The Ultimate Sin in Business

...is to be unprofitable.

Sure, you'd say, that's your CFO "pedigree" talking, there must be larger sins than this.

So hear me out.

A bottom line (the profit) is easily dismissed as an accounting convention. Cash is king - they say. And it's true! But this accounting convention was not invented for the purpose of distracting cash-minded managers from what really matters. Profit is a long-term indication of a business's ability to turn out positive cash flow. Fail to deliver that and your cash-rich days will be over - sooner than you think.

So, beyond Finance 101, a red bottom line signals a dysfunctional business model. Persisting losses in a business lead to an accumulation of damages to the organization that become increasingly difficult to course-correct:

- the mindset of the organization moves from "who's building what" to "who's avoiding the next layoff round", which leads to high amount of unproductive political actions (lies, deceit, backstabbing) and to a very clear negative selection of personnel - only the weak ones (or whose only skill is organizational survival) are left, since the good ones are more likely to be hunted out of the organization;
- the increasing negative pressure for immediate results, coupled with a weakening control environment and a rationalization of what's acceptable to do in a chronically ill organization will lead to corruption, red tape and other forms of non-compliant behavior;
- beyond people, the asset base (tangible and intangible) will be eroded from lack of proper care and will continue to lose its capacity to accrue economic benefits to the business;
- there is an erosion of creditworthiness as well, which leads initially to higher costs from the supplier base (as everyone prices in the business's inability to pay on time), up to the breaking point of credit default and insolvency.

Some people may push some valid counter-examples, like start-ups - they are not yet profitable. But this may be not because of a dysfunctional business model:
1/ a start-up is a vehicle in search of a valid business model so they may not have found it yet;
2/ or its business model only gets validated at a certain scale

And of course, there's the unicorns, which are heavily-funded start-ups that are expected to prove their business model (and win big) at huge scales. But these are not yet businesses, they are just more sophisticated bets. Extremely few of them pay off big, some of them earn some money back, most of them nothing at all - isn't that the definition of a bet?

Throughout my career as a CFO, I have long been an enemy of waste - not surprisingly, my start-up actively works with visionary entrepreneurs and business leaders in fixing their most important waste baskets (inefficient and manual business processes, ossified enterprise landscapes). The results and the initial take off are amazing.

So isn't an unprofitable business model, just simply, the biggest form of waste? All the money thrown away, all the human talent drain, all the assets blown to pieces?

I believe so, but then how do we repent from this sinful behavior? :-)

There is no universal recipe, but the biggest building blocks are
1/ gain visibility over your waste baskets (how's your controlling, by the way?),
2/ fix the easiest/biggest waste baskets first (which may very well mean scaling back)

and then

3/ gradually heal your business model by putting in place the right people, processes and systems.

Sounds like standard economics textbook? You'd be surprised how few businesses go past step no 2/.

The secret to a sustainable, profitable business is execute 3/ every day so that you don't need to execute 1/ and 2/ every now and then.

Which could probably get translated as more righteous living leads to less repentance :-)

More to come...

The CFO as the Chief Business Architect

Few enterprises today have descriptive representations that depict how the enterprise works. Therefore, change can only be accommodated by trial and error. As complexity and the rate of change increases, risk of trial and error increases. Architecture provides the structure to predict the impact of change, reduce the risk and maintain enterprise viability in a changing environment.-John Zachman

Enterprise Architecture is a complex framework that has emerged from the IT world as a way to clearly describe the enterprise IT environment to now represent an impressive tool for orchestrating enterprise behaviour and change.

I would not go into the intricacies of what Enterprise Architecture really means, there are enough experts to battle it out forever. I only have a simple perspective and I enjoy keeping it that way.

It is no secret that the business world has already shifted its expectations for CFOs from being the guys in charge of the financial model and perhaps of the control environment to the guys in charge of the integrity of the entire business model of an Enterprise. 

Therefore, a CFO is uniquely positioned to take on the Chief Business Architect role because s/he is at the nexus of all business model perspectives. Let's examine them one by one:

1. The motivation model - the markets the Enterprise operates in, the goals, the strategies, the external change vectors.

A CFO is required to scrutinize and keep abreast of all these. SWOT analysis? Check. PESTEL? Check. Macroeconomics analysis? Check. Competitive intelligence and benchmarks? Check.

2. The organizational model - the org chart, the motivation systems, the functional design of departments, the roles and responsibilities, the back-up systems, the outsourcing / partnership strategy.

A CFO must contribute to the organizational model because maximizing the return on the human capital is the most comprehensive way to maximize enterprise value. Yes, it is rarely measurable and therefore not obvious, but that is precisely why the CFO must be involved. 

3. The process model - the process taxonomy, the task successions, the business rules matrix, the data model (the master, the transactions, the unstructured data), the adaptation strategy.

4. The technology model - the technology stack, the IT architecture, the support and services model.

The CFO is the best positioned executive to drive the internal innovation agenda, both in terms of how things get done (the process model) or what tools are appropriate to support the Enterprise (the technology model).

And of course all the business model perspectives but be tied together into something that holds water, and that is done by linking everything to the financial model  - the P/L, the balance sheet, the capital mix, the investment & dividend policies.

One could argue that it is the CEO's job to reconcile the business model perspectives. But there is a lot of in-depth work and understanding that is required by a Chief Business Architect role and in my opinion this can only be accomplished effectively by the CFO.



photo credit: NathanaelB via photopin cc

Process Re-design, Challenge #03

Re-design Around Roles, Not Persons

Democracy is the process by which people choose the man who'll get the blame.
~Bertrand Russell 

In many business process re-design projects, there is a strong temptation to start re-thinking the processes while having an eye at your current employees as process actors, in terms of capabilities, possible performance considerations, possible conflicts of interest, possible personality clashes etc.

This is the wrong way to go, because you will be designing your new process around specific people or personality traits and this kind of structure is guaranteed to be unstable.

Rather, once the ideal process sequence is established, think hard about the ideal roles that should perform the process activities: how does information flow most naturally (i.e. with the least waste) to their role? how do they get the authority to perform those steps? how are their organizational objectives aligned with the process objectives?

In a smart process, work must occur where it makes most sense.

Process Re-design, Challenge #01

Re-design From a Blank Slate

A relentless barrage of "why’s" is the best way to prepare your mind to pierce the clouded veil of thinking caused by the status quo.  Use it often.  
~Shigeo Shingo

When you hire BPM consultants to help you redesign your processes, they will usually start with a presentation of the implementation methodology, a recommendation of the software package to use for modelling and a timesheet estimate for the blueprint project (AS-IS, TO-BE and gap analysis)

As a result, many organizations start a process re-design by having a look at their current process, the AS-IS situation.

My challenge: this AS-IS approach is a waste!

When starting from the current situation, you are basically throwing resources back at yourself, ending up either:
1/ being convinced that you were right to start a re-design project or
2/ getting comfortable with the current status quo.

So, get over your legacy mindset and take a completely fresh view of what you do - you might be surprised about how many bright ideas are lurking in your -apparently dormant- organizational layers.

I would even argue whether a proper methodology is needed! Of course you need clear steps on how you execute the re-design (as in: how do you manage transition?), but business process design does not work best with a methodical approach.

More on this next week :-)

Lean Processes, Tip #03

Morph Your Handoffs Into Teamwork

I discussed last week about the need to minimize the number of handoffs, as they build up cycle time and noise in the organization.

When we cannot reduce anymore the number of handoffs, we should try to optimize the handoff process, so that we enable process roles to be more aware of each other in their quest to fulfill the common process goal:

1. Make your upstream roles proactive on the downstream information needs.
This way upstream roles can design templates and checklists before they push the info downstream.

Example: an efficient salesperson (what is that, anyway? :-) ) would follow a predefined checklist when finding out about a new customer to ensure the lead is fully qualified (do they have the budget / the authority, the pain / the urgency to buy?) before proceeding along the sales funnel.

2. Promote downstream roles upstream.
Sometimes you just need to redesign the whole process and have your downstream role take up upstream responsibilities.

To note, this "tip" requires quite a bit of proper transformation within the organization:
- cross-functional trainings;
- setting up stand-ins / back-ups for all process roles;
- setting up systems to automate data validations (in templates and checklists) wherever possible;
- have a Business Process Lifecycle Management practice in place.

I never said it would be easy! :-)

More to come :-)

Lean Processes, Tip #02

Minimize the number of handoffs

If you want a fast and reliable process, cut the middlemen.

A process handoff is an intermediate step in a business process where work and information passes from an upstream player to a downstream player.

Handoffs are the usual suspects for a slow process. Here's why:

1. a handoff is an opportunity for cycle time build-up
Prior to a handoff, the upstream employee usually prepares the information, the documents, the action history or any other data that will assist the downstream employee in performing future work.
After the handoff, the downstream employee will consume the data prepared by the upstream employee, will seek clarifications and / or further guidance and will then proceed with work.

These additional activities create additional time in the process, only for the sake of the process.

Example: most Sales people abhor doing paperwork - especially when they create a new sales transaction. If they have to bring complete cases to the Legal Department, they have to spend time building them. Under pressure, they will deliver incomplete cases just to hand them off quickly and then the time waste is moved in the Legal Department. This could be redesigned through a technique I am going to discuss about next week.

2. a handoff adds noise in the information flow
With signal, comes noise. The more we communicate, the more likely we are to be misunderstood. When handing off multiple activities multiple times, the noise can get out of control.

In the SCRUM methodology (an agile software development methodology), an estimated 50% of knowledge is wasted after 5 successive handoffs. Therefore, a handoff is a significant opportunity for mistakes and misplaced work, to the point you could reliably measure its cost.

Example: a purchasing employee obtains an additional rebate deal for a complex Purchase Order, gets approval of Management in one form, then passes this to Contract Management, who then passes this to the Warehouse (if it's a goods deal) or to a Service acceptance function (if it's a service deal), then somehow this info needs to come to Invoice Passing (maybe other functions, like Engineering or Tax). The more complex the deal is, the more likely it is to get misunderstood, to get stuck, or to get executed very differently from what has been approved - and generate lots of waste.

If you cannot minimize the number of handoffs (especially in large organizations), there is a solution: morph your handoffs into teamwork.

More on that next week :-)

Lean Processes, Tip #01

Design Around Customer Interactions

Your value chain processes should be designed with the end in mind: attract and delight your customers as fast and as friction-free as possible. They will be more than willing to then pay for whatever they perceive as valuable in your offer.

Think about a high-touch sales process:
1/ establish initial contact (meeting, business cards)
2/ execute sales pitch
3/ follow-up for decision to enter into business together
4/ negotiate contract T's&C's
5/ acquire customer master data to set them up in transactional systems
6/ sign contracts
7/ get order
8/ deliver
9/ wait for the payment term
10/ cash in
11/ if not cashed in, follow-up on overdues through a dunning process

At the opposing end, you have the no-touch sales process (the so-called freemium model), where you first give some of your product's features away for free and then try to upsell your initially acquired customers to your paid product.

Between these two extremes, you can imagine a plethora of accelerated sales processes, by asking some of the following questions:
- can you execute your sales pitch proactively? Create marketing, webinars, YouTube presentations, grow an audience.
- can you make your business case extremely clear in how you deliver value? Your product landing page should be like a Mafia offer: so good they can't refuse!
- can you make your standard T's&C's extremely friendly to your customer? This way you will remove upfront a massive class of typical customer objections.
- can you skip some customer master data on the first sale? Can you collect the non-critical data after the sales closure - I bet you can.
- can you automate your collection? Remember, your objective is to part your customers from their money as fast as possible for you and as fun as possible for them.

Take a look at already existing examples of excellent frictionless customer interaction examples: Amazon Web Shop (and 1-click payment), Mobile Ecosystems (Google Play or Apple App Store). These examples have almost completely turned the classical sales process on its head.

I'm eager to learn from you some other fascinating examples of brilliant processes that simply look at every aspect of enhancing customer interaction.

The Process Shall Set You Free

“If you can’t describe what you are doing as a process, you don’t know what you’re doing.” 
– W. Edwards Deming

In emerging markets, having clear business processes in a company is seen, more often than not, as a sign that bureacracy and narrow-minded control freaks have kicked in and it's time to leave towards something more fun.

This is mainly due to several objective factors, economic and cultural:

1. emerging markets had cheap, relatively well trained, workforce. So whenever more work had to be done, it was easy to just tap into the cheap labour pool and call it a day. Back in the days, cheap was smart. It still is, in some cases.

2. emerging markets were tough to plan. They were highly volatile and anyway they were growing so fast that your elaborate business plan would have been left in the dust in a few months. I remember that, in one of my positions responsible for the whole Balkans region, we used to call our region "the CNN countries", because at that time there was always something in the international news about them: wars in Bosnia or Serbia, ethnic tensions in FYROM or Albania, an economic meltdown in Bulgaria, a political turmoil in Romania, an army standoff in Moldova. Good luck doing anything else than surviving.

3. the prevalent emerging market business model was: "start doing something, doesn't matter how because you are anyway one of the firsts, grow it fast and sell it to a multinational that wants a quick way into an unknown market without the trouble of setting up shop". There is no room for business processes in such a gold rush.

There are also lots of subjective factors that stem from the negative-bias management style (particularly specific to former Eastern Europe dictatorships), the social pressure to quickly perform and achieve a desired status (which leads to corruption) etc..

They all lead to the same conclusion: educating local businesses about the need for business processes is one tough nut to crack.

Nevertheless, in the following weeks, I'll be trying my teeth at this seemingly monstruous task, but not in the usual "consultant's way", preaching incessantly about optimization and automatization and standardization and return on investment.

Instead, I'll be giving out specific tips & tricks, from my own experience, at the same time putting them into the overall framework of "lean mentality".

Feel free to chip in with your own tips & tricks.... as of next week. :-)

More to come :-)