Driving Profitability Through Enhanced Expense Management Policies

I don’t know of any private or publicly listed organization that is in business only to break-even. Among others, the main goal for these entities is to deliver a profitable return to the owners of the business. This desire to make profit with the least resources inherently makes cost management across the business a strategic imperative.

As strategic business partners, finance teams are suitably positioned to help their organizations manage costs and focus spending only on those activities and/or initiatives that enable business performance.

In my experience of working with diverse organizations and business leaders, I have come to the realization that quite a number of them lack a precise understanding of what “cost management” really involves. There is a common perception that managing costs is all about cutting costs or merely a matter of buying fewer goods and services. This is seldom true.

Cost management is not simply a euphemism for “cost cutting”. The discipline is about understanding the true cost drivers of the business and ensuring that a company acquires only goods and services that it needs to execute its strategic priorities at a known and managed cost. One of the areas I see organizations often struggle with is identifying those activities, processes and investments responsible for rising cost levels.

Because of this misunderstanding of the real cost drivers, many companies end up taking the obvious route of cost control: they reduce payroll-related expenses, cut direct costs and capital expenditures. Rarely do companies focus their attention on improving indirect expense management to drive savings and boost profitability with the same resources.

Inadequate Spending Information Acting as a Barrier Against Savings Delivery

In today’s digital-enabled business environment the ability of an organization to consolidate and analyze its indirect spending patterns is key to acquiring crucial insights essential to pursue better deals with vendors. Simply having information is not enough. What golden nuggets are you harvesting from this sea of information and you are able to use them as sources of leverage when dealing directly with suppliers?

Unfortunately, in my dealings with diverse finance teams, many of them are not analyzing their organization’s spending data and are therefore losing out on achieving substantial cost savings. One of the reasons often given by these teams on why they are not able to do so is lack of time and resources needed to analyze spending data and recognize the benefits. A significant amount of their time is spent on balancing the books and justifying the numbers.

I was surprised with the manner in which procurement reports are generated and delivered in one of the companies I recently worked with. Their procurement processes are still highly manual, all invoices are stored in lever arch files and there is no spend visibility across the organization. Each business function records its own spending and there is no overall aggregation of this spending information.

As a result of these highly manual processes, it is seemingly impossible for the finance manager to obtain a clearer picture of how much is being spent on each vendor and on what, say per month, quarter, half-yearly or yearly. Technology and e-procurement systems have evolved and because of these advancements CFOs and their organizations can gather this procurement information in an accessible, easy-to-use format and in real-time.

Lack of financial resources should therefore not be given as an excuse, there are now cheaper tools that an organization can invest in and achieve its spend analytics ambitions and these SaaS and/or cloud-based solutions do not require huge initial capital outlays.

When you have ready access to information and are able to analyze your company’s’ major spending categories, you will be able prioritize the use of your scarce time and resources, consolidate spending with selected vendors, negotiate better terms and realize substantial benefits.

Close Scrutiny of Discretionary Spending

Many at times I have heard people say in order to make money you have to spend money. As much as we would like to accept this statement in its entirety and pay attention to the advice, I think we should heed the advice with a pinch of salt. Not all spending is necessary. In addition to direct expenditures which are linked directly to the goods and services a company is producing or providing there will always be discretionary expenditures not tied to business performance.

However, uncontrolled spending simply for the sake of spending often leads to depleted margins and cash woes. Am I therefore advocating against discretionary spending? No. Responding to business opportunities often calls for flexibility and judgement. There are times where the organization has to leverage its cash position, take advantage of emerging opportunities to enhance its competitive position and improve productivity.

Close scrutiny of discretionary spending on things that are perhaps nice to have, but not enabling business performance is therefore critical. Finance business partners can help instill spending discipline and good judgement across the enterprise by educating employees on the How, What and Where of spending carefully as well as setting up spending policies to encourage productivity and enhanced performance.

Spending policies play a significant role in directing employee behaviour and generating useful information on what goods and services are purchased, how and where. For example, they help an organization drive savings through documenting and substantiating purchases, discouraging excessive acquisitions and prescribing exactly where and how employees may procure items.

Any off-policy spending patterns are quickly identified and addressed. However, in implementing these spending policies care must be taken that a right balance between control and latitude is struck. You want your employees to have a sense of empowerment and responsibility.

In other words, the company’s spending policies should not be viewed as punitive measures, but rather, allow employees the appropriate degree of flexibility, and nothing extra. This fosters compliance.

The Effectiveness of Any Spending Policy Rests on Its Widespread Adoption

Implementing the right spending policies is only part of the equation. In order for policies to be effective, employees must comply with them. In most cases you will realize that an organization has well-defined policies on spending, the finance executive is leading the pack garnering support for its enterprise-wide adoption and yet despite all his efforts the positive message falls on deaf ears.

Compliance often falls short and as a result the organization fails to achieve the intended benefits. As with almost every other aspect of everyday running of the business, senior management support is central to the success of any organizations’ spending policies. Senior management determines company culture and sets the tone for employee behaviour.

No matter how hard the finance executive tries to convert the positive message of disciplined spending, if the other senior leaders are failing to set a good example then we shouldn’t be surprised to see significant low levels of employee compliance.

Many organizations often suffer from a lack of consistent approach when implementing and upholding spending policies. For instance, you will find out that there is a clear prescription of the exact steps to follow when dealing with employee expense reimbursements. By default, the approach should be the same across the enterprise but then you start noticing some employees getting reimbursed for expenses that other employees are not.

Moreover, the senior manager approves the reimbursement of an expense without seeing the backing documentation even though the policy clearly specifies that a physical receipt or invoice must support the expense claim. This inconsistency sets a bad precedence resulting in finger-pointing as well as favoritism gestures. Rather, management should take the lead by enforcing policies uniformly throughout the employee hierarchy, and by demonstrating good compliance behaviour.

Furthermore, in order to ensure effective compliance, senior management should also communicate policies effectively as well as the business rationale and the more tangible benefits that the new spending policy would provide. Employees need to know what policies they will be held accountable for and why they are being held accountable.

I don’t believe there is an employee acting in their normal capacity who would join an organization just to do wrong. Employees, generally want to do the right thing and what a better way to support this ambition other than explaining to them all the nitty-gritty of the company’s spending policies.

Ideally, once the policies are enforced it is a good idea to regularly provide employees with feedback on their performance, the benefits that are being realized as a result of the policy changes and offer rewards where necessary. Following this approach bolsters the rationale for making the decisions and gives employees an interest in the company’s performance as well as a greater incentive to do well.

As finance executives step up to an expanded, more strategic role and seek to drive profitability across their organizations, it’s critical that they establish efficient and effective means to provide employees with the right tools, processes and structures they need to successfully perform their jobs without opening the door to spendthrift behaviour, poor controls, and irregular expenditures.

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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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