned well in the market?

Is our revenue quality strategy working?

Is our revenue volume strategy working?

Is the customer relationship management strategy working?

Do we have the processes to support our strategies for CRM?

Do we have the money to sustain market leadership?

Do we have the human resources to drive differentiation?

Do we have the right product offering?

Do we have the information to manage these processes?

Questions on commercial overview

16

message differ by changing the anglefrom which we look at the data? It’simportant to separate this step fromanalysis. Once the charts and graphshave been completed in the previousstep, the question is: what does thismean for the business? It’s here thatthinking as a detective becomescrucial. Tools include informationvisualisation and benchmarking.

� Communicate insights – how can webest deliver the conclusion we havereached? Valuable insights could belost if the message is not delivered inthe right way, so it’s prudent thatinsights are put in a suitable deliverychannel for the audience. Tools hereinclude presentation skills andattention management techniques.

� Take action – how do we act on thatdata? How do we prioritise ouractions? This is where all the workdone so far can be transferred intoactions to deliver value. Tools hereinclude decision-making andprioritisation techniques, and projectmanagement and feedback systems.

The lessons learntThe improvements have not ended withthe Performance Prism and the new QPRstructure. Instead, the measurementsystem has kept developing and willcontinue to do so. DHL has learnt thefollowing key lessons from the process:� The role of the board. This has

changed significantly now that theperformance analysts play a far greater

Performance Reporting to Boards Case study 1

role in the QPRs than before. Insteadof preparing material for boardmembers to present, they are expectedto deliver their own analysis and, ineffect, be cross-examined by the boardon two issues: the quality of theanalysis and the implications for thebusiness (and the actions required).Involving the analysts more fully hasbeen a crucial development, because ithas allowed executives to act as aboard, rather than as individualsrepresenting their functions. In thedays when the director responsible forcompliance delivered the presentationon “how well are we meetingregulations?”, he naturally tried topresent data that showed his functionin a good light. The compliancedirector is now simply anothermember of the board. Everyone playsa role in ensuring that the businessmeets the regulator’s requirements, soit’s essential that the board grasps thesituation and jointly decides what thebusiness needs to do next.

� Focus on action, not measurement.DHL UK has devoted significanteffort in shifting the focus ofperformance reviews to closingthe performance gap, rather thanjustifying the firm’s current position.Far too often in organisations thedebate on performance data centreson justifying why the business iswhere it is. Why the business iswhere it is doesn’t matter. Whatmatters is what the business needs todo to get to where it wants to be.

� Prioritising actions. Board members arenow more explicit about which of thepotential actions they have identifiedwill work best. They achieve this intwo ways. First, they evaluate theimpact of the proposed action on thecustomer through their “how does itaffect the customer” programme.This requires them to consider theimpact of each specific action theyare proposing on DHL’s customers.Second, they prioritise actions basedon importance and required focususing a two-by-two matrix.

� The role of the performance analysts.Various lessons were learnt from theanalyst community, which can besummarised as follows:– The need for cross-functional

analysis. The focus should be onthe organisation as a whole, noton functional silos.

– The need for facilitation to achieveeffective board meetings.

– The need to focus on informationnot data. Boards must avoid microdiscussions and instead focus ontheir duties as ”ship captains”.

– The benefits of creating a centre ofexcellence such as the businessanalyst community. The betterequipped the analysts are, themore insights they can provide andthe more value they can extractfrom the data. �

Professor Andy Neely ([email protected]) is

director of the Centre for Business Performance at

Cranfield School of Management, where Dr Yasar Jarrar

([email protected]) is a visiting research fellow

Develop hypothesis

Gather data Analyse data Interpret dataCommunicate

insightsTake action

Figure 5 The performance planning value chain

Deliver value

Tomkins plc, a world-class globalengineering group, was founded in1925 as the FH Tomkins BuckleCompany, a maker of buckles and fas-teners, writes Dominic Powell. The com-pany remained focused on this specialist market until 1983, by which time it wasmaking an annual profit of £1.6 millionon sales of £17 million. It was not untilthe mid-1980s, following a change ofmanagement, that it began to developinto the global engineering group it istoday, with an annual operating profit of£266 million on sales of £3.4 billion.

This tremendous growth was fuelledlargely by several acquisitions from1984 onwards, broadening both itsproduct offering and its geographicalspread. Companies that were acquiredincluded Ferraris Piston Service, PhilipsIndustries Inc, Rank Hovis McDougall,Gates Corporation and ACD Tridon.Many of the acquisitions that were madein the 1980s and early 1990s were basedon the technique of targeting poorlyperforming businesses in unglamorousindustries, selling off underperformingassets and tightly managing the firmsthrough to health.

Subsequent restructuring focused onthe group’s engineering strengths,leading to the formation of three coreengineering businesses: Air SystemsComponents, Engineered &Construction Products and Industrial & Automotive. The culture of thecompany has developed in line with this restructuring over the past coupleof years. Divisional managers have been encouraged to widen their focusfrom the tight financial management of the business units to an in-depth,ongoing assessment of how these units ought to compete in theirrespective marketplaces.

This has been underpinned by thedevelopment of management reportingsystems and processes. Specifically, themanagement reports and processes thathave been implemented have moved theemphasis away from the production of

17


aggregated transaction data towards anongoing performance analysis.

Phase 1 – a need for changeBy 1999 Tomkins had a bottom-upperformance reporting system wherebyeach of its 50 to 60 business units anddivisions submitted their results in afixed format – including a balancesheet summary, a cash flow summary,capital expenditure summary andan income statement – every month.The reports were in addition to theyearly financial plans. These comprisedthe same analyses as well as a numberof others – eg, “cash added value”statements, which helped to ascertainwhether the cash return in the businessunit exceeded the cost of capital overthe period covered by the plan.

Information was submittedelectronically to Tomkins CorporateCentre’s centralised managementdatabase. Monthly consolidated reportswere then generated and sent throughto the company’s executivemanagement. In addition, business-unitperformance reports were returned todivisional management to be reviewed.

These statements provided a roadmapfor business-unit, divisional andcorporate managers to formulate andagree forecasts, as well as to calculateperformance against targets. The mainbenefit of the system within such a largeconglomerate was that the board receiveda consolidated set of information aboutthe performance of the three key divisionsand the constituent business units.

The main drawbacks of the systemwere as follows: � The sheer volume of data from around

50 to 60 operating companies obscured the key business messageswithin that data.

� The complexity of identifyingmeaningful performance trends withinP&L, balance sheet and cash across 50to 60 business units was difficult athead office. The costs to management

in time and effort of deriving year-on-year comparisons were high. As aresult, the company’s ability to pinpointfundamental changes or shifts withinsales, costs or cash, or indeed for anyother key financial variable within thebusiness units, was limited. These problems made matters harder

for the senior executives, who were keento focus on shareholder value creation byincreasing the economic value of theconstituent businesses. They led to theformulation of a number of objectives:� Establish an information system and

reporting mechanism that enabledintegration between divisional andbusiness-unit management in therunning of their businesses. If, forexample, divisional managers were toestablish and focus on ways to enabletheir businesses to compete effectively,they needed a system that capturedand consolidated relevant informationfrom the business units far morequickly, was scalable in itsperformance and was fully integratedwithin the board’s reporting process.

� Enable management to spend moretime diagnosing and understandingthe key business messages inherentwithin the “wall of reported numbers”than on the formulation and readingof executive reports.

� Create an objective, shared platformof understanding about theperformance of business units anddivisions among the respective seniormanagement and those at head office.This meant having a fixed set ofbusiness analyses that would be usedto extract the messages from reporteddata. The means of analysis wouldtherefore be consistent for all seniormanagers in the medium to long term.

� Be able to build on this platform ofunderstanding of businessperformance to establish credible top-down budget objectives formanagement throughout the group.

� Detect significant year-end risks forany given financial year (risks refer to

13 Case study 2: Metapraxis – an early-warning support systemfor directors at Tomkins plc

the probability that end-of-yearperformance for a business unit might differ substantially from thatwhich is forecast).

� Be able to diagnose key turningpoints in financial performance trendsand ratios for all divisions and units.

Phase 2 – visualising the keybusiness messages Tomkins decided to implement amanagement reporting system thatwould address the above issues in twoconsecutive stages. First, an informationvisualisation capability was added to theexisting consolidation systems in 2002.A later development of this system willsee the rationalisation of the separatedatabases into a single group-widesystem underpinning both the statutoryand management reporting processes.It’s expected that this final stage will becompleted in 2004.

Performance Reporting to Boards Case study 2

18

The first stage of work involvedoverlaying business visualisation softwareon the consolidation base (see figure 6,below). The process for the capture andconsolidation of information did notchange substantially. What did changewere the tools that were available to theexecutive and divisional management forthe diagnosis of business-unitperformance. Specifically: � Business performance could be

viewed through organisation chartsthat rapidly identified which businessunit had achieved which outcome.This enabled underperforming unitsto be identified instantly. These“organisational performance” chartscould be used to show actual values orvariances, for example against budgetor previous year. In addition,management teams could gain a moredetailed view of business-unitperformance by drilling down into theorganisational chart.

� Trend analyses of business performancecould be used by executive managersto identify, focus on and track keyturning points, changes, aberrations or anomalies.

� Comparative analyses gave managersclear visual explanations of theunderlying factors behind unexpectedperformance in the business units.They could also be used to identify the best- and worst-performing units in a division or area(management can drill down intoareas of interest or concerns tocontinue a thread of analysis).

� Business-driver analyses that weretailored to Tomkins’ specific corporateobjectives and performance driversshowed executive managers thecause-and-effect relationships betweenboth financial and non-financial driversand business outcomes.

� Significant year-end risks for any givenfinancial year could be detectedautomatically by means of statisticallysmoothed trend charts describingbusiness-unit performance andpinpointing implausible movements inany key financial or non-financialindicator; and end-of-period forecaststhat could be calculated automaticallyas a series of management-nominatedscenarios for each unit and for keyfinancial variables. Executive managerscould then compare these objectiveassessments of performance againstunit/divisional management forecaststo determine any significant variances.

Phase 3 – an integrated, group-wide consolidation systemThe third phase of the roll-out ofreporting systems will ensure theintegration of disparate statutory andmanagement information systems into asingle consolidated system. Overlaid onthis consolidation system will remain thebusiness visualisation software that driveskey performance data through a series ofanalyses. Critically, though, the new

Figure 6 The management reporting structure in phase 2

Statutory information consolidation databases

Total group

Statutory accounts

Ad hoc reports

Ad hocreports

On-linecapability

Management accounts Performance visualisation

Corporatecentre users

Operational statutoryinformation

Spreadsheets, generalledger, ERP etc

Companies

Statutory information consolidation databases

Divisions

Operational managementinformation


Companies

Management information consolidation databases

Total group

Visualisation database

Total group

Copies ofconsolidation database

Divisions

Copies ofvisualisation database

Divisions

Divisionalusers

Operationalcompany users

system will create a means for managersto understand what is happening in thebusiness. Tomkins’ use of intelligentbusiness systems will allow itsmanagement to assimilate the keybusiness messages in the data quickly,freeing them up to manage the business.

Tomkins’ success over the past fewyears has had much to do with thedelegation of strategic, operational andfinancial responsibility to senior company management. Analysis ofcompetitive differentiation has translated into strategy, and strategy has translated into a targeted investmentof funds and resources in marketing,operations and support.

The delegation of responsibility tosenior company management has been,and continues to be, aided by thedevelopment and roll-out of reportingsystems and processes. Specifically, thecentralised consolidation of data (“huband spoke” reporting mechanism) hasbeen replaced by a homogeneous,group-wide consolidation and businessanalysis system. The homogeneity of the

References/further reading

Corporate Governance, The New StrategicImperative, Economist Intelligence Unit(sponsored by KPMG International), 2002.

“How about now? A survey of thereal-time economy”, The Economist,2 February 2002.

“How a toxic mixture of asbestos liabilitiesand plummeting demand poisoned anindustrial powerhouse”, Financial Times,23 October 2002.

New Directions in Business – PerformanceReporting, Communications and Assurance,KPMG, 2002.

Prospective Financial Information: Guidancefor UK Directors (consultation draft), Instituteof Chartered Accountants in England andWales, 2002.

C Bartlett and S Ghoshal, “Changing therole of top management: beyond systemsto people”, Harvard Business Review,May/June 1995.

T Bentley, Defining Management’sInformation Needs, CIMA Publishing, 1990(revised 1997).

C Cornforth and C Edwards, GoodGovernance: Developing EffectiveBoard-Management Relations in Publicand Voluntary Organisations, CIMAPublishing, 1998.

Corporate Reporting: The ManagementInterface, CIMA Publishing, 1990.

S DiPiazza and R Eccles, Building Public Trust:The Future of Corporate Reporting, John Wiley& Sons Inc, New York, 2002.

S Dressler, “Management accountingmaster: closing the gap between managerialaccounting and external reporting”,Journal of Cost Management, Jan/Feb 2002.

M Fahy, Strategic Enterprise ManagementSystems – Tools for the 21st Century,CIMA Publishing, 2001.

R Palmer, “The smart director”, Directorsand Boards, Spring 1993.

J Ross, “Is real time a real need?”,Accountancy Age, 16 May 2002.

R Scapens et al, External Reporting andManagement Decisions, CIMA Publishing, 1996.

R Derwent and M Jones, The CorporateGovernance Handbook, Gee Publishing, 1996.

B Tricker, “What information do directorsneed?”, Corporate Governance, July 1997.

19

new system means that information willbe consolidated far more quickly andshared more easily. The advancedanalyses within the new system means that both financial and non-financial performance can be diagnosed,shared and understood by a widermanagement audience.

The homogeneity of the new reportingsystem, and diagnostic tools within it,will contribute significantly to thesuccessful delegation of responsibility tosenior company management.Specifically, they will provide a common,up-to-date platform of businessunderstanding among management andreduce both operational and financialrisks in the meantime. �

Dominic Powell ([email protected]) is

director of Alliance Partnerships at Metapraxis Ltd

Operational statutoryinformation


Companies

Statutory information

consolidation

Visualisation database

Management information

consolidation

Operational managementinformation


Companies

Figure 7 The management reporting structure in phase 3

Co

mp

anie

sD

ivis

ion

sTo

tal g

rou

p

Divisionalusers

Divisionalusers

Divisionalusers

Performance Reporting to Boards: A Guide to Good Practice

The Chartered Institute of Management Accountants (CIMA) represents financial managers and accountants working in industry, commerce, not-for-profitand public-sector organisations. Its key activities relate to business strategy, information strategy and financial strategy. CIMA is the voice of more than 77,000students and 60,000 members in 154 countries. Its focus is to qualify students, to support both members and employers and to protect the public interest.

The Chartered Institute of Management Accountants, 26 Chapter Street, London SW1P 4NP +44 (0)20 7663 5441 www.cimaglobal.com

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