A British retailer recently announced plans to close over a hundred stores. Could part of the problem be an FP&A group whose ideas are outdated? The responsibility of FP&A extends far beyond forecasting and reporting financial numbers, to providing advice and insights into managing, nurturing, protecting and growing intangible assets such as customer and brand loyalty, as though they were tangible assets.
The modern-day FP&A function is challenged to drive a management system which controls all elements of an organisation’s performance. The system must be integrated: strategy, budgeting, forecasting, performance measurement, management reporting, incentive compensation and corporate governance, are all part of the process.
The FP&A group should be producing reliable business forecasts which anticipate changes in the economy, consumer behaviour and financial markets, and respond to strategic changes generated inside the business. Excellent financial reporting should be combined with non-financial metrics that capture the heartbeat of the business. In the retail industry these include customer counts, basket sizes, trading densities, departmental participations, units per employee hour, and inventory turn. Negative trends in these measures should trigger calls to action.
Surrogate non-financial measures
- The well-known performance measurement tools of key performance indicators, scorecards and dashboards, help us understand trends in intangibles by using surrogate non-financial metrics. These surrogate measures give us insight into intangibles that are not possible or impractical to measure directly in financial terms. Surrogate measures are often combined with sampling techniques to arrive at reliable answers.
- There are experts who say they can calculate the value of a brand by applying the present value concept. It would be interesting to see these experts justifying these values to hard-headed business executives around a negotiating table, or to a judge in a courtroom. I can give you an estimated value for a national brand based on certain assumptions, but I can measure brand recognition much more accurately - the percentage of people in a sample who are able to recognise the brand within 30 seconds - and whether this percentage is increasing or declining each year. I can also use sampling to tell you how a particular demographic group’s preference between two retail brands is changing from year to year.
- Customer loyalty can take years to build up. I can’t tell you the precise value of a group of loyal customers, but I can measure the number of customer visits and average spend in each retail outlet each month. I can also measure the rate of customer acquisition and retention. Retailers of fashion items use sampling techniques to measure share of wardrobe.
- I can’t tell you the money value of the team of specialised and experienced staff who work together to run a chain of retail stores. People in the industry are sometimes cynical about customer ratings of service levels and friendliness but it is difficult to argue with hard numbers like customer repeat visits and staff turnover.
Rules for managing intangibles
What are the rules for managing intangible assets? We can learn from winning companies and disruptors who applied these rules years before their competitors.
- Winning companies require their managers and staff to treat their intangibles as valuable assets, not as costs, even when they don’t appear on their Balance Sheets. They manage their intangibles actively not passively, and don’t just let them happen. They keep asset registers of their people, patents, contracts, customers and software and verify their existence annually.
- Winning companies nominate a “champion” to nurture and grow each IP component. The champion is required to prepare a business plan and set measurable goals for each IP component and report progress at regular intervals.
- They do everything they can to ensure legal ownership of intellectual property resides with the organisation and not in the minds of certain key employees
- They invest in measurement systems, succession planning and training to ensure the momentum and knowledge to nurture and grow the IP is ongoing.
- They ring fence and make their IP difficult for competitors to copy by registering patents, copyrights and trademarks, and attacking infringements aggressively.
- They understand that intellectual assets have a life span that needs to be monitored and renewed with regular investment.
- Their systems measure, measure, and measure again.
The article was first published in Unit 4 Prevero Blog