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Applying Design Thinking to Finance

I recently finished reading The Design of Business: Why Design Thinking is the Next Competitive Advantage by Roger L. Martin. It’s well worth reading. Even though the book was published almost a decade ago, the ideas and principles espoused by the author are still relevant and applicable in today’s business environment.

Design thinking is a customer centric process used by designers for creative problem solving. The process utilizes elements from the designer’s toolkit like empathy, intuition, systemic reasoning and experimentation to arrive at innovative solutions that benefit the end user or the customer.

Finance is increasingly being called upon to provide effective business decision support. For many traditionally trained accounting and finance professionals, the request is a big ask.

Understanding and influencing the entire value creation cycle of the business is not something that they are accustomed to. Instead, many accounting and finance teams are comfortable working in financial reporting roles.

However, as businesses increasingly leverage new technologies to automate rules-based, transactional and repetitive tasks for a fraction of the full time employee salary, it’s only a matter of time before some finance team members become an endangered species.

Part of the problem is the fact that during our training, the majority of the courses we undertake make us believe that our core role is to deliver compliance-focused tasks.

Think of Financial Reporting, Taxation, Auditing and Assurance, Business Law, and Financial Accounting modules. All are compliance-focused. At the beginning of the learning, the content of each module is the basics and progresses into advanced topics towards the end.

Ultimately, we develop a box-ticking mindset. Having such a mindset will not help differentiate the business from its competitors and create a competitive advantage. I’m not discounting the importance of financial reporting or any other compliance tasks.

They too are important. But, innovative and successful companies do not become so simply by heavily investing in compliance activities.

Innovation and efficiency do not have to be at odds

In The Design of Business, Roger L. Martin highlights that one of the reasons many businesses face a struggle to innovate and create value for their stakeholders is because of an increased reliance on analytical thinking versus intuitive thinking.

The former involves senior management attempt to base strategy on rigorous, quantitative analysis (optimally backed by decision support software). The later is centered on the primacy of creativity and innovation, the art of knowing without reasoning. Roger Martin does not advocate the adoption of one approach over the other. Instead, he advises businesses to seek a balance or reconciliation of the two.

Traditionally, finance transformation initiatives are driven by cost reduction strategies. The focus is on squeezing out as much fat as possible and achieve efficiency. Take adoption of new finance software as an example. Rather than view the adoption as an opportunity to relieve finance teams of rudimentary tasks and focus on initiatives that require critical thinking, CFOs view this as an opportunity get rid of employees and cut costs.

If a business is heavily dependent on analytical thinking, especially where performance and rewards are budget and or forecast driven, maintaining the status quo often prevails. The organization finds itself operating as it always has and is reluctant to design and redesign itself dynamically over time.

When faced with a decision about investing in a new product, market or something new and promising, but not in the current budget, the answer is always no. Many at times the argument is that if something cannot be planned and budgeted for in advance, it is not worth pursuing. This ultimately breeds conformity and stifles innovation as resources are allocated to business units based on past performance.

Finding a balance between exploration and exploitation

Balancing innovation and efficiency demands the organization’s resource allocation not to be based entirely on past performance. Rather, a portion of the resources should be distributed based on the unproved ideas and projects each business unit presents for the coming year.

One of the reasons why a number of promising projects fail to see the light of the day is because management have created a culture that first seeks a predictable outcome before paving way for the project. They seek reliability, which is in direct contrast to a designer’s mindset.

A designer seeks validity over reliability with the goal of producing outcomes that meet a desired objective. The end result is shown to be correct through the passage of time.

The current business environment is awash with mysteries, which take an infinite variety of forms. For example, we don’t know how our product and market segments will continue to perform in future. We are not certain which technologies will have an immediate impact on our business. Or we might explore the mysteries of competition and geopolitical tension.

Data on past performance might help us extrapolate future performance but the future is no guarantee.

Given that the future is a mystery, the business should embrace a new way of thinking that provides a simplified understanding of the mystery and in turn help devise an explicit, step-by-step procedure for solving the problem.

An organization may decide to focus on exploration, which involves a search for new knowledge and the reinvention of the business, or exploitation which focuses on business administration and seeks to increase payoff from existing knowledge.

Intuition, originality and hypotheses about the future are often the driving forces behind exploration. On the other hand, analysis, reasoning, historical data and mastery are the forces behind exploitation. Both approaches can create significant value, and both are important to the success of any business organization. However, organizations struggle to pursue both approaches simultaneously.

More often, an organization chooses to focus on exploitation, to the exclusion of exploration and to its own disadvantage. The solution is not to embrace the randomness of intuitive thinking and avoid analytical thinking completely. The solution lies in the organization embracing both approaches, turn away from the false certainty of the past, and instead peer into a mystery to ask what could be.

In other words, balance exploration and exploitation, invention of business and business administration, and originality and mastery.

Finance plays a critical role in helping the business achieve efficiencies, redeploy the savings and redirect freed-up resources towards exploration of new opportunities.

Building design into finance

As design thinking is frequently associated with marketing and product development, finance is deemed an unlikely place to apply design thinking principles. However, design thinking can be applied to the finance function in every organization. The key is to identify and define the customers clearly and approach their needs empathetically.

Unlike the marketing function which focuses its efforts on external customers, finance’s efforts are focused on meeting the needs of its internal customers. To elevate design thinking in finance, the function should think differently about its structures, its processes, and its cultural norms.

Quite a number of finance organizations are organized around ongoing, permanent tasks. Roles are firmly defined, with clear responsibilities and reward incentives linked tightly to those individual responsibilities. The problem with such a structure is that it discourages employees to see the bigger picture. Individuals employees see their work as own territory to be protected by all means.

There is little to none collaboration. It’s all about “my responsibilities,” not “our responsibilities.” As a result, individuals limit their focus to those individual responsibilities, refining and perfecting outputs before sharing a complete final product with others. This can be routine production of monthly reports.

In contrast, designers are accustomed to working collaboratively with adhoc teams and clearly defined goals in a projected-oriented environment. Rather than waiting until the outcome is right, designers expose their clients to a series of prototypes that improve with each iteration.

Considering that finance business partnering extends beyond traditional month-end reporting tasks and involves working on various business related projects, sharing performance insights and creating value, CFOs should therefore foster a culture that supports project-based work and explicitly make it clear that working on a project is no less important or rewarded than running a business segment.

It is therefore imperative that finance business partners acquire design thinking capabilities that can help them develop a detailed and holistic understanding of their internal customers’ needs and frustrations, and serve them better by formulating and recommending creative and actionable solutions that deliver the desired outcomes.

Equally important too is having the courage to elicit feedback from business partners, develop mastery of the value proposition model and deliver improved solutions.

Rather than immortalizing the past, the focus should be on creating and influencing the future.

Migrating From On-Premise to Cloud-Based Solutions

Gartner forecasts cloud computing to be a $278 billion business by 2021, as companies increasingly adopt cloud services to realize their desired digital business outcomes. In a separate survey of 439 global financial executives, the research company found that finance is moving to the cloud much faster than expected.

By 2020, 36 percent of enterprises are expected to be using the cloud to support more than half of their transactional systems of record.

With cloud technology promising to provide the speed and agility that the business requires, including generating significant cost savings and new sources of revenue, it’s not surprising the cloud market is experiencing a boom.

While companies have experienced both organic and inorganic growth, many have struggled to keep pace with rapidly changing technology landscape. Their businesses are saddled with legacy technology infrastructures that are slowing progress towards the achievement of strategic objectives as they are slow to react to change.

Given the need to react more quickly, at the same time become more proactive and drive business performance, senior finance executives are turning to cloud-based financial solutions to provide real-time management information reporting and decision support.

Adopting cloud not a simple and quick decision

Looking at the expected growth metrics for the cloud market and then hearing of all the novel opportunities offered by cloud computing, CFOs and CIOs are enticed to believe that it is only a matter of time before the organization’s computing technology and data is skyward.

However, over the course of my career I have come to understand that the only thing right about a forecast is that it’s wrong. Either the forecast is close to reality or very far from reality.

Cost savings is cited most often by senior finance executives as the reason for adopting cloud technology. Considering that cloud is essentially a form of outsourcing arrangement in which client organizations use the internet to connect to a variety of applications, storage services, hardware resources, platforms and other IT capabilities offered by cloud service providers, upfront capital investment and maintenance costs are minimal.

This is because the cloud service provider owns the necessary hardware and other resources needed to deliver these services and is also responsible for employing the staff required to support them. Unlike on-premise solutions where the business has to incur large capital outlays for hardware and IT support staff, cloud is an operating expense (except implementation costs which can be capitalized), that is payable as and when incurred.

With cloud, a business is able to add new licences to its subscription when it needs them and scale its licensing costs with its growth, rather than buying in bulk upfront. This is in direct contrast to traditional on-premise software where companies in anticipation of business growth have over invested in IT systems hoping to add more users to the user list soon after the growth is achieved.

However, when deciding whether to invest in cloud or not, CFOs should look beyond cost benefits. In addition to cost savings, they should also consider tactical and more strategic and structural issues. Unfortunately, the challenge for many finance professionals is that when evaluating investments the focus is solely on cost. We fail to examine and evaluate the non-financial risks and strategic impact of the investment on the business.

Strategic and structural considerations

As I have written in the past, most organizations get caught up in the hype of new technologies and end up making technology investments that are unaligned to the strategy of the business. There is no strong business case for investing in the new technology. Don’t allow yourself to fall into the same trap.

Investing in cloud is not an IT or finance only decision. Decisions of what to migrate to the cloud, when to migrate it, and how to transition from an on-premise environment to a cloud-based environment all require a collaborated effort if the organization is to achieve its stated objectives.

Further, transitioning to the cloud computing environment  is not a matter of flicking the switch up and down. You need to have deeper understanding of the cloud resources (public cloud, private cloud, community cloud and hybrid cloud) available on the market, their delivery models (SaaS, PaaS and IaaS) and how these all fit together into your business and technology model.

Understanding the cloud model will help you determine whether cloud is appropriate in the context of your business purpose and risks. For example, in the case of public cloud, the applications and cloud-based services are positioned as utilities available to anyone who signs on.

If over the years your company has built and strengthened IT capabilities that differentiate you from competitors, migrating to the cloud can mean walking away from your success recipe and expose yourself to vulnerabilities.

Therefore, if you  are planning to migrate your on-premise computing environment to the cloud, take a long-term view of your IT environment and determine what type of applications are candidates for the cloud and which will not be transitioned until the distant future.

Ideally, you should start with applications that have low risk associated with them or those that have a business need that cannot be met using traditional computing capabilities. Once you have build greater comfort and trust in the cloud, you can then scale to include other applications.

The pain of disintegration

It is no secret that many businesses today are re-evaluating their technology infrastructure and leveraging new technologies to respond faster and be more flexible. But is cloud computing right for your business? Is speed to deploy more important to you than having systems that talk to each other?

In a world where each cloud service provider is claiming that their solution is better than the next one on the same shelf, CFOs and CIOs are grappling with the decision of which cloud service provider to go with. As a result, the company ends up doing business with more than one vendor to compensate for the shortfalls of the other system.

The problem arises when the cloud-based application from one vendor is unable to work with an application from another provider resulting in more than one version of the truth. In other cases, the company’s on-premise IT infrastructure does not allow sharing data with multiple cloud-based applications, which in turn results in finance spending time consolidating and reconciling data from disparate systems in excel.

Given that the cloud model depends on providing essentially a standardized package across the board, it is important to weigh the pros and cons of foregoing customization versus rapid implementation. Because the cloud market is projected to grow in the coming years, many IT solution providers are channeling money towards cloud-based solutions. This has resulted in some vendors withdrawing IT support on legacy ERP systems and phasing them out.

In some cases, the vendors have installed upgrades to the same solutions. The problem with these solutions is that they were originally not built with modern business requirements in mind hence they can only get you a few more years of support.

It is therefore important for CFOs and CIOs to be cognizant whether the solution was originally designed as a cloud-based solution, or it is a modified version of a solution initially designed to function in a traditional on-premise client-ownership model.

With data being found everywhere today and advanced analytics playing a critical role in supporting key decision making, delivering one version of truth has never been so important. In order to make sense of all the data at its disposal a company should focus its efforts on centralizing data management and IT policies. Having a single data repository ensures everyone is drinking from the same well for information and insights.

However, in companies where IT governance is weak the tendency is for teams to autonomously adopt cloud-based solutions that meet their individual needs. This is counter-productive to data management centralization efforts as data normally ends up spread across multiple cloud-based systems that are dis-aggregated.

Just imagine a scenario where FP&A, tax, treasury, procurement, supply chain, and other finance functions each identify and select their own cloud solution. Consolidating and analyzing relevant data from these various systems to get a big picture view of business performance in itself is a huge task to complete as that data is divided across many domains.

While each cloud-based move may look beneficial in isolation, adopted together they may increase operating expenses to a level that undermines the anticipated savings.

Control versus no control

Although cloud-based solutions offer more affordable options and more flexible payment plans than traditional software providers, the issue of data control is still a concern. Cyber criminals are getting smarter by the day,and the fact is, whether organizational data resides on the internet or offline on the company’s network, it’s never completely immune to attack.

When it comes to data security, it is imperative for CFOs and CIOs to know that the moment data is no longer in-house, the business may end up having less control over who has access to key systems and data. The fact that you have outsourced your IT systems and data control to a third party does not make your company immune to a lawsuit in the event of a breach. You therefore need to sign agreements that protect you against various types of misfortunes.

Although the cloud service provider employs a team of IT support staff to monitor and perform regular threat assessments and deploy the latest patch immediately, the organization should not relax and assume the house is in order. You need to get strong assurances from your cloud vendor that your business data is safe.

You also need to know where your data is stored, the applicable data laws, how often it is backed up and whether you are able to perform audits on the data. Other factors to consider include end of agreements for convenience. Many software vendors try to lock in client organizations for a significant period of time. This in turn makes it difficult for client organizations to change vendors without incurring costs or changing systems some way.

Thus, when negotiating an agreement with a cloud-based service provider, try by all means to ensure that you are not locked-in for lengthy periods just in case you need to change technology providers in the near future.

Don’t rush to the cloud without a clearly defined vision and road map. Engage in plenty of deliberation to ensure the new surpasses the old, sample technologies with less risk and related influences on the business and then scale the adoption.

Delivering Reliable Insights From Data Analytics

Data and analytics are becoming increasingly integral to business decisions. Organizations across all sectors are leveraging advanced real-time predictive analytics to balance intuitive decision-making and data-driven insights to monitor brand sentiment on social media, better serve their customers, streamline operations, manage risks and ultimately drive strategic performance.

Traditional business intelligence reporting tools with static charts and graphs are being replaced by interactive data visualization tools that enable business insights to be shared in a format that is easily understood by decision makers, in turn enabling better, faster operational and strategic decision-making.

Given the constantly changing business landscape driven by increased competition, macro and geopolitical risks, intense regulatory demands, complex supply chains, advanced technological changes etc. decision makers are turning to finance teams for actionable insights to help them navigate through this volatility and uncertainty.

As business unit managers increasingly rely on finance decision support for enhanced business performance, it is imperative for CFOs and their teams to ensure the performance insights they are delivering are informed and actionable. However, a 2016 survey report by KPMG revealed that 60% of the survey participants are not very confident in their data and analytics insights.

Data Quality or Quantity?

In today’s world of exponential data growth, the ability for finance to deliver reliable and actionable insights rests not on the quantity of data collected, analyzed and interpreted, but rather on the quality of that data. The starting point for any successful data analytics initiative involves clarifying why the business needs to collect a particular type of data.

One of the challenges facing many businesses today is identifying and selecting which internal and external sources of data to focus on. As a result, these companies end up investing in data warehouses full of massive amounts of useless data. To avoid being data rich and insight poor, CFOs need to understand  the role of quality in developing and managing tools, data and analytics.

Before inputting data into any analytical model, it is important to first assess the appropriateness of your data sources. Do they provide relevant and accurate data for analysis and interpretation? Instead of relying on a single source of data for analysis, you need to have the ability to blend and analyze multiple sources of data. This will help make informed decisions and drive business performance.

Further, businesses are operating in a period of rapid market changes. Market and customer data is getting outdated quickly. As a result, being agile and having the ability to quickly respond to changing market conditions has become a critical requirement for survival. The business cannot afford to sit on raw data for longer periods. Capabilities that enable data to be accessed, stored, retrieved and analysed in a timely basis should be enhanced.

Thus, in order to provide business users with access to real-time and near-time operational and financial data, the organization should focus on reducing data latency. Reducing data latency allows finance teams to run ad-hoc reports to answer specific business questions which in turn enables decision makers to make important decisions more quickly.

In the event that finance provides business insights or recommendations based on inaccurate data, analysis and predictions, this will quickly erode, if not extinguish, business trust and shake the confidence of those decision makers who rely on these predictions to make informed decisions.

As data volumes increase and new uses emerge, the challenge will only increase. It is therefore critical for finance to put in place robust data governance structures that assess and evaluate the accuracy of data analytics inputs and outputs.

Work with business partners to set objectives up front

Churning out performance reports that do not influence decision making is a waste of time yet that is what most finance teams are spending their time doing. It is not always the case that the numbers that make sense to finance will also make sense to business partners.

The biggest problem in the majority of these cases is lack of understanding by finance of the business objectives. Instead of collaborating with the business to develop a better understanding of their operations and how performance should be measured and reported, many finance analytics teams are working in their own silos without truly linking their activities back to business outcomes.

To improve finance’s reporting outcomes, the function should take stock of the reports it produces per month, quarter or annually. Then evaluate the nature and purpose of each report produced and what key decisions it helps to drive. It is not about the quantity of reports that matters, but rather the quality of the reports.

Business partners need to be engaged at the start of the process and throughout the analytics process. They need to be involved as finance explores the data and develop insights to ensure that when the modeling is complete, the results make sense from a business perspective

By working with business partners and setting objectives up front, finance will be able to focus its efforts and resources on value-add reports that tell a better business story. Further, the function will be able to assess and monitor the effectiveness of its data models in supporting business decisions

Simplify interconnected analytics

With so many variables impacting business performance the organization cannot continue to rely on gut instinct to make better decisions. The organization has no choice but to use data to drive insights. As a result, organizations are relying on a number of interconnected analytical models to predict and visualize future performance.

However, given that one variable might have multiple effects, it is important for the business to understand how changes in one variable will affect all the models that use that variable, rather than just one individual model. By maintaining a meta-model, the organization would be able to visualize and control how different analytical models are linked.

It also helps ensure consistency in how data is used across different analytical models. Ultimately, decision makers will be able to prioritize projects with the greatest potential of delivering the highest value to the business.

Build a data analytics culture

Advanced data analytics is a growing field and as such competition for talent among organizations is high. Due to their traditional professional training, many accounting and finance professionals lack the necessary data and analytics skills.

More over, decision makers not knowing enough about analytics are reluctant to adopt their use. Because of cognitive bias, it is human nature to subconsciously feel that their successful decisions in the past justify a continued use of old sources of data and insight. What we tend to forget is that what got us here won’t get us there, hence the need to learn, relearn and unlearn old habits.

To move forward, the organization should focus on overcoming cognitive biases developed over the years, and closing this skills gap and develop training and development programs that can help achieve the desired outcomes. Using advanced analytics to generate trusted insights requires an understanding of the various analytics methodologies, their rigor and applicability.

It’s difficult to have people understand if they don’t have the technical capabilities. However, building a data analytics culture does not imply that the organization should focus on developing data science skills alone. You also need to develop analytics translators.

These are individuals who are able apply their domain expertise in your industry or function, using a deep understanding of the drivers, processes, and metrics of the business to better leverage the data and turn it into reliable insights and concrete measurable actions.

Building a data analytics culture that promotes making decisions based on data-driven insights is a continuous endeavour that spans the data analytics life cycle from data through to insights and ultimately to generating value. Successful use cases can be used to further drive the culture across the organization.

Finance Value Creation Goes Beyond Running the Financial Side of the Business

Advances in technology are helping the finance function reduce operational costs, streamline processes and improve productivity. Thanks to automation, tasks that used to take months to complete are being completed in weeks and those that took weeks to accomplish are getting done in days.

For instance, advanced analytics and robotic process automation are shortening the timelines finance teams require to produce a forecast, perform account reconciliations or close the books.

Technology is enabling more to be done with less and the trend is not expected to go away anytime time soon. A couple of years go the staff size of the finance function was big. CFOs were happy to have separate staff handle AP, AR, Payroll, Bank Reconciliations, Management Accounts etc.

Today the size of the finance function has shrunk significantly. Thanks to shared services centers, outsourcing and process automation. Robots have taken over rules-based, repetitive and transactional tasks that were once performed by humans.

Machine learning algorithms are already replicating highly analytical tasks, analyzing large data sets and churning out insights in real time to support decision making. Although the adoption of machine learning and/or AI tools is not yet widespread it’s only a matter of time before the technology becomes a part of our everyday life.

Implications for finance professionals

In order to stay current and move ahead finance teams need to evolve and adapt to the changing environment.

Some of the skills we have acquired in the past and relied on to get us to the next level are no longer sufficient in the current and future environment. As a result, we have to develop a continuous learning mindset. Learn new ways of doing things, unlearn the old habits and continue to relearn.

For instance, being detailed oriented alone used to be sufficient. Not anymore. Today finance professionals are expected to be commercially aware and broad in their thinking.

Decision makers are searching for collaborative business partners who have a deeper understanding of the operational and strategic challenges facing the business. Problem solvers able to enrich the business with insightful analysis and capable of recommending the right solutions. Team players who understand the markets in which the business operates, its products, competitor business and the drivers of performance as a whole.

Build a big picture perspective of the business

If finance is to be recognized as a valuable strategic business partner we need to build a big picture perspective of the business and be able to recognize the role and contribution of each function, individual, process and activity in achieving the objectives of the company. Knowing debits and credits alone will not take us far.

With the business environment constantly changing, we need to shift our focus from historical analysis to forward looking.

Many at times we spend a lot of time producing variance analysis reports that do not drive the right conclusions and actions out of the insights. For example, simply commenting sales for the month are up 5% or operational costs are down by $1MM is not insightful enough to support key decision making.

We need to understand what the numbers mean and the real drivers behind them. For example, did sales increase because of new customers, price increases, improved demand, enhanced marketing efforts, new product lines, entry into new markets, product bundling?

CFOs and their teams need to be doing more than running the financial side of the business – recording revenues and costs. Instead, they should help the business adapt and make insight-driven strategic turns without throwing off alignment between broad strategy and day-to-day execution.

Part of building a bigger picture perspective of the business requires a finance function that is more flexible and collaborative than in the past and knows how to manage its internal working relationships. A finance function that is capable of partnering with operations instead of always pointing out what operations is always doing wrong.

Spending the majority of our time behind our desks preparing financial statements and regulatory compliance reports will not help us become more strategic and commercially aware. We need to get interested in the affairs of the business. Avail ourselves for projects that take us out of our comfort zones. Regularly interact with colleagues outside finance to get a deeper understanding of the drivers of the business, what projects the teams are working on, how they align with the broader strategy, the risks and challenges they are facing and recommend solutions.

If you are used to sitting behind a computer all day, leaving your desk to engage with the business is initially unnerving but the more you do it the more confidence you gather. Evolving priorities require a finance professional with a well-honed ability to communicate, build trust and maintain collaborative relationships with the rest of the business.

Driving business growth versus cost cutting

Too often finance teams are focused on cost cutting activities in order to improve the bottom line instead of identifying alternative ways of driving up top line growth. Today’s global companies are operating in a world of complex supply chains, intense competition, shifting customer expectations, increased regulatory demands, emerging operating models and exposure to significant business risk. Cost reduction alone will not help the business sustain its competitive relevance in this world.

The problem with many cost optimization programmes is that they fail to deliver the expected outcomes. It is not about how much you cut the costs, rather where you channel resources to differentiate, stimulate growth and achieve strategic objectives. Finance needs to look beyond narrowly defined functional or organizational structures when identifying candidates for cost cutting and take a holistic, end-to-end view of costs across the whole organization. This will help separate the strategically-aligned good costs from the non-essential bad costs.

With the adoption of big data and analytical tools becoming mainstream, it’s not too late for finance to play catch up. Transitioning to data analytics starts with putting in place a well-structured data and information management foundation and then combining technology with the right analytics and expertise.

Only then can finance transform data into true, actionable business intelligence (on products, customers, markets, process efficiencies, supply chain, competition and business risk) that drives better informed decision making and business growth.

Traditional financial reporting does not provide the actionable information the business needs to make more informed strategic decisions. Today, the business needs to leverage both structured data (which resides in enterprise databases) and unstructured data (email, social media, internet) including analytics to generate insightful analysis that can help drive operational and strategic performance.

For example, finance should be able to collaborate with the marketing function, analyze and interpret customer data to understand customer journeys, and help the function design and implement better customer/brand strategies and responses.

Finance cannot expect to drive business growth by continuously doing the same things. It’s not about this is how we have always done things here. Ask yourselves: what is the right way of doing things in today’s disruptive world and what are the expectations of the business?

Risk-Based Decision Making

Risk is an inherent element of the business. Given that every business activity or decision has a risk consequence, a business should not expect to operate and progress by making risk an afterthought.

Technological advances, evolving customer expectations, volatile markets, global political instabilities, shifting demographics and natural disasters are impacting business models and forcing organizations in every sector to rethink the way they operate.

Left unaddressed, these forces of change have a huge potential of derailing the strategic plan of the business and accelerate the organization towards failure. In order to survive in this VUCA world, the business should make a paradigm shift from reactive to proactive mode. This helps prepare and plan for the future rather than respond to it  after it has arrived.

The challenge today in many companies is that risk-based decision making is an afterthought. Only after going through a turmoil do people start asking where is risk management and why did the risk experts fail to anticipate the events in advance. In financial services companies where there are dedicated risk management teams, it is easier to point the finger of blame.

However, not all companies have a dedicated risk management function.

Risk is everyone’s responsibility

What exactly is the meaning of this statement?

Is making risk everyone’s responsibility part and parcel of risk culture?

What is the best approach of making everyone embrace risk-based decision making?

If some employees within the organization have never received training or guidance towards risk decision making, are they still held responsible?

By making risk everyone’s responsibility are we increasing confusion and blurring the lines between accountability and responsibility?

In the event that a business fails as a result of activities or decisions that could have been avoided, who is held accountable and responsible?

The CFO as the champion of risk-based decision making

In companies lacking a dedicated risk management function with a CRO at the helm, overseeing of risk management is normally under the purview of the CFO. The CFO is better positioned to champion meaningful risk conversations across the organization and drive better decision making processes.

Many people connect risk management with the negatives, hence the desire to avoid risk at all costs. Risk-based decision making is not about managing or avoiding risk. Effective risk management involves looking at the upside of risk and making informed risk decisions that help the organization achieve its stated objectives.

Driving a risk-based decision making culture therefore goes beyond lip service. It is not about merely saying everyone is responsible for risk. It is about raising risk management awareness and developing risk competencies across all staff levels through training, discussion and sharing of risk information.

Risk doesn’t start to happen once the strategy has been set. With the world always changing, risk is a constant present both before and after strategy setting. That is why it is important to understand the risks of your strategy including risks to the execution of the strategy.

Once every employee has a better understanding of risk, how it applies to their individual area of responsibility and align with the overall strategy of the business, risk-based decision making ultimately becomes part of the culture.

Given that finance has a unique end-to-end view of an organization the CFO plays a critical role in helping business partners understand the strategic plan of the business, identify, quantify, and mitigate any risk that affects or is inherent in the company’s business strategy, strategic objectives, and strategy execution.

The CFO is capable of leading the risk conversation and ensuring that the focus is more on taking advantage of opportunities and achieving strategic objectives and less on the downside, in turn ensuring that more value is created than is preserved.

Although the CFO has the bird’s eye view of the organization and an understanding of where the risks are coming from including the mitigation strategies, s/he cannot do it alone. Risk management requires an holistic approach across the company, and different risks are the problem of the function that they most impact.

It is therefore imperative that the CFO co-ordinates efforts and works alongside other C-suite executives to identify and assess emerging risks and best understand how to mitigate them.

Having the ability to partner with the business and speak their language is key to leading and engaging C-suite executives in meaningful risk conversations that help mitigate risks to the execution of the strategy.

Relationship between risk and performance

Risk conversations have to keep pace with the complexity of the business. Elevate the conversation to include a discussion around sources of potential disruption, their impact on the day-to-day execution of your strategy and the creation of value, and what your organization should do to increase the possibility of success.

Risk and performance are two sides of the same coin. A business cannot manage risk in isolation of performance. At the same time, the business cannot manage performance without consideration of risk. It is therefore imperative to integrate risk into your strategy and performance management decision making processes.

One way of embedding risk in the strategic planning process involves connecting your risk reporting and your strategy execution. Unfortunately, companies spend a significant amount of time compiling risk registers that do not inform strategic decision making. I have come across risk registers that list hundreds of risk events with very few of the events connected to the achievement of strategic objectives.

Risk assessment exercises should not be performed in isolation to strategic decision making. It is therefore important for the team responsible for performing risk assessments and compiling risk reports to understand what the strategy of the organization is, including what the strategy colleagues are doing on a day-to-day basis.

Not only will this help understand the business environment but also key assumptions. Instead of churning out the same report with the same list of risks on a monthly or quarterly basis, your report should be a reflection of key risk management changes overtime and help influence business decisions.

Conclusion

Risk-based decision making should be integrated into the overall management system of the organization. Given the constantly changing business environment, the business should always be ready for the unthinkable.

Business leaders should therefore focus on continuously improving the organization’s risk management framework and employee risk competencies to ensure both are capable of withstanding the test of times.

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