3 Reasons Why Finance Should Adopt Lean Principles and Tools

There is a lot of discussion on what the Finance function must do in order to become an enabler to the business and remain relevant in today’s increasingly complex business environment.

From business partnering to leveraging new technologies, streamlining processes, retraining and coaching Finance teams to focus on the higher-value-add activities, and dynamically shaping the business model to ensure the company remains market relevant now and in the future – the list is endless.

All these key enablers fall into either one of these categories. People, technology or systems and processes. All three are essential for the successful transformation of the Finance function into a value-add business partner. It is no secret that the ongoing technological transformation is changing the role of Finance for the better.

However, even if an organization manages to acquire and implement state of the art technology, the full potential of that new technology will not be reached as long as the other two vital ingredients are missing from the equation.

Talented, motivated, empowered and committed people are the driving force behind any successful transformation efforts or the adoption of a new business model. At the same time, well-defined and standardized processes are needed to maximize value creation and ensure the business is not wasting time and resources on non value-adding tasks.

As business partners increasingly call on Finance teams to help them make better operational and strategic decisions and ultimately create value, it is imperative that Finance teams get the basics right, reduce the time spent on low value adding activities and channel resources to tasks with the potential of improving productivity gains.

Taking a Lean approach and applying its principles and tools can help CFOs optimize Finance processes, reduce and/or eliminate waste, free up human resources from non-value adding work, and redirect them to tasks that are more engaging and create more value for both internal and external customers.

Lean Makes Areas of Waste Visible

Although the concept of Lean has its roots in the manufacturing sector, its principles are also equally applicable in the service sector with positive results. Lean is a process improvement technique used to create customer value, identify value-added activities, simplify process flows and eliminate waste that does not create value.

Today, a number of Finance functions are burdened with inefficient Procure-to-Pay, Order-to-Cash, Record-to- Report, and FP&A processes thereby hindering their progress of becoming an effective business partner.

By applying Lean thinking to the Finance function, CFOs are able to identify and eliminate sources of waste (Transport, Inventory, Motion, Waiting, Over-production, Over-processing, Defects and Skills) and streamline processes.

Taking Procure-to-Pay as an example and applying Lean thinking to the process, the eight wastes of Lean are:

  1. Transport: This is associated with the movement of people, products and information across the organization. Sometimes the handling or movement is too much resulting in wasted efforts and energy. Applied to Finance, an example would be the excessive number of manual approvals or decision points a supplier invoice has to go through before it gets paid, some of which are unnecessary but a duplication of efforts.
  2. Inventory: This is excess Work in Progress that mounds up between work stations, which is a result of imbalanced demand and supply. An example of this are invoice backlogs pending processing as a result of incomplete or inaccurate supporting documentation or absent invoice payment authorizers.
  3. Motion: Unnecessary movements by people which do not add value. A case in point is movement of people between departments chasing for invoice approvals or missing supplier information.
  4. Waiting: Time wasted while waiting for parts, information, instructions or equipment. Applied to P2P, an example would be the procurement administrator sitting idle because he/she is waiting for invoices from other departments, or multiple invoices piling up in a tray waiting to be approved by a department head delaying the next step in a process.
  5. Over-production: This relates to producing, processing or making more than what is immediately required. An example of over-production within the context of P2P is the creation of vendor reports that are not used or at worst, considered useless by business partners.
  6. Over-processing: Excessive or undue process steps when a simpler approach suffices. For example, repetition of data required on the same form when on-boarding a new supplier to the system. The resulting effect is that more time is unnecessarily spent on vendor creation as opposed to say spend analytics in order to generate useful supplier insights.
  7. Defects: Rework, scrap or incorrect documentation that requires costly remediation. Defects common in a P2P process include mixing up backing documentation of different supplier invoices, incorrect entry of invoice amount resulting in payment errors and wasted efforts trying to recover the overpayment or rectify the underpayment.
  8. Skills: Underutilizing employees’ knowledge, skills and abilities or delegating tasks to employees with limited training. An example is using a highly-skilled and experienced professional to perform procurement tasks that can easily be automated or are considered entry-level requiring minor formal training.

Waste exists everywhere in the organization in various forms. By highlighting areas of inefficiencies CFOs and their teams are able to focus on potential improvement opportunities.

Finance Will Get a Better Understanding of Financial & Operational Processes

Not only will implementing Lean thinking help CFOs highlight areas of waste within the value chain, it also helps them develop a stronger understanding of existing business processes and their cause-and-effect relationships.

So often, companies are fixated on improving processes without first developing a better understanding of where in the process is value created or destroyed. Because processes flow across functions and departments, few people involved have comprehensive view of the end-to-end workflow, and interdependencies are often concealed.

This can result in costly inefficiencies and high error rates. A detailed analysis of the current state often uncovers significant opportunities to improve performance.

The Lean approach helps Finance organizations carry out a detailed analysis and evaluation of all the key activities and decision points involved in a process and know exactly which activity is value-adding and which is non value-adding. This in turn helps to conduct a root cause analysis for the areas of inefficiencies, challenge current ways of thinking, and prioritize improvement opportunities.

Conducting a root cause analysis is key to understanding why there are problems in the first place, so that the improvement process can focus on fixing the root causes and not the symptoms of waste. Because multiple linkages exist between the multiple stakeholders of the business, root cause analysis also helps identify possible primary and secondary causes of problems and how they are all interrelated.

Lean Embeds a Culture of Continuous Improvement in the Finance Function

The Lean approach is a continuous process improvement technique not solely focused on implementing once-off improvement initiatives and tools. Rather, it is more about driving sustainable results by building capabilities and an effective continuous improvement culture.

To achieve its business partnering objectives, the Finance function should develop a culture of learning and improvement so that employees are receptive and supportive of positive changes.

As the role of Finance continues to evolve, it is therefore imperative that Finance teams receive ongoing relevant training and coaching to ensure they are equipped with the relevant skills essential to make the Finance function better.

Transformation is a journey. Do not expect immediate results or perfection. It may take a while for positive results to materialize but what is critical is for the entire team to be positive in its approach and exhibit appropriate behaviours that signify a desire to continuously learn and improve.

One of the challenges often faced by team leaders when presented with new concepts and tools is identifying and selecting the right one. Faced with this confusion, organizations end up trying to implement all the concepts and tools in one go resulting in sub-optimal outcomes. You do not need to apply all Lean principles in your organization as not every tool is relevant to your company.

Instead, evaluate which principle and tool will be most appropriate to your business, and pilot your new methods and approach to a specific process, function or geography before implementing it enterprise-wide.

A majority of waste is left unidentified or dealt with in many Finance organizations because no one is accountable and responsible for process optimization.

By implementing Lean principles and tools, CFOs would be able to establish KPIs that are linked to value creation and promote a culture which holds employees accountable for continuous improvement, removing any inertia which may exist.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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