For satellite services provider Hughes Communications, the most material determinant of the company’s profitability is consumer uptake of services. Projections of profit and loss, cash flow, and the balance sheet depend heavily on a three-year model of new consumer subscriptions — the only forecast that Hughes updates every month. The forecast is so important that it can affect investment decisions such as whether or not the company should launch its own satellite (a $400 million prospect) or continue to lease transponders from others, says finance chief Grant Barber.
By staying close to call-center orders and new installations, Hughes took preventive action ahead of the economic downturn two months ago. The company gave Internet service consumers the option to pay equipment and installation fees over time instead of all upfront, which Barber says kept new installations from stalling. “We’re constantly turning the knobs and making changes to the consumer models,” he adds.
Good forecasts have long hinged on finance’s ability to dig into operational metrics, but increasingly companies are realizing that communication, and data, need to flow both ways. “It doesn’t make sense to sit in an ivory tower anymore and make projections,” says Lillis. “You don’t get buy-in from leadership.”
Business-unit leaders, for example, can run “distress simulations” on their own, increasing awareness of how their performance alters corporate results. Park Nicollet Health Services, a Minnesota-based primary-care and hospital provider, uses a baseline run-rate model and a second version that executives of its 54 business units can tinker with, says CFO David Cooke. A primary-care-facility manager can change patient volumes and the mix of commercial versus Medicare payers, for example, to measure the effects on profit margin. “Last year we lost $84 million because [the Medicare and Medicaid mix] went up unexpectedly,” Cooke says.
Serving a higher percentage of government-insured patients (which is a current trend) means taking steps to boost productivity — asking doctors to see two more patients a day, for example, Cooke says. New software (from Cognos) may help, because it will give business leaders the ability to input data directly rather than route it through finance. That may allow the company to move more quickly as it tackles important challenges such as staffing (it can take a year to recruit a surgeon) and determining whether it should consolidate facilities.
While companies are developing a new appreciation for greater hands-on involvement from business managers, they do see limits, particularly when it comes to tying forecasts to compensation. Mueller Inc., a supplier of metal roofing and steel buildings, recently took such responsibility away from individual managers. “We were very poor at forecasting,” says Phillip Arp, CFO of the Ballinger, Texas, company. “Managers couldn’t back up forecasting with anything concrete and they felt pressure to give a number higher than the prior year, so we removed the performance contract piece.”
Now, individual managers are responsible for executing against a matrix of recommendations based on branch sales levels that Mueller’s finance unit provides. “They receive a set of tools that gives them guidance on their potential profitability, which includes margin, compensation, head count, asset levels, and mainline expenses,” Arp says.