Value . . .
How Can I Use Reporting to Create and Deliver Value?
OK, this makes a pretty compelling case for consolidating your organisations existing reports. But what about initiating new reports? More fundamentally, why do we even have enterprise reporting at all? Perhaps the simplest "textbook" answer I can give is: it helps solve the Principal-Agent Problem. The idea here is that one group of people (the Principals, or owners of your firm) get another group of people (the Agents, or managers in your firm) to do work on their behalf ie run the business. Naturally, the Principals want this done in a way that best suits their interests (most likely: maximising profits and minimising risks, subject to legal and ethical requirements). How do the owners motivate the managers to do this? Well, they use incentives like share options, commissions, bonuses, the (veiled) threat of sacking, references and a host of other methods. Most of these methods require the owners to monitor the performance of management to make sure they're doing a good job, making the right decisions and generally doing well. Enterprise reporting is a crucial ingredient in ensuring the managers' behaviour is aligned with the owners' interests.
The Owners' Perspective
Enterprise Reporting can help owners (or perhaps external stakeholders like taxpayers or regulators) by lowering the monitoring costs associated with aligning management's interests with the owners'. For example, suppose a hot-shot new manager on a generous profit-share scheme is considering opening a new product line. Over the three years of her tenure, it may boost sales and help her get promoted and earn hefty bonuses. On the other hand, it may cannibalise sales from other products, so over a five or ten year view, it's a bad idea. (This is sometimes called the investment time horizon problem.) So, during business case formulation, she has an incentive to downplay the longer-term loss of sales, perhaps through making unrealistic assumptions and burying negative sales figures. Enterprise Reporting is essential here to test the business case, that is, track the assumptions (inputs) and predictions (outputs) of new intiatives. If the owners piped up and insist on regular ongoing reporting linked to performance bonuses, the hot-shot manager will not try to hoodwink the owners in this way.
The Managers' Perspective
Many senior managers and contracted labour have a portion of their remuneration "at risk" or contingent on performance. Sometimes, this is hidden (for example, if sufficiently bad performance means the firm folds and you're out of a job). Enterprise Reporting - especially with leading indicators - can help them perform well and "make their numbers". Another observation: management is often competitive even within an organisation and frought with office politics. If managers are held accountable for their decisions by having their results published internally (to their rivals), then it becomes much harder to hide consistent under-performance. Up-and-coming managers will see that weakness as an opportunity to "make their mark".
Lessons for Enterprise Reporting
- Test the Business Case - Ensure that the assumptions and predictions of all major decisions are tracked. Owners would be foolhardy to approve an investment plan that lacked any real means of effective monitoring. So make sure that the reports can be used to keep management honest.
- Give Reports Teeth - Don't just report on the figures; report on how whether or not the figures are where they are supposed to be. For example, if a proposal or plan promises that a product will have 10% penetration after 6 months, then set that as a target (or threshold) on the report and tie it to a person. Also, making that mean something to the decision-maker's remuneration.
- Don't Be Shy - While it may not be possible - or even desirable - to link KPIs and bonuses to everything the firm reports on, don't discount the power of pride and shame. By opening up the reports to a wide readership (with business owners' names and targets clearly displayed), managers' reputations are put on the line. This is a less crude instrument than bonuses and can help motivate managers to think like owners.