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.