A Practical Approach to Using Artificial Intelligence for CFOs – Part III

Part III Where to Invest in AI, How to Measure the Financial Impact and Select Projects

If you haven’t had a chance to read Part I – Leveraging AI in the CFO Suite and Part II – The Benefits of AI and What You Will Need to Make It a Success yet, please do so before continuing on.

Where the CFO can invest in AI to create a positive impact.

Now that we know what AI is and its benefits for finance, how can a CFO develop a plan around how to apply it in their business? To borrow a phrase from Stephen Covey, Begin with the end in mind. Visualize where you want to be and work backwards, considering what is preventing you from realizing your future today. This step will help prevent you from building AI around current systems and processes that are encumbering your digital transformation.

The next step in identifying where to invest in AI is to summarize the outputs your team creates for the company’s stakeholders. Define output as anything your team delivers to a stakeholder that they use. Examples of outputs include; invoices to customers, financial reports to management, pay checks/stubs to employees, borrowing base to the bank, work papers to the auditor, KPIs to the Board of Directors, credit information requests from vendors, accounts receivable aging report to the credit department, new project investment analysis for the CEO, productivity reports for the COO, etc.

​To be highly effective the implementation of AI is a multi-discipline exercise that will require resources from many parts of the business. A good example of this can be illustrated when using AI to assist in auto invoicing and payment applications. The sales department, manufacturing and shipping departments will provide data that allows these two functions to operate autonomously. The data from these departments will be incorporated into algorithms that function to determine how much, when and to whom to send an invoice; and, how to apply payments when the bank reports them as received.

​ Below are some important criteria to think about when selecting where to apply AI:

​ 1. Stakeholder focused; Serve your most important constituents first – Customers, Vendors, Employees (including management) and Directors

​ 2. Determine where AI has the largest potential impact

  • ​ Where improvements speed, accuracy and/or volume have significant impact
  • ​ Revenue generation
  • ​ Cost savings

 3. Understand the complexity of AI application.

  • ​ Data requirements
  • ​ System requirements
  • ​ Process requirements

Measuring the (financial) benefits of an investment in AI for a business

​Just like any other business case development, it is important to measure the benefits of investing in AI technology. These benefits are either tangible or intangible. Tangible benefits are those that can easily be quantified, you can put a value against. On the other hand, intangible benefits are difficult to quantify, but expected to occur as a result of the investment.

​So, is one set of benefits better than the other? Our answer is no. Both tangible and intangible benefits are important. But only tangible benefits can be used to calculate the financial return of AI investment. This can be looked at from the perspective of additional savings or income generated as a result of AI.

​However, the challenge for many CFOs when it comes to implementing new technological solutions for their companies is clearly defining how success will be measured and quantifying the ROI.

​Since the adoption of AI technologies is not yet widespread but still in the pilot phase we suggest CFOs take a simplified approach to calculating the value of AI projects and follow these steps:

1. Identify a specific problem. Although AI is promising to be a huge game changer for your business, AI is not the answer to all your business problems. Don’t fall into the trap of investing in AI for the sake of investing, or worse, succumb to “herd mentality”. To successfully benefit from AI, first identify a specific problem that may be solved though AI. The AI Identification Worksheet discussed earlier can help you here.

​2. Define the outcomes. What will success look like in your company? What is the result you are targeting, and can this be defined in monetary or percentage values?

​3. Measure the results. After clearly defining the outcomes, the next step is estimating the performance of AI against your baseline measurements or outcomes. The spread between your expected performance and the baseline provides with the expected benefits of the proposed AI solution. Put in place a system to measure the actual results

4. Identify and calculate the costs (investment) incurred in delivering the results. Here you need to consider things like initial investment costs, ongoing support costs and the impact on cash flow.

​5. Calculate the return on investment (ROI). This final step involves calculating the ratio of money gained (or lost) relative to the amount of money invested (the total cost). If the projected ROI meets your hurdle rate, you’ll move ahead with the project. Set up to schedule to review the actual performance vs. the expected results to develop the feedback loop to improve your investment model.

Below is an example of calculating the ROI using the steps above:

1. Identifying a specific problem: ABC Company P2P process is highly manual and incurs annual labor costs of $300,000. During a cost and profitability analysis exercise, Brenda, the company’s CFO established that due to high error rates and rework as a result of these manual processes, the company is incurring additional overhead costs of $100,000 per annum. She remembered that from one of the CFO conferences she attended, the speaker spoke about AI and the technologies potential to drive process efficiencies. She proposes to the Board that the company invests in AI, specifically for improving P2P and test the concept.

​2. Defining the outcomes: After a series of meetings with various functional leaders, stakeholders and consideration of various factors, Brenda presents to the board her findings. By piloting AI for the P2P function, the company stands to achieve annual labor cost reduction of 10% and overhead reduction of 15%. The Board approves the project, expecting savings of $45,000 excluding the potential benefits from higher accuracy and improved vendor relations.

After conducting a thorough market analysis of the suitable AI solutions available, with the support of the Board, Brenda engaged the services of FinancePro, a cloud-based software provider specializing in AI software for the CFO office.

​3. Measuring the results: After conducting a thorough market analysis of the suitable AI solutions available, with the support of the Board, Brenda engaged the services of FinancePro, a cloud-based software provider specializing in AI software for the CFO office. It is now 12 months since the pilot project went live and the Board wants to know if the company managed to achieve the 10% labor cost and 15% overhead cost reduction targets. Brenda compares last years’ costs against current years’ costs and her targets of 10% and 15% cost reductions have been met. In year 2, the company estimated benefits of $60,000.

4. Identify and calculate the costs (investment) incurred in delivering the results: Although the cost reduction targets have been met, Brenda believes that these figures evaluated in isolation are not helpful for evaluating the overall investment. She therefore decides to identify and calculate the total cost ABC Company incurred in meeting these targets. She takes into account all initial costs such as license fees of the new AI software, implementation costs and employee training costs for the full amount of $30,000. She also calculates ongoing costs such as maintenance and support, communications and data storage costs which amounted to $20,000.

​5. Calculate the return on investment (ROI): This is calculated as follows

​ • She uses a cash on cash analysis to determine the 2-year ROI:

​In this example, ROI is calculated by taking the total financial benefits ($105,000) subtracting the total financial costs ($70,000), dividing by the total financial costs then multiplying by 100 to arrive at the ROI (50%). This calculation is over a 2-year period but can be applied on an annual basis as well. We have developed a simple model to help you summarize and compare your AI projects. Use it to:

  1. ​ Analyze and select AI projects,
  2. ​ Get your executive team familiar with the financial benefits of AI and,
  3. ​ As a performance measurement and improvement tool once an AI project has started.

Click here to get your AI ROI Calculation model.

Next Up: Part IV Getting After It: Take the Next Step and Make Your Investment in AI

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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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