Wednesday, January 15, 2014

Is the CFO's Organization a Professional Service Firm?

"All of my directors seem to want to promote people, but this just isn't realistic. If they have their way pretty soon we'll end up as an organization of managers with nobody to manage!"

Aisha Sarin, VP of Human Resources, listened patiently as Tuck Wallace, the company's CFO, discussed his current staffing situation.

"Do you need more managers, Tuck?" she asked.

"No, I really don't think we do. What's that saying? Too many cooks in the kitchen spoil the soup?"

Aisha smiled. "Yes, something like that. I'd like to understand the situation better. Sometimes managers feel as if they do not have a lot of 'tools in the toolbox' when it comes to rewarding great work, but there are also instances where people who can truly perform at the 'next level' are held back...or not challenged enough."

Tuck thought for a moment. "Probably a little of both in this case, actually. Where do we go with this?"

In prior Treasury Cafe posts we've discussed adopting the viewpoint that our finance organization is an independent company (see A Matter of Perspective).

Thinking in this way changes our viewpoint. If that snarky remark we heard yesterday came from our boss, we might be de-motivated, resentful, and dis-empowered, and our thought bubbles might read "After all I've done...", "what a %*#@", "I'm not paid enought to take this kind of crap", etc.

When that same remark comes from a customer, we attempt to identify potential problem areas and invent ways of providing even better service. We think "there is some kind of problem that needs to be solved here because my customer is unhappy".

A much more productive approach.

If we are to regard our finance organization in this light, is it possible that there are lessons we can learn from the employment models that are used in professional service firms?

How Many People?

David Maister says there are three levels within a professional service firm: "Finders, Minders, and Grinders".

Figure A
Personnel Requirements Equations
The number of each level of personnel is determined by the number and length of projects, time requirements per project, and the utilization rate of that persons time

These names come about because the partners, who are the seniors in the firm, usually are responsible for finding the business, the mid-level pros are the ones who manage the various projects and engagements (thus the minders), and the junior / entry-level folks are the ones plugging away on specific project tasks.

How do the economics of this model work?

Figure A shows the equations that go in to determining the number of personnel required in the firm. The number of projects the firm has each year and the length of each project determine the number of project hours the firm has. For a given project a percentage of time is required for each level. Finally, each level has a certain number of 'billable hours' capacity. These factors, when combined, allow us to determine a staffing level.

Figure B
Personnel Requirements Calculation
The average project takes 3 months. On a 50 week per year basis, and 40 hour work week, each project takes 500 hours. At 12 projects per year, there is 6000 project hours per year. Each project requires 50% of a Sr's time, 1 Mid-level and 3 Jr's. Each level has a certain amount of time available for projects per year, which is the annual project capacity. The required time for each level divided by the per person capacity yields the required number of personnel. In this example, the firm requires staffing of 2 Srs, 4 Mids, and 10 Jrs.

Figure B shows a calculation of the personnel requirements based on the equations in Figure A. The firm has 6000 project hours per year.

Each project requires 50% of time from the Sr level. so the firm needs 3000 hours of time from people at this level. In similar fashion, it needs 6,000 hours of Mid time and 18,000 hours of Jr time.

Based on the utilization rates for each level, this translates into 2 Srs, 4 Mids, and 10 Jrs for the firm.

Whenever we are creating a framework for analysis it is helpful to "calibrate the model" - which is analysis-speak for asking "are we getting the answers we think we should get?". In other words, if I enter "2 + 2" does the model give me 4?

In Figure B we use the same project time requirements and utilization levels as in Maister's example, and end up with the same ratio of Mids to Srs and Jrs to Srs as he did, which should give us confidence that we got the equations right in Excel.

Now that we have established the method for determining staffing levels, we can now turn to the issue of what happens through time.

Evolution

"Ultimately, the rate we promote people depends on two things - the number of people leaving the firm due to retirement, etc. and the growth of the firm" Tuck opined.

"Yes, that is essentially right, Tuck." Aisha replied. "The only other thing might be if the type of work changes. This can impact the mix sometimes as well."

"I see your point Aisha. I can think of that in terms of the span of control. Some people have 3 direct reports, others have 10, which is somewhat determined by the nature of the work they perform."

Nobody is going to want to remain a Junior forever.

At some point they expect to move up. At some point their employer expects them to move up...or out.

Employers don't want Juniors forever either.

In Maister's example, an average of 4 years is the point of progression. He uses 80% as the transition rate for Jr to Mid and 50% for Mid to Sr.

Using the information in Figure B as an example, that means we will eventually have 4 Srs (the original 2 plus 50% of the 4 Mids) and 8 Mids (80% of the original 10 Jrs), and have to hire 20 new Jrs.

A very important point - in order to sustain this rate of advancement we need to double the number of projects!

If we do not grow the business, then the Mids will not become Srs. Presumably, they will become Srs somewhere else.

The Jrs, seeing that Mids do not move up but all move out, will likely begin spending some of their time finding new gigs as well. What's the point of becoming a Mid if it is a dead end?

So the critical issue here is that firm growth and employee advancement are inextricably linked. Without one you cannot sustain the other.

A benefit to establishing the equations as we did in Figure A is to help us determine these factors. Because we have a set of equations, we can use mathematical techniques to assist in our understanding. In this case, because we are concerned with change, we can borrow from calculus and use the derivatives of these functions to help us determine the dynamics of progression within our firm.

Figure C
Rate of Personnel Change Due to Projects
The required number of personnel will increase or decrease for a given change in the number of projects is determined by the length of project, the time requirements for a project at that level, and the utilization rate of people at that level.

Figure C shows the derivatives of the Figure A equations with respect to projects. They answer the question "how does a change in the number of projects impact the number of Srs, Mids, and Jrs required by our firm?" The absence of any exponents indicates that this is a linear relationship. Using the numbers in Figure B, an addition or subtraction of one project requires a change of about 17% Srs, 33% Mids and 83% Jrs.

We can use this information to calculate a growth requirement. If we want to move someone into a Midlevel role (without any transition of current Midlevels), then we need to add 3 projects (since each project requires 1/3 of a Midlevel) to our existing 12 - a 25% rate of growth.

We can extrapolate this math further. Say we know our firm is growing at 10%. This implies that by the end of the next year we will have 13.2 projects (10% increase from 12).

Figure D
Midlevel Staff
Horizontal lines are current Midlevel staff and current Jr staff. At 10% growth, it will take 15 years to promote the entire batch of current Jrs to Midlevel.

Figure D shows the number of Mids required at 10% growth through time. In the first 8 years, we will need 4 additional ones, a promotion rate of 1 every 2 years. It will take about 15 years to promote all Jrs to Mids at this rate of growth, an average of one promotion every 1 and 1/2 years.

The information generated by this basic model helps provide insights as to how our organization will evolve through time. Will it be helpful to provide some additional dynamics?

Bells and Whistles

"I understand that the project model provides some insights as to how our organization will progress, Aisha. But it is a little simplistic."

"What are you thinking about that makes you say that, Tuck?" Aisha asked.

"Well, for one we have not accounted for migration out of the firm. People eventually retire, or their spouse gets a new job thousands of miles away and they need to relocate, so positions can be generated by this as well."

"Yes, I see your point. Some people move out of finance to other areas of the company as well, don't they?" she queried.

"Absolutely"

"Perhaps adding a factor in the model can account for some of these issues?"

Whenever we are creating a model, it helps to keep in mind that all models are wrong. The purpose of a model is to provide a framework of understanding in the most economical/efficient/simple way possible.

We cannot perfectly model reality - there are too many factors. To do so we would need to get to the level where we are simulating "butterfly movements in China" (to use the chaos theory metaphor that a butterfly's movements can create hurricanes on the other side of the world).

Every model is a tradeoff between the benefits of the information produced and the costs (time, maintenance, etc.) required to produce it..

Figure E
Incorporating Additional Information
The number of Srs required is the change in projects plus a probability factor that attrition occurs amongst the currrent staff.

Should we decide that the costs are worthwhile, we can consider some of the following options.

Figure E shows a modified personnel requirement equation which has included an attrition factor in addition to the change due to change in number of projects. As noted in the conversation above, there are a number of factors that will create attrition. The probability factor for the equation can be based on historical experience, a forecast by company personnel or 'experts', an industry average, or on some other plausible basis.

Another possibile approach would be to create the basic model at a lower point in the organization, and then aggregate it up to the CFO level.

Maister suggests that there are different types of projects, some requiring more execution, some more diagnosis, some requiring lots of contact with customers, others requiring little. Each of these project types will suggest a different construction of the different levels of time required. Thus, one department might be at the 50%/100%/300% ratio as the example in Figure B, while other departments might be at 100%/100%/100%. So we might assess the organization as a compliation of several different organizations rather than doing it as a whole.

Figure F
Disaggregation of Staff Requirements
Staffing requirements for a CFO organzation with 6000 hours in total divided into three types of activities with various staffing requirements. Total requirements are 3 and 1/3 Srs, 3 and 1/3 Mids, and 5 Jrs.

Figure F provides an example of a group with different staffing requirements for each project.

Another modification we may wish to consider is the number of levels. In large corporate organizations the division of roles may be different than the three-level system Maister considers.

For example, there may be one to four levels for individual contributors, and then several levels for managment afterwards (supervisor, manager, director, etc.). Some firms consider separate tracks, one for management and one for specialists, each with a separate level system. Adding layers and levels helps to customize the professional service firm model to our own particular organization, though again at the cost of additional modeling complexity.

What Can We Do?

We can improve our organization using the professional service firm employment model in a number of ways, such as:

Change Perspective: View Your Organization as a Series of Projects - the fact that the basic model derives from a professional service organization can sometimes throw people off - "But I do not have 100% projects". Some of this is a matter of interpretation. If our accounting organization closes the books every month, we can look at this as a routine process or reoccuring procedure, or we can consider it as a successive series of projects. Each month closing the books is a project, with certain requirements, certain actions, and certain desired outcomes. The fact that it is repeated does not necessarily invalidate viewing each one as a separate project.

Inventory Our "Projects" - breaking each of our organizations projects and tasks down to a specific allocation of time requirements from the various levels will allow us to understand where the time demands occur. Where is the greatest number of Jrs required? Srs? Understanding this can help us to determine different career path patterns within the firm. Jrs might rotate from a "Grinder" group (i.e. a group with a high Jr to Sr ratio) to one that requires more involvement from Mids and Srs. This would be a benefit to the Jr, even though they remain at the Jr level, because they are involved in higher order projects, and will thus be more likely to pick up on the different skill requirements of the levels above. Their development progresses even as they remain at the Jr level for a couple of more years.

Communicate Realistic Expectations - because we can assess the number of additional personnel required given a growth level, we can use this information to set expectations realistically within the organization. Going back to the state of our organization at 10% growth shown in Figure D, if each of Tuck's managers expects to promote someone every year, there is going to be a lot of disappointment. Tuck can use the analysis presented here to guide his organization to a more realistic expectation of how progression will occur, thereby nipping an annual cycle of demotivation "in the bud".

Develop Alternative Tools - Figure D illustrated that it will take some people 15 years to move up a level. This seems like a painfully long period of time. Developing alternative tools to recognize and reward people will therefore be required. Can we implement gamification elements that will make the job different from month to month or year to year? Rotation is another tool that can be used. New jobs are often considered rewards even if they are lateral from the org chart perspective. Can we create alternate heirarchies or project allocation systems? In colleges class selection is often done using a bidding system. Could we implement something similar with respect to some of our projects? People would end up working on things that are more meaningful to them, which is a potent form of reward.

Use as an Interpretation Framework - the professional service firm model can be a useful way to process information. For example, the consulting firm Treasury Strategies noted an evolution of Finance areas from one that was more transaction oriented to one that was more analytically oriented, moving from a traditional pyramid to an inverted one (see example here ). Using our framework, we can interpret this as one of moving from projects with a high Jr to Mid or Jr to Sr ratio to ones where the ratios are a lot lower, indicating that the skill sets of our organization will need to evolve and develop in order to keep pace with the demands from our 'customers'.

Key Takeaways

The professional service firm employment model is a useful perspective with which to view our organization. It allows us to identify issues that need to be addressed, such as employee transition rates, growth requirements and constraints, and as a convenient method to assess how changes in the industry and professional landscape can impact the value of our organization's human capital.

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Questions
    ::What additional factors would you add to the basic model?
    ::How might this model be used to improve your organization?

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






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