Costs, Customer or Cash - What Should You Be Measuring Now?

Over the past 15 years, the vigilant finance organization has driven costs down significantly. In 1988, finance cost the typical company 2.2 percent of annual revenues; today that cost has dropped to 0.8 to 1.1 percent, a 50% reduction. Despite getting incredibly efficient – and, at the same time, facing off increased complexity, demands for speed and greater compliance burdens – finance can’t yet take a breather. Value remains to be harvested. CEOs perceive it; CFOs feel the pressure.

With finance organizations having made transaction processing (the largest finance cost) the focus of improvement over the years, and most having done a good job in reducing costs, there isn’t much more efficiency to be had. However, the game is changing – and it needs to change.

Those who were vanguards in productivity improvement have moved off the mountain of continually striving to surpass world-class cost metrics, viewing such external yardsticks to have run their useful life. These vanguards now have determined that shaving another US$.02 per transaction is not the right way to spend time. They are exploring the new, fertile valleys of organizational effectiveness by concentrating on value generation. They are providing analysis and insight and helping to determine how well services are delivered to stakeholders such as customers and suppliers.

A simple example reinforces the point. Working harder to save an incremental US$.02 annually on a million accounting transactions drops US$20,000 to your bottom line. By comparison, trimming your days sales outstanding (DSO) by only 15 days can save US$1million+ in annual finance charges for a billion-dollar corporation. Where would you spend your time?

Finance in and of itself cannot add value to the organization. But finance can provide measurement, analysis and insight, educate management and develop policies, processes and infrastructure – all to move the entity in important new directions that generate value.

The vanguard companies are first delving into new measures related to adding value in the course of providing products and services to customers – revenue metrics for success, if you will. Such measurements help the company collect cash faster, resolve problems more quickly, hold less inventory and retain and cross-sell customers.

The measures mostly concern velocity and accuracy, and they help the organization balance cost, value and risk. They enable tracking of internal change trends. The measures might answer questions such as how difficult or easy your organization is to work with, or how likely your customers are to switch to your competitor. In addition, the measures may assess your product’s durability and gauge your order processing and delivery speed/accuracy. The numbers now being emphasized by the vanguard companies measure vital relationships with a high degree of specificity and investigate the root causes of where and why maximum value is not being achieved. In sum, the measures can help transform finance from a shop that processes transactions, closes books and reports results to a value-boosting partner that serves as the eyes and ears for executives and is a customer relationship enhancer and a fountain of cash.

One of the keys to establishing a set of pivotal internal performance metrics tailored to your organization’s service delivery is to think more holistically. The most successful mix of metrics will transcend internal boundaries and organizational borders. Most importantly, you should adopt the perspective of your customers: you measure what is important to them and check your performance against their critical success factors. It would be useful, for example, to think about your "order-to-cash" cycle as a continuous process extending beyond the silos of your finance organization to embrace functions such as customer acquisition, order management, order fulfillment and returns – not just the typical finance activities of customer billing, collections management, deduction/dispute management and cash application. Extending this thinking even further leads to a redefinition of the process as being not merely "order-to-cash" but "order to next order", thereby capturing the true value of delighting a customer – getting more business.

The vanguard companies are looking at new measures that fall into several broad categories, most of which apply to every organization: working capital, customer satisfaction, management visibility/control, compliance/regulatory requirements and business flexibility.

Working Capital 

Enhancing cash flow and releasing locked working capital have become enormously important to a company’s viability in a slower-growing economy. In addition, in light of recent scandals, a growing number of companies are directing investors’ attention towards cashflow as a clearer barometer of business health. Measures to help understand and improve working capital performance focus on excess inventory and outstanding receivables and the underlying root causes: issues related to pricing, billing, terms, delivery, quality, collections and cash application. For example, you should be monitoring customer buying patterns to ensure a match with inventory or production to have the right goods in the right place at the right time.

Days bills outstanding (DBO) and DSO are examples of key measures here. Driving down DSO not only frees up working capital, it also is a strong overall measure of process effectiveness and financial strength of the business. Lower DSO generally signifies balanced credit terms and swift problem resolution. Paul French, Equitant’s founder and co-chairman, summarizes it very well: "Revenue is vanity; profit is sanity; cash is reality!"

Customer Satisfaction 

It is no longer sufficient to simply satisfy your customers – you must delight them. A customer who is merely satisfied – who is simply getting what was expected – will not increase business with you, nor recommend you to others. For example, meeting a service-level agreement is not delighting a customer. Further, one unsatisfying event could drive the customer to investigate other partners, while a delighted customer will give you another chance. Measures of customer satisfaction should comprehensively examine your fulfillment of orders, your product quality and your delivery of service.

Typical measures could include new customer revenues, new product revenues, cross-selling, customer penetration, market share growth, sales growth, customer complaints, positive payments handled, customer disputes, product fill rates, order delivery performance, customer profitability and customer turnover. Delight could be assessed by "propensity to recommend" and volume of reorders.

Management Visibility and Control 

Improving management’s visibility and control over operations will enhance decision-making and target needed process or policy change efforts at the root of the issues. Online access to key performance indicators provides timely, detailed and actionable information. Some key metrics in the order-to-cash cycle might include percentage current vs. past due A/R, percent invoices cleared within terms, average terms, average credit note value, cash forecast, orders-to-invoice ratios, order-to-bill cycle times, bad-debt-to-sales ratios, touches per disputed invoice, top disputes by reason code and average time to apply cash. For example, you certainly want to identify and monitor exposure due to a negative trend of lengthening credit terms. In addition, you should be keeping an eye on early-warning signs such as problems arising in the industry of the customers of your customers.

Compliance/Regulatory Requirements 

Process and data integrity and transparency are imperative for compliance with Sarbanes-Oxley. Vanguard companies are monitoring measures for stronger preventative, rather than detective, controls on fraud occurrences. Assessing risk is a key component, and there are many dimensions to risk: credit, relationship, financial, reputational, operational, technological and competitive. Up-front modeling and forecasting are vital to identify major risks and highlight their potential incursion. Vanguard companies are building sophisticated mechanisms to provide early warning of potential problems. Volatility in revenue recognition is one red flag; others include blips at quarter’s end and abnormal expense spending patterns. The current "belt and suspenders" cost of compliance will not be sustainable in the long term. Forward thinking finance leaders are already endeavoring to build the controls into systems.

Business Flexibility 

Companies are dizzy from the rapid launch of new products, entry into new markets, the introduction of new distribution channels and new infrastructure requirements resulting from advances in technology, divestitures or M&A activities. It is important for you to understand the cost of bringing products to market and of channeling success and profitability, as well as the impact of product-line cannibalization, on customer profitability. Measures are needed to rapidly gain control of new divisions/market channels and to ensure clean-up of divestures. Some examples are cycle-time of customer data file consolidation, cycle-time to launch new market segment, cycle-time of supplier contract rationalization and speed of technology integration. Outsourcing can often enhance your flexibility in these areas by offering rapid access to integrated, state-of-the-art solutions.

The particular activities, functions or processes you should measure and monitor will differ significantly by your type of business. External comparisons will not be valid – or especially easy to obtain. Companies in your industry will be unwilling to share such information, believing it to be a competitive advantage, and measures outside your industry will probably be irrelevant. Don’t think your job is done by defining a set of internal performance measures and monitoring the data. The critical question to ask is why your performance is falling short and what is causing it. This is where the analysis and insight capabilities of finance come into play to add value. Finance can fishbone back to root causes, then help solve the problem at its source with new processes, policies, infrastructures and organizational directives.

Should you be approaching world-class cost and productivity performance, declare victory and move on. Best-practices models are widely known and employed; which one you have doesn’t much matter. Your attention is better redirected. And if your organization hasn’t achieved 30 to 50 percent transaction cost improvement over the past five years, don’t expend any more energy trying to achieve it – for example, by embarking on a three-to-five-year improvement program. Find a competent outsourcing partner to enable you to redirect your efforts away from solving cost and productivity problems and turn towards enabling greater strategic focus supporting value identification and creation.

The outstanding outsourcers typically excel at cost-control and best practices and are leaders in the value generation and new measures that you will need to be competitive in the future.

About the Authors

David Axson is president of The Sonax Group having recently completed an assignment as Head of Corporate Planning at Bank of America. David was a cofounder of The Hackett Group, and is also the author of the book Best Practices in Planning and Management Reporting – From Data to Decisions published by John Wiley & Sons. Email: daxson@sonaxgroup.com.

Chris Gattenio is Senior Vice President, Sales & Marketing, of Equitant, Inc., the leading provider of order-to-cash managed services. Previously, Chris was Senior Vice President, Client Management of The Hackett Group, where she advised senior executives of numerous Global 1000 companies, and Vice President and Corporate Controller of National Education Corporation. Email: chris.gattenio@equitant.com.

The authors wish to thank Greg Hackett for his input into this article.