Implementing solid internal management reporting (IMR) is one of the most important steps a company can take to effectively accomplish the following major goals:
GAAP and statutory financial statements fall far short in terms of helping management with the three objectives above. Such statements operate under rules that often value consistency, transparency and simplicity over economic reality. Accounting rules also have overt objectives that emphasize conservatism over economic realism in cases where there are multiple ways to perform valuation. Internal management reporting, by its very nature, offers an opportunity to stress true value-added activities, if that IMR environment is constructed properly.
Beyond converting from an “accounting-based” to an “economic-based” system of internal measurements and rewards, it is also critical that organizations pay more attention to expense allocations. It has been our experience that such allocations are often done using simple rules-of-thumb (ratio to revenue, for example), which can be extremely inaccurate, perhaps to the point of continuing businesses that are actually unprofitable. We feel that the investment made to assign costs more accurately will yield tremendous rewards in terms of better reflecting true profitability of a business at any level of detail.
Finally, for management to be effective, the goals and objectives that they set out for their employees should be expressed in just a few metrics. For example, consider a company with the following objectives for its managers: (1) increase volume; (2) maximize profit margin; and (3) minimize risk. This represents a plan with too many, inherently conflicting goals. Would you rather have a particular business unit produce $15M of business with a 30% ROE or $50M of business with a 10% ROE? Only a measure expressed in dollar terms, that explicitly deals with (and pays for) risk, will avoid these pitfalls.
A better plan would state simply “maximize the economic value that your unit contributes to the organization.” (where the cost of additional risk is already embedded within that economic value). Managers quickly adapt when they know that they have one number to focus on and influence through their actions. It is generally true that “you get what you measure and reward,” and thus the natural outcome is higher economic value. This is exactly the sort of system that we advocate.
Of course, a major characteristic of a good IMR environment would be to meet all of the goals set out above! Beyond that, we emphasize several key structural characteristics:
With all that said, unfortunately, IMR is an area that can often be short-changed due to its complexity and/or internal budget constraints. Internal management reporting is more complicated in the insurance industry because loss costs are largely unknown at the time of the sales transaction. However, we view that inherent complexity as an opportunity for a firm to set itself apart from its competitors, and ultimately make better decisions and outperform the industry.
At Gross Consulting, we have a wealth of knowledge and experience to help your firm take advantage of management reporting and execute strategies using better information than your competitors. We have a professional staff with a proven track record of improving and developing internal management reporting that is effective and timely for management. We would love the opportunity to speak with you about how we can help your firm — please contact us.