Friday, September 30, 2011

Benchmarking for Mediocrity

The other day I ran across something that reminded me of a benchmarking exercise we once had to perform. It was a bona fide learning experience, though perhaps not in the way one might expect.
At First Blush – A Great Idea
The idea of benchmarking is honorable - in the business world there is a sense of motherhood and apple pie about it. Who could be against it? It does have a certain appeal. It’s like a World Cup match – somebody is going to end up on top - no ifs, ands, or buts. There is a satisfying clarity and finality.
As bosses it makes us feel good too. Being able to say “we are in the process of benchmarking our organization” gives the impression that we are in charge and in control. We can believe that we’re going to knock heads and get rid of all kinds of inefficiency. We get to view lots of reports with lots of numbers and charts (not too dissimilar from reading the sports pages, which in fact is quite fun!) that show where we stand. We are managing by the numbers. We are tough!
Real Life Has A Way of Interfering
Game theory has given the strategy person a great set of tools, and we look for situations where we can create decision trees and payoff matrices. In a benchmarking exercise, there are three possible outcomes – we come out on top, we come out in the middle, or we come out on the bottom.
Coming out at either extreme will cause extra scrutiny of the results.
If we come in on top there will be an exhaustive review of what was including and what might not have been but should have. The reaction is “this is too good to be true, let’s find out what is really going on”.
If we come out on bottom, there will be a lot of action plans and remediation efforts that will need to be undertaken.
So the payoff for this exercise is as follows:

Look good but fly in under the radar – that’s the goal.
Let’s Not Pretend We Are Special
Given the payoff diagram above, any company participating or going through the same type of exercise is targeting the exact same objective. And provided there is enough ways to slice and dice the data – geography, division, types of revenue, business line, organizational structure, regulatory environment, etc. – there will be some way that the objective can be achieved.
Ironically, the benchmarking effort winds up begetting the average rather than excellence!
This Will Help Us More Than Benchmarking
Keeping two points in mind can help us avoid getting sucked into the benchmark trap.
We are unique – benchmarking will not help us any more than it will help a parent decide that child X is better or worse than child Y. As a parent we love them both for who they are, not where they fit on a quartile graph. Eliminating sources of uniqueness may be an unintended consequence through the benchmarking process and may very well hurt us more than any benefits we receive.
We can achieve the results even without it – knowing we are far away from the goal or close to the goal doesn’t change how we would go about changing it, which would be one step at a time. Interestingly, if we adopt a continuous improvement mindset, then we are always improving one step at a time already! We don’t need a benchmark effort to begin a march to excellence.
The moral of the story is somewhat Confucian – “Those who benchmark will be average, and those who don’t may become excellent.”
I would love to hear your thoughts about benchmarking or your stories on this topic if you have them.
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Monday, September 26, 2011


Has anyone noticed an inverse relationship to the amount of hype a book’s author(s) use in their first or several chapters to what we end up getting out of it? I remember reading a book once where the first 3/4 of the book told me why the information I was about to receive would be so important to my life and the world. Guess wasn’t.
Thinking about this, it is somewhat perplexing, isn’t it? If we didn’t think it was important or relevant information, we wouldn’t have picked up the book in the first place!
Why are authors trying to sing to the choir? A couple of possibilities come to mind:
1) they don’t have enough to say without hype content,
2) they hope we are so amped up on the hype we won’t notice that what they said is relatively meager, or
3) they really don’t have anything to say at all and are just piggy-backing on the trend they are hyping about.
A Red Flag
The book I am currently reading is about branding in our increasingly on-line world (yes, finance and strategy folks are interested in marketing issues too!) and I have yet to get past the sizzle to the steak.
Given the “singing to the choir” suspicions above, this raises a red flag, so then the hunt starts for information and clarity. What is being said about our socially networked age and what can actually be believed? Two examples are:
The authors of this book claim that consumers want choice, and therefore the internet, with its ability to bring unparalleled choices, is fantastic.
This actually contradicts a lot of research. In an area that I know well, 401k plans actually have lower participation by employees the more investment choices are offered. People want some choice, sure, but too much choice drives us into the other direction. Who can blame them? Researching 30 different investment funds is a lot of work!
Transparent and Authentic
Another claim is that we want companies to be transparent and authentic. We want to know that their employees all believe in what they are doing and decisions are clear and understandable both within and outside the organization.
The success of Apple’s iPod, iPhone and iPad products is one example that refutes the above – other than Steve Jobs it is not very well understood by anybody what process they go through in order to achieve the design of these products. Part of Apple’s appeal is the mystery that surrounds it.
In another example, ABC News recently had a special report about where goods were manufactured for college dormitory catalogs. Not one item made in the USA, and the colleges didn’t even know it! Nor did the students who bought these items! Nobody seemed to be paying too much attention to transparency here.
Let’s Be Grateful
A recent Forbes article put the number of Facebook users at about 750 million.
Let’s think about that for a minute – 750 million…out of around 7 billion people in the world. That’s just a little better than 10%.
And that 10% are using computers, tablets, smart-phones and other technologies, all connected by wire or wireless carriers. These are all things that cost money. Given that this money is not being used for food, or shelter, or clothing (i.e. it is discretionary), we can safely assume that the majority of folks (not all, I am sure there are exceptions) in this web-world have a decent level of income or wealth.
Hmmm…relatively few people…who have more money than most. Wouldn’t we call a group with those attributes “elite”?
[Author’s aside: Given that we are a part of it, we should take a moment to be grateful for whatever paths, resources, people and assistance have led us to this point.]
But we should also be careful of extrapolating current usage of social media into the future. Why? Because as a tool of the elite it might be utilized in a far different manner than a tool of the masses. Speaking in “statistical-ese” - the sample size is not representative of the population. The ultimate evolution might be very different. We do not know enough yet.
We’ve Got Work To Do
Given that the ultimate outcome of the web-enabled socially networked world is still unknown, it is fertile ground for consideration by strategy and finance. We need to develop different social media scenarios, and the drivers and impacts that may be possible. Given those scenarios, we also need to anticipate responses. What are the nodes on the decision tree? What existing or historical situations in the world might prove to be analogous?
One thing is clear, change is here, and it’s coming again, sooner than we think, and then it is going to come again…and again…and again.
Don’t ignore it…but also don’t believe we already know where this is headed.
Let’s get to work so we are ready!
I would love to hear your thoughts about this social media perspective or your stories on this topic if you have them.
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Friday, September 23, 2011

Does Your Accountant Speak “Finance”?

I can’t begin to count how many times I saw a Vice-President of Finance role being advertised, got all excited, only to find that it was almost 100% accounting-related. Or a Director of Decision Support, only to find that it principally involved comparing actual accounting results to budgets.
[Disclaimer: I do not in any way mean to malign accountants by this post. I like accounting. I have taken enough accounting courses to qualify for an accounting degree. There are plenty of times in the course of a year when I use T-accounts to analyze transactions. Accountants should be a valued and esteemed part of any organization, performing numerous tasks that help it fulfill its mission.]
What seems to happen though is that accountants have a tendency to get caught up in GAAP and IFRS and things like that (disclaimer again: and at one level, rightly so). It is understandable, after all it is part of the profession and part of the certification.
However, sometimes the needs of the organization diverge from GAAP. Sometimes we need a finance view of things. Let’s be clear, Accounting and Finance are two very different animals.
A Potential Investment:
Assume that we have a cost of capital of 10% (which we have determined by some permutation of the capital asset pricing model), and we are contemplating an investment where, if we make it, will generate ²1 of cash per year for 10 years (the ² is a symbol for Treasury CafĂ© Monetary Units, or TCMU’s). We will be willing to pay approximately ²6.14 for this opportunity, utilizing the Net Present Value calculation (the formula for NPV can be found in an earlier post) below:
When valuing an asset - be it a machine, a business, a tractor - we pay attention to cash flows. Our investment above represents the most basic of investment archetypes, cash out in the beginning and cash coming in thereafter. A graph of this cash flow is:

Summarizing so far, we have dealt with items such as cash, cash flow throughout time, investment, and cost of capital - all important subject areas to a finance person. Also note that our endeavor so far has been future directed. We are valuing a projected stream of cash flows and determining their value.
A Tale of Two Returns
From the finance perspective, all free cash flow coming in is one of two things: a return on capital or a return of capital. If we put ²10 of our money into a bank CD for one year bearing 10%, then at the end of the year we get ²11. The ²1 is our return on capital, and the ²10 is a return of capital.
We can breakdown our ²6.14 investment into its return on and return of components for the entire investment horizon, as follows:
We can notice a couple of things here. Return On capital is higher in the beginning and lower later, and Return Of capital exhibits the opposite pattern. If we have a mortgage this is the same type of phenomenon - we pay a fixed amount every month, and in the beginning that payment almost entirely goes to interest (i.e. "return on") while near the end of the mortgage it almost all goes to principal (i.e. "return of").

We can also notice that return on capital, when it is divided by beginning asset value, is 10% for every period. It is not a coincidence that the cost of capital we used to value this asset is also 10%. From the above, we can verify that we have correctly valued the asset - if the return of capital is 10% every period and the ending asset value is 0 at the end, we know we started with the correct value.

Now, Enter the Accountants
In the accounting world, the matching principle requires that we attribute cash outflows into the period in which the benefits of those outflows are realized. One method used to do this is straight-line depreciation (other methods exist, double-declining balance, MACRS, etc.). Since our investment horizon is 10 years and we initially spent ²6.14 on the asset, using the straight line method under accounting rules we will depreciate 1/10 of the initial cost every year, or ²0.614.
The difference between the revenue of ²1 and the depreciation rate, assuming no other costs, is net income, and can be considered the return on capital (note that we are simply assuming that items not important to our example don’t exist, such as taxes, O&M, etc). The amount of depreciation is the return of capital.
Interestingly, this then is the pattern according to accounting of the above:
Notice, if we calculate return on capital (same as above, Return On / Beginning Asset Value) under this scenario, it varies from 6% to 62%!

Don’t Make a Bad Decision
This is a problem, especially if we are going to use past performance information to make decisions. Say we had two different investments, one that makes matchsticks and one that makes buggy whips, that both match our original payout profile (i.e. ²6.14 investment and ²1 cash flow for 10 years thereafter). Say our matchstick investment is now one year old and the buggy whip investment just finished its ninth year.
According to our accounting, we would have earned 6.27% on the matchstick business and 31.37% on the buggy whip business. What is the likely outcome of the decision to invest another ²6.14 in something? Most will naturally choose the higher returning investment.
Yet we know that there is no difference between the investments, they had the same payoff profile. The only difference was their length of operation.
What if we say that these two were separate businesses and we were investors? We might be tempted to overpay for stock in the almost 32% return business and underpay for stock in the almost 6% business. Overpaying and underpaying for two businesses that have the exact same economics?
The graph below illustrates over the 10-year investment period  the return using the economic value finance perspective and the return using the accounting methodology:

The Moral of the Story Is…
While we need to have accountants to produce required financial statements for investors and auditors in the accounting language, we need to make sure we have someone who speaks finance as well.
While we need to have accounting systems to correctly capture our organization's performance according to the established rules, we need those systems to provide us the flexibility to recast this data in ways that allow us to evaluate from a finance perspective as well.
Both accounting and finance are important in an organization, but let's be careful about confusing the two.
I would love to hear your thoughts about the language of finance or your stories on this topic if you have them.
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Tuesday, September 20, 2011

Class Warfare Class

In the United States, the President proposed a plan to increase taxes on the rich. Republicans then denounced this as “class warfare”.
Anecdotally, it seems to me that most US government programs benefit the poor and disadvantaged in higher proportions to the rich. Food stamps, unemployment insurance, medicare, social security – these are all things that benefit the poor more. Occupational Health and Safety Administration rules and enforcement benefit folks in manufacturing, who are not raking in millions. US Department of Agriculture inspections help consumers who are going to shop in supermarkets and cannot afford premium butchered products. Student assistance for colleges and universities benefits those who cannot afford to go to school.
These are all programs eligible for deficit reduction.
So let’s do some math, and for the sake of simplicity we will just use made up numbers and consider only first order effects. Let’s say the US is spending $10 and bringing in $5, for a deficit of $5.
Scenario 1: Balance budget through cuts only, reduce spending by $5.
Impact on rich = $0.         Impact on poor = -$5.
Scenario 2: Balance budget through tax increase of $2.5 on rich and reduce spending by $2.5.
Impact on rich = -$2.5     Impact on poor = -$2.5.
The cut-spending only scenario is more unbalanced than the alternative. So the “class warfare defense” seems a bit suspect. It appears to be political spin more than fact.
Nobody likes increased taxes. Nobody likes spending cuts. As we have discussed before, however, this is not rocket science. A budget will only get balanced if revenues increase or costs are cut.
I would love to hear your thoughts about class warfare or your stories on this topic if you have them.
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Thursday, September 15, 2011

The Matrix

Shared service centers attempt to leverage economies of scale by taking internal functions common to different business units, such as payroll or accounts payable, and moving them into a central unit that provides the service to all. At that point, the business units become the center’s customers. It is something like a business within a business.
The evolution of shared service center’s organization is generally idealized as a transition from a set of functions (e.g. IT, AP, Accounting, HR) to a set of value stream deliveries (e.g. order-to-cash, talent development). This allows the organization to “break down silos” and “integrate for seamless delivery”.
If we were to depict this graphically, it would look something like this:
While phrases such as these sound good, something like motherhood and apple pie, it might be prudent to ask ourselves whether our organization’s silos might have benefits.
At a recent conference (Corporate Executive Board’s Agile Enterprise Summit) someone remarked that organizational silos have their purposes. As a previous critic of silos, it was incumbent on me to consider this remark in all fairness in order to have a completely informed opinion.
In other words, can a silo possibly be good?
Body of Knowledge
Consider the “to-be” nature of the shared service organization. Presumably, there is someone from each function in these value streams, but potentially no more than a few.
The professions normally associated with shared services – accounting, finance, human resources, information technology – are ones that have professional standards and a common body of knowledge. Accountants get their CPA’s, treasury people their CTP’s, financial analysts their CFA’s, the IT folks their certifications.
If there is only one person of each of these types in the value stream, who will encourage them, or prepare them, or value the knowledge addition?
The stressed Vice-President in charge of the value-stream, intent on maximizing efficiency and utilization? No.
The business-unit (now a customer) chief looking to lower their cost allocation or minimize the increase in their Service Level Agreements? No.
The most likely support environment for an accountant to get their CPA, etc. is peers who are also pursuing it and bosses that understand the importance and support it, and a system that acknowledges it.
What type of organization would do all these things? An accounting organization!
In other words, a silo.
Looking at things from a slightly different angle, if the value stream has one finance person, where is that person to aspire? To move up the value-chain organization, the person would need to acquire other non-finance skills in order to move-up the organizational chart. So long as the person only knows finance, that person is stuck.
The skill set of the shared service professions will therefor atrophy over time. The organizations will attract a lot of rudimentary, entry-level talent, but it will not develop for the personnel will aspire to learn non-functional items in order to progress in the value-chain structured organization.
How would we encourage others to develop professional skills and ability to move up within their profession. Provide managergial, director level, and executive level roles for them. In other words, become a silo!
Now What Do We Do?
So if silos are bad but silos are good, what do we do? My thought here is that the natural gravitational pull is towards the matrix – both value stream and functional. As follows:
Matrix organizations were the trend for awhile, but most have seemed to fall out of favor. Matrix organizations are difficult to manage. Matrix organizations result in some amount of inefficiency on the employees part – after all, balancing the wills and desires of two bosses takes a certain amount of time and effort. This time and effort may have been better spent doing something like…oh, I don’t know… working?
But hold on. Don’t we all manage more than one thing our lives already? We have work. We have families. We have community involvements. In other words, we are already managing more than one boss, one taskmaster, and a variety of separate functional interests.
Bringing it Together
What is remarkable is that the chart above essentially represents a social network. We previously discussed the interaction as being the primary unit of work for the knowledge worker. We can now conclude that the social network is the primary environment on which we execute the primary activity. This has implications.
But for now, we can summarize as follows:
We interact, within a social network. This is the essence of knowledge work. Therefore, this is the primary route for a finance and treasury person to create value.
I would love to hear your thoughts about the Matrix or your stories on this topic if you have them.
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Saturday, September 10, 2011

Poor, Poor NPV

It is common knowledge in the financial world that the Net Present Value method, or NPV, is the only appropriate valuation procedure with which to analyze projects, investments, securities, our companies, etc.
Yet, over the course of a year, it is still more likely than not we will hear someone say “this is a great project, it pays for itself within a year” or “this investment is better because it has a higher rate of return”.
NPV might be the better method, but…
Here is the NPV formula:
Just by looking at this formula we can begin to see the problem. Who would want to use this? There are n number of division problems (n representing the number of periods, so if we are valuing something 10 years long n equals 10 if annual, or 120 if monthly) that need to be done, one for each period. These then need to be added up.
Furthermore, there are exponents in the denominator of each division problem. These are not easy to calculate – quick what is 1.3 to the 4th power? It’s also not easy to divide by these numbers.
All these factors conspire to make NPV not very friendly to all but your typical finance guy or rocket scientist.
Other Methods are People Friendly
In contrast, the payback method is a lot simpler. Add up a year’s worth (or whatever period you are using, months, days, etc.) of investment returns or project savings and compare to the investment or project outlay. Is it larger? No, then add the next period. Now is it larger? Once you hit the period where the inflows become greater than the outflows, that’s your payback period. At least there are no exponents!
The internal rate of return method (or IRR) is intuitive. It gives us a percentage. This investment will earn 12%. This project will save 20%.
NPV, in contrast to this, gives us a dollar amount (or euro, renminbi, whatever currency we are working in). If we estimate our cost of capital is 15%, and the project just hits that, the NPV is 0. Which would you rather do – the project that earns us 15% or the one with an NPV of 0? Yes they are both the same, but doesn’t the one sound a whole lot better?
What Can We Do?
The problem here, of course, is that the NPV method always works, where the IRR method and the payback method do not. They can lead to erroneous conclusions.
The finance purist will always want to do NPV, and roll over the folks calculating payback on the back of a napkin or discussing rates of return. This just causes needless friction.
Given that NPV will be calculated in a spreadsheet or other technology-enhanced system, it is really little extra effort to calculate all the measures. That way, people can gravitate to any metric they want, and NPV, lonely and unloved, will still be there to make sure we do not go down a road that will destroy value.
I would love to hear your thoughts about net present value or your stories on this topic if you have them.
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Thursday, September 8, 2011

Gettin’ on the Bus

Someone asked me today whether a Big 4 (i.e. one of the major accounting firms) employee would be considered an acceptable employment candidate for an organization’s Treasury group.
If we picture this employee doing what they currently do, researching appropriate accounting treatments, massaging spreadsheets and enterprise systems to achieve balance, seems a little at odds with dealing with banks and capital market players, forex traders, and risk managers. The Treasury person is the one who knows it’s how much cash we have in the bank, not how it’s accounted for, that makes the difference. A lot of accounting folks don’t entirely understand that.
If, instead, we picture this employee as being smart, bright, interactive, with a good grasp of numbers, able to pick up things as they go, it is not altogether inconceivable they could be a great Treasury person.
Jim Collins, in Good to Great, used the phrase getting the right people on the bus as being of prime importance for companies who made the transitions subject to his study. In fact, he said get the right people on the bus, then figure out where you want to go.
In other words, figuring out where we want to go is easy once we get the right people on the bus.
Another great book, “Now, Discover Your Strengths”, discusses the difference between strengths and skills. Skills can be taught so long as people are able to learn. Skills are easy to pass around and replicate. It is strengths that are more difficult, because they take a longer time to develop.
Yet, many businesses hire on the basis of skills - “this position involves a lot of foreign exchange, so we are going to need someone with 5 years of experience”. High forex involved roles entail knowledge of tax codes in different countries, local banking system rules, hedging strategies, and multi-currency cash forecasting techniques among other things. But these are mostly skills and knowledge. These can be learned by anyone capable of learning.
The problem when we hire on the basis of needed skills is that we get the wrong people on the bus. If we are an innovative, progressive organization that values people who can learn new things, think outside the box, adapt well to change, and collaborate well, then we will have problems when we hire the professional forex person who (without a doubt will “hit the ground running”) possesses strengths in individualism and love of protocol and ritual. Long-term they are a poor organizational fit.
What do we need to do to get the right people on the bus?
Make sure “right” is right – the right person in one company will not be the right one for another. A strong ego and thick skin and ability to take initiative are important to succeed in the Apprentice, whereas in a lot of companies ability to subsume ego to become part of a team is the required strength.
Figure out how to figure it out – when I first learned about behavioral based interviewing I thought “this is the ticket”. We now have a method to ascertain those that have a quality vs. those that don’t. When I got involved in a company that bureaucratized the entire process I realized that it was not the silver bullet in all circumstances I thought it was. It is a tool that can be used. On-line assessment tools are another. Strengthsfinder testing from the authors of the aforementioned book, or the viasurvey are two. There are/will be others, some free, some that cost. There are professionals who can administer other tests, some that have been around for quite some time, which might attest to their usefulness.
Give ‘em some Slack – if we are going to hire the right people, but teach them skills, then we need enough capacity in the system to absorb the time requirements training and learning entail. If the right people need to rotate through numerous positions their first year or two or three at the company, we need to be able to accommodate this from a staffing perspective. It might not look good on any FTE benchmark survey now, but five years from now we will be kickin’ you-know-what! Once systematized, it won’t show up no matter when the benchmark survey is conducted!
I would love to hear your thoughts about getting the right people into your organization or your stories on this topic if you have them.
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Wednesday, September 7, 2011

Big Data in the House

In the past week, I have run across the term “Big Data” a number of times. While there is a temptation to reflect on how something pops into awareness like that, from seemingly all directions at the same time, today we will focus on the topic and not the means and methods.
In “That New Big Data Magic”, CFO magazine cites the proliferation of sensing devices (such as radio frequency identification), wireless networks, social networks, point of sale systems, on-line transaction systems, and others as a major reason that the amount of data will double roughly every two years.
The Economist went higher, saying it increases tenfold every five years.
No matter who we believe – those are huge increases!
This coming data explosion poses the danger of “insight deficits” according to the Corporate Executive Board, especially since Ventana Research has already said that “businesses have more of it [data] than ever before”.
Suspicious and Promising, Scary and Exciting All at the Same Time
For those who are financial contrarians, this is immediately suspicious. Magazine articles? “Special reports”? “Special research”? Somebody is trying to sell someone something somewhere! When will these fads end?
For the analytically minded, this is exciting news on a number of fronts. Finally, there is data to crunch! Finally, people are really going to start looking at the numbers and using analysis before they make decisions. Finally, we will get senior management support.
For those who like their current roles, this is frightening, as they will likely change dramatically over the next 5 to 10 years.
For the entrepreneurs, it is promising. McKinsey in a special report on the topic, identified a number of value creating aspects to “Big Data”, including better customer segmentation, transparency benefits, competitive advantages, and opportunities for new products and services.
Somewhere in my past I ran across the concept that data was different than information. This was echoed in the Economist article “Information is made up of a collection of data and knowledge is made up of different strands of information”.
A bunch of numbers on a page?…Data.
Grouped into three different categories with one group representing 75% of the total?...Information.
Selecting the appropriate marketing strategies that work on that large segment?...Knowledge.
If data develops information which creates knowledge, and data is going to double every two years, or grow tenfold every five years, then we are going to be creating a boatload of knowledge!
More people will become knowledge workers, either from the get go or from role transformation as this knowledge is developed, synthesized and disseminated. This is obvious to me in the Treasury field.
Back in the day, when I was an auditor, we reconciled bank statements with highlighters, marking the corresponding items from the bank statement to the accounting ledger. Ideally, once we were done both were highlighted completely and there were no entries still not accounted for.
Today, the Treasury Workstation or ERP system, through its algorithms, performs 99% of a bank reconciliation today, leaving the cash processor to focus on the handful of exception items. And it’s the exception items, knowing where to hunt the answers down, zeroing in on the promising and avoiding the red herrings, which is the knowledge work component of the job.
Let’s Get Ready
What do we need to do as organizational leaders to get ready for Big Data’s appearance in our house? In some ways this is the easiest part of the puzzle to address:
Get Some Skills and Talent, and Reappraise the Skills and Talent Already at Hand – we are going to need people, and there is going to be a shortage of those capable of handling analytics. Some of the people in the organization already possess some knowledge or ability, and are capable of learning and developing further. A lot of what we will do with Big Data is not new, as Ted Sapountzis tells us.
Be Introspective and Curious – the best thing we can do is ask questions. Adopt the mindset of the boy taking the radio apart to see how it works, only apply it to information. We have this category, how do people in this differ from ones in others? How can we do x, y and z better? What information can we review to prove it?
Demand Data – how do I get comfortable this is the correct conclusion? Is this just a theory or can it be backed up by facts?
Question Data – just because there is data lying around doesn’t mean it is any good. Has it been scrubbed? Are we drawing conclusions that the data justifies or are we using techniques erroneously?
Be Strong – just because we have data, doesn’t mean we should always base our decisions on it. We are still the deciders, not the black box. “The data shows the Speed Limit is 55 and we are going 50, therefore we should speed up.” “OK, but you know what? I am still going to slow down, because it has just rained, there is a 90 degree curve just ahead, and there is a huge truck in front of us, and it doesn’t look like it’s going anywhere near 55!”
Look for Opportunities – Big Data has potential to spawn new products and services based on its creation. Depending on what line of business we are in, there is a potential to develop our own big data as a competitive advantage, or branch into some of these products and services.
Big Data is already here, but we are going to notice it more and more. Interesting times, indeed!
I would love to hear your thoughts about “Big Data” or your stories on this topic if you have them.
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Tuesday, September 6, 2011

Let’s Go To Work

In prior posts we mentioned three types of interaction – transformational, transactional, and tacit – that characterized the work of the organization. Knowledge work is primarily tacit, and Finance and Treasury work is in large part knowledge work, so therefore a basic unit of work in our field is the tacit interaction.
For someone who has been used to referring to our work output as the completed deal, or the decision based on the strategic analysis, or the successful completion of daily cash operations, thinking about the above is a brand new perspective.
The interaction is the basic unit of work.
Karl Albrecht, in Practical Intelligence, identified five “approaches” to a conversation or interaction between two or more people:
·         As a Performance – to show off, impress
·         As a Sport – battle of wits
·         As a way to Sell – change viewpoints, accept ideas
·         As a way to Learn – new ideas, perspectives
·         As a way to Connect – affirm common interests, create sense of community
Thinking about our activities – deals, analysis, operations – in this light makes me aware of the numerous interactions that have occurred to accomplish them.
For a deal, there are a lot of learning interactions, where we seek to understand the state of the market from bankers, investors, peers, and others. These might be the result of learning interactions those parties had earlier on. There are also “selling” transactions to secure internal support in order to proceed.
For an analysis, we often connect with the relevant areas of the organization to promote a sense of teamwork with the analysis to be performed. There are many learning interactions in this endeavor as well, both internally and externally. Finally, a recommendation needs to be sold, and this effort starts long before the final day.
For daily operations, we often connect with others within and outside the organization, reinforcing our sense of “value-chain community”. We spend time identifying (i.e. learning) information gaps that need to be resolved.
The interaction is the basic unit of work.
Initially, it is unusual to approach our work thinking from this perspective. With whom should we interact with today? Should we make the interaction part of reputation management, or should we connect? Can we do both? Can we add a persuasion element as well? Or possibly learn something too?
By thinking through the types of interaction, we can seek to maximize the value of our interactions, where as previously we may have only focused on one thing or the other.
Thinking in this manner also provides us a means to migrate to a more electronic, web-based world (see our prior posts). Our LinkedIn interactions (or Twitter, or Facebook, etc.) merely supplement what we do in person.
Can we use them to enhance reputation efforts, learn new things, persuade others, and maintain connections?
Yes, we can.
I would love to hear your thoughts about interactions or your stories on this topic if you have them.
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Friday, September 2, 2011

Cleaning Up After the “Boss”

Chicago’s mayor, Rahm Emanuel, faced a lot of heat this past week during a series of Town Hall style meetings on his budget, according to local Chicago news sources.
This public reaction is very puzzling. He has been in office all of what - 3 months? Is he somehow to blame for the $637 million shortfall Chicago’s budget faces this year? He seemed to be looking for input from his constituents as to how to prioritize the measures available to close the gap. Isn’t this progressive politics? A politician trying to do what the people want?
This is a finance blog, not a public politics one, but I am bringing this up because it highlights a number of applicable finance and treasury subject areas. The budget process, for one. Organizational behavior, for another.
And then there is the mechanism of…
Infrastructure Finance
This is a structured type financing product. By this phrase we mean to say that it is a financing based on very specific assets, and with very specific remedies available to the lender. Regular company debt is supported by all assets of the company. If it files for Chapter 11 or begins liquidation, corporate debt holders can stake a claim to almost all the assets.
Structured debt holders usually have a claim only to a very specific asset. It might be receivables, it might be inventory on display for sale, it may be a portion of a utility bill (personally, these types of deals are fun to do because they are challenging and complex). In Chicago’s case, it is tolls from the Skyway, fees for its downtown parking structures, and revenues from its parking meters.
In a series of transactions over the past 6 years, the city of Chicago executed structured transactions for each of these city assets, where the assets themselves, along with rights associated with them, were leased for up to 99 year terms to investor groups in exchange for large amounts of cash. Billions of dollars of cash.
Asset – Liability Match
Finance theory tells us that we should match the terms of our liabilities with the terms of our assets. If we own a house, something that will last 30+ years if appropriately maintained, it is reasonable for us to see 30-year debt to finance that asset. If we buy a car, it would be unreasonable for us to see 30 year debt to finance that. The car will likely be around for less than half of the debt term.
Lenders are never very happy if there are not any assets to back up the loan should push come to shove.
Chicago did something very different. They used the proceeds of these up-to-99 year term assets to pay off current operating expenses in their budgets the past few years. This is a big mismatch.
According to Medill Reports, it is akin to “mortgaging the house to pay the electric bill”. The problem here is that if we do that, we got nothing left to pay the next 98 years worth of electric bills. Where will that money come from?
When in Rahm, You Can’t Do as the Daley’s Do
Rahm inherited a budget that has had a deficit for the past 5 years, at least. However, the former mayor mortgaged a chunk of the city’s future income to close the gap. He mortgaged the future to pay the electric bills.
Now Rahm still needs to pay the electric bills, but no longer has the toll and parking revenues to pay them. So how is he going to pay them? That is what he went out to ask the citizens of Chicago. Get their input, understand their priorities. And they yelled at him!
He is not the one who sold the next 99 years to pay the electric bill in 2006.
Leadership Lessons
What can we learn from Rahm’s experience?
First, if the person who was in the position before us was a “short-timer” (this is military slang for someone who is being discharged soon) for a good period of time, chances are they deferred a lot of problems for you to handle, and at the same time might have used up a lot of valuable tools you could have used to solve them. So let’s go into new situations with our eyes open.
Second, as the person in charge of our area, we will get blamed by others no matter who’s fault it actually was. Comes with the territory. We need to have thick skin and be willing to accept that some dings are inevitable.
Third, we need to have a solid plan in place to dig out of the holes our predecessor’s left for us.
Finally, if we are truly intent on serving the company or organization we are working for, we should always seek to leave it in a better state than we found it. Otherwise, we will weaken the entire enterprise once others have to come along and clean up our mess.
I would love to hear your thoughts about infrastructure finance or your stories on this topic if you have them.
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Thursday, September 1, 2011


I ran across a posting recently that indicated that the majority of fraud in companies was perpetuated by people working in collusion in the finance area.
This is distressing to me for two reasons.
First, as a finance person, entrusted with a company’s most liquid assets, occupying a certain level of esteem (see our vision and mission post), I do not like the fact that these people give the profession a bad name. Finance was responsible for roughly 1/3 of the fraud instances, so it is still true that the majority of fraud is not committed by finance, but by other areas.
Second, “in collusion” is a problem as well. Most financial and accounting controls center around a “no collusion” principle, the procedures are set up so that fraud cannot occur unless someone walks up to someone else and says “hey, you know, if you and I get together….” The response in this scenario is supposed to be that the person approached says “No, how dare you!” and reports the other to the proper personnel and we all go on with our day.
The no-collusion principle is the reason we see two signatures on a check, why it takes two individuals to release a bank wire, why daily bank activity is reviewed by someone not involved in the daily bank activity, people who reconcile accounts are not the people who execute transactions on those accounts, etc.
If we cannot rely on no-collusion, what are we to do? Upping the collusion ante, as it were, would make fraud less likely. But where do we stop? Three people? Four? Five? Even having two people introduces process inefficiencies, each additional person probably makes the inefficiencies grow geometrically.
A lot of banks have a rule where people need to be out for a certain length of time, under the assumption that if they are engaged in something it will come unraveled before they come back. We could institute some type of similar policy.
Alternatively, technology may be able to assist us. If two people are required for a task, could we segregate this at a task level, where the second person was randomly assigned the role for that transaction? This would prevent collusion, since the two people would never know prior to the fact that they would be working on the same thing. We need at least three folks, probably more (sick days, etc.) performing the task in question to implement this reliably.
Introducing some type of random review, or audit, also helps discover these things, though usually after the fact. Yet the mere threat of audit adds an additional level of deterrent. One needs to keep this in mind, there is a tendency to audit only necessary things in tough economic times, and searching for unidentified fraud activity does not make it high on the list of priorities.
Whatever we do, we cannot rely on our instincts that we trust a person. As one of my co-workers said to me “Nobody has committed fraud on a company that wasn’t trusted”.
I would love to hear your thoughts about financial fraud or your stories on this topic if you have them.
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