Friday, September 21, 2012

Don’t Waste Your Time Benchmarking Against Others

There are a number of different paths one can take to benchmark their finance and accounting organization’s operating performance against others:
·       Use publicly available information in order to calculate metrics, such as the Cash Conversion Cycle.
·       Use information from consulting firms who have a “window” into many firms’ performance and have consolidated and summarized this information.
·       Use a consultant to perform a study specific to your organization
·       Participate in a group study with a number of other firms, such as members of a trade association or industry group.
Avoid this activity if at all possible!
The Promise
The promise of benchmarking is that it will provide us with a nice, neat set of results that tells the operational tale. It is akin to looking at the sports standings – Team A is 16-3 and Team B is 13-6, and therefore Team A is #1.
The results are indisputable, and this simplicity provides comfort.
Running a business is a complex undertaking. As such, it is almost always the case that the decisions we face have the following qualities:
·       There is no clear answer among the alternatives
·       There is balance required amongst many factors, such as stakeholders interests or organization objectives
·       We lack all the relevant information
·       Feedback is not available or “muddy”
Decision making under uncertainty is stressful. We are never totally sure, and never will we ever be.
Benchmarking provides the illusion that there is feedback on these decisions, allowing us to say things like “We’re in the top quartile, so we must be doing something right” or “These three areas need to be the focus for our improvement efforts this coming year”.
The benchmarking results confirm and validate what we have done, and point the way for what we must do in the future. They are the lighthouse beacon in the stormy sea.
The Reality
The problem with this is that it does not reflect the reality of our organization or the environment we operate in.
Let’s look at some of the reasons:
Apples to Oranges
The results of a benchmarking study are never completely apples to apples, but rather apples to oranges.
There is a wide variety of options for where functions land within an organization. Risk Management, for example, may be housed in Accounting & Finance, in its own separate area with a Chief Risk Officer, or somewhere within the operating companies.
There are numerous “shades of gray” along the Centralization - Decentralization continuum. Benchmark Company A requires its operating units to come up with budget numbers that they then consolidate, for which purpose a number of people from across the unit devote a portion of their time towards budgeting work. Company B has a fully staffed unit within Accounting and Finance working full-time that comes up with the numbers after working with the business units.
If the benchmarking effort is very intensive, chewing up a lot of staff (or consultant’s) time and attention in order to “levelize” these differences, some of these factors can be overcome, but invariably some of them will be missed.
People are People
Decisions about how to go about the benchmarking itself involve a myriad of factors: the make up of the comparable group of companies, the methodology of the study, the metrics that will be used, who is selected to perform the study, and the scope of the analysis to be performed.
Because the benchmarking is initiated by human beings, underlying agendas will inevitably come into play with respect to these decisions.
For instance, what benchmarking results might you expect to see if the person initiating the analysis is going to use the results a) in order to enhance the status of the department within the organization in order to get a “seat at the table”, b) to burnish their resume for the recruiters who have recently been calling, or c) in advance of an upcoming critical performance review?
Compare that to the results you might expect to see if the person initiating the analysis is going to use the results a) to shake up an intractable bureaucracy inherited from a predecessor, or b) to paint a potential organizational rival in a bad light?
This is not to say that people are malicious or underhanded (at least for the most part). However, a lot of what we do is outside of our awareness and is in congruence with our needs and desires.
The Organization is Holistic
What do you think a parent’s response would be if you asked them “who is the better person, your first or second born child?” In all likelihood, we would expect the answer to be along the lines of “each one is special in their own way”.
The fact is that most organizational decisions will take into account a wide variety of perspectives and objectives.
Let’s say a benchmarking analysis comes back showing Company A with a cost per square foot of building space that is 25% lower than Company B’s. Before we conclude that Company A is the winner, let’s think about what might factor into that difference.
Company A, whose primary objective is to reduce cost, moved their headquarters to another jurisdiction to reduce taxes. Company B, who has long invested in community relations efforts, operates a booth at all the downtown street festivals, and has maintained their original presence in the community in which it was founded decades ago, has taken a jurisdictional move “off the table” when considering its options.
Or Company A has moved to a far-suburban “office campus” due to a new CEO’s preference, with the result that long commutes are now required for a large percentage of its workforce. Company B, on the other hand, conducted an employee transportation study and located their building near several transportation hubs in order to make it convenient for its workforce to get to work, thereby boosting morale and improving retention.  
Company leadership is required to balance the demands of a large number of stakeholders and the many varied needs of the business. There are literally hundreds of variables that can enter into the mix. Each decision embodies this balance amongst this multitude of competing objectives, and the amount of weight given to each will invariably be somewhat different between entities.
You Can Still Reap the Benefits
If benchmarking is not the answer, what is?
The “promise” of benchmarking against others is:
·         We will be able to identify who is world-class so that we can emulate them
·         We will identify areas of weakness that we can improve upon
These benefits are attainable without the time, effort and cost of conducting a study.
Become the Best
As discussed, the organization is holistic - it is not just the sum of its parts or described by one or two metrics.
Your vision should be to be the best Finance and Accounting unit your organization could ever hope to have. Spend the time you would have spent benchmarking performing the work of detailing exactly how “best” will manifest itself in your firm - do not rely on the simple platitudes of “providing the best service” etc.
View your organization as a separate business, and the CEO, the Board, the Operating Companies and other Staff Functions as your customers within this holistic structure. Find out what your customers want and need, and then go beyond and find a way to “delight them”. We have discussed fulfilling this type of vision in “Triangulating Mission and Vision Using Mind Maps” and “Rollin the DICEE”.
Avoid the temptation to identify other world class organizations, because if you are going to emulate another you have taken yourself out of the running for being the best. You might achieve being the same, but you will not be the best.
If we want to be truly world-class and best-in-breed, than the only appropriate benchmark to go after is the one we set ourselves! Internal comparisons will drive us farther and farther. Establishing targets and metrics that convey meaningful information about the path to our organization’s mission are valuable, and much more important than learning “who beats who” on facility cost per employee or some other silly measure! Looking to others conveys a loss of confidence in ourselves and keeps our sights set too low. Stay the course!
Continually Improve
Think about it this way – if we use an external benchmarking effort to identify the areas where we “are behind”, what happens after this occurs? The answer is - we will begin to devote time and effort towards improving those functions. We’ll have discussions, draft plans, and then go about executing them.
Well, why wait? We can implement the activities that would come out of a benchmarking study without ever needing to do the study itself. The two items – benchmark study and improvement efforts – are not “cause and effect”, but two separate and distinct activities. One does not beget the other, and either can exist on their own without the other. You do not need an external benchmark in order to improve.
But how can we identify the areas to improve? There are many methodologies that exist today to improve processes, such as Lean, Six Sigma, and BPM. Using any one of these will serve to guide us towards improvement efforts.
For example, in the Lean world they tell us to look for the “7 Wastes”. We can identify these today by:
·       Simply leaving our offices and observing people doing their work
·       Holding a departmental meeting where the current process is “mapped” and asking where the value added steps are and which steps do not add value
·       Asking the people doing the work what is inefficient and what creates “pain points”
·       Asking our customers what is working and what is not
The advantage to this is that we will generate process improvement opportunities today, not three months later when the study is completed. Let’s get going!
Key Takeaways
One cannot summarize an organization’s activity into a set of metrics anymore than one can drive a car simply by looking at the instrument panel. Don’t pretend that you can. And don’t get bogged down in comparing your organization to others. Focus on being the best provider of your organization’s needs, and improve constantly and continuously, and all the benefits of benchmarking are yours to enjoy without wasting your time.
·         What has been your experience with competitive benchmarking? Was it rewarding?
Add to the discussion with your thoughts, comments, questions and feedback! Please share Treasury Café with others. Thank you!

Friday, September 7, 2012

A Life’s Worth of Leadership Lessons

You may have noticed that Wally Bock’s Three Star Leadership blog has been on the Treasury Café blog roll for a long time. I ran across Wally’s site in my early blogging days, and liked it for a number of reasons:
·         Posts are nice, short, and easily digestible
·         He likes to promote “Independent” bloggers
·         He has a very common sense perspective
·         He is not prone to hype
I had not read his bio for quite awhile, so last week I reviewed it again, and was struck by the fact that it contained some very practical and time tested leadership attributes, activities, and principles, just like he writes about.
So what information can we learn from Wally Bock’s life that can make us better leaders?
Know Thyself
“He [slightly older relative] avoided going to classes for a year and a half, before his father found out. I thought about that a lot. I realized that however bright I was, if I went to college right then I’d probably do pretty much the same thing.”
If we are going to interact with others and maintain a leadership role, we need to understand ourselves with clarity. This is because our words, and especially our actions, will be subject to a hyper-vigilant and keen awareness amongst our group – discussed, analyzed, and interpreted beyond our wildest imaginations.
If we delude ourselves about our strengths and weaknesses, we lose the ability to understand how we can impact our teams. They will know our weakness while we remain blissfully unaware, thereby perpetuating the situation, and we will not leverage our strengths effectively.
Embrace Challenges
“Even in those days of the draft, the military services were on the lookout for bright young men and women. Army, Navy, Air Force, and Coast Guard recruiters offered me wonderful packages of benefits if I would sign up with them. The last service I talked to was the Marines.
I walked into the recruiting station where an old guy, (he was probably thirty-five) with an almost shaved head, a jaw as big as my fist, and creases in his shirt and trousers you could cut glass with, was filling out a form. He was the Marine recruiter.
When he looked up, I told him what all the other services had offered me one-by-one. He listened quietly. I concluded by asking, “What will the Marine Corps offer me?”
He turned back to his paperwork and growled, “Four years of Hell. A haircut every week. And a rifle.” Naturally, I joined the Marines.”
Mr. Bock had the choice of the easy road and the hard road.
I am reminded of Professor Dumbledore telling Harry Potter, who was concerned that he shared many traits with the evil Voldemort:  it is our choices, Harry, that show what we truly are, far more than our abilities
Our choices tell the world our morals, values, and attitudes. They can also determine how much we grow and develop.
For these reasons, it is often the case that the choice of the hard road is the correct one. In school, if we choose easy we learn little, if we choose hard we learn a lot. For a CFO, it is easy to maintain last quarter’s earnings forecast, it is hard to announce that it is to be lowered. For someone who needs to follow a healthy diet, it is tempting to reach for the cookie, and quite hard to go for the celery instead.
Accomplish the Mission and Care For Your People
“[About the Marine Corps experience] There were a lot of things that stay with me to this day, but there are two that are important here. The first one is the job of the Marine leader. It has two parts. Accomplish the mission. And care for your people. That's true for leadership anywhere.”
‘nuff said.
It’s Sergeants That Win the Wars
“When I was up before the Promotional Board examining me for promotion to Sergeant, I was asked what my ambitions were. I said that I wanted to acquire a commission and ultimately become Commandant of the Marine Corps.
A Marine Major was in charge of that panel. He enlisted during World War II and landed at Iowa Jima. That adventure gave him a scar that started above his hairline, ran across his cheek, and disappeared down into his collar. He fixed a steely glare on me.
“Don’t worry too much if you don’t make it all the way, son,” he said. “You’re seeking promotion to the most important job in the Marines. Those Generals may win a battle or two, but it’s Sergeants that win the wars.””
As leaders, it is tempting to believe that our actions and initiatives are what impact the company. Yet this is likely in part due to our need to feel like we are being useful.
If you are in business, the ultimate objective is to “make the sausage” or “get the beer on the truck”. The folks who do these activities are not the rarified executives of the firm, they are the folks working the sausage grinders and loading docks.
Zappo’s gets a lot of credit and kudos for its fantastic customer service, but it’s the customer service reps that actually pull it off, no matter who has set the strategy. The folks working on the “front lines” of your business are the ones who are getting the job done (or not).
Without their efforts, you won’t have a business. Don’t forget it.
Keep It Simple
“They [the Oakland Police Department] were looking for someone to do supervisory training for newly promoted Sergeants. I did a needs assessment, determined that I, in fact, could do some things that would be helpful, and wound up getting the contract. I assumed that there would be plenty of good written material on what makes a good Police supervisor. That’s another time that I was wrong.
In fact, there was next to nothing. The books, at the time, were either weighty academic tomes, filled with theory and little else, or “This is how I did it” stories of experienced supervisors. If I was going to do good training, I couldn’t use those and I’d have to come up with something different.
That turned out to be a good thing. As I developed the training, I also embarked on a multi-year research project to define what great Police Sergeants do that sets them apart from their peers. In the training world, that's called “Competency-based Training.”
The principle is pretty simple. You find out what top performers do. You train others to do what they do, and they become top performers, as well.”
We can do a lot of research on leadership. There are innumerable blogs, books, websites, consultants, coaches, and philosophers to read, study, and learn from. We can do this for years and years and years, arriving at elaborate models and approaches involving many factors and detailed playbooks designed to handle every possible situation.
Yet, I cannot help but wonder if this is a case of “analysis paralysis”, or the hype of people looking to make a sale.
Sometimes it is wise to Keep It Simple. There is a lot less to distract, deter and derail your efforts.
Explore New Territory and Embrace Change
“In about 1982, I discovered online discussion groups on CompuServe. I wound up selling some of my books there. I was one of the first people in the world doing what we now call e-commerce. People began asking me to talk and write about what I did.
That led to a book contract or two, and I caught the opening wave of interest in what was then called The Information Superhighway. For several years, that was my main business focus.”
It’s easy to look back from the present day and believe that our interconnected, mobile world was inevitable. Yet not too long ago it was very difficult to get online and get around. It was a serious investment of time, energy and resources, with an uncertain payoff.
The willingness to explore new territories allows you to move your team to where the opportunities are happening. Doing everything just like you did yesterday will take your group down the road of obsolescence.
Wally’s Takeaway
“Leadership is an apprentice trade. You may learn something about it from books and in the classroom, but you learn about it mostly from other people.
Most of the written material out there talks about theories and about the difference between managers and leaders. Different authors and pundits use different vocabulary and definitions. While a lot of that is good and helpful, it's more important to understand that leadership is about behavior.
Leadership is using the behavior you can control (your own) to influence the behavior of others in a group so that the group moves toward an objective. Learning about leadership should involve learning how to do that.
Leadership is a lifelong learning project. You are never done because there are always techniques and skills that you need to master.”
Key Takeaways
Understanding the paths someone has been down, the choices they have made, and the lessons they have learned is often the best route to wisdom. Take time to listen to others and seek out their stories.
·       What leadership lessons, behaviors, or activities have you noticed in Wally Bock’s biography that have not been covered in this post?
·       Whose life history have you come across that serves as an example of leadership wisdom?  
Add to the discussion with your thoughts, comments, questions and feedback! Please share Treasury Café with others. Thank you!

Tuesday, September 4, 2012

5 Steps You Can Begin Today To Be a Better Financial Analyst

Financial Analysis is a core Finance / Treasury organization function that serves a number of purposes, including:
·         Project Analysis
·         M&A Valuation
·         Peer Group Studies
·         Financing Structures
·         Operations Support
·         Market Analysis
While this is not an exhaustive list, a large proportion of analyst projects will fall into the above categories.
The Power of Numbers
Because Financial Analysis is such a prevalent activity, a finance/ treasury organization will have a large contingent of analysts on their staff, and it would not be uncommon to see more employees in this role than any other in the organization.
This being the case, if we can improve the financial analyst’s skill set across the board, then we can achieve a multiplicative impact on our group’s effectiveness, efficiency, and ability to fulfill our mission.
While long-term activities, such as going back to school, are legitimate and valuable ways to increase skills, these initiatives will take a while to translate into higher performance.
However, there are activities that an analyst can begin doing today that will increase their skill, ability, and value to the organization.
1. Ask Questions
As we perform our tasks during the day, there are endless opportunities to ask questions and seek further insight about what we are doing. The act of questioning data and getting answers changes the role from one of reporting to one of insight generation.
For example, if one is working on assessing the working capital of the firm, it is one thing to note in your report that receivables over 30 days past due increased.
It is quite another to pick up the phone, contact your collections area, and inquire as to what they are seeing that has prompted the data you are looking at. You might find that there was a problem with equipment that resulted in delays in invoices going out, or you might find that the data is a result of new customers recently added as part of a new promotion effort that began the quarter before.
Each of these answers will point to a different action that needs to be taken (e.g. repair or replace equipment, start targeting different customer segments). By asking question, you have changed a piece of data or a fact into an actionable piece of information.
Actionable Intelligence is valuable, data is meaningless.
2. Learn Your Tools
The spreadsheet is everywhere - almost everyone uses them at some point during the day. My own sense is that spreadsheet usage is probably similar to our use of our brains - most are operating at 10%-20% capacity.
A superior craftsman knows how to use their tools inside and out, and our usage of spreadsheets should be similar.
How can we improve our ability with spreadsheets without some training? There are several possibilities.
First, the next time you open one, go into the function section and pick out one you have never used before. Play with it and learn how it works. Using suggestion #1, ask yourself “how might I use this function?”
Figure A
For instance, in “Working Capital Primer: How is it that this Capital Works?” there was a graph used to discuss the working capital cycle (attached here as Figure A). In an effort to make smoothly curved lines, I used trigonometry functions (sine formulas using radians) which one can find in Excel (the SIN() function and the RAD() function).
Sine and radian functions are not the first things one would think of when depicting a graph of assets, but because I was familiar with these functions in Excel I was able to use them in a different way.
Second, the next time you are working with spreadsheet data and need to perform a calculation, try and perform it in three different ways.
For instance, if we have three cells of data (A1, A2, and A3) that we need to multiply by three factors (B1, B2, B3), we could simply use the formula “A1*B1 + A2*B2+A3*B3”. Or we could use the SUMPRODUCT() function “sumproduct(A1:A3,B1:B3)”. Finally, we could store results for each multiplication in column C, and then use the sum function “=sum(c1:c3)”.
Doing this will challenge you to remain versatile and creative in your usage of this common tool.
3. Know Your Organization
In the first step we noted that insights are valuable commodities within a firm. Our ability to deliver actionable intelligence will greatly increase if we learn how our firm works, what it does, and the groups involved.
If you make a product, take a tour of the factory floor. If you are a retailer, spend some time in the stores with the folks, have them show you around, both front and “behind the scenes”. If part of your role is to support an operating unit, ask to attend their meetings.
By doing this, you begin to learn what is important to them. Through the manufacturing tour you might notice how they strive to reduce work in process, stock raw materials, and fulfill job orders. Through your visit to the retail store you might learn how customer’s are handled in order to facilitate sales, and how SKU’s are managed. Through the departmental meeting you might notice how certain phrases and topics keep surfacing.
Learning what is important to the folks you are providing services for provides you the opportunity of looking at your work through their perspective, and being able to generate actionable intelligence in those specific areas.
4. Communicate With Your Customer
Finance and analysis is a specialized function. Terms such as Net Present Value, Cost of Capital, and Probability of Default are things most people will not understand.
As you deal with the other organizations who you serve within your firm, the ability to deliver information in a manner that they understand is critical. People are not going to act on the intelligence you provide if they do not “get it”. How can they?
Having performed step #3, you are in a position to speak language they do understand. Rather than achieve a “20% improvement”, you can say “it’s removing 5 gear shafts from the inventory queue in front of Station #3”. If your analysis is meaningful at a “.05 p-level”, you can say “the chances of this information not being sound is better than the chances of the top card in a deck being an ace”.
If they understand what you are saying and you speak a language they understand, you will find they are receptive to what information you have to deliver, and might even decide you are valuable to have around!
5. Learn Your Technology
One of my persistent mantras during the life of this blog is the importance of learning the underlying technology involved in your work. This plays a larger and larger role within the field each and every day. Understanding the technology you are working with allows you to communicate better and make things more efficient.
For example, a lot of Treasury folks deal with Treasury Workstations or their organization’s accounting system. Both of these technologies are essentially highly customized database programs.
Most office suites have Access as part of their software package. If not, there are open source alternatives that you can explore as well. Learn how to make a simple database. If you do then you will understand the role of a Table, a Query, and Report and how they come about.
I was once involved in a project where a new system was being implemented, and as part of the implementation there was a meeting to discuss difficulties in understanding what to include in a report. This was the third or fourth such meeting that had been scheduled, so the difficulties did not appear to be of a simple variety.
We were able to successfully communicate our needs to them by using “database –speak” – stating in effect “what we imagine was if this information was in Table A, and this was in Table B, then this report would result from a query that pulled this info from Table A here, and this information from Table B there, and then ran it through Table C”. All at once we noticed the tech folks nodding their heads in understanding, and the difficult-to-deliver report was provided the very next day.
As another example, one of our co-workers needed to download information out of a report into Excel, where they would spend about an hour selecting specific parts of the report, organizing this information, summarizing it using calculations within the spreadsheet, and preparing it for printing.
We were able to develop simple Visual Basic for Applications code (this comes with Excel) that effectively performed these repeatable tasks for the co-worker and made their work effectively a push of the button exercise. Once they had executed the download, all they had to do was push a button in Excel and walk to the printer. One-hour’s worth of work had become less than 5 minutes!
Today, as you perform your work in Excel, record some of it as a Macro. After you have finished recording, go into the VBA window and look at the code that resulted from your activity. What parts are identifiable to you just by looking at the code (even if you do not understand VBA code)? Can you find out the syntax using a simple Google search of some of the items?
Key Takeaways
Financial Analysts do not need to wait for a lot of long-term formal training in order to improve their efficiency, effectiveness, and contribution to the organization, all that is required is taking the time to have a curious mind and ask lots of question, learn the tools of the trade, understand the organizational environment, communicate with business partners and develop technology familiarity.
·         What steps do you believe a Financial Analyst can begin taking today that will improve their value contribution?
·         Do any of the steps listed above resonate with your experience?
Add to the discussion with your thoughts, comments, questions and feedback! Please share Treasury Café with others. Thank you!