Right now, we are in the midst of massive changes globally, whether they be called transformations, reorganizations, or just pure and simple survival. The underlying objectives are changing the go-to-market strategy, updating and streamlining business processes, and automation as part of significant changes in how the businesses are run and structured.
I have previously covered the challenges of Transformations and Re-orgs in earlier posts, and won’t go over these again, but I would recommend that you should read them in conjunction with this post to get a more in-depth perspective.
In this article, we are going to look at this from the perspective of meeting bottom-line targets. In this type of transformation, the CFO and finance teams play a critical role in setting the targets, but also in providing the necessary discipline in minimizing value leakage.
Taking this approach can be very beneficial in driving innovation if you have a CFO that understands the business. Still, the reverse is that if your CFO is more like a financial controller who is just looking at numbers, the results can be tragic. I have experienced this first hand, and some of the statements that I have heard are “Operations has 80% of the headcount budget, reduce it by 60%.”; “The Cost to Serve is too high.” If you are thinking to yourself, I have heard these before, you are not alone, but they need context plus the data needs to be correct. As I reflect on the above experience, what was interesting is that the reason the cost for operations, as well as the Cost to Serve, was that they had bundled the sales and marketing costs under operations. What was strange when we analyzed the data correctly that the most expensive department in the business was Finance, but they would never cut their team. If you are working with incorrect data, you are already in trouble.
I digress; why are there variations between the proposed changes and expected savings to the results achieved? Aside from the apparent reason that the business sets high expectations, but isn’t willing to put in the hard yards to achieve this or fails to set clear goals and accountability, there are three reasons which I have seen.
Under Delivery of the Initiative
The initiative doesn’t meet up to the projected benefits. Some examples of this are “a new product takes longer to launch than planned,” or the uptake of a new service fails to meet adoption rates.
These are events that are outside the control of the company, such as currency fluctuations, increased cost in labor, or raw materials.
Underperformance in other Business Functions
Management actions that erode the value achieved via the change actions. An example that I have seen many times is the savings funneled from the initiative to other underperforming business functions in the hope that they will improve. A common area I have seen this is with increasing marketing budgets to attract more customers, but without making any changes to the current process (good money after bad if it is not working well today).
BHAG — Big Hairy Audacious Goals
BHAG is an idea that was conceptualized by Jim Collins and Jerry Porras in the book “Built to Last: Successful Habits of Visionary Companies.”
If you want to transform your business and see the results show up on the “bottom-line,” you need to ditch the approach that so many companies use is “what we did last year?” This mindset is limiting in that it creates the behavior of “as long as we do better than last year; we are good.”
Start thinking in terms of overarching objectives of growth, operational excellence, and business structure. Once you have set these, then it is vital to work with the finance team, who should be the ones that set the ground rules. Any initiative needs to have a formal evaluation with the finance team to ensure that the financial calculations and risk assessments are correct instead of what we often see today is that it becomes a finance problem when an issue arises. The plan should also include explicit, measurable objectives (I prefer OKR’s, but it can work with KPI’s as well) and who is accountable for the attainment of these.
It is common that when we undertake any transformation effort that we separate this from day-to-day operations. I’m afraid I have to disagree with this approach as it insulates the project from the rest of the business, which misses an opportunity to get buy-in from employees very early in the process, which is key to the success of any transformation project.
There needs to be integration in forecasts, reporting, and budgeting as well as any transformation project. Integrated reporting provides a single view that gives everyone a clear understanding of the investments that the company is making, the impact of these investments, and how the business overall is performing. This clarity in communication is a critical component in any successful change initiative.
For any transformation, the CFO and Finance teams must work closely with the business leaders to articulate and track the value of the respective initiatives. As the change is underway, the reports should be combined and integrated with the daily operations reports. The “single-stream view” will provide the CEO and other executives with clarity around which aspects are working and which aren’t.
By taking this approach, it will become easier to answer the question, “how is this impacting our bottom-line?”