Achieving Management Reforms Through ROIC Improvement: Linking Management Goals and On-Site Activities (Part 1)

In response to demand from capital markets, more and more companies are introducing and disclosing ROIC as an accounting management indicator.
On the other hand, these corporate planning departments and other corporate division spearheading ROIC management often give us feedback saying that aspects of the process such as “linking ROIC with on-site activities” and “achieving on-site penetration for ROIC-based business management cycles” are difficult.
Especially at companies with strong operations departments and weak corporate divisions, getting penetration into on-site workplaces for ROIC-linked performance management frameworks is no simple task.
ABeam Consulting believes that the lack of connection between corporate divisions and operations departments and other cross-departmental barriers have an impact on this (see Figure 1).

From the perspectives of KPI, rules, and data, we can identify the following three challenges.

Challenge  1. KPI perspective: Company-wide performance goals and on-site activities are not linked
At companies that have adopted ROIC, it is common to create a KPI tree that breaks down ROIC and use this to carry out performance management.
Generally, ROIC is broken down into finance KPIs such as operating profit margin and capital turnover ratio, but these finance KPIs are often not linked to on-site KPIs.
The result is the following conditions: on-site staff have to deal with larger numbers of unnecessary management indicators, causing increased management costs, and corporate division cannot tell which on-site initiatives are affecting ROIC.

Challenge 2. Rule perspective: Communication between departments is poor due to a lack of shared terminology
At the corporate management workplace, similar terminology can have different meanings between departments, leading to mistakes in management decision-making.
For example, in order to prioritize sales of products with a high profit ratio, consider the case of profit and loss calculations for individual products. From the corporate perspective, calculations should be carried out with the correct product costs, but since the management granularity differs by department (sales departments consider selling costs, logistics departments consider logistics fees, manufacturing departments collect manufacturing cost data), shared costs are allocated differently.
These allocation rules differ by department and system, so without awareness of the disparity between departments, products considered to be high profit might not be reflecting the true conditions, potentially leading to incorrect business decisions (see Figure 2).
(For example, although expenses are allocated based on the data stored in the financial accounting system at the accounting department, the manufacturing department allocates them based on different standards data stored in the manufacturing execution system. This causes inconsistencies in awareness between departments.)

Challenge 3. Data perspective: Acquiring the information needed for analysis is difficult
ROIC is an initiative for the entirety of the corporate group, requiring the corporate division to make decisions based on data.
On the other hand, when systems differ between departments and there is a lot of manual work still remaining with a focus on Excel, flexible decision-making is impossible.
For example, if you clear Challenges 1 and 2 mentioned previously, this means company-wide and on-site KPIs are linked, and you have entered the operation phase of managing planning, results, and achievement forecasts based on consistent rules.
At this time, if the systems used for managing this data differ between departments and the corporate division completes calculations based on a manual, there is a risk that the corporate division will be swamped with work and unable to check conditions based on the optimal perspective for the whole company, as is ideal.

As preparation for ROIC management penetration, implementing problem-solving using the approaches below is one method to consider.

Challenge  1. KPI perspective: Company-wide performance goals and on-site activities are not linked
The relationship of finance KPIs to on-site activities must be quantitatively clarified using statistical methods.
Through this handling, in addition to getting a sense of the effect that the content of measures implemented by the corporate division and other departments has on finance KPIs, you can also understand the impact of each department on these KPIs (see Figure 4).

In addition, there is a need for corporate to simulate and consider cross-departmental policies with a company-wide optimization perspective and choose which to adopt and reject (see Figure 5).

Challenge 2. Rule perspective: Communication between departments is poor due to a lack of shared terminology
Visualization of each department’s rules and sharing among departments is the first step. As you progress through this process, the differences in rules between departments will become clear.
Prepare a data utilization scenario to determine what kind of management decisions are needed next. This is because what kind of figures you need to prepare and what rules apply differ depending on the data utilization scenario.
Finally, convert the combined data utilization scenario and applicable rules into a system format and develop a framework for automated calculations (see Figure 6).

In preparation for this kind of company-wide rule implementation, the role of the financial planning and analysis (FP&A) department is important. This is because for cross-departmental considerations, management needs to take on a leadership role in resolution, and a functional organization with the role of linking management with related departments (FP&A) is essential.
Creating FP&A within each department and establishing a management process for reporting to the CFO is an effective way to promote rule penetration.

Challenge 3. Data perspective: Acquiring the information needed for analysis is difficult
Due to the rise in low-code development solutions and cloud services, the budget formulation operations that were mainly performed manually up until now are also becoming increasingly automated.
By including not only budget collection, processing, and aggregation, but also on-site activity KPI planning and achievement forecasts in this automation, corporate can concentrate its resources on its intrinsic role, company-wide perspective checking operations.
Although work process automation is only the first step, progressing to analysis, simulation, and other advanced data utilization and cultivating a culture of inter-departmental discussion looking at the same data is important for human resource development (see Figure 7).