A very useful article on a methodology to develop operational KPIs, that can useful for the Balanced Scorecard Project

1. Business Process Services
White Paper
Connecting the Dots:
Aligning Financial Goals with Operational Efficiencies

2. About the Author
Shirley Kamath
Shirley is a Chartered Accountant and law graduate and is currently managing a
corporate initiative for 'Simplification of Internal Processes' at Tata Consultancy Services
(TCS). Backed by her expertise in Finance and Accounts and experience in IT, she has
successfully led many transformation projects. She has also been instrumental in
TM designing FORE , TCS' transformation framework. Shirley has over 20 years of
experience spanning both IT and BPS, and her areas of expertise include ERP
implementations, and process and technology consulting.

3. Abstract
As businesses face greater complexity and uncertainty in their economic environment, every
function needs to rethink its role and realign its objectives with organizational goals. This is
especially true for the finance function. Today, the role of finance extends beyond transaction
processing, accounting, and reporting. CFOs are being called upon to become strategic
business partners who support and drive growth. They are responsible for defining and
applying clearly defined objectives and milestones that link operational efficiencies with
business outcomes.
This white paper outlines the importance of being part of the 'big picture' in building an
effective finance function, and how finance functions need to translate financial objectives
into clear operational targets. It recommends a two-pronged approach – top-down and
bottom-up – to create and sustain value for the organization. The paper illustrates how CFOs
and financial executives can align their objectives with operational efficiency.

4. Contents
1. Introduction 5
2. Aligning financial goals to overall business goals 5
3. Building a finance function on a strong foundation 5
4. Making the connection: Linking financial and operational performance 6
The top-down approach to decision making 6
The bottom-up approach to execution 7
5. Scenario: Optimizing working capital 7
Using the top-down approach to identify factors impacting working capital 7
Using the bottom-up approach to identify a solution 8
6. Creating a backdrop for greater financial and business alignment 9
7. Conclusion 10

5. 1. Introduction
The objectives and goals of the finance function have evolved over time, and today it plays a critical role in shaping
the overall business strategy. Finance is not only expected to offer transaction-processing, control, planning and
financial reporting, but also to enable decision-making activities for the business. Therefore, in order to ensure
collective success, CFOs cannot just focus on their functional role. They also need to consider operational and
process-related challenges, along with the overall business impact of each decision. Such challenges include
complying with the ever changing, increasingly stringent regulatory requirements, and aligning with a complex
and dynamic business environment.
However, to achieve this balance, finance functions will need more than just the support of efficient transaction
processing systems. CFOs need to arm their functions with relevant and timely information and frameworks for
making strategic decisions, and to identify operational opportunities with quick actionable insights.
2. Aligning financial goals to overall business goals
In the current economic and business scenario, CFOs are no longer seen as only controllers focused on recording
and reporting numbers, but as strategic stakeholders in the organization. Thus, CFOs are required to understand
their organization’s strategic goals and align them with their functional objectives. This alignment is imperative in
order to direct employees to realize mission-critical objectives through the right operational approach – in effect
operationalizing the goals.
To effectively operationalize business goals into financial goals requires the organization and the CFO to
collaboratively design the right alignment practices. This requires a two-way flow of information and
understanding — while business planners must evaluate the impact of the strategy on finance, CFOs need to help
middle managers and front-line associates understand how their short-term targets translate into strategic impact
for the organization.
3. Building a finance function on a strong foundation
To create an effective finance function that drives sustainable value for the business, there are no ‘ready-to-use’ or
‘one-size-fits-all’ solutions. While requirements may vary across organizations, there are some fundamental
questions that must be answered to design the right solutions and derive the targeted benefits:
n Are the vision, goals, and value drivers of the organization well defined?
n Are the performance measures of the finance function (business KPIs or metrics) clearly defined and
communicated?
n Are the performance measures linked to the goals and drivers of the organization?
5

6. 6
n Is there a process to regularly capture and analyze the trends in operational performance?
n Are the performance measures regularly compared and benchmarked with peer groups and industry leaders?
n Is there a regular mechanism to review industry trends and leading practices to identify opportunities to
improve performance?
The suggested approach in this paper helps organizations answer these questions affirmatively and derive more
value from their finance functions.
4. Making the connection: Linking financial and
operational performance
The performance of the finance function is inextricably linked to that of the organization; financial decisions cannot
be made in silos without considering the impact and influence on operational goals. It is therefore critical to
identify financial performance measures to balance strategic priorities and operational needs. We suggest a two-pronged
approach — a combination of top-down and bottom-up methods. Correlating the objectives derived
from the top-down approach to actionable requirements derived from the bottom-up approach helps translate
financial objectives into operational targets for the business.
The top-down approach to decision making
This approach starts with a sound understanding of overall organizational goals and subsequently the operational
requirements to achieve them. Decision makers from finance functions need to:
1. Establish the correlation between financial goals and process performance — in other words, establish the
business metrics. For example, the business may need to improve liquidity management to meet the goals of
optimizing working capital and improving cash flow.
2. Identify key operational metrics by establishing a correlation between the metrics and operational targets. For
example, the key metrics that impact working capital and cash flow are day sales outstanding (DSO) and day
payable outstanding (DPO). This helps zero in on the process areas that need to be addressed —invoice
processing, disbursements (AP), billing, and cash management (AR). DPO is impacted by the percent of invoices
paid on time; DSO on the other hand depends on the collection effectiveness index, which is the percent of
unapplied payment.

7. The bottom-up approach to execution
This approach assesses the processes that are impacted, and helps identify leading practices that can positively
influence operational metrics. For this approach, decision makers should:
1. Identify the underlying high impact processes and establish a cause-effect relationship between the operational
7
metrics and processes. In the above example, DSO is influenced by some of the back office processes pertaining
to accounts receivable such as customer master maintenance, customer billing, collections, cash applications,
and customer credit rating.
2. Leverage best practices that impact operational metrics to build a sustainable platform for driving business
metrics.
5. Scenario: Optimizing working capital
Consider an organization trying to optimize working capital, which is an important indication of operational
liquidity that impacts overall organizational performance. However, this metric might not mean much to teams
handling accounts receivable or accounts payable operations. These employees may have little or no idea of how
their work contributes to the organization’s net cash flow. The failure to understand such implications at the
organizational level means that they view issues with payments receivable as simply a matter of delay — and not as
a reduction in working capital.
Let’s apply the suggested methodology to this example.
Using the top-down approach to identify factors impacting working capital
As a first step, we need to monitor DSO and DPO to optimize working capital through daily operational metrics. The
next step involves the identification of factors driving DSO and DPO performance. Further analysis can help derive
the operational metrics and challenges that impact DSO such as:
n Delays in billing
n Aging of receivables and delays in collections
n Inaccurate customer credit analysis or rating
DSO may also be influenced by metrics such as the percentage of:
n Bills raised on time
n Receivables past the due date
n Receivables past 90 days of the due date
n Bills under query

8. Figure 1 illustrates how operational metrics and challenges can be derived from strategic goals.
Process Technology
People Controls
Using the bottom-up approach to identify a solution
Having understood the underlying metrics and challenges that impact working capital, the next step would be to
derive solutions on how to influence them positively. This requires an analysis of the performance linkages between
operational measures and finance goals. The results of the analysis can then help make the right decisions and
identify solutions that can be applied bottom-up for achieving the overall goal.
In this instance, we can formulate four solutions that are likely to have a direct impact on operational metrics, and
thus deliver greater business value:
8
Figure 1: Deriving operational metrics for optimizing working capital
Strategic Metrics
Metric aligned with
Strategic goals
Business Metrics
Effectiveness
Measure
Operational
Metrics
Related to process
Strategic
Goal (L1)
Business
Metric (L2)
Operational
Metric (L3)
Accounts Receivable
%
Bills under
query or on hold
TAT-Bill
generation
%
Receivables
>due date
%
Receivables
>90 days
Daily Sales
Outstanding
(DSO)
% Bad Debts
Daily Bill
Outstanding
(DBO)
Optimize
Working Capital
Risk
profiling
and
customer
segmentation
Bill
processing
realignment
to handle
surges
during
the month
Automatic
processing
of
dunning
with
alerts
System
generated
aging
analysis/
probable
bad debts
Stucture
Procedures Policies
Onboarding
Best practices
levers and enablers
to drive performance
Analyze performance linkages from business
goals to operational measures

9. Solution A: Risk profiling and customer segmentation: Helps improve the percentage of receivables collected
on or before the due date
Solution B: Billing process realignment to handle surges during the month: Helps improve the percentage of
bills raised on time and ensures that customer dues are received on or before the due date
Solution C: Automatic processing of dunning¹ with alerts: Ensures that reminders of payments due are sent to
customers on time, and also helps reduce the number of outstanding payments
Solution D: System generated aging analysis and identification of probable bad debts: Enables managers to
take necessary preventive action ahead of time to support targeted customers, reducing bad debts and the volume
of outstanding payments
6. Creating a backdrop for greater financial and
business alignment
An organization may choose to apply any framework or methodology to achieve operational efficiency and
functional effectiveness, but its success depends on having strong organizational support and a clearly defined
roadmap for the future. In order to make the most of the approaches already outlined, organizations need to
ensure the following:
Well-defined strategy: This consists of the mission, vision and goals, along with a clear definition of objectives and
targets. Operations that are aligned with the strategy provide the foundation for driving greater value and
achieving sustainable growth. It is equally critical to update the strategy as per market requirements and translate it
into clearly defined goals² and objectives, both at the organization level and the unit level.
Strong executive sponsorship: Organizations should not underestimate the power of commitment and
sponsorship from their senior leadership. A cross-functional team comprising finance and business unit heads
ensures participation and also serves as a governing body to provide direction, secure funding, oversee progress,
and resolve disputes.
Project based approach and key resource plan: It is important to drive the framework as a targeted project
supported by a team with the right skill sets and experience. The team must also be well respected by their peers
for faster acceptance across the function.
Change management process: Robust change management practices must be initiated by key stakeholders and
supported by effective communication across all channels.
9
[1] Dunning refers to persistent efforts by lenders or suppliers to collect payment from borrowers or buyers
[2] Goals are broad statements that showcase what an organization would like to achieve, and are substantiated with objectives representing short-term targets.

10. 7. Conclusion
In the aftermath of the global financial crisis, finance functions have evolved and are poised to deliver greater value
to business. But this also places immense pressure on CFOs to strike the right balance between strategy and
operational performance. For this to happen, high-level goals must be distilled into operational targets with
specific metrics that impact them. They must also identify issues, challenges, and best practices at the ground level,
and connect them to the broader targets and goals of the business. The future is going to be all the more
demanding, as finance functions become the building blocks for not only influencing, but also implementing and
executing key strategic goals.
The requirements for striking the right balance between strategy and performance will differ from industry to
industry, and organization to organization.
We recommend using a framework such as the methodology suggested in this paper, to correlate metrics at various
levels of processes as well as across functions. This helps stakeholders understand the impact of each process and
transaction, and gain insights on balancing operational efficiencies and financial goals.
10

11. About TCS' Business Process Services Unit
Enterprises seek to drive business growth and agility through innovation in an increasingly
regulated, competitive, and global market. TCS helps clients achieve these goals by managing and
executing their business operations effectively and efficiently.
TCS' Business Process Services (BPS) include core industry-specific processes, analytics and insights,
and enterprise services such as finance and accounting, HR, and supply chain management.
TM TCS creates value through its FORE simplification and transformation methodology, backed by its
TM deep domain expertise, extensive technology experience, and TRAPEZE governance enablers and
solutions. TCS complements its experience and expertise with innovative delivery models such as
using robotic automation and providing Business Processes as a Service (BPaaS).
TCS' BPS unit has been positioned in the leaders' quadrant for various service lines by many leading
analyst firms. With over four decades of global experience and a delivery footprint spanning six
continents, TCS is one of the largest BPS providers today.
Contact
For more information about TCS’ Business Process Services Unit, visit: www.tcs.com/bps
(http://www.tcs.com/bps) Email: bps.connect@tcs.com
Subscribe to TCS White Papers
TCS.com RSS: http://www.tcs.com/rss_feeds/Pages/feed.aspx?f=w
Feedburner: http://feeds2.feedburner.com/tcswhitepapers
About Tata Consultancy Services (TCS)
Tata Consultancy Services is an IT services, consulting and business solutions organization that
delivers real results to global business, ensuring a level of certainty no other firm can match.
TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and
TM assurance services. This is delivered through its unique Global Network Delivery Model ,
recognized as the benchmark of excellence in software development. A part of the Tata Group,
India’s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock
Exchange and Bombay Stock Exchange in India.
For more information, visit us at www.tcs.com
IT Services
Business Solutions
Consulting
All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at
the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form
without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable
laws, and could result in criminal or civil penalties. Copyright © 2014 Tata Consultancy Services Limited
TCS Design Services I M I 10 I 14