The changing role of the CFO: a focus on decision support

Morris Treadway

John Rolfs

PricewaterhouseCoopers LLP

Within the office of the chief financial officer (CFO), executives are realizing the need to shift their focus from that of regulatory accounting and traditional scorekeeping to becoming a trusted advisor and business partner within their organization.

A new value chain imposes new challenges. As utility restructuring progresses, the industry will go through a transformation that will redefine the roles of players in the market and the rules by which they play. In a recent study conducted by PricewaterhouseCoopers, “Visions of the Industry Future,” it was concluded that electric companies will evolve from integrated providers of the traditional value chain elements-generation , transmission and distribution-to more complex organizations that specialize in specific regulated and non-regulated functions across the energy industry (see table).

These changes create an interesting challenge; the need for more precise, detailed information, along all portions of a dis-aggregating value chain, while at the same time competition continues to intensify. A recent cross-industry survey sponsored by PricewaterhouseCoopers and conducted by the Economist Intelligence Unit revealed that 92 percent of companies say they have a critical or important need to improve the way they manage their performance. Intense competition is the main driver of this need with innovation and customer focus being the key engines of future performance improvement.

Performance & decision support

To begin closing the information gaps, utilities must change what they measure and manage. These changes include:

– How profitability is measured-from rate of return to profitability and cash flow by line of business, product and customer;

– How management`s actions are measured and rewarded-from managing budget variances to maximizing profitability and free cash flows;

– What cost information the utility uses to manage-from FERC and expense account views to costs by activity and work productivity;

– How the utility reports and distributes management information-from hard copy reports to timely, distributed, on-line reporting views; and,

– How the utility plans and budgets resources-from a historic resource approach to a product, process and customer perspective.

The foregoing changes underscore a shift from an expense view to one encompassing revenues, expenses and assets enabling emphasis on cash flow. Several common enablers are required to help the utility capture, report and analyze new performance information. Examples of these enablers include:

– Designing a comprehensive chart of account structure to capture multiple dimensions of data;

– Applying activity based management tools and techniques to help minimize cost allocations and provide meaningful performance drill-downs; and,

– Implementing data warehousing techniques (i.e., data marts) and on-line analytical processing (OLAP) tools to provide easy access and timely information to end-users.

Most utilities have initiated this process by implementing activity based costing as part of a larger enterprise resource planning (ERP) integrated solution. Unfortunately, these systems rarely have considered performance information beyond just costs. Furthermore, the reporting out of the ERP system is typically difficult to read and access, hardcopy in nature, and relatively inflexible.

For the reasons stated above, some utilities have implemented data warehousing based initiatives with OLAP tools to address their reporting needs. These tools are being used to report and analyze balanced scorecard performance measures, multi- dimensional views of cost and performance, and business unit reporting including profitability analysis. American Electric Power (AEP) is one such utility that has successfully integrated aspects of ERP, data warehousing and OLAP tools to design a decision support system (DSS) supportive of multi-dimensional analysis and strategic cost management. The DSS encourages performance measurement and information sharing, thus enhancing the CFO`s ability to become an effective business partner with operations.

AEP case study

AEP is a large electric utility holding company headquartered in Columbus, OH with operations in Ohio, Indiana, Michigan, West Virginia, Tennessee, Kentucky, and Virginia. AEP`s annual revenue exceeds more than $6 billion serving approximately 29 million customers.

In 1996, AEP implemented an enterprise-wide activity based management system (ABMS) to support budgeting and cost management throughout the company. The ABM system has had marginal use since that time despite defining a manageable set of activities (approximately 340) and delivering a comprehensive training program. One of the main reasons for this limited use has been the complexity and long response times associated with generating reports. Even though the relevance of the data was improved, the time lags and lack of accessibility of reports made it difficult for the users to leverage the information to support business decisions.

To address these concerns, AEP requ-ested PricewaterhouseCoopers to help them design and implement a DSS that was capable of augmenting the existing ABMS reporting capabilities. AEP desired to use the DSS application as an executive information system (EIS) for senior executives and an on-line analytical processing (OLAP) tool for managers and analysts. A rapid prototyping approach was used to demonstrate “proof-of-concept” and promote a better understanding of the DSS application features and capabilities through direct interaction with the intended users.

ABM-DSS solution

The ABM-DSS project approach was based on very rapid (8-10 weeks) delivery cycles/releases that were focused on presenting new information views, enhancing certain features and functions, and adding additional users. AEP selected Hyperion Solution`s OLAP suite for this project which included Essbase as the multi-dimensional database engine for quick retrieval of the information and Wired for OLAP tool to support executive reporting and drill-down analysis.

The first delivery release supported an initial group of 160 users focused on strategic cost information including financial targets and process/activity analysis. The DSS views were designed to provide logical starting points for the end-user to quickly view the ABM information and decide what further analysis or actions were needed. The end-user navigation, as depicted in Exhibit 2, was designed to be highly intuitive and allow quick, easy access for all types of users. The main view, depicted in Exhibit 3, was designed to be the end-users “home page” and provide an immediate cost assessment of the user`s financial target and business process position.

These views and tools were proven to help close AEP`s reporting and analysis gaps. Using these tools, the performance views can be navigated instantaneously by the user. The end-user has the capability of selecting what views they wish to analyze (e.g., time period, cost category, organization, activity, etc.) in addition to what analysis they wish to employ (e.g., variance analysis, benchmarking, trend analysis, balanced scorecard, etc.).

The second delivery release will focus on providing OLAP support to the annual budgeting cycle and is estimated to take eight weeks to complete. This support consist of summary views and drill-back capabilities from the budget support Essbase cube to the Oracle tables containing the detailed transaction data.

The CFO faces numerous challenges when transitioning from a role of scorekeeper to business partner. Critical to these challenges is adopting the philosophy that sharing information is power and, as a result, each business unit should be armed and empowered with the right information to support strategic and operational decisions. AEP`s DSS is one example of a proven business solution capable of meeting this objective. n

Morris Treadway is energy consulting partner for PricewaterhouseCoopers LLP and John Rolfs is systems integration managing director.

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Regardless of industry sector, all CFOs face seven critical challenges when shifting from the role of scorekeeper to one of business partner. CFOs that successfully transition to the business partner role will help their organizations to identify and implement value creating strategies. Their new focus will assist business unit and operational personnel to buy into change programs and will therefore increase the probability of success for new improvement initiatives.

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