Advisor insights from the field

Sources of Business Complexity

April 18th, 2012 by Troy Schrock

The 2010 IBM Global CEO Study Capitalizing on Complexity included the following quote: “Today’s complexity is only expected to rise, and more than half of CEOs doubt their ability to manage it.  Seventy-nine percent of CEOs anticipate even greater complexity ahead.”

Undoubtedly, complexity is a key issue for organizations.  Indeed, complexity is one of the primary underlying issues that prevents or stymies organizational growth.  Over the years, I have come across a number of resources that identify various sources of complexity.  Here is a conglomerated (though not exhaustive) list:

  1. Growth in customers – both the number of customers served and the geographic service area.
  2. Growth in the number of suppliers
  3. Extended geographic area of operations, facilities and personnel (think different time zones)
  4. More options for products and services
  5. Increase in personnel
  6. Technology acceleration and fragmentation – an increase in technology advances as well as the number of different technology platforms (that often don’t easily integrate data)
  7. Added regulation – greater reporting and compliance monitoring requirements
  8. Growth in management organizations (layers, departments, and information)
  9. Increased development of the global competitive environment

A common response to increasing complexity is to burden the organization with extra processes that really only serve as temporary fixes.  The larger bureaucracy increases cost.  Business leaders must be disciplined in their approach to these new challenges so as not to compound the complexity from without by increasing the complexity within.

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Capitalizing on Complexity

March 7th, 2012 by Troy Schrock

In my last post, I referred to the IBM study entitled Capitalizing on Complexity.  Here is another quote from that report: “…one set of organizations — we call them ‘Standouts’ — has turned increased complexity into financial advantage over the past five years.”

Complexity can certainly present trouble, but it also presents opportunity.  I see four ways in which your organization can capitalize on complexity:

  1. Prioritize.  Focus your organization and its resources on the best few areas.  Many of your competitors will waste precious resources trying to deal with too much.
  2. “Procedurize.”  Simplify processes by creating repeatable steps and/or integrating activities across the organization.
  3. Reorganize.  The organizational structure that worked in a different time and environment may not be the best fit for the current reality.
  4. Monetize.  Once you solve a complexity issue, share that solution with other businesses for a service fee.

Each of these is a form of innovation that either strips complexity out of the organization or creates new, more effective ways of managing complexity.  At a minimum, they will bring about cost savings, but in some cases, they will even generate additional revenue.

In short, don’t shy away from complexity!  It’s only going to increase, so you might as well use it to your advantage.  Some organizations simply charge their customers for increased complexity, but that’s the easy way out.  With a little fortitude and creative energy, you can capitalize on complexity to benefit both you and your customers.

Forecasting is a Learned Skill

March 7th, 2012 by Troy Schrock

Forecasting is a learned skill, and as such, it can be taught and improved over time.  It also will never be perfect.  Yet, I often see CEOs and executives giving the financial staff a terrible time when actual results differ from the forecast.  I have also seen many financial personnel terrified to provide a forecast to the executive team because it is built on assumptions rather than “facts.”  By nature, financial personnel tend to be more averse to making mistakes than others.  They want their numbers to be right, but forecasts are never “right” in precisely matching actual results.  No one can absolutely predict the future.  A forecast can only provide a directional view based on the best knowledge available.

Forecasting is not limited to financial numbers.  Every discipline has some kind of key activity or metric to forecast, so CEOs, CFOs, CIOs, COOs, and any other kind of business leader ought to be able to understand the uncertainty and apprehension involved in forecasting.

You can only become excellent at forecasting by working on it.  Mistakes will be made.  Through practice, you will gain a better understanding of the drivers of the key activities which are drivers for the financial results.  Not only will the accuracy of your forecasts improve over time, but you will also gain a deeper understanding of your business (which is the greatest value of forecasting).

For more insight on financial forecasting, consider reading Before You Hire a CFO

Choosing Smart Numbers (Part 2)

February 15th, 2012 by Troy Schrock

(Read Part 1.)

Once smart numbers are developed, they need to be properly communicated.  The reporting process is as important as the numbers themselves.  Information cannot inform decisions if not shared in a practical and useful way.  A simple scorecard captures the smart numbers on a daily – or at least weekly – basis.  In addition to providing the current smart number, the scorecard should provide context (for example, the smart numbers for each day that week, the prior six weeks, or the last year).

Who should see the smart number report?  At the very least, the executive team should see the report.  Other managers may benefit from seeing the overall company perspective contained in the smart
numbers report.  Keep in mind, the purpose of the smart numbers is to enable decision makers to react quickly to the current reality.  Anyone who can help the company by knowing the smart numbers should be included in the distribution.

The second insight is a practical tip.  Business conditions change over time, so you should periodically review your smart numbers to ensure they are still applicable and appropriate.  Sometimes a slight modification is required, while other times, one or two of the existing smart numbers may need to be replaced completely.

Business Strategy: Types of Metrics

January 4th, 2012 by Troy Schrock

There are many different types of metrics (key performance indicators, or KPIs) that can be used to gauge progress or relative position.  In addition to the four domain areas for balanced measures, here is a list of metric types that your strategic metrics should include:

  • Leading (advance alerts)
  • Lagging (results of past decisions)
  • Internal
  • External
  • Quantitative
  • Qualitative

Though it is common to equate metrics with financial results, most metrics will not be money-based.  There are many key processes and activities that make good KPIs.

Business Strategy: Choosing the Right Metrics

November 21st, 2011 by Troy Schrock

Strategic plans should always be linked to metrics.  Which metrics are best for your organization?  Those that are consistent with your specific strategy.  An organization whose business model depends on being the low-cost provider, for example, should track metrics that directly help them do that (e.g., on-time delivery, transaction costs).  An organization that focuses on providing highly customized solutions for customers might track metrics like share of customer or customer satisfaction.  Each of these metric examples might be applicable to either type of strategy, but each organization must select a few that are the most meaningful.  The strategy determines that.

Perhaps you have heard of the Balanced Scorecard approach.  The general idea behind the Balanced Scorecard is that an organization needs to view data from across four key domains: customers,
employees, operations, and financials.  Following is a short list of some key metrics in each of these domains:

  • Customer – delivery against the value proposition, responsiveness, delivery, market, and product profitability
  • Employees – employee engagement, teamwork, health of the culture, knowledge, and career development
  • Operations – performance of the key operations, efficiency, and productivity
  • Financial – historical financial performance, ratios, risk, forecasting, and value management

Most organization’s metrics are heavily oriented toward measures from the operational and financial domains and, accordingly, light on the customer and employee domains.  Perhaps your business is guilty of this.  Regardless, the specific metrics you choose should align with your strategy.  In fact, someone ought to be able to discern your strategy just by looking at your metrics.

Talent by the Slice

October 31st, 2011 by Troy Schrock

In our current business environment, businesses face mounting pressure to master a broad range of specialized knowledge in order to succeed.  Such knowledge is not limited to the specific technical areas in which they deliver their services; it also covers the administrative and management functions – financial, strategic, talent management, back office technology, legal, etc. 

Most small and midsize organizations cannot afford to master all of these areas of specialized knowledge with internal staff – at least not full-time.  Not only is the initial cost of training high, but the ongoing investment required to keep all those different resources up to speed in their particular area of specialized knowledge is cost-prohibitive for most organizations.  Therefore, it’s not surprising to see a proliferation in outsourced services, including payroll, benefits administration, staffing, IT, etc.  Many companies have grown quite large by providing these specialized services to other businesses. 

No less surprising is the increase in organizations buying talent by the slice – hiring consultants or advisors.  Some areas of specialized expertise do not require high volumes of repetitive activities or transactions (such as payroll or benefits processing).  Into these areas step veteran knowledge workers who prefer to work independently, spread their expertise over more than one organization, and networks with other individuals who possess similar or complementary expertise.  By hiring such an advisor on an as-needed basis, a small to midsize organization can afford a level of expertise that they could not afford full-time. 

This “talent by the slice” trend is likely to continue for three reasons:

  1. The competitive pressure on organizations continues to increase.
  2. The fragmentation and specialization of knowledge continues to increase, and the rapid advancement of this knowledge requires a great deal of continuous learning. 
  3. The number of qualified individuals who want to work independently is increasing.  This is largely fueled by the Baby Boomer demographic.  They want to remain engaged in business with greater time flexibility, they have years of expertise that can benefit others, and in many cases, their personal financial situations require them to continue generating income.  Serving clients as advisors is a way for them to fill each of these needs. 

3 Financial Management Objectives for CFOs

October 8th, 2011 by Troy Schrock

3 Financial Management Objectives for CFOs

3 objectives for the CFOs of entrepreneurial and mid-market companies:

  1. Integrity in Financial Reporting: Implement the proper personnel and processes for reliable financial data.  Financial reporting is historical; it tells “what happened.” 
  2. Sound Financial Analysis and Synthesis: With solid financial reporting disciplines in place, CFOs can focus on what it means.  But they must not stop there.  CFOs also need to synthesize the information and help the organization’s decision-makers think about the future.  How do the financial results affect strategic and operating decisions, and vice versa.
  3. Tight Financial Management (Budget and Cost Control):  The budget (or the financial forecast, which is more flexible and preferred by some) paints the future financial picture for the organization’s leaders.  First, it connects current decisions to expected results.  Then, actual results can be measured and compared to expectations.  This calibrates the assumptions of the decision makers.  Because it requires an understanding of the key value drivers of the business, this discipline also enables CFOs to identify specific areas of cost control that need addressed (which can be anything from a line item to an entire process).

The CFO must ensure that the first objective is achieved, but second and third objectives are where CFOs add the greatest value to a business.  Therefore, those are the objectives on which he should focus his time.

Growing from Controller to CFO

September 12th, 2011 by Troy Schrock

The following was developed to help a specific person, but in our experience as ActionCFO advisors, we have found it to have wide application.  A controller who would like to grow into a CFO should focus on the following: 

  1. Build leadership and management skills.  Controllers tend to be great technicians, but they are rarely good managers.  A CFO, however, must be skilled in managing staff and nurturing their professional development.  Of course, this is not a “finance thing;” it’s a management thing.  Effectively delegating, dealing with performance issues, setting staff goals, and identifying specific areas of development for career growth are basic skills requied for any manager to be successful.
  2. Connect business strategy to financial strategy.  Which activities generate the best value?  How do they connect with the business’s value proposition? It is the CFO’s job to provide the financial perspective to strategic discussions with the CEO and executive team.
  3. Shift focus from data to information.  Transactions, recording, compliance – all primary tasks of the controller – are all about data.  But this data is meaningless if it is not converted to information – insights that can be used to make decisions.  A CFO must be able to discern meaningful information from the data. 
  4. Increase time spent presenting relevant information to decision makers within the business.  It is incumbent upon the CFO to talk with leaders and understand what information will help them do their work more effectively.

These skills will move a controller form a rear-looking mindset (recording what has happened) to a more strategic forward-looking mindset (anticipating what will happen).  In determining what the data means and persuasively communicating how it should affect business decisions, it may be helpful to ask these three questions: 

  1. What happened?
  2. What does it mean?
  3. Now what?

The “what happened” should really be handled by the financial staff.  Once that basic analysis has been done, the CFO can focus on “what does it mean?” and “now what?” in helping the executive team make good decisions.

Depth and Breadth

July 25th, 2011 by Troy Schrock

I once worked in a distribution business where the customer was the end consumer.  Leaders in that business often said, “Depth equals profitability and breadth equals stability.” 

By “depth equals profitability,” they meant that more volume delivered to an existing customer directly led to greater profitability.  This makes sense, of course.  Delivery efficiencies increase and selling costs are lower than when securing new customers. 

If the saying had stopped there, however, the business would have been very vulnerable.  If you focus entirely on selling more to existing customers, what happens if one of those customers suddenly stops doing business with you?  Lack of diversification in revenue stream is a glaring risk for any business – particularly small ones.   That is why “breadth equals stability.”  Customer attrition will happen, so broadening your customer base is extremely important to improve your ability to survive it. 

In short, the long-term health and stability of your business depends on a balance between depth (share of customer) and breadth (share of market).