What is Financial Intelligence

Financial Intelligence is the
process of receiving data, converting it, and disseminating it, for the purpose
of enhancing key decision making.

Over the past two years bad
decisions were made by otherwise seemingly smart managers.  Whilst not all of this was due to poor
intelligence and poor organisational knowledge, much of it was.  More importantly it appears that in many
cases, rather than intelligence being unavailable, it was not being transmitted
to the right decision-making levels in the organisation.  Further there were issues with the
interpretation of intelligence particularly in respect of its impact on
organisational risk.  The end result was
a severe diminution of shareholder and investor wealth.

There seems little doubt that good
financial intelligence processes can increase shareholder value.

However an effective financial
intelligence process will possess several characteristics:

• It will be only one part of overall organisation
  knowledge
• It will provide the organisation with a
  competitive advantage
• It will  be aligned with overall organisation strategy
• It has a role to play in strategy development
• Its development will be process driven.

1. 1.      
   It
   will be only one part of overall organisation knowledge

Financial
intelligence is only one part of the organisational resource mix.  All organisations go to work with a tool-kit
of resources which includes its people, systems, physical and intellectual
property, customer and supplier relationships, and organisational knowledge.

Intelligence is
only one part of knowledge and financial intelligence is only a part of all
intelligence available to an organization. 
Non- financial intelligence plus the hard and soft systems and channels
for intelligence dissemination are part of overall organizational
knowledge.  Financial intelligence is an
important part, but also one that requires overall integration to be of optimal
benefit.

1. 2.       It will provide the organisation with a
   competitive advantage

There
are many models of how organisations gain and sustain a competitive advantage
but most centre on adding value to customers by either using less or providing
more.

But organisations need to achieve this in an environment of
uncertainty and those that are able to reduce uncertainty are likely to gain a
competitive advantage more quickly and more effectively.  Financial intelligence is able to reduce
uncertainty as well as speed up the feed-back loops to enable better
understanding of cause and effect relationships.

However to gain a competitive advantage from financial
intelligence, the organisation must treat it as a strategic resource.  Five key requirements are:

1. Financial intelligence processes should be
   considered a key part of the governance framework.
2. Sufficient management time and resource should
   be allocated to planning, establishing, and monitoring financial intelligence
   processes.
3. Financial intelligence should be treated as an
   imbedded and continuous resource.
4. The process needs an executive owner with budget
   allocation and objectives. 
5. Get expert advice.

1. 3.      
   It will
   be aligned with overall organisational strategy

The output of a
financial intelligence process must serve the organization’s strategic
plan.  If it doesn’t, the organisation
will incur real and opportunity costs from the distracting influence of a
non-value adding process.

If for example a key
strategic thrust was to lift retail pricing, the organisation should ensure
financial intelligence on market pricing, elasticity, promotional impacts are
all being effectively captured and disseminated to the key decision
makers.  Alternatively an organisation
with more certain and predictable pricing but with volatility in input costs
might focus intelligence gathering in the supply market.

The key requirements
for ensuring financial intelligence is aligned are:

• The specific streams of financial intelligence
  must relate to the organisations strategic imperatives.
• The financial intelligence must aid the
  organisation in understanding if tactics are working and if not, how to adjust
  them.
• The financial intelligence must help the
  organisation in gaining focus on strategic imperatives across the organisation.

1. 4.      
   It
   has a role to play in strategy development

Most financial
intelligence is used for tactical decisions making rather than strategy.   Whilst financial intelligence is useful in
organisation strategy, how it is used will depend on the position in the
strategy process.  A common framework is
to break strategy into:  strategy
development; strategic planning; and tactical implementation.

The strategy development stage typically is
infused with questions about the future, large uncertainty, foresight, and
interpretation. It requires time and the consideration of scenarios.  Financial intelligence at this stage should
be spread widely, be integrated with non-financial data, be spread widely
throughout the organisation, and is likely to be generated more from external
sources. 

The Strategic planning stage requires the
development of a plan to implement strategy and in my experience is largely
tactical in time horizon and path constraint. 
Financial intelligence requires a good understanding of cause and effect
relationships.  The strategic planning
process should also help determine what sort of financial intelligence is
required by the organisation.

The tactical implementation stage requires more
immediate and frequent financial intelligence and that which is able to be
reacted to by in-users.

1. 5.      
   Process
   for developing or assessing financial intelligence requirements

In assessing
financial intelligence requirements it is important to start at the strategy
end rather than the data end.  That is,
work out what is needed rather than what is available.  The key questions to ask are:

• What are the key strategic imperatives?
• What are the key causal intelligence streams?
• Who will be making the decisions and how often?
• What conversion needs to take place and how?
• Where can the data streams be accessed?

In summary, financial intelligence is an important part of
overall organisation knowledge and one that can provide strong benefits to the
bottom line if gathered and used effectively. 
Financial intelligence must however be treated as a strategic resource,
must give the organisation a competitive advantage, and needs to be developed
in a systematic way to ensure the best use of resources.

Financial intelligence has uses in both tactical and strategy
areas but organisations need to ensure its use is appropriate for each purpose.