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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The Art of Risk Management

This is the title of the article by BCG published a few years ago. The article discusses the principles that should govern the approach to risk management by companies of all shapes and sizes.

The authors make several points with which I agree. Here are some excerpts:

  • Risk management is essential in today’s volatile economy. In a continuously changing economic environment, companies cannot assume a stable risk landscape.
  • Stop thinking of risk management as primarily a regulatory issue. Embed risk management in the mindset of the broader organization.
  • Risk management is a value-creating activity that is an essential part of the strategic conversation inside the company. The goal of that discussion should not be to eliminate or minimize risk but to use it to create a competitive advantage.
  • Risk management starts at the top. The organization needs to demonstrate that it has made risk management a high priority and an integral part of the decision-making process by appointing a dedicated risk leader who reports back frequently to the CEO and the board to discuss the latest trends and any changes in the company’s risk scenarios.
  • Risk cannot be managed from an ivory tower. Risk Management should not exist in isolation from the rest of the organization, with an insufficiently granular understanding of the actual business-specific risks the company faces. To avoid this outcome, integrate risk management into the company’s entire routine management processes, including planning, capital allocation, controlling, and reporting.
    • Understand the scope of the risks the company faces.
    • Plan for how the company will manage those risks.
    • Act to mitigate the risks or take advantage of strategic opportunities.
  • Avoid relying on black boxes. Although sometimes appropriate, over-reliance on complex metrics or models can muddy the risk management process, turning it from a transparent management activity into a frustrating black box. The appropriate level of complexity is company-specific and depends on the industry, business model, availability of data, level of experience, and mandatory legal requirements.
  • Align risk management with a company’s overall business strategy. Companies need to identify all relevant risks – not just those that can be easily quantified. Some of the relevant risks for a company may be those that are qualitative and especially difficult to quantify.
  • Risk management is more than a policy; it is a culture. The objective of a company’s risk-management system should be not only to enforce new policies but also to create a risk-aware culture that addresses risks proactively, not reactively, and manages them to create new sources of competitive advantage.
  • Effective risk management depends on the free flow of information throughout the organization. Unless employees at all levels of the organization are actively involved in the risk management process, it will be difficult to maintain the unrestricted flow of information. This can result in the most important data getting buried in one part of the organization unavailable to other parts of the business.
  • Risk management deals with uncertain futures. As a result, the goal should not be to develop precise metrics or future outcomes but to strive for a general understanding of the probabilities and potential impact of various trends or scenarios on business performance and enable decision-makers to confront the uncertain nature of risk and act accordingly.
  • Risk management is never about finding “the answer.” Rather, it is about continually refining the organization’s assumptions about the future and its understanding of the implications of those assumptions for the company’s business. Assumptions about risk often change quickly, so the relevant parameters, probabilities, impacts, and correlations should be revisited frequently.
  • It is possible to prepare for unknown risks by building an organization that so excels at crisis management that it is resilient even in situations in which it is blindsided by unprecedented challenges. For example, through developing the ability to detect, capture, and exploit information patterns as well as to think outside existing frameworks and risk landscapes.
  • Avoid the downside, but don’t forget the upside. Companies should use risk management also to identify new opportunities and to exploit them systematically. For example, scenario planning should be used to define not only worst-case scenarios but also best-case scenarios. Think in advance about how a company can make the best use of the latest market developments and trends and ultimately make the right decisions.

I enjoyed reading the article and highly recommend it.

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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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