The problem and need for savings evaluations

Observation #12

carpedia-observation-12Financial managers are often skeptical when they hear people claim that their projects have generated, or will generate, substantial financial benefit. There is often a long legacy of projects or investments that were based on some type of ROI. Unfortunately, the ROI tends to be largely designed for the decision, not for ongoing management or accountability.

It’s often hard to find a proper financial reconciliation of past investments. This is unfortunate, because savings evaluations are important. They are also very difficult. Savings evaluations, by necessity, attempt to demonstrate that relative performance has improved from one period over another. However, “relative” performance is difficult to define. There are many variables that can come into play that can both positively and negatively affect financial results. Here are just a few:

  • The seasonality of the business
  • The product or service “mix”
  • Wage increases
  • Supplier prices
  • Competitor actions

For savings evaluations to correlate with financial results, the baseline that’s being used must be correct. A baseline can be anything from year over year, month over month, or week over week. The more volumes fluctuate, the harder it is to create a useful baseline — and the more important it is to find reasonably comparative periods. If you use an annual base in a highly variable environment, you look like a hero when the volumes are high, but if the volumes drop, which they inevitably do, you might see the financial manager quietly grinning.

Despite their inherent difficulties, savings evaluations are critically important for managing performance improvement. When done correctly, they create ongoing accountability — and they force you to reconcile claimed improvement with actual financial improvement.