Why You Should Have a Finance Person

I ran across Brian Hamilton’s post on Inc. magazine’s website, entitled “The 7 Biggest Financial Mistakes Businesses Make”. It seems like the finance function should be well prepared to help someone avoid these mistakes, since they are financial. How?

Mistake #1 – Hiring in advance of revenue

A finance person can assist the business owner or CEO a couple of different ways. First, we know how to forecast. We can do daily forecasts for one month, one quarter, or one year. We can do monthly forecasts for a quarter up to twenty years (or longer if there is really a need). Part of any forecast is a sensitivity analysis of primary drivers, and should you have a shortfall in revenue the forecast would show your loss exposure.

Secondly, treasury people deal with bank accounts, know the cash that goes into them and where it came from, and know why the cash leaves these accounts and where it goes. If revenue has not hit the bank account and payroll is going up, the treasury person is going to know very quickly that this is not sustainable.

Mistake #2 – Borrowing Money When You Don’t Really Need It, but When the Bank Is Willing to Lend It

The finance person is the one who will understand and explain the impacts to the business of different capital structures, and the pros and cons of each. This goes to financing strategy, which is an integral part of the company or business strategy. They go hand in hand. The finance person intermediates the interchange between the two strategies.

Mistake #3 – Not Paying Payroll Taxes on Time

The Treasury folks, especially if they are responsible for accounts payable, are well-versed in payment requirements and the activities needed to be in compliance with regulations, rules, and policies.

Mistake #4 – Pricing Too Low

This is another case where company / business strategy and financing strategy intersect. Sensitivity analysis of the cash flow forecast will identify the impacts of different pricing structures. In addition, identifying the various components of strategic pricing elements: cost, cost-plus, relative value, avoided cost, consumer surplus, producer surplus, and net benefits, are all at heart financial calculations.

Mistake #5 – Permitting Accounts Receivable

The finance person is the one who will understand the working capital impacts of this decision, the cost involved, and the risk issues, and have the ability to mitigate and manage these impacts to the extent possible.

Mistake #6 – Counting on One Major Source of Revenue

A proper financial forecast and sensitivity analysis will contribute to avoiding this mistake, along with sound financial risk management principles and practices. Finance people at a very young age are taught that diversification is one of the top risk management practices that can be undertaken.

Mistake #7 – Hiring Too Much Overhead

A finance person can assist with this activity as well, excluding finance of course!

I would love to hear your thoughts about the Value of the Finance Function or your stories on this topic if you have them.

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Organizational Balloons

We run across a lot of business articles, or books, or consulting engagements, that diagnose the problem that ails us as one of inadequate communication.

Conclusions such as:

“The company is not innovative enough, because R&D has not talked to sales.” Or,

“The marketing has gone poorly, because marketing has not talked to sales.” Or,

“The production has been faulty, because operations did not talk with R&D.” or,

“The company is not making enough money, because marketing has not talked with finance.”

In some ways this is an easy explanation, isn’t it? If we work in a company of 1,000, or 10,000, or 100,000, aren’t we bound to find someone who isn’t talking with someone else? What are the odds that we would not find someone who wasn’t talking with someone else?

We then make an extra effort, implement a project, create another procedure or policy, which with enough attention, focus, and follow-up will succeed in helping R&D talk with sales. In fact, it works. Those two groups are humming along now.

But our time is finite, and the result of this is that the organization can be somewhat like a balloon. With all that focus and energy, while R&D is talking with sales, the people in R&D who used to talk with finance don’t have time to do it as often any more, or are not talking with marketing anymore due to their schedules, or not talking with operations anymore because it isn’t an agenda item any longer.

There are three ways out of the balloon scenario. The first is to add resources, so that the increase in time spent coordinating the current problem area does not take away time spent coordinating other currently functioning areas.

The second is to increase the efficiency or productivity of the coordination effort, so that the gains in time saving are available to spend on the current problem area.

Finally, we can create several smaller businesses out of a larger business. This lowers the time required to coordinate, but it will come at the expense of any synergies to be had from a larger combination.

Large organizations are always going to incur costs related to coordination, and there are always going to be areas where communication needs to be improved. We must keep our eyes open as we intervene to address these if we are to avoid getting caught up in squeezing the balloon.

I would love to hear your thoughts about Organizational Balloons or your stories on this topic if you have them.

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It’s The People

In every group I have led, I have asked those on the team what is the best part of their jobs, what is good about working for the company, what is going well, what could go better, etc.

Invariably, the most common positive benefit cited?

“It’s the people”!

No matter the industry, the place, the function or the era.

Have I lucked out, finding pockets of really great people to work with?

I don’t think so. What happens is that we, as humans (who are by nature social creatures) will always (to the extent we are able) attempt to satisfy what social needs we can in our working environment. It is, after all, where a lot of us spend the majority of our waking hours.

The dynamics at work, I think, are similar to the dynamics of families. Consider:

·         We do not choose whether a boy or girls comes into the world, no less than we choose whether Tom, Jane, Dick or Suzy is hired for that vacant cubicle. We end up accepting what we are given and working with it.

·         We do not choose whether our baby is colicky or forever smiling, no less than we choose whether our new co-worker is grouchy, cynical, playful, or charismatic. We play the hand we are dealt the best we can.

·         No less so, our babies did not choose us, but adapt to whatever kind of mommies and daddies we turn out to be. Our co-workers adapt to our idiosyncraticities as best they can!

At the end of the day, most us make our families work out ok, and in similar fashion we also make our work-lives work out ok as well. We accept people as they are, push to change where we can, learn to appreciate particular strengths and abilities, fight occasionally, kiss and make up when we do, and get on with life.

So we have situations such as:

We all know that Bob from Accounts Payable is always a little grumpy, and we know he is not going to change, that is part of who he is, so we roll with it, and yet we really do appreciate his ability to find the absolute best office humor cartoons, and because of that he has made us laugh many, many times.

Or Carmen, who loves to gossip about the latest reality TV stars (using names of people we have never even heard of!), always needs a little extra prodding to get her away from the water cooler at the start of work, but wears her heart on her sleeve and is always the first one to offer to help us out in a pinch, and who knows how many countless times that has happened?

And when we retire?

After an appropriate amount of time has lapsed at our coffee and cake reception, Bob or Carmen are going to ask us “what was the best part of working here?”, and we will suddenly become aware of how much we will miss the help in a pinch, and the daily funny cartoon, and more likely than not we are going to say…with meaning…and heart-felt emotion…“it’s the people”.

I would love to hear your thoughts about Workplace Atmosphere or your stories on this topic if you have them.

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Pfeffer Power

I just finished reading the book “Power” by Jeffrey Pfeffer. He is a Stanford professor who has made power and organizational politics a centerpiece of his academic career.

One of the things I needed to learn the hard way in my career is that we cannot avoid politics. My final realization of this occurred in the cut throat setting of a “merger of equals”. It is not pretty, it is not easy, and it does not always work out the way we want. And it is also true that there is no such thing as “equals”, no matter how hard they try to sell it that way.

Since that wake-up call I have been an avid reader and researcher of politics.

Anyone leading a finance organization in any size company will need to employ political strategies and exercise some form of organizational power. It cannot be avoided.

The book was plainly written. It contains advice that is then illustrated with various stories of people the author knows or has researched.

The thing I liked best about it was that he did not try to sugarcoat anything (at one point in the book he even agrees with Machiavell).

We often hear from CEO’s in the leadership literature really nice things, like sticking with the vision, listening to your people, etc. Pfeffer states that “most books by well-known executives…should be stamped CAUTION: THS MATERIAL CAN BE HAZADOUS TO YOUR ORGANIZARIONAL SURVIVAL”.

The reasons for this are: 1) leaders are good at self-presenting, which is a selective endeavor, 2) those in power get to write history, so it always sounds a bit better than it actually was, and 3) successful leaders benefit from the “just-world effect” (meaning others perceive that they must have done something good to reap this position, because the world is fair and just). The “just-world effect” seems to me to be another phrase for the “Halo Effect”, discussed in prior posts.

All in all, maybe not a whole lot new here, though the reasons why things are as they are have been explained a little bit more. If you are well-versed in the topic I am not sure if you will find this book of great use. On the other hand, this book follows in large part an MBA level course he taught called “Paths to Power”. If you are at that level, in fact or in mind (like I was), this might be a good read.

I would love to hear your thoughts about Power or your stories on this topic if you have them.

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Why We Turned the Tables on Our Bankers

In the credit facility syndication process, finalization of the credit agreement usually occurs about ½ day prior to closing the transaction.

From a game theory standpoint, this is not ideal. If we imagine a decision tree with two outcomes, agreement or no agreement along with their associated payoffs, we can understand why this is the case.

If a facility has been worked on for several months, everyone from the janitor to the Chairman of the Board is aware of its occurrence, and thus a breakdown in the deal is highly public, and due to the importance of credit to the firm highly scrutinized. “Did you guys really need to hold out for e-mail notification over fax?”

Near the end we are therefore at our lowest in terms of bargaining power, since the bank is aware that we do not have much other choice at that point.

Having experienced this a couple of times, we experimented with changing the process. Rather than follow the standard timeline, we insisted on negotiating the agreement first, prior to engaging the syndication agent.

This was the point of our greatest negotiating leverage - we could in fact still walk away from the deal without the difficult repercussions.

The terms and conditions in that agreement were much better than the ones obtained in our prior deals.

Sometimes that theory really works!

I would love to hear your thoughts about successful uses of Game Theory or your stories on this topic if you have them.

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What’s a 5-Star Rating Worth?

Fresh off our multi-part posting entitled Wikifinance, Wikitreasury, where we explored professional changes we may potentially face, we may want to focus on some aspects of the networked world that are somewhat problematic.

One of these areas is the concept of “liking” and “rating”. These were mentioned in separate blogs I ran across. In "The Future of S&P Downgrades: FYI, CYA, or LOL", the author's portend that Standard and Poors can be made obsolete, and likely will, as people become more networked. Rating debt issuances will be similar to a LinkedIn discussion or Facebook posting, we will “like” items and by virtue of this the really good debt will be higher rated.

In "Thinking About Curation in the Enterprise", the claim is “peer-reviewed and peer-ranked expertise” is something that web technology is good at.

Statistics Principle – Random Samples from a Population

The field of statistics has methodologies to help us figure out whether things are different. If we pull 10 balls out bucket A, and some are red and some are blue, and 10 balls out of bucket B, also some red and some blue, there are tests we can employ to determine how likely it is that both buckets are similar, and have about the same number of red balls and blue balls.

Underpinning these methodologies is the fact that we need to draw a random sample from the population. This means that any one ball is just as likely to be picked as any other ball. So if we pick every third ball, that is not a random sample, since every first and second ball had no likelihood of being picked. Any results of our statistical tests are not valid in this case.

What Does a “Five-Star” Rating Tell Us?

So if we are on Amazon, comparing books about blogging, and one is rated 5 stars and another is rated 4 stars, can we be confident that the book with the higher rating is a better?

From a statistics point of view, we cannot, since the ratings do not come from a random sample. The ratings do not tell us anything!

Why is this the case? Don’t we like to see polls and votes to see who wins. Don’t we use them in real life for lots of important things – US Presidents, legislation, whether our office is going for Chinese or Pizza today? Don’t the book ratings provide that same type of thing?

For one, there is a subtle difference in these examples versus ratings. For a political election, or an opinion survey, we get one vote. When we go onto Amazon, we may choose to make no ratings, one rating, or one hundred ratings.

When Encountering a Rating – Let the Viewer Beware!

What if the 5-star rating came from a total of 3 people and the 4-star rating is from 30? A statistical reason here would be that we can be more confident of the 4-star rating since it is from a larger sample size. But again, only if the sample were random.

To address this, some folks do not trust a rating unless there is a minimum number of people who have rated it. Even that is not fool-proof. What if we discovered that all of the 5-star book ratings came from friends of the authors? And one of them had a lot of friends, and the other not as many? Does the rating measure the value of the book in this case? No, it measures the number of friends.

Are two books, each with 10 ratings of 5, each as good? What if 1 out of 10 book purchasers who like a book will rate it, while 1 out of 100 of those who do not like a book will rate it? What if we were told one of the books has sold 10,000 copies and the other 100 copies?

Be careful out there!

I would love to hear your thoughts about problems with internet rating systems or your stories on this topic if you have them.

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Wikifinance, Wikitreasury – Part 4

To quickly recap this theme - we have, from part 1 – change is going to happen; from part 2 – tacit interactions is where the rubber hits the road and the social network is the unit of work; from part 3 – change hasn’t happened yet but don’t let it fool us into thinking it won’t.

Web Trend, Forces and Phenomenon and Their Possibilities

When cooking pasta, one way to tell if it’s done is to take a handful and throw it against the wall. If it sticks, it’s done. So same concept here, I will throw a bunch of stuff against the wall. We can all think about whether it “sticks” or not for us.

From our previous discussion, we have talked about the social network being a principal unit. What if these social networks were branded? Think of something that sounds cool from a marketing perspective – maybe “Treasury Tigers”? We have a network of 500 Treasury professionals, each who meet some rigorous qualification standards. We hire ourselves out collectively as a network. Interviewer to CFO – “Who is your Treasurer?” CFO response “Treasury Tigers, of course”

One of the reasons to globalize and go virtual is demographics. The US, Europe and Japan are getting older. Even China has reported problems due to the one child rule. If the up and coming talent is from India, or Africa, and the service is needed in Canada, a virtual organization is the only way it will be provided. I headed a virtual Treasury organization, my folks could all have managed cash from a beach in Hawaii if they had wanted to.

Tacit productivity, according to McKinsey, is enhanced by better information, more value-added interactions, broader and deeper networks, collaboration to produce better ideas, and learning. Companies that find ways to foster these will have an advantage over others.

 In the book “The 2020 Workplace”, the authors Meister and Willyerd use the term “uber-connected” to describe companies performing their functions in this brave new world. These activities will involve knowledge capture, broadcasting thought leadership, collaborating, designing, and engaging employees.

One can imagine employees being trained virtually, making their location irrelevant.

Many assume that companies will become more “porous”. Thought leadership may become more important for the Treasury organization. If the most talented want to work at the top 100, there will be a lot of competition to attain that level.

As the flexibility of the web and mobile technology increases, one can imagine that collaboration with banking, supply chain, and customers may enhance payments and processing in a myriad of ways. Networks of these parties may also bring about benefits, such as the mythical “straight through processing”.

We have only scratched the surface of the possibilities that may arise. But the dynamics illustrated here, network connectivity and interactivity for knowledge transfer, design, collaboration and engagement purposes will be near the center.

I would love to hear your thoughts about impacts to the future treasury organization or your stories on this topic if you have them.

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Wikifinance, Wikitreasury – Part 3

To quickly recap this theme - we have, from part 1 – change is going to happen, and from part 2 – tacit interactions is where the rubber hits the road and the social network is the unit of work.

Exhibit A

I am attending the Association of Finance Professionals annual conference later this year. The 4 day program will provide me the following – a keynote speech, a social event, 10 content sessions selected from 10 different tracks, two to four bank sponsored events, eight to ten hours of interaction with finance and treasury vendors, and an evening of entertainment.

I have not checked this for a fact, but I would wager that we could find on YouTube and other social media sites a famous keynote speech and 10 presentations dealing with finance content. On magazine and professional sites I can browse and download vendor sponsored whitepapers and subsequently correspond via e-mail or telephone. I can find two hours of entertainment on any number of sites. I could replicate the chance encounters at this conference by participating in some LinkedIn professional groups. After all that I could meet my banker for drinks.

In other words, even today there are alternatives.

Still Not Quite There

However, I will tell you this – after having had a virtual organization experience for several years, there is still no substitute for face to face interaction. I do not think I am alone in this - airlines still fill up seats with people going from here to there to meet clients, attend meetings, make presentations, etc. The conference I mentioned above still has thousands and thousands of attendees.

This tells us that the promise or threat of the Web-world is still on the horizon. It should not give us comfort that it is an empty threat. Rather, it should tell us that the reasons why “old school” methods still work will become the subject of further innovation, forever chipping away at the stone.

For instance, I have never experienced, but believe that if I sat in a meeting room, with a floor to ceiling screen of one or more counterparts on video from a distant city, that the need for a face to face meeting would be almost satisfied. Or, if there was a 3-D holograph. At least enough to make one trip a year feasible rather than one trip per quarter, say.

But Getting Closer

While we may not be there yet, we are getting closer. On a personal level, I did not blog last year. My LinkedIn contacts have doubled since last year. My group participation in LinkedIn has more than doubled. I never commented on somebody else’s blog or whitepaper before last year. I’m even thinking of getting one of those smartphones everybody seems to have…!

So, now - we have, from part 1 – change is going to happen, and from part 2 – tacit interactions is where the rubber hits the road and the social network is the unit of work, from part 3 – change hasn’t happened yet but don’t let it fool us into thinking it won’t....stay tuned.

I would love to hear your thoughts about impacts to the future treasury organization or your stories on this topic if you have them.

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Wikifinance, Wikitreasury – Part 2

Types of Organizational Interactions

McKinsey identifies three types of organizational interaction or activity:

Transformational – where something is transformed, rock into iron ore in a railcar, or iron ore into a steel bar, or a piece of leather into a shoe.

Transactional – a routine interaction takes place, such as ringing up a sale, balancing the bank account to the accounting ledger, or filling out an expense report.

Tacit – interactions requiring experience, expertise and judgment, focused on complex problem solving, strategy, planning and knowledge exchange.

A finance and treasury organization focuses on transactional and tacit activities. Transactional activities include posting, balancing and reconciling, routine banking activities such as cash concentration, issuance and investments. Tacit activities include assisting business units in analysis and strategic planning, determining cost of capital, and managing relationships with banks and market participants. Participation on project teams often involves exchanging knowledge, problem solving, and planning.

The Intersection of Treasury and Web

It is certainly the case that the intersection of treasury and web has come a long way with respect to transactional activities. Most Treasury work today is done interfacing with bank websites, treasury workstations, and ERP systems.

On the tacit side of things, there are discussion group sites, such as the Association of Finance Professionals, where knowledge is exchanged, and which sometimes pose problems that need to be solved. This also occurs within discussion groups on LinkedIn, and on various private sites. Blogs also contribute expertise, thoughts, ideas and information which may be of assistance to those interacting tacitly.

Net-worked

The primary factor involved in the intersections above is the network. This is a primary unit in the tacit economy.

In the old days, our network consisted of those we interacted with at the country club, the professional association dinners, and industry and professional conferences.

Our networks now are friends in Facebook profiles, those we follow and who follow us in Twitter, our LinkedIn professional groups and networks, among other things. These networks are more plentiful, larger, and more overlapping than before.

 Summary

OK, so far we have, from part 1 – change is going to happen, and from part 2 – tacit interactions is where the rubber hits the road and the social network is the unit of work.

The exploration will continue…

I would love to hear your thoughts about impacts to the future treasury organization or your stories on this topic if you have them.

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Quotes of the Week

“As a visual display, the London Underground diagram/map has a use: to help someone see where they are and decide where they're going. That's the end; its map-ness or diagram-ness is simply the means. Matching ideal means to useful ends is "what a designer does.” From http://www.fastcodesign.com/1664692/london-tube-map-sparks-furor-over-what-design-means

“The recipe for a great CFO: one part tactical accountant, one part management guru, and one part business advisor.” – Corporate Executive Board

“To be conscious that you are ignorant of the facts is a great step to knowledge” – Benjamin Disraeli, as Re-tweeted by @Filipinosuccess

"Inspiration is not random...our jobs as designers is to prepare for the lightning strike" - @trevstair Retweeted by @bokardo

“Inspiration Checklist: 1) Learn the competitive landscape 2) Get a global perspective 3) Understand what makes your project different” @nswg, Retweeted by @bokardo

“What many don’t realize is that today’s always-on economy has an entirely new dynamic that involves an always-on, anywhere customer, unpredictable demand, and — most importantly — the limited attention span of customers. Add fierce competition to the mix, and what you have is an unpredictable and highly chaotic marketplace. And what that means is that today’s company – regardless of their business focus — has to have a much higher metabolic rate. It grows faster, and fails even faster. Against such a backdrop, one needs to break down one’s business into many small chunks.” - Om Malik, from http://gigaom.com/2011/05/31/economics-of-good-enough/

“..as long as you keep your boss or bosses happy, performance really does not matter that much and, by contrast, if you upset them, performance won’t save you.” – Jeffrey Pfeffer in Power

I would love to hear your thoughts about the Quotes of the Week or your stories on this topic if you have them.

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Wikifinance, Wikitreasury – Part 1

Once Upon a Time…

…there were thousands of people who made a living traversing the cities, towns and countryside selling encyclopedias – World Book, Britannica, Funk & Wagnalls (this is the one my family had). These encyclopedias were printed by printing shops contracted by the publisher. These print shops needed printing presses and paper, and people to ship them to the correct places from the source. The encyclopedias were created by very smart people who were paid to write entries.

In other words, there was an entire value-chain involved in the encyclopedia business, spanning several industries, locations, and professions.

I imagine that these encyclopedia organizations were normal office working environments, staffed with writers, producers, supervisors, janitors, executives, etc. These people were all part of the company, worked in the same building together, went out to lunch occasionally and attended the annual company picnic, car-pooled, got to know each other’s kids, gave occasional advice on another’s planned purchase of a refrigerator, etc.

But Then…

…this entire value-chain has been upended by Wikipedia, which was essentially created by the free, voluntary donation of a lot of peoples’ time.

The writers, producers, supervisors, janitors and executives got replaced by the encyclopedia-developing equivalent of a flash mob. Whoever, from wherever, at whenever got involved in whatever. Didn’t know ya before. Don’t know ya now. Might never know ya later.

And so…

…this strikes me as a very, very, very fundamental change. Consider:

·         Consumers are now getting something for free they used to pay for, so they obviously benefit.

·         Labor is provided for free, so a motivation other than money is satisfied.

·         The projects get completed in a haphazard way due to the volunteer nature of the contributors, so traditional project management techniques can’t be used.

The phenomenon did not stop at encyclopedias. Computer operating platforms (Linux) and sophisticated statistical programs (R) have been created in similar manner.

So Many Questions, So Little Time

What does this portend for the Finance and Treasury professional? How might this impact the Treasury organization of our companies?

Will the fruits of our training and experience be free? How will we feed our kids?

Will flash mobs, on a voluntary basis, get our wires out in the morning, our CP and investment transactions executed, and our cash consolidated and balanced?

Will we use wikis involving hundreds of participants to evaluate the financial merits of new investments and acquisitions?

Some will say that can never happen. Others will say it is inevitable. I do not know if one is right, or both, or neither.

However, in order to prepare for some change (order of magnitude currently unknown) it might be wise for us explore how these types of groups and organizations are guided, led, and operated to achieve what they do.

We will explore more tomorrow…..

I would love to hear your thoughts about impacts to the future treasury organization or your stories on this topic if you have them.

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The Power of 10,000 hours - Part 3

In our last post, we discussed the Power of 10,000 hours and what a lot of work it is.

Given that expertise lies at the end of the rainbow, it still might be worth it to pursue Deliberate Practice.

However, as organizational leaders, there are several factors we need to think about which make this even more difficult.

Mightily more difficult.  

Since Deliberate Practice focuses on things we cannot yet do, it will involve failures. The gymnast does not just hop up on the balance beam and perform a triple walkover. The gymnast likely falls off, only does a double, or lands with a thud on the beam hundreds of times prior to success.

How many of us work in an organization that can tolerate that much failure? When we go to work, aren’t we there to perform, to get things done right, to achieve our objectives?

If one of our prospective employees told us in an interview “I can do that job after 100 attempts”, how many of us would say “that is the one for me, hire ‘em”? Don’t we generally look for the one who can “hit the ground running” and add “immediate value”?

Since this is the common and prevailing perspective, we will need to spend a lot of time and effort sheltering and protecting our teams as they go through the failure process.

Depending on our organization, its culture, and its politics, even this might not be enough.

Can Our Organization Tolerate Failure?

In any political environment track records count, strengths and weaknesses of opponents matter, and in some cases are pounced upon. “I successfully completed xyz, my counterpart could not achieve abc even after three tries”. Who is more likely to win a promotion, or additional resources, or greater scope of control with an argument like that? Not the eventual expert, the one operating under Deliberate Practice!

Furthermore, research has shown that those who are successful are more likely to be ascribed positive attributes than their failing counterparts (a la The Halo Effect). Again, with a groundswell of positive attributions from the organization at large, who will hire the currently failing, future Expert?

It Takes Time

Simple fact – if it takes 10,000 hours of Deliberate Practice to become an expert, our group needs to have this much time available for this practice. In a reorganizing, synergy-seeking, cost-cutting, make-do type of environment, how likely is it that we have a stray 5 FTE’s available to do nothing but practice?

When the CEO comes around when it is time to “stretch” the budget, how many of us will be able to protect those FTE’s from contributing to the company’s “urgent” need to hit its current forecasts?

It Takes Others

If we are building an expertise we do not yet have, we will need to involve others in coaching and guidance roles. Do we have the right network and story to convince an appropriate coach to work with us? Do we have the financial resources to attract the right kinds of folks to guide us?

Since we are talking about time and money, there will be a great temptation to cut corners and make-do with good enough people and activities. This will not create expertise!

Why Is This Good News?

Why is this news good? How can it be so? We need the right organization with the right kind of politics, with extra time created for the purpose and appropriate coaching and guidance provided. This is a tall order.

So tall, in fact, it is 1) unlikely anyone will try, and 2) unlikely that anyone could replicate what we do even if they did.

If we can truly pull off 10,000 hours of Deliberate Practice with our teams, we will achieve what 99.99% cannot, because the odds are stacked so hard against it!

And we can regard the hard work that we perform to overcome the obstacles noted above as our contribution to the Deliberate Practice that establishes our organizations expertise.

Look forward to seeing you in the winner’s circle!

I would love to hear your thoughts about developing expertise or your stories on this topic if you have them.

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The Power of 10,000 hours - Part 2

In our last post, we discussed the Power of 10,000 hours and created a very optimistic outlook for our businesses. All we have to do is spend 10,000 hours doing something and we will become experts in it and our businesses will have competitive advantages.

Now we will come back down to earth.

Ultimately, it comes down to work. Ten thousand hours of it, in fact.

But not just any kind of work - if we are to become experts, the 10,000 hours must be spent in what is called “Deliberate Practice”. Following are the things we need to do according to noted expertise researcher K. Anders Ericsson as discussed in his Harvard Business Review article:

We work on things we cannot yet do

 “When most people practice, they focus on the things they already know how to do. Deliberate practice is different. It entails considerable, specific, and sustained efforts to do something you can’t do well—or even at all. Research across domains shows that it is only by working at what you can’t do that you turn into the expert you want to become.”

We must concentrate really hard

“Deliberate practice involves two kinds of learning: improving the skills you already have and extending the reach and range of your skills. The enormous concentration required to undertake these twin tasks limits the amount of time you can spend doing them.”

We must think really hard

“Genuine experts not only practice deliberately but also think deliberately… We’ve observed that when a course of action doesn’t work out as expected, the expert players will go back to their prior analysis to assess where they went wrong and how to avoid future errors. They continually work to eliminate their weaknesses.”

It requires motivation and willingness to tolerate pain (see earlier blog)

“Moving outside your traditional comfort zone of achievement requires substantial motivation and sacrifice, but it’s a necessary discipline. As the golf champion Sam Snead once put it, ‘It is only human nature to want to practice what you can already do well, since it’s a hell of a lot less work and a hell of a lot more fun.’”

We Can’t Do It Alone

“Research…has shown that future experts need different kinds of teachers at different stages of their development. In the beginning, most are coached by local teachers, people who can give generously of their time and praise. Later on, however, it is essential that performers seek out more advanced teachers to keep improving their skills. Eventually, all top performers work closely with teachers who have themselves reached international levels of achievement.”

This has serious work implications, which we will discuss tomorrow….

I would love to hear your thoughts about developing expertise or your stories on this topic if you have them.

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The Power of 10,000 Hours

One of the benefits of blogging is that you share an interest and affiliation with others that you never would have crossed paths with otherwise. Most of the bloggers I have been in contact with have not been even the least interested in business, or finance, or treasury - yet even then points of similarity occur.

One of these bloggers, in their blog Blogging Without a Blog, discussed Malcolm Gladwell’s references in his book Outliers to K. Anders Ericsson’s studies, and others, of what it takes to be an expert. One of the simple takeaways from this research was that it came down to 10,000 hours of practice.

Want to be good at playing trumpet? Practice for 10,000 hours. Want to be a great hockey player? Practice for 10,000 hours. Want to be great at chess? Practice for 10,000 hours.

Want to be a great Treasurer or CFO? You know what I am going to say.

What is 10,000 hours? It is about 5 years of 40 hour work weeks. In other words, a long time. So long, in fact, that none of us can hope to be expert in everything. We need to choose, because there are limitations, even if we work 80 hour weeks.

What we choose to use our limited amount of time to be expert in will be, for better or worse, our source of competitive advantage. This phrase is overused, I know, much in the manner of Best Practice, subject of prior blogs, but I am willing to use it in this context because it can be true.

Take ten folks from a treasury staff and calculate what they spent 10,000 hours on, and they will all be different. One will have developed deep Excel Macro skills, another picked up project management processes, and another nailed down accounting rules and regulations pertaining to cash and investments.

Take this group in aggregate, and compare the 100,000 hours it has spent in total to any other Treasury group, whether in the same industry or not, and it will be different. This leads to the conclusion that no two Treasury groups are identical - each Treasury group is unique.

Taken another way, over the next five years we all have the opportunity to dramatically re-direct and enhance our Treasury groups to entirely new levels of knowledge and performance, in ways nobody else will duplicate. What a great opportunity!

I would love to hear your thoughts about achieving expertise or your stories on this topic if you have them.

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Is Treasury 3.0 Coming?

Treasury Strategies posted on LinkedIn their new whitepaper entitled “Treasury Services 3.0”. Let me say upfront that I am a fan of Treasury Strategies, their website has a lot of useful information to the finance professional and I have read a lot of it and it informs my way of thinking on a lot of things.

What is Treasury 3.0?

The essence of the article is that we are passing into a new era in the Treasury field, from 2.0 to 3.0. This is an era when we are passing from customer-centric products to bank-centric comprehensive liquidity solutions.

If we imagine working capital activities (billing, receivables, invoicing, payables) on one axis and liquidity activities (investing, borrowing, sweeps) on another, the banks’ traditional stronghold has been the intersection of the two, what I would call the commercial checking account.

In Treasury 3.0, the banks will move from this center along both axes to create the bank-centric liquidity and product solutions.

Already in Action…

From one turn of the kaleidoscope, I see what is being talked about here. One of the items that appears “hot” for banks to push these days is their credit card systems. They promise to come in, go through our AP vendor listing with a fine-toothed comb, and identify customers who will accept card payments, and then help us convert these customers to credit card payments, thereby saving the company time because it will process far fewer PO’s and invoices (these being more labor intensive activities).

Conceptually, we can think of the savings in the value chain being split between the bank and the company. Good news for the company, good news for the bank, and bad news if you are an AP clerk.

…Or 2.0 Redux?

However, if we turn the kaleidoscope again, several items can give us pause. It seems (from what I have seen and heard) that more banks are using outsourced providers for these services – the industry term for this being “white-labeling”. Non-bank providers are better able in a lot of instances to meet company requirements because they are not hampered by the strict regulatory regime and rules the banks are subject to. Finally, a lot of the activities we are discussing here are still associated in some manner to the traditional commercial bank account.

This all seems like 2.0 rather than 3.0 behavior.

One item we finance folk who enjoy bank credit need to be concerned about is the ancillary business that banks receive. If we have 5 banks providing 20 million of credit each, we need to make sure our 2 million in annual fees is evenly distributed amongst these institutions.

Issues to Be Addressed Remain

If we move to the bank-centric solutions of 3.0, how are the other 4 banks then compensated? Or are we destined to tie our fate to one financial institution? This is not wise from a risk management standard – diversification is our first and probably most effective tool. Given the events that occurred in 2008, it is not very conceivable companies are going to run to put all their eggs in one banker’s basket.

All this being said, Treasury Strategies is the group that brought us the inverted pyramid of treasury activity - noting that transactional activities were phasing out and analytical and strategic activities were phasing in. This has proven to be correct to a large extent, so we cannot bet against the 3.0 vision lightly.

Key Takeaway

There are things to consider here, but it will take quite a while to sort it all out, and several significant hurdles will need to be climbed. As mentioned in an earlier blog, incremental change will likely rule the day.

Questions

·         Have you seen examples of Treasury 3.0?

·         What are the significant hurdles and issues to address?

Add to the discussion with your thoughts, comments, questions and feedback! Please share Treasury Café with others. Thank you! 

Collection Effectiveness Index – A Good Measure?

Rene Micheau, through a recent blog post, introduced a type of working capital metric to me called the Collections Effectiveness Index (CEI). This is an alternative metric to Days Sales Outstanding (DSO) that is supposed to better capture AR performance.

The calculation of CEI is:

(Beginning AR + Sales – Ending AR) / (Ending AR + Sales – Current AR) * 100.

I left a comment on this post mentioning that DSO was not the best metric for collection activity, and when I was in Asset Based Lending we used one called turnover as a better indicator.

My inner analyst decided to play with this calculation to see how it worked. To simplify things, I assume that there is 100 of AR that is all current at the beginning of the month but is due in less than 30 days, so anything not collected during the month will be past due by the end of the month. I realize that this simplification may not perfectly reflect reality, but when attempting to explain something one can simplify the irrelevant aspects (see prior blog post for further information).

What happens if we collect none of the prior months AR and have sales of 50 during the current month?

                CEI = (100 + 50 – 150) / (150 + 50 – 50) = 0/150 = 0 x 100 = 0

This intuitively makes sense, as no collections should correlate to a score of 0.

What happens if we collect all of the prior months AR and have sales of 50 during the current month?

                CEI = (100 + 50 –50) / (50 + 50 – 50) = 100/50 = 2 x 100 = 200

This result is inconsistent with the claim that the highest score is 100 unless there are prepayments.

What happens if we collect all of the prior months AR and have sales of 102 during the current month?

                CEI = (100 + 102 –102) / (102 + 102 – 102) = 100/102 =.98 x 100 = 98

This result indicates that when sales are higher for the current month than the prior, the CEI will slightly understate the collection activity, which is 100% of receivables coming due.

What happens if we collect all of the prior months AR and have sales of 98 during the current month?

                CEI = (100 + 98 –98) / (98 + 98 – 98) = 100/98 =1.02 x 100 = 102

This result indicates that when sales are lower for the current month than the prior, the CEI will slightly overstate the collection activity, which is 100% of receivables coming due.

These examples indicate that the CEI is a proxy for collection of receivables coming due, but becomes more distorted and less meaningful the more current sales diverges from past activity.

I would love to hear your thoughts about the CEI or your stories on this topic if you have them.

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Australian Opportunity

A posting on Rene Micheu’s blog entitled “Cash Management in Australia: Connecting East and West”, focuses on the opportunities for Australian banks due to their long-lived involvement across the Pacific region combined with their connections with Western banks and cultures.

This argument reminded me of a postulation of social network theory: that entrepreneurs are those that bridge the networks of two separate groups who otherwise would not connect if it weren’t for the common connection.

This article indicates this is a possible opportunity in Pacific banking. If a) Australian banks have connections into both Eastern and Western networks that others don’t have, and b) they can link these groups together before they find other routes, then this should prove rewarding as the Pacific era ascends.

The big questions are: Do they? And Can They?

I am not sure what the answers are to these questions, but it is certainly interesting to think about.

I would love to hear your thoughts about Australian Opportunities or your stories on this topic if you have them.

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Oops, We Made the Company Analytical

A recent LinkedIn discussion group was talking about companies adopting the use of Analytics. The gist of the original discussion thread was a lot of firms only ask for reports, and what would it take for them to have a more analytic culture or mindset?

My comment on this post was that sometimes you want to approach these items below-the-radar. Sometimes it is wise to heed the adage “it is better to beg forgiveness than permission”. Build a series of small wins, and you build a momentum that begins to take on a life of its own.

“Oops, we made the company analytical…sorry ‘bout that”

A lot of the management guru initiatives we read about on consultant websites, or hear about at seminars, or entertain during visits, rely on this notion that it will require “strong senior management support”.

There is only so much of that support to go around, and the senior managers might have a lot bigger fish to fry than our analytical culture project. None of us can jump on every bandwagon that comes along.

So rather than wait for that scarce resource, why not figure out ways we can pilot something today? Figure out someone sympathetic to the initiative and use their area as the test case? Pretty soon, the results sell themselves, and we find that senior management support was never really needed to begin with.

That is the power of stringing together a series of small wins.

I would love to hear your thoughts about Small Wins or your stories on this topic if you have them.

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The Specialist Disadvantage

A recent LinkedIn discussion group was talking about companies adopting the use of Analytics. The gist of the original discussion thread was a lot of firms only ask for reports, and what would it take for them to have a more analytic culture or mindset?

There are several facets to address with this question.

First, any specialist, be it an engineer, a financier, an accountant, a HR rep, has a tendency to view the company, its problems and its opportunities, from their own specialist perspective. A finance person might, for example, have a tendency to believe that if we get the capital investment and ROIC metrics correct the company will be fine, all the other issues, such as operations, strategy, etc. will somehow be resolved along with that or are secondary to begin with.

This comes with the territory of being a specialist - things are viewed through that paradigm. It’s kind of like the same song running through your head that you can’t seem to shake all day.

The problem is that the company is a combination of all these specialties. Over time, the importance of each one relative to the others will wax and wane. The company is a holistic enterprise, it cannot do without any of its elements. Items from each specialty are important and need to be thought about.

So the answer to the blog’s original question from this standpoint is “the company takes into account the needs of all specialties, and embarking on this mindset would upset our holistic balance”.

Second, every activity has a benefit that accrues at a cost. As specialists, we may attribute higher value to the benefits than the rest of the company, and therefore believe that things are cost effective when they are not – from a holistic viewpoint.

So it could very well be that the answer to the blog’s original questions is “we do not derive enough benefit to do it”, even though it may be that specialty’s pet raison d’etre.

As finance people, we need to be aware of the dangers and bias inherent in our specialist role and seek to overcome that to the extent we can in order to achieve a holistic vision of the company.

I would love to hear your thoughts about the Specialist Disadvantage or your stories on this topic if you have them.

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You Don’t Have a Vision or Mission Until You Feel the Burn

We discussed the inevitability of pain if one is to grow and change. This feeling is also one of the indicators that we are actually deploying our vision or mission.

Visions and Missions are Great…

Put simply, any vision or mission is going to sound really good. We are all for Mom and Dad, truth, justice, goodwill towards man, peace on earth, etc. It does not cost anything to say this.

Most corporate visions and missions are similar. Yes…we value our customers. Yes…our employees are our most valuable resource. Yes…we seek to maximize shareholder value. Yes…we want to be the best or top quartile performer. Who could be against any of these things?

…But What Happens When the Rubber Hits the Road?

It is only when we are willing to sacrifice, to give something up, to undertake an arduous journey that we discover whether we really mean it or not.

How often have we heard of the company whose “employees are our most valuable asset” make across the board layoffs, curtail training and development, or eliminate bonuses and perks? Sure, times are tough when these decisions are made. But, if the employees were truly the most valuable, wouldn’t we expect to see cost curtailment in other areas, elimination of other programs?

There is an old phrase that come to mind…

“Put Your Money Where Your Mouth Is”

The example most often pointed out is Johnson & Johnson in the 80’s. They had a vision and mission that their customer’s health and well-being was the ultimate objective. When someone started sneaking into supermarkets and spiking some of the Tylenol product with poison, J&J tool all Tylenol off the shelves everywhere. All the lawyers said this was not an action required to shield them from liability, but they went ahead and did it anyway…because it was the only action consistent with the mission.

It cost J&J millions and millions of dollars to take this course of action. This is willingness to sacrifice for what you believe in!

Feel the Burn

This phrase is taken from exercise regimes – we are not lifting enough weights or running far enough unless we “feel the burn”, i.e. some pain or discomfort.

Until we experience some of these feelings in order to implement our vision or mission, it really is an empty promise. We have not faced the trial by fire.

Are there times when implementing a vision or mission does not require this - sure. But there will come a time when it does, and running away from the consequences of sticking with it will undo decades of work.

Are there rational reasons that will allow us to alter the vision? Yes. How about - our employees are our greatest asset, but this is an exceptionally long and deep recession.

Or, we have already cut everywhere else, but we still need more, so some layoffs are on the table. Sounds reasonable? “Yes, we understand why you are doing this”. Do we believe that employees are your most valuable asset? “Not anymore”.

Walking the Talk

I knew a guy who ran a construction company - he kept his entire payroll employed during a very severe and prolonged recession. Sometimes they did not have anything to do.

Could he have saved a few bucks by laying them off? Yes.

Would most “practical” business-folk approve? Yes.

Would it be “reasonable” to make an exception in this case? Yes.

Would his employees ever believe he stood behind them 100%? No.

This may be dumb or it may be smart – it depends on the value we place on it, and its order in our list of priorities.

But if we are going to talk about our “employees are the most valuable asset…blah, blah, blah” this man backed it up with action that few would dare to take.

I would love to hear your thoughts about visions and missions or your stories on this topic if you have them.

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