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Discipline #4: CFO as a Warrior of Waste

June 17th, 2009

            In the last segment on “Reinventing the CFO”, I covered the CFO role as the Architect of Adaptive Management.  The 4th discipline in Jeremy Hope’s book is CFO; Warrior of Waste. In this segment, Hope addresses that topic of deploying the economic resources of the firm and tabling the question of whether all those resources are creating the necessary return/value for the firm. He doesn’t so much address the absolute dollars that are being spent, so much as measuring the return on the resources deployed. One of the key quotes in the chapter, which summarizes the views of the 19th century Italian economist Vilfredo Pareto “economic results are directly proportionate to revenue, while costs are directly proportionate to transactions and activities.” In short, Pareto was the primary source behind the “80/20” rule that so many now enjoy referencing.

 

            The challenge, as discussed by Hope, and referencing the work of Peter Drucker, is identifying the specific costs that are deployed in support of the 20% that generate 80% of the results. While it might be possible for a moderate level of expenses, or projects, it’s just not feasible since a large percentage of a firm’s operating expenses go towards supporting the entire entity. Hope discusses some key points, which have been adopted by leading global organizations, which contribute to their position as market-leading brands.

  • Dismantle head office bureaucracy
  • Manage processes and flow rather than functions and activities
  • Manage fixed costs through directional goals and ratios than cost budgets
  • Make central services responsive to internal customers
  • Match capacity to current demand
  • Ensure that all projects are necessary and add value

I certainly can’t say that I’ve had success in achieving the first point above, since I have always been part of a larger finance consortium and not in the position to make that large an effect on a global organization. However, on the processes and flow, I have been able to realize some significant results through this discipline. I spent the better part of 9-months leading an EBIT-improvement project in which we placed a laser focus on key processes in the organization. Within 20-months, we moved from EBIT levels of approximately 8%, identifying processes to target, implementing changes, to achieved EBIT levels of 12%.  These were achieved not through headcount reductions, but through refining processes and the flow of resources through our firm.

 

In addressing the issue of matching capacity to current demand, I led the effort to implement a previously non-existent measuring of work hours related to field service personnel for the same company mentioned above. There was an implementation of a new web-based payroll system, new activity codes to track field activities, productivity classifications of those work codes, and the reporting of results by region. We were then able to effectively monitor hourly cost rates, ensure our billing rates were appropriate, and shift unused resources to territories that were encountering heavy service demands.

 

This section of Hope’s book is probably one of the more difficult to measure and put into play on a daily basis since it involves more than just a view of the P&L and making a judgment call that a “cost is too high”. It means really understanding how your firm operates and whether the resources you are approving are going to help you achieve your targeted financial results. It means that most evaluations will move beyond the typical “Invest in A, Sell at B price, and achieve X profit. It may very well mean that you need to develop and implement a new level of reporting to better understand the business in order to make the appropriate decisions.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

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