Quick takes

Citation

(2001), "Quick takes", Strategy & Leadership, Vol. 29 No. 5. https://doi.org/10.1108/sl.2001.26129eae.001

Quick takes

Editor's note

"Quick takes" presents the key points and action steps contained in each of the feature articles. Catherine Gorrell prepares these summaries.

Page 4Beyond bean counting: the CFO's expanding role

Paul Favaro

Over the last 20 years, a dramatic shift has occurred in the role of the CFO in most large corporations. The CFO must now be not only the overseer of accounting and finance functions but also an advisor to the CEO on the important decisions in the areas of strategic planning, information management, investor relations, and organizational leadership. Successful CEOs quickly realize that having a CFO who can help manage these challenges is not only desirable, but also indispensable:

1. 1.

   Strategic planning. The CFO must become a strategic business partner with all line managers to:

• •

  Support corporate and business unit management m making tough and complex decisions by knowing where and how value is created.

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  Reshape the decision-making process with effective strategy development, providing input and driving the process.

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  The CFO's primary job used to be telling the boss where they have been, now it is to help determine where the company is going.

1. 1.

   The CFO as CIO. If it is true that "how you gather, manage, and use information will determine whether you win or lose," then the CFO must proactively manage and integrate the growing array of information systems in most companies. With a strategic perspective of knowing where the company's value (profitable difference) is created, the CFO must astutely track the investment in technology to create and exploit the company's competitive advantage.

2. 2.

   Investor relations. CFOs face enormous demands to oversee and manage the increasingly volatile relationship with the investment community. Today's CFOs must possess extraordinary public relations skills and understand the implications of upcoming announcements for all stakeholders.

3. 3.

   Organizational leadership. The CFO must be able to structure and manage the organization in a way that provides clarity around where and how value is created, focus on the drivers of value and the highest value-creating opportunities, and accountability for managing value deep in the organization.

By understanding the economics of the business, being involved in the strategy development process, maintaining relationships with key constituencies such as the board of directors and the investment community, and developing a close advisory relationship with the CEO, today's CFO plays a critical role in propelling the company forward.

Page 9The value creation index: quantifying intangible value

Pamela Cohen Kalafut and Jonathan Low

Intangibles have always been a driver of corporate performance. Institutional investors take intangibles into account in theft analysis and earnings estimates. Managers, by the same token, are increasingly adopting non-traditional methodologies of measurement.

Cap Gemini Ernst & Young has developed a rigorous, comprehensive tool, the value creation index, to assess the impact of non-financial factors on a company' s market valuation.

The index combines the impact of key value drivers such as innovation; quality, customer relations, management capabilities, alliances, technology, and brand value to form a single measure of non-financial performance:

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  Manufacturing. In both durable and non-durable manufacturing, innovation is shown to have the greatest impact on market value, followed by management quality and employee relations. Technology companies head the list of durable successes; however, Ford Motor Company also ranked in the top ten. In non-durables, pharmaceuticals and consumer product firms head the list.

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  E-commerce. Valuations in this industry have turned tradition upside down. Top value drivers here are strategic alliances, investments in innovation, and number of "eyes," while building brand awareness had no statistical association with market values.

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  Airlines. In this industry, employee quality and career efficiency (ticketing and boarding, baggage handling, and on-time record) are the most powerful drivers. Among US carriers, United was top-ranked, followed by Southwest and Delta.

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  Financial services. According the VCI, the top value drivers in this industry are alliances, human capital, and quality of management. In overall non-financial performance, Morgan Stanley Dean Witter tops the list, followed by Merrill Lynch and Citigroup.

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  Telecommunications. Leading telecom value drivers are employee talent, management quality, brand strength, workplace environment, and technological innovation. In this industry, Cisco came out on top, followed by Nokia, SBC Communications, and Nortel.

For investors, the Value Creation Index offers a more reliable, more comprehensive way of evaluating a company's intangible assets. For managers, the index provides an invaluable set of levers that can be adjusted to produce improvements in organizational performance. For both, it is the ticket to a more efficient use of capital and resources.

Page 16Unleashing the power of finance

Bruce J. Wright

The finance process is often overlooked as an opportunity for gaining competitive advantage. The finance and accounting processes are mistakenly viewed only as necessary functions of month-end closing and historical focus. When finance becomes recognized as a value-adding process – creating and focusing information to facilitate achieving the goals and objectives of the corporation, its impact on the bottom line will be fully realized.

The key to revising this view of finance is to change the focus and processes of the finance and accounting functions:

1. 1.

   Changing the focus of the accounting information cycle. The accounting function coordinates four types of accounting: GAAP practices (close and balance the books each month); management accounting (reporting); cash accounting; and tax accounting. To make finance and accounting effective contributors of the business, they must move from being a historical information group to being a dynamic information group, managing three key information flows:

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  revenue flow (source of funds);

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  staffing flow (people);

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  procurement flow (acquisition of goods and services).

1. 1.

   If these three flows are coordinated properly, the controls of the organization can be shifted from direct and after-the-fact to exception and statistical. This equates to focusing first on management accounting, which in turn will drive cash accounting. Finally, GAAP accounting will be the historical coordination of information required by the organization. (Tax accounting will always be an island of its own.)

2. 2.

   Change the information flow to product or service. Creating a dynamic system of information feedback is essential. The trend is to employ a centralized repository so that all the data are accessible from a central database for easy and fast consolidation and availability to those who have the need and the authority. A central database through the Internet eliminates application software distribution problems and provides the ability to work the data 24/7. Using selective keys and a relational database technology increases usefulness, reduces costs, and eliminates the paper systems that have run parallel to the computer systems.

Taken together, these steps create a dynamic process and allow the finance and accounting functions to have a direct effect on management decisions and thus to make a marked contribution to the company's success.

Page 21The new operating-finance partnership: a potent strategy for value creation

Martin G. Mand and William Whipple III

Organizations need the operating people to satisfy customers and grow the business, and they need finance people to help ensure that the organization attracts the funding it needs and applies its financial resources to create value. But it is only when the two groups work effectively together as equals, as in "partnering for performance" (PFP), that the real possibility of new value creation can be realized.

Furthermore, such partnering allows the value creation imperative to be built into the decision-making processes of an organization from the onset, rather than being belatedly recognized as a result of pressure from investors and other stakeholders. The goal of PFP is to ensure that financial considerations are addressed in a timely fashion while minimizing the disruption of operating objectives.

Both finance and operations have a strong stake in the success of a "partnering" attitude. For finance, a PFP approach actively seeks their participation in making strategic business decisions as opposed to being called in when it is time to implement the decisions. For operations, embracing financial techniques in planning and execution can enhance their effectiveness.

A good illustration of the PFP approach is the evaluation process for considering a strategic acquisition. The criteria for a good fit clearly include both the dimensions of operational and cultural compatibility, as well as correct pricing. Joint decision-making by the operating and finance people needs to be encouraged. PFP can also be applied to the almost universally unsatisfactory process of budgeting. Nearly everyone wants to simplify and speed up this process and, thereby, achieve more meaningful results with less effort.

Many business leaders believe that their finance and operations people are already working together as partners. An in-depth review of the budget process is a good test for determining if there really is a partnership or if the idea is just receiving lip service.

Given the stakes involved in seeking to meet the value creation challenge of a competitive, dynamic marketplace (namely success and even survival), it is hard to see why an organization would be willing to settle for anything less than a full commitment to partnering for performance.

Page 26Becoming measurement-managed: strategic focus and business metrics at Monsanto's IFS

Richard B. Clark and Brian S. Morgan

During the latter half of the 1990s, Monsanto's Integrated Financial Services (IFS) unit was undergoing dramatic transformation that involved everything from its core organization to the basic systems it used to do work. To achieve the transformation, the leadership team began by developing a clear vision and to support that vision with metrics. The unit's story is a lesson in the development and business value of a Measurement-Managed OrganizationTM (MMO).

MMOs distinguish themselves by achieving sustained profitability and agility at lower levels of risk. They have four basic characteristics:

1. 1.

   There is a clear, agreed-upon business model that captures the value proposition of the organization. For Monsanto IFS, the vision was succinctly stated as "One company, one system, one time."

2. 2.

   The business model is operationalized by a balanced set of strategic measures. For IFS, five core goals were chosen, each supported with clearly identified values.

3. 3.

   The strategic measures – and the strategy – are linked to business units, teams, and individuals in a meaningful way. To achieve baseline information on the key elements of the vision and values, IFS conducted surveys. Gaps were identified, and measures were established.

4. 4.

   The structures, processes, systems, capabilities, culture, and resources of the organization are aligned with the strategic performance measures.

MMOs outperform competitors because they more clearly define and communicate strategy. They accelerate strategy implementation by riveting the entire organization on the critical few drivers for strategic success. For IFS, the results exceeded expectations in almost every area in which performance measures had been identified. For example, cycle times for financial closings were improved, the new ERP system was completely installed, and the IFS team contributed significantly more to the financial performance of Monsanto than it thought it could. This was attributed to the fact that very specific goals allowed everyone to focus on financial drivers. This improvement served the IFS unit well during their transformation period and in subsequent periods of dramatic change, including a major merger. In summary, being an MMO has enabled IFS to sustain productivity improvement and continually direct its efforts toward achievement of specific business results.