This article was first published in the July/August 2016 international edition of Accounting and Business magazine.

Commercial organisations are struggling to understand the profitability of channels. The third in a series of KPMG and ACCA thought leadership reports has found that profitability and cost analysis models are often too organisation-centric, highlighting a need to develop both the skills of financial professionals and the tools that businesses are using. Just 45% of those surveyed for the report, Profitability and Cost Analysis: an eye on value, monitor who their most profitable customers are and what they like to buy. Only a third (32%) said they measure the profitability of their sales channels, leaving them unable to assess or forecast the continued cost of sales shifting to online.

Effective profitability and cost analysis should be at the heart of great business decision making, according to John O’Mahony, head of enterprise performance management at KPMG UK. He says: ‘The first lesson that emerged from the report was that while there is a lot of emphasis on product and service line profitability there is a long way to go in terms of understanding digital versus physical channels.’

A view shared by Omid Tissier, professional insights – business management portfolio, ACCA: ‘What is most striking is that we are seeing companies doing profitability and cost analysis to a certain degree, but not as well as they could.’ He adds that companies are product-centric and not looking at analysis by customer or channel. He says the research demonstrated that understanding which channels suit which customers is key. ‘If you don’t have that information it is difficult making commercial decisions; which product for which customer using which channels.’

The data in the report came from a survey of 1,100 finance professionals in 90 countries interviewed in January 2016. While organisations of all sizes participated, 60% worked for businesses with over 1,000 employees and turnover of US$100m or more.

While good models for profitability and cost analysis are often developed, O’Mahony says that the research showed this was often happening remotely from the business. The report highlights considerations for finance business partnering. It notes: ‘The development of a centre of excellence can release time previously used on the production of management information to now focus on providing insight and driving business decision making.’ 

He warns that remote analysis without involving local representatives – the business partners – risks missing a lot of the story. The research found that less than quarter of organisations employ a centre of excellence model but such a model can provide an effective bridge between finance and the business, supporting business ownership in a way that is difficult to achieve when activities are performed in a finance shared service centre. 

Tissier says given the research included a high proportion of large organisations, greater use of centres of excellence would have been expected. He added: ‘In parallel you would expect to see effective finance/business partnering in place providing the value but not doing all the data processing to free up finance’s time to be true business partners.’

Cultural barriers

The research underlines a need for continued upskilling of finance. O’Mahony makes the point that if businesses want to develop profitability and cost analysis, finance professionals need to be able to work with the data to provide information and insight. ‘They need to have a thorough understanding of the business: they need skillsets broader than traditional accountants such as commercial analysis which understands the context so they can help support decision making in the business.’ Although the research did show that finance is willing to provide what is required, they need the business to tell them what is most critical. 

The research exposed barriers. Asked which were the main barriers to an effective cost-allocation approach, issues cited by finance professionals included stakeholder buy-in; cost; external, finance and operational data; as well as technology and processes. The biggest – noted by 65% – was people and culture. Tissier says: ‘Finance needs to agree with key stakeholders in the business what exactly they need this for, why they are doing it and what the focus should be.’

Inevitably technology has a large part to play. The ability of the finance function to efficiently deliver profitability and cost-analysis insights is undermined by the existence of manual processes such as ad hoc allocation journals (mentioned by 31%) and manual Excel spreadsheets to integrate and analyse data. Nearly half (45%) said their organisation had not invested in a software application, suggesting the use of spreadsheets is still widespread. The data model is the foundation of profitability and cost analysis. As technology generally makes life easier, O’Mahony says the cost of the tools required is relatively low considering the return on investment. A surprising finding was that many organisations had not taken the time to do the exercise and invest properly in order for them to continue to support the business. 

One ongoing niggle is the challenge around data quality. O’Mahony says: ‘Organisations may have the aspiration but they are compromised by the quality and consistency of data, particularly non-financial data, to provide insights.’ 

Without knowing who is buying what, via whom and from where, businesses lack the insight needed to inform future investments associated with their fulfilment and operating model. It also means they can’t price goods effectively, because they don’t know the real cost of selling them by specific channel. O’Mahony says: ‘In some businesses there remains at best a stubborn focus on product and service profitability. This myopia is dominating financial reporting, while the customer and their buying habits remain mysteriously absent from management reports.’ 

Peter Williams, accountant and journalist