Managing companies for success across a range of time frames — a requisite for achieving both performance and health — is one of the toughest challenges in business today. Turbulent economic conditions have concentrated the collective minds of many executives on pure survival. The fact that 10 of the largest 15 bankruptcies in history have occurred in the last 10 years is a strong deterrent to business building, playing upon its inherent risks.
Businesses complain that financial markets increasingly focus on quarterly results and give little credit to strategies for creating longer-term value. Tools intended to encourage a more balanced approach and to promote broader thinking have been available for some time. But many of these tools are simply not accurate and too mechanical to be effective. What good is a credit score that’s 6 months old? Or reports a delinquent payment from a year ago?
This shortsighted behavior is widespread. In a 2005 survey1, they would forgo an investment offering a decent return on capital if it meant missing their quarterly earnings expectations. Indeed, more than 80 percent of the executives responding said they would cut expenditures on R&D and marketing to ensure that they met quarterly earnings targets — even if they believed that the cuts were destroying long-term value.
What? Why? Most “scorecards” consist of disconnected metrics that confuse the organization and lack any real impact. The good news is that changes are emerging. In a recent McKinsey survey2, 70% of public company directors want additional information about markets; a more detailed analysis of customers, competitors, and suppliers. Above all, boards want to help their companies seize opportunities for long term growth and avoid exposure to risk from organizational blind spots — like a major supplier going out of business.
So what do companies need to think about in building long term health, performance, and viability?
From my perspective 5 things:
Strategy — one that reflects different time horizons
Metrics — a dashboard that measures peer generated content regarding a company’s performance
Communication — change the nature of the dialogue with employees and capital markets by using social media
Leadership — manage both the performance and health of the business
Governance — keep a close eye on regulatory influence and supplier partnerships
All good stuff, but I want to draw your attention to 1). Metrics, and 2). Governance because we think these areas create the biggest opportunity for improvement in looking at corporate financial performance in B2B. If you can see what’s coming, you can react before it’s too late to do anything. Better visibility creates better performance. A closer look…
Metrics:
Not just any metrics, but a robust set of peer-based metrics that allow you to monitor a company’s performance and health. Existing B2B credit bureaus and information services rely on objective data sources such as accounting reports, profit and loss statements, balance sheets, and credit reports. These are all backward-looking, inaccurate, and expensive. Instead of relying on lagging information, Trust Exchange utilizes smart crowd data to provide forward-looking insight into a company’s performance. Looked at over time you begin to understand a company’s reputation. By leveraging the smart crowd of valid customers, suppliers, and partners, Trust Exchange has created a metric that when trended and compared with other data provides alerts that represent leading indicators of a company’s health. Combining this with the ability to monitor either a single company or a portfolio of companies, you have clear visibility into the health of their business and can monitor risk more quickly and easily. Just want Directors are looking for, more real-time visibility to markets, competitors, and suppliers.
Don’t wait for a lacking, traditional business indicator to learn a company is in trouble, use Trust Exchange to understand reputation real-time.
Company Metrics
Governance (or Custom Trust):
Recent regulatory changes are requiring that banks monitor all of their third-party relationships for the life of the contract. Banks must monitor service provider’s operational performance, required licenses, certifications, and financial stability for the entire term of the engagement — expensive and laborious, and doesn’t have much to do with the business of banking!
With Trust Exchange, banks can monitor and track 100% of their vendors, create custom risk ratings as well as
custom operational certificates, and have these events pushed proactively to the bank. More visibility, a clearer understanding of risk, and a single dashboard within which to monitor all activities — real-time.
Companies must learn how to meet next quarter’s and next year’s earnings expectations while at the same time implementing platforms within which to monitor financial performance in real-time. It calls for a carefully designed set of metrics — balanced across the business and linked to the creation of real, tangible trust and reputation.
Trust Exchange gives you the tools to do just that. Contact us.
Notes:
1). John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, “The economic implications of corporate financial reporting,“ January 11, 2005.
2). Robert F. Felton and Pamela Keenan Fritz, “The view from the boardroom,” The McKinsey Quarterly, 2005 special edition: Value and Performance.