categoryPerformance Management

The Finance Function of the Future

McKinsey has published an interesting piece that merits the attention of finance leaders and professionals.

Their Finance 2030: Four Imperatives for the Next Decade include:

  1. Look beyond transactional activities
  2. Help finance lead in data
  3. Improve decision-making
  4. Reimagine the finance operating model with new capabilities

Highlights consist of these key points:

  • Leading finance departments are guardians of enterprise value creation, demonstrating stewardship of their own spend by lowering absolute costs and shifting work towards more value-added activities.
  • Finance leaders further differentiate themselves by spending a greater portion of their time on value-added activities, such as financial planning and analysis (FP&A), strategic planning, treasury, operational-risk management, and policy setting.
  • Achieving the next frontier in finance efficiency and effectiveness will likely require finance executives to shift their thinking from the priorities of the past.
  • Finance staff’s time is valuable, and best devoted to analyses that drive actual business performance.
  • Equip staff in critical roles with the necessary level of experience, leadership mind-sets, and authority to influence the business.
  • Finance departments need a clearly defined master data-management strategy to guide the collection, storage, and interrogation of the rising volume of data needed to perform the types of analytics the business requires.
  • Owing to its central role, the finance function is uniquely positioned to help define the master data strategy for the enterprise.
  • Beyond providing analytical insights, the finance department is also responsible for framing discussions on company performance and the actions needed to improve it.
  • Reimagine the finance operating model with new capabilities. This requires not only a different way of organizing how work gets done, but also a different type of finance professional.
  • Embed digital skills across the finance organization. These capabilities may include programing bot algorithms, using analytics software, or learning how to translate business data into actionable insights
  • Develop a core of business-savvy finance leaders with the stature to engage company leaders as peers.

These are all good points. My thoughts:

  • Over the last decade, finance has progressed significantly in terms of delivering value-added activities. Much of this progress can be attributed to advancements in automation and analytical technologies which are reducing time spent on performing routine, transactional activities. There is still a lot of progress to be made to improve the time spent on FP&A and business partnering in laggard organizations.
  • Achieving the next frontier in finance efficiency is very important. However, when we talk of efficiency it’s imperative to clarify at what. Many organizations have succumbed to the seduction of efficiency resulting in efficiency becoming an end in itself. Efficiency, when it is understood correctly as the best possible use of scarce resources to achieve a valued end, is undoubtedly important.
  • I agree entirely with the need to make sure finance devotes more time to analyses that impacts actual business performance. More often, finance teams are wasting time and resources producing reports that serve little to no purpose at all. Decision makers want to understand the key drivers of business performance and how these can be influenced to achieve enterprise objectives, but they are bombarded with more analyses on what happened, and less on what could happen, how, when and why. Reporting is about communicating. Rather than communicate what you want to say, tell decision makers what they need to know.
  • Data types, data sources and the speed at which data is generated are all continuously increasing at alarming levels; therefore a more effective and efficient enterprise data management strategy is critical. Build a central data repository (to make sure there is one version of the truth) where data is securely stored and can be updated, accessed, or shared in real-time to perform the types of analytics the business requires. Erroneous data is practically useless and even possibly harmful to the business because if management teams are making critical decisions based on inaccurate data, the outcomes could be costly.
  • The idea of framing discussions on company performance and the actions needed to improve it, is challenging for many finance professionals. Our training has taught us to solve problems using a logical approach or deductive thinking. The problem with this process is that there is just one possible solution or a limited set of correct solutions, and does not take full advantage of the creativity within us. We need to embrace both deductive and inductive reasoning, start asking questions on company performance that have never been asked before, challenge rigid rules and tired frameworks, and consider risks worth taking that we would otherwise not take when thinking deductively.
  • I agree entirely with the need to reimagine the finance operating model with new capabilities. To achieve this, finance leaders need to cultivate a culture of continuous improvement. A culture that is always questioning the status quo, and promotes testing of new processes, tools and operating models, including learning from mistakes. Further, traditional accounting and finance skill sets alone are no longer sufficient today to build an effective value-adding finance organization. Instead, cross pollination of individuals with varying backgrounds is necessary.
  • The ideas of embedding digital skills across the finance organization and building business-savvy finance leaders are both positive ones. Nevertheless, development of other soft skills such as collaboration, communication, problem-solving, critical-thinking, adaptability, emotional intelligence and persuasion should not be neglected.

New Report on Finance Transformation From AICPA & CIMA and KPMG

In the past years, finance has been undergoing significant changes in order to streamline its operations and free up more time to partner with the business and support key decision-making processes that drive enterprise performance.

Sadly, not all finance transformation initiatives are achieving the expected outcomes or return on investment outlined in their business cases.

A number of theories are usually cited for these failures, and they include – talent struggles, thinking transformation is a one-time project, concentrating too much on cost cutting, focusing too much on customer satisfaction, lack of strategic alignment, inability to leverage technology in the right way, and insufficient leadership sponsorship.

But how many of these causes are real? We must be careful and not run the risk of focusing more on symptoms, critical though they may be, without getting to the underlying causes of breakdowns in transformation initiatives.

Catastrophic finance transformation initiatives can be prevented, but only if we start thinking about transformation in strikingly new ways.

For starters, this means putting aside the widely-held notion that finance transformation is all about new technologies and systems improvement, and start looking closely at the real causes of failure – the people who lead and implement the change.

People play a pivotal role in the success or failure of any business or organizational transformation initiative. But in an increasingly digital world, are organizations neglecting the people perspective as they work to transform their businesses?

Finance Transformation: The Human Perspective, a new publication from AICPA & CIMA and KPMG seeks to provide an answer to this important question and has some interesting content on why it’s time for finance to invest in its people. Here are some useful excerpts with my comments:

  • Under-investment in people can spell disaster for transformation programmes and the wider organization. As much as employees are responsible for preparing themselves for a new world of learning and work in which people will interact ever more closely with machines, employers should not take the back seat and relax. In fact, finance leaders should take charge and start now to envision what the future finance function looks like, the talent and capabilities that would be required to succeed in this brave new world, and come up with a robust action plan to close any gaps, and be future-ready. Unfortunately, most employers are involved in more talk and less action about the organization’s future talent needs, and it’s time to flip the scale upside down.
  • The key to success is developing the digital, technical and people skills that will bring out the best in the technology, maximizing insight, influence and impact. Machines cannot do everything. In order to achieve improved productivity, a range of human skills in the workplace, from technological expertise to important social, out-of-the box thinking, problem solving and emotional capabilities are also required. Therefore, train your teams to think of new digital tools as team members rather than as competitive threats.
  • Finance professionals must commit to lifelong learning and upskilling, so they can keep pace in this ever-changing business ecosystem. The authors are spot-on. Placing continued trust in the skills, capabilities, habits and behaviors we developed during our professional training to cushion us from this ongoing change is ill-advisable and quickly makes us irrelevant.
  • It’s people not robots, who are the key to better insights and analysis. Simply buying new technology doesn’t help you to truly transform. Technology is an enabler of change, and can be used both for good and bad. The type and quality of data that goes through machine analysis ultimately determines the quality of insights, recommendations and impact generated. Garbage In, Garbage Out. Hence the need to train people in business, data governance and translation skills so that they can monitor and understand where and how these technologies are deployed across the organization. Also, if your team is not equipped to use the new tools to perform their jobs better, then it doesn’t matter how shiny the new tool is because an opportunity to create value is immediately lost.
  • While advances like AI promise to change the way we work, it is easy to forget that new technologies are driven by human responses to a changing environment. Although certain old roles are being eliminated and new ones created because of AI, the goal should be to augment human and technology capabilities, rather than reduce the size of your workforce. Identify and differentiate which tasks humans and machines are best suited for. For example, in the context of prediction, humans and machines both have identifiable strengths and weaknesses, and it’s important to understand the extent of these otherwise your organization’s analytics and AI investments will fail to deliver the desired outcomes.
  • The ability to learn, evolve, think differently and understand quickly is just as important for individuals as it is for business. In today’s ever-changing environment the ability to learn, unlearn and relearn is going to be a key currency for finance professionals to hold. Allowing inertia to creep in and deciding to stick with the tried and tested approaches definitely hampers innovation and change.
  • As old systems and processes are superseded by new ways of working, we must learn to leave our legacy mindsets in the past. Finance transformation is not a series of projects, it is a change in the mindset of the organization. Thriving in today’s new world of learning and work requires organizations to adapt its workforce skills and ways of working. This means embracing a growth mindset rather than a fixed mindset. That which made the company successful in the past is no longer valued in the same way today. Understand that the rules of the game are continuously changing and thus you need to be adaptive.
  • Leaders have many roles to play; introducing and communicating the need for change, acting as a change champion and enrolling employees in idea generation. Efficient and effective change management is a result of leaders taking action rather than doing more lip service. Most leaders create playbooks to guide their managerial action, and sometimes as much as the world changes they firmly hold on to those playbooks. Rather than respond to their challenges and mistakes, or earnestly learn from the problems of their competitors, they continue unhampered in their quest for certainty, stability, and conformity. As a leader today, are you relying entirely on preconceived fixed notions about your organization’s talent needs while ignoring or rejecting any contrary signs?
  • The future is unpredictable; ensuring that finance teams have the right mix of digital, technical, business and people skills to deliver insight, influence and impact will be essential if organizations are to successfully navigate the uncharted waters. Since the level of uncertainty and complexity is intensifying and the rate of change also increasing, it’s critical for organizations to ensure that their workforce are equipped with the right skills and capabilities to perform their jobs better. Employers themselves stand to reap the greatest benefits (improved productivity, increased morale, innovative ideas etc.) if they can successfully transform their workforce. On the contrary, not acting right now or delaying action shuts down opportunities to adapt and change in accordance with the new demands.

The authors go on to discuss the various catalysts for transformation, current digital skills gap, and barriers to skills development.

I recommend you to read the entire piece.

Finance and Enterprise Performance Improvement

In the past several years, the role of finance in business has significantly transformed from being a back office, desk-bound, number cruncher into a more broader, stakeholder-engaging and advisory role responsible for influencing strategic and operational decision making and improving enterprise performance.

Thanks to new innovative digital technologies and business operating models, CFOs and their teams are no longer spending plenty of time working on low-value add and backward looking tasks such as account reconciliations and reporting.

Instead, the explosion in RPA, advanced data analytics and AI technologies is empowering the finance organization to generate, consolidate and analyze data from various sources, and provide actionable insights that add real strategic value to the business.

As a result, commercially-minded and technology savvy finance leaders are cementing their positions as the trusted advisor to the CEO and Board, helping define and execute on the strategic direction of the business.

Today, we live in a world that is dynamically changing and full of surprises and uncertainties.

For example, one day we are dealing with the fallout from geopolitical tensions, the next day it’s natural and man-made disasters disrupting the entire supply chain.

Then a criminal cyber attack bringing the company’s payments and receipts system to a complete halt. This cycle is never ending.

In this environment typified by impermanence – there is no guarantee that existing finance strategies, operating models, systems, processes and talent will continually take your finance organization to new heights.

Although some progress has been made over the years concerning how finance work is done, we are not yet there yet. There is still ample room for improvement.

Lead the charge for change

Familiarity is the antithesis of progress. In order to soar to new heights, finance leaders and their teams ought to be receptive to change.

In spite of the immense potential of new digital technologies to transform the way finance creates and delivers value across the business, compared to other functions, adoption of game changing technologies within finance has been lackluster in the past years.

Does this imply that CFOs should get their hands on each and every latest shiny tool out there? No, technology is simply an enabler to achieve better business decisions.

What is important is for the CFO to understand the art of the possible.

That is the capabilities provided by the new technology to support and adapt the business’ value propositions, processes, pricing and revenue models, strategy execution, and growth.

The CFO should take charge and act as catalyst for change, ensuring that all represented stakeholders have a complete view understanding of what the business is seeking to achieve, what problems you’re trying to solve and what processes you’re looking to make more efficient, and what the investment’s contribution towards the achievement of enterprise objectives is.

Think differently enough to provide an alternative perspective.

Today, finance is no longer just a numbers game. What was typically a role centered on cost, compliance and reporting has now expanded to include strategy, risk decision-making and performance management.

It’s therefore important that finance leaders and their teams invest some time developing an in depth understanding of the business model, strategy, market opportunities and threats, competition dynamics, product portfolio, supplier relationships and customer profiles as this is key to providing a unique perspective that looks across all departments.

Historical performance reporting has been overtaken by trend recognition, forward-looking business and operating plans, real-time metrics, and driver-based rolling forecasts ultimately accelerating the need for the modern finance leader to be more proactive and growth-oriented, rather than being restrictive.

Being a finance leader does not necessarilly mean you should have all the answers to business performance related matters.

What is required is curiosity. Continuously raising key performance questions that ultimately kickstart productive conversations and collaborative efforts across the business.

CFOs with the ability to utilise modern digital offerings to close information gaps across the business, uncover hidden opportunities, accurately predict the future and improve decision making will by far differentiate themselves from their counterparts.

People, People, People

To be successful CFOs must build teams capable and empowered with the right tools and support to deliver a high standard of work across the various finance pillars.

This is essential for freeing up time for the CFO to support the board in driving the business forward.

Whether it’s for themselves or other members of their team, CFOs should continually look at reskilling and upskilling opportunities. The changing dynamics of CFOs’ role mean they need to keep learning to have the business, analytical and data skills both them and their team require.

In addition to reskilling and upskilling team members, CFOs also need to create an environment that encourages testing of new ideas, processes and tools. When teams and individuals are encouraged to explore, great things happen.

The journey to great heights is sometimes fraught with twists and turns and failures. But it is only through ongoing learning from these experiences that we become better. CFOs should never be afraid to test new business models, processes, technologies and skills for fear of failure.

The time to embrace change and transform is now.

Plan Continuation Bias and Decision Making

Businesses of all shapes and sizes often operate in a system with the different parts of the system interacting with one another to produce effects or outcomes that are anticipated or not.

Some systems are linear with easily predictable outcomes. Other systems are more complex, more like a spider web, with many of their parts intricately linked and easily affecting one another.

Understanding the pertinent system dynamics is therefore critical for making better, informed decisions.

Unfortunately, the business environment in which key performance decisions are made on a regular basis is not linear and the outcomes easily predicted.

Businesses inhabit and operate in environments that consist of interdependent networks in relationships which connect with and interact with each other to produce outcomes.

In their book Meltdown: Why Our Systems Fail and What We Can Do About It, Chris Clearfield and András Tilcsik saw that even seemingly unrelated parts in a system are connected indirectly, and some subsystems are linked to many parts of the system. In the unfortunate event of something going wrong, problems show up everywhere, making it difficult to understand what’s happening.

So what do complex systems have to do with plan continuation bias?

We can plan for the future, but we don’t have a crystal ball to predict accurately what will happen next week, month, quarter or year. Based on past experiences, and analysis of data, we might have an idea but that is all there is.

In spite of the past not always being the best predictor of future performance, it’s surprising to see the level of system blindness that decision makers still exhibit.

Let’s look at a decision to enter a new international market as an example. The strategy and factors that contributed to success in one market by all means do not guarantee success in a different market.

Instead of following a step-by-step approach to better understand the system dynamics of the new market, most of the time leaders adopt a copy and paste approach resulting in widespread failures.

Even though there are tell-tell signs of the expansionary move heading sideways, leaders push ahead by implementing the bad strategy. An indication that plan continuation bias is probably the contributing factor.

Simply put, plan continuation bias is the tendency we all human beings have to continue on the path we have already chosen or fallen into, or pursue a decision we have made without rigorously checking whether that is still the best decision or not.

In business decisions, this form of bias is prevalent in strategy implementation, project management, as well as forecasting and planning. We often don’t take the time to review the plan against actual results and change course. We persist even when the original plan no longer makes sense.

It could be that the system in which we based our original plan assumptions has significantly changed, ultimately requiring us to take a step back and reflect to better understand what’s going on and decide how to proceed.

Because we are so much fixated on the end goal which seems achievable, we blindly convince ourselves to push ahead or continue even if the current results are telling us otherwise. We continue to pump resources towards the plan or project, eventually resulting in waste and worse results than before.

Sometimes plan continuation bias is a result of the organizational culture. If the culture is one that doesn’t tolerate “bad news” and suppresses speaking up when circumstances change, then chances are high that everyone will become so obsessed with getting there.

Leaders should therefore encourage speaking up, and employees will not be afraid to speak up for fear of being reprimanded.

Rather than reprimand an employee who has identified flaws in the existing plan or discovers an impending project catastrophe, why not publicly praise them given that such a move sends out a message that leaders are open to receiving feedback.

Considering the complexity of today’s business environment and its tight linkages, it might not be feasible to pause each time a key decision is made. You want to avoid a situation where decisions made are more reactive than proactive.

Instead, find a balance between focusing on the tasks or initiatives to be performed and making sense of what is happening. Avoid getting fixated on one or the other.

Making sense of what is happening gives you a chance to notice unexpected threats and figure out what to do about them before things get completely out of hand.

Avoid making key decisions under time pressure and consider all plan possibilities instead of settling just on one.

Finance as the Custodian of Enterprise Performance Management

The days of having CFOs responsible for only preparing the statutory financial reports of the business and play the role of the bookkeeper are long gone. Today, finance leaders are expected to play the role of the strategic advisor to senior management and the board,and help drive operational and strategic performance across the enterprise.

That is, become custodians of enterprise performance management (EPM) by taking the lead on performance management and delivering informed business insights. EPM takes a completely different approach towards measuring, monitoring and improving enterprise performance.

Instead of assessing business performance in a siloed approach, EPM ensures the business evaluates and monitors its performance holistically. Although a majority of business decisions have either positive or negative financial implications on the health of the organization, evaluating, monitoring and improving business performance extends beyond a sole focus on financial metrics.

In order to perform better in their new business performance custodian role, it is imperative that finance leaders develop knowledge and a deeper understanding what constitutes and doesn’t constitute EPM. 

A simple google search of the words “Performance Management” brings up results that associate performance management to the process of conducting employee performance appraisals and supervising employees and departments to ensure that goals and objectives are met efficiently.

As a result, many people think that performance management is a human resources process that is only people-focused and has nothing to do with finance – Human Performance Management. To a lesser extent, their thinking is correct in the sense that people are part of the process. However, to a larger extent, they are wrong.

Performance management is not entirely focused on carrying out the outdated employee annual performance appraisals or reviews based on isolated individual key performance indicators (KPIs).

Rather, performance management is the integration of multiple managerial methods and or frameworks such as strategy maps, balanced scorecards, activity based costing/management, driver-based rolling forecasts, process improvement, risk management and advanced analytics to support strategic decisions and drive performance.

This is not achievable individually, hence the key word “enterprise.”

As custodians of business performance, finance should play a leading role in implementing a robust EPM framework across the organization. The framework should enable the organization to communicate and translate its strategy into financial and non-financial metrics and targets, monitor its performance, create accountability, and focus its efforts and resources on the key business drivers.

Additionally, the EPM framework should ensure there is alignment between individual KPIs and reward and recognition systems, and corporate objectives, as opposed to mere job descriptions, in order to encourage behaviours which positively contribute to the overall strategy of the business.

When implementing the EPM framework, it is important to ask the following questions:

  1. What do we want to achieve and excel at? This helps define your goals and key value drivers.
  2. How do we know if we are actually excelling at this? This involves defining financial and non-financial KPIs, which are measures that help you understand whether you are achieving your goals
  3. What is the desired level of performance that we would like to see? Defining KPIs is not enough, you also need to define your targets that represent the level of success or failure at achieving your KPIs.
  4. What initiatives should we pursue or engage in to meet our performance targets? These are actions or projects or strategies or processes needed to achieve a target, or improve performance level.
  5. What resources and or investments are needed to achieve our target? Utilizing driver-based budgets and dynamic rolling forecasts will ensure resources are allocated strategically and efficiently.

Asking and answering the above questions helps design and implement management processes and systems that align business strategy to drive accountabilities, decision support and performance improvement.

For example, when KPIs are aligned with business strategy, decision makers will focus on the critical success factors of the organization. On the contrary, if there is lack of KPI alignment, senior management end up getting overwhelmed with an increasing number of performance reports that lack key insights necessary to move the business forward.

As custodians of enterprise performance, it’s important for finance to have the ability and capabilities to consolidate, analyze and interpret business performance in real-time. Rather than simply report on the past, finance teams must be able to explain the reasons behind the numbers (the whys and what-ifs).

Leveraging consolidation solutions enable teams to quickly model and assess the impact of alternative business scenarios and formulate appropriate solutions.  

Given the complexity of today’s business environment, finance leaders need to rise to the occasion and perform the strategic advisory role now expected of them by senior management and the board.

 

Finance Needs To Do More Than Prepare Reports

There is an ongoing discussion about the evolving role of finance and the function’s contribution towards enterprise performance improvement. Thanks to new operating models and emerging technologies, finance has been presented with an opportunity to step up and shine.

That is, focus more effort on providing effective decision support that drives organizational success and less on rote tasks that can easily be automated, outsourced or performed separately in a shared services center.

Providing effective decision support requires a deep understanding of the business in its completeness, the cause-and-effect relationships between business units, big growth drivers and performance drivers. It’s more than producing a complete set of financials on a monthly basis.

By virtue of their training, many finance professionals possess strong technical accounting backgrounds and limited business experience. For instance, preparing external reporting financials that are IFRS-aligned comes natural to them. At any point in time, they are able to interpret a particular standard, paragraph by paragraph, without even making reference to the standard handbook itself.

There is nothing wrong with becoming an accounting standard expert. The problem arises when the entire finance team is made up of financial reporting experts who spend the majority of their time churning out reports just to meet regulatory and compliance requirements and less on driving business performance.

Month-end, quarter-end and year-end reporting are still an important part of running a successful finance organization. It’s important that the financial statements are free from material misstatements and faithfully represent the financial performance and position of the business.

However, the process should not end there. Finance should also be able to interpret the reported numbers, create meaning and simplicity from them as well as communicate a point of view about how the numbers will inform strategic decisions.

It’s therefore imperative for finance leaders to continuously assess the tasks their teams are focused on. Begin with why. For instance, why does your team produce the reports it produces on a weekly, monthly and quarterly basis? What purpose do they serve in informing business decisions?

After you have answered the why question, you should be able to determine whether the activity, report or process is a value add or not.

Any activity, report or process that is not value enhancing should be discontinued completely or streamlined. This will in turn help you free up more time and channel resources towards issues and or initiatives that really matter to business partners and senior decision makers.

Given that individuals are creatures of habit, it can be difficult to let go of traditional practices or old habits.

Unfortunately, sticking with the familiar in a constantly changing environment will not do you any justice. Just because this is how you have always done things in the past and are used to does not mean you should continue on the same path of the tried-and-tested.

In addition to getting rid of old habits that are no longer able to withstand the test of time, it’s also important to ask if the company’s business model is still fit for purpose to address today’s demands and challenges, and more important, is it fit for purpose for the future? With the world changing so fast around us, a business never reaches a point where it has the ideal model.

The operating model needs to continue to evolve. Finance can help shape this model through spending time with business partners and engaging in a two-way conversation about the business and offering its perspective. Communication between finance and the business should not be limited to month-end reports only.

Leveraging our financial expertise, we can help drive change by helping the company identify sources of growth and operational improvements, allocate resources effectively and efficiently, and accelerate its performance over time.

Finance is often regarded as the purse-holder of the company, holding the power to greenlight some initiatives and redlight others.

However, in order to drive innovation and change, finance must learn to see the world not only through a finance lens but also through a business lens. Many finance professionals are conservative and risk averse in their approach. Taking risk is something perceived extraordinary. We need to transition from this kind of thinking.

There is of course balance between taking risk and mitigating risk, but if finance is inclined to opt for the later, value creation opportunities can be missed. It’s therefore critical that we do not succumb to analysis paralysis because it’s easier to lose the big picture of what is needed to drive the company’s success in a myriad of daily transactions or useless data.

In conclusion, if finance is to influence strategic decisions and add value, finance leaders should start asking if their teams are focusing on what really matters to the business or the function.

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.

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?

Rethinking The Use of KPIs In The Digital Era

Most companies do not deploy Key Performance Indicators (KPIs) rigorously for review or as drivers of change. This is the overall finding from a recent survey report, Leading With Next Generation Key Performance Indicators, published by MIT Sloan Management Review. The report is biased towards Sales and Marketing functions.

Changes in the business environment such as accelerating technological innovation, intensifying competitive pressure, significant emerging risks, increasing customer expectations, and complex regulations are influencing business models and causing tremendous shifts in the strategic direction of the company.

As a result, executives are struggling to balance tactical and strategic KPIs, including operational and financial KPIs that effectively capture the moment while anticipating the future.

Part of the survey findings include:

  • KPIs are not enjoying special status as either enablers or drivers of change in many companies. Instead of providing value added insight to guide and drive performance improvements, KPIs are more about “tick-box” compliance. Either that gives you a sense of the scale of key decisions made on intuition versus data-driven or it makes you realize that despite the critical role of KPIs in enabling informed decisions, many executives are still not aware of this.
  • Lack of alignment of KPIs with strategic objectives. Only 26% of the survey respondents agreed that their functional KPIs are aligned with the organization’s stated goals and strategic priorities. Such a huge disconnect explains why many companies are struggling to execute their strategy more effectively.
  • Customer-focused KPIs are increasingly becoming more important. Many companies are taking a more customer-centric approach to spur growth. As a result, they are seeking to understand customers in more holistic ways. 63% of respondents say they are now using KPIs (such as NPS, customer segmentation, customer lifetime value, brand equity, churn) to develop a single integrated view of the customer and understand the customer’s experience at each touch point including the aggregated journey.

Based on respondents’ answers to a specific set of questions on how well a company has aligned its use of KPIs, the report authors were able to categorize the companies into three – Measurement Leaders, Measurement Capable and Measurement Challenged.

According to the study findings, six behaviors are common to Measurement Leaders:

  1. Use KPIs to lead, as well manage, the business. Companies falling into this category treat their KPIs not simply as “numbers to hit” but as tools of transformation. KPIs are used to effectively align the organization (people and processes) and also provide predictive insight that help frame strategy and lead the company into the future.
  2. Develop an integrated view of the customer: Respondents falling into this category have shifted their focus beyond traditional financial and customer satisfaction metrics to including externally focused KPIs that enable them to better segment and engage customers. Such measures complement and build upon more internally focused process KPIs. However, an integrated customer view remains an aspiration for many businesses. For example, 41% of survey respondents are still managing digital customers separately from physical customers. Companies that are making progress in this space are experimenting with automation and machine learning technologies to develop a 360-degree view of their customers.
  3. See KPIs as data sets for machine learning: Nearly 75% of executives surveyed expect that ML/AI technologies will help them achieve strategic goals. Instead of viewing KPIs just as analytic outputs for business performance review and planning, organizations can take advantage of ML which empowers software and systems to learn from data-driven experience. This creates opportunities to use KPIs (individually and collectively) and their underlying data to teach ML algorithms to improve and optimize their performance and drive marketing activities. However, care must be taken that the KPIs used as data inputs for ML actually reflect business reality, otherwise the systems will learn from wrong inputs leading to garbage in, garbage out.
  4. Drill Down into KPI Components: Drilling down to a KPIs components is critical for effective KPIs. It helps executives see the underlying data or analytic components that are aggregated into KPIs, determine why specific KPIs have over or under-achieved and prioritize critical business issues. For example, the drilling down can be done according to different customers, segments, channels or different products. Legacy organizations with legacy IT systems and legacy financial reporting processes, however, generally lack this capability
  5. Share trusted KPI data: While it is true that the whole is greater than the sum of its parts, having shared KPIs facilitates effective cross-functional collaboration because managers can see the positive or negative impact of their own KPIs on others. This cause-and-effect relationship also enables opportunistic efficiencies and outcomes. Although transparent, shareable KPIs can create new dynamics, in some cases, conflict may arise within the organization due to overstepping of boundaries in turn affecting accountability.
  6. Aim for KPI Parsimony: There is no magic number of desirable effective KPIs for an organization. However, too many KPIs easily become unwieldy, unmanageable, and create unrealistic expectations. Too few might result in the neglect of critical business issues. In today’s digital world characterized by data proliferation, it is much easier to get carried away and succumb to “KPI creep”. Measurement leaders know what to focus on – a balanced set of vital and valuable KPIs that have massive potential to make a huge difference to their businesses. Instead of wasting resources on ordinary metrics or measures that promote bad behaviours and fail to influence the strategic priorities of the business, they understand that to be effective and account for business success, KPIs must truly be “key” performance indicators.

To obtain greater value and returns from their KPIs, the report recommends companies to identify their top 3 enterprise and top 3 functional KPIs, create a process for ongoing enterprise-wide discussion of KPIs, and treat KPIs as a special class of data asset.

Additionally, I believe company leadership should also:

  • Acknowledge that effective performance measurement requires a cultural shift. The fish rots from the head. If there is no executive sponsorship, chances are high that the use of KPIs to drive growth will remain relegated to the lower rungs of the ladder.
  • Integrate performance management with risk management. The former looks at KPIs and the latter looks at Key Risk Indicators (KRIs). Business success is also a result of making informed and intelligent risk decisions
  • Start with the WHY of data collection. While it may be true to say that data and analytics are the raw ingredients of KPIs, a company’s data needs must be supported by the key performance questions raised. It is therefore imperative to ask critical questions before accessing any new data.
  • Understand that technology is just a means to an end and not the end itself. A company does not necessarily need to invest in new technology to reap returns from its KPIs. Just because “experts” are preaching the gospel of ML/AI as the solution to modern business problems, first evaluate if your business is in dire need of such technology and cannot survive without it.

FP&A Leaders are Failing to Deliver Higher Strategic Value

Last month, Prophix Software released its findings from the survey, Defining the Evolution of FP&A: Benchmarks, Challenges & Opportunities. The survey which was carried out between Q2 and Q3 of 2017 received feedback from over 300 FP&A leaders from all companies of all sizes across the globe.

The survey was conducted to establish the maturity of analytics solutions across the globe, the effectiveness and efficiency of FP&A leaders’ planning processes, how companies are leveraging technology to improve FP&A processes, and to gauge internal perceptions relative to the value of FP&A.

Although certain parts of the results are encouraging, FP&A teams significantly need to improve on their role of delivering higher strategic value to their companies.

In today’s fast moving markets, characterized by intense competitive pressures, shorter product life spans, complex business environment, increased volatility, and heightened uncertainty, it is imperative that a company’s FP&A people, processes, and systems are highly mature, effective, efficient, and leverage the necessary enabling technologies.

While going through the survey findings, a couple of statistics captured my attention.

  • 55% of the survey respondents reported being in a basic or developing state of the FP&A analytical maturity.

Comment: Essentially, more than half of the survey respondents have no formal FP&A process, no established analytical and reporting matrixes, no planning model and tools as well as BI tools. If ever they are there, these are all basic, highly manual and descriptive in nature.

This basic level of analytical maturity brings to light the fact that a culture of continuous innovation and improvement is non-existent in Finance. As the custodians of data within the organization, one would assume Finance to be at the forefront of analytical maturity, but this is not the case.

Surprisingly, 50% of respondents are mindful of technology but seldom upgrade. This statistic alone is concerning. Why are FP&A leaders reluctant to change? Are they happy with the status quo? Are they lacking the resources necessary to transform? Is it ignorance in its purest form?

Transitioning from a basic to an advanced or leading FP&A maturity level, above all, requires a cultural shift all the way from the top to the bottom of the organization. There has to be a desire to change for the better, a willingness to commit and continuous learning attitude.

Attending industry conferences, seminars or webinars and reading thought leadership resources as well as listening to their podcasts can help FP&A leaders keep abreast of trends and benchmark their company’s performance against peers.

  • Only 12% of the survey respondents have access to the right data, at the right time, to inform strategic decisions at their companies.

Comment: Having access to the right data, at the right time is key to informing strategic decisions and driving business performance. Unfortunately, 88% of respondents do not have this access.

This means the majority of critical decisions in companies across the globe are based on gut-feel and not evidence-based.

In today’s Big Data age, it’s startling to know that companies are not leveraging advanced analytical tools to aggregate and analyze data from disparate sources and generate key nuggets on customer experiences, competitor behaviour, trends, emerging risks and opportunities.

Moving forward, FP&A leaders need to make use of data management framework that facilitates the creation of a central data repository and ensures everyone in the company has access to relevant data whenever they need it.

This can only happen if the company makes a key decision to advance its analytical maturity model. Highly manual processes make it difficult to update FP&A models in real time, thereby inhibiting quick decision-making processes.

With the recent advancements in technology, the costs of implementing new software to enhance FP&A processes have significantly reduced. Companies should therefore not use cost as an excuse for low adoption rates.

  • Only 10% of companies reported that they find it somewhat easy to perform scenario analysis.

Comment: In today’s VUCA business environment, companies need to be proactive, develop superior forward-looking capabilities and be ready to deal with any disruptive forces threatening their survival and existence.

They need to become more flexible, adaptable and be increasingly aware of the impact on business performance of changes in the environment. This will help them take corrective actions more quickly and efficiently.

Unfortunately, 90% of the surveyed companies are finding it difficult to perform scenario analysis. As already reported, over half of them are still reliant on basic and highly manual processes which in turn makes it difficult to consider all possible scenarios in their FP&A models.

For the 10% who are finding it somewhat easy to perform scenario analysis, what are they doing right? They have managed to figure out that FP&A is a collaborative process extending beyond the walls of Finance. Also, rather than use fixed time-specific budgets, they are using driver-based rolling forecasts to see beyond 12 months.

Instead of sitting on their desks all day long, these professionals engage the wider business community, learn about the external and internal factors influencing strategy execution, how they are all interrelated and their material impact. They are then able to leverage new technologies, calculate any probabilities and update their FP&A models in real time.

Having a deeper understanding of the key drivers of business performance helps FP&A leaders define relevant scenarios that describe a range of future operating environments, and generate forecasts reflecting the changes in scenarios which in turn helps decision makers to adjust their strategic plans, targets and action plans.

  •  55% of respondents conveyed that their companies don’t think that FP&A delivers high strategic value.

Comment: FP&A professionals are a critical part of the Finance team. They help operational and strategic decision makers make informed decisions by providing them with reliable, timely and fact-based recommendations.

They bridge the gap between financial and operational plans and ensure decision makers receive the right information, at the right time. The reason why 55% of the surveyed companies are not happy with value-delivery of FP&A is because FP&A teams are spending the majority of their time on low-hanging fruits.

According to the survey findings, 51% of the time spent on FP&A is allocated to data collection or validation. Thus, instead of spending more time on generating insights and influencing business decisions, FP&A teams are busy reporting on the past and justifying reported results.

This quite understandable given the high levels of technological immaturity in many companies. By leveraging advanced analytical tools, FP&A will be able to reduce time spent on data collection, reconciliation and cleansing and free up resources that can be used to deliver higher strategic value.

Instead of generating reports and analysis that they feel are valuable, FP&A teams should regularly liaise with business teams and establish their reporting and information requirements. This will help ensure that resources and time are constantly not being wasted on non-value adding activities.

For the majority of companies that are still basic or developing their analytical maturity, I recommend that they take a candid review of their current FP&A people, processes and systems, and make an honest conclusion of whether they are happy with where they are at the present moment or need to make significant changes.

Everything might look good today, but always remember that Good is the Enemy of Great!

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