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Archive for March, 2012

Capitalizing on Complexity

Wednesday, 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.

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Forecasting is a Learned Skill

Wednesday, 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