Finance in more than two dimensions

I have been attending corporate financial management conferences for 20 years or more now, and there has been one consistent theme that has managed to survive the decades intact: how can finance and its FP&A function become more strategic, more focused on value-add decision support, and less transaction/ journal entry oriented, or as some have said, “we do F & P pretty well, but not very much A”.  I will admit that some progress has been made during this time span.  When it started out the ratio was 80/20 in favor of transactions, with the goal to be able to turn that number on its head, so that it became 80/20 in favor of value-add decision support activities.  The current consensus among FP&A types at the more recent conferences I attend or chair seems to be that we’ve worked ourselves up to a balanced 50/50 split, which means that while we’ve banished Pareto and his 80/20 band of unproductivity thieves from the latter half of the week, we are still stuck with him as a lunch partner through Wednesdays.

Just yesterday at the CFO CPM conference in New York, Mary Driscoll, Senior Research Fellow at APQC, moderated a panel discussion on this very topic entitled: “Profitability Management--How Finance Can Help to Deliver on Strategic Promises”.  In preparing for this panel, I ordered my own thoughts regarding how finance could play a more strategic role within the organization, which I share below, along with some of the additional ideas that surfaced during the discussion.

-   Integrated Business Planning.  Of the strategies that fail, 80% of them fail not because they were wrong, but because of poor execution. The typical 3-level model for IBP usually shows strategy at the top, operations at the bottom, and financial planning in the middle linking the two.  For finance, this is the ideal structure for us to exert influence and control so as to improve those execution odds, starting with assuring that top-level strategy is reflected in the business plan, and continuing the emphasis by also assuring that detailed operational budgets and metrics are linked and aligned with corporate goals.

-   Stratex, or Strategic Expenditure, is a term coined by Robert Kaplan to reflect expenses related to strategic programs and initiatives.  Once again, finance is in an ideal position to assure that strategic projects get their own staffing, budgets and resources, rather than depending on borrowing from benched or excess functional resources who somehow manage to find some cycle time for the project.  Furthermore, finance needs to assure that in difficult times, Stratex is protected from mindless, across-the-board 10% expense cuts.

-   Profitability as a Metric.  Too many organizations treat profitability as a residual, what’s left after expenses are subtracted from revenue.  Without some application of ABM, profitability can only be ascertained and incented at the C-level after all the books have been consolidated.  With ABM, profitability can be driven down to the division, region, department, product or customer level.

-   Risk. Are you incorporating risk into your business decision process, or are you simply going with the largest number, the largest ROI or IRR, the largest “return” irrespective of risk?  If you calculate return to three significant digits, but risk is still just sticking a finger in the air to get an order of magnitude, you are not doing all of your job.  Of the three components of “How Much, How Soon and How Certain” in every business decision, finance is very good at the first two, but typically neglects the associated risk.

-   Cross Functional Coordination. I talked about this one in my recent post, “The Attack of the 50-foot Cliché”. In the absence of a formal Office of Strategy Management, finance is the next most likely function to be in a position to assure that the key, cross-functional processes that create (or destroy) value in an organization are given their proper due; those cross-functional processes that no one person or function owns but that comprise the core of the organization’s value proposition.

-   External factors:  If the finance department is guilty of navel gazing, then most likely the rest of the organization will follow suit.  If the monthly financial reporting package is solely about internal measures and metrics, all neatly packaged in 10K format, then that will become corporate culture.  If instead, the monthly financial reports and dashboard metrics included operational metrics, third-party data, competition, SWOT information, external benchmarks, and if the forecasting process incorporated external sources into its consensus building process, this too would become the new norm, the example to be emulated throughout the company.

-   Business Models:   Once you start incorporating external data, you quite naturally continue to pay attention to the other non-financial external factors that at a minimum affect your business, and may even catch you completely out of sorts with where technology, products, media, regulations, or customer sentiment is taking the market.  I like to think that what Steve Jobs’ genius was about, was in working backwards from a new business model.  He didn’t so much as first invent iTunes and the iPod as he invented a new business model for music distribution – the physical device was secondary.  Same for the iPhone – primarily a piece of technology in support of a new business model for licensable “apps”.  One of the most valuable things finance can do is to get their operational business partners thinking in terms of the business model - how do they make money today, how can that be improved, what external business-model threats loom on the horizon, and what new models might they exploit.

Finance can be quite two-dimensional in its thinking, starting with our VERY two-dimensional spreadsheets.  If we’re going to be more strategic, however, it’s not enough just to think outside of the box, we need to use all the dimensions available to us and start thinking outside the dodecahedron, or outside the hypercube.  Or at the very least, go find yourself a REALLY big (three-dimensional) box.

tags: business modeling, dashboards, financial management, FP&A, integrated business planning, performance management, profitability, risk, strategy, strategy management

One Comment

  1. Steve Player
    Posted February 5, 2012 at 11:22 am | Permalink

    Leo, you make a good case for changing finance by focusing in additional dimensions. You provide a long agenda of additional things to focus on. A CFO can quickly get a headache.
    I believe that the first additional dimension should be time. But inside of reporting on it, we must create it. The only way finance can act on this agenda is to "find the time" to act. The organozations and CFOs I work with have found this to be a great challenge.
    So let me recommend a first step for your action agenda - Finance can create the time to do these actions if we "Stop doing dumb stuff." These include annual budget negotiations, variance analysis based on budgets whose assumptions proved to be wrong shortly after they were printed, insisting of forecast accuracy in an unpredictable world, and hundreds of kinds of paper pushing busy work that keeps finance being truly strategic ( see my Finance Transformation blog at Business Finance magazine for additional examples). To be successful we must first seize control of the time dimension.

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