Using Scenario Planning To Improve Decision Making Processes

As the business and economic environment continue to change at alarming levels and become increasingly complex, the pressure on the finance organization to support the core business by strategically addressing volatility, uncertainty and risk is also intensifying.

This fast changing environment is making it extremely difficult for organizations to forecast business performance with a greater degree of uncertainty. What was once considered extraordinary is now the ordinary and the previously unthinkable is now reality. In this environment, organizations need to become more flexible and adaptable, as opposed to being reactive. Traditional planning cycles, such as the static annual budget, are no longer ideal for this dynamic economy.

Despite widespread evidence indicating this rapid change, many organizations are still relying on the annual budgeting process for planning purposes. They still have not mastered the fact that the annual budget gives a false view of a stable future. By the time the annual budgeting process is over, the majority of the assumptions used to prepare the budget are outdated. Also, when preparing their budgets, many organizations make use of historical performance as the baseline for predicting future performance. Again, they are failing to realize that past performance cannot be used to mirror future performance.

Most budgets prepared by companies have a financial focus, normally adding a percentage to last year’s numbers. They lack specific consideration of the forces driving the business and value creation. There is a broken link between the organization’s strategy, planning, resource allocation and performance reporting processes.

With the current volatility, uncertainty and complexity in the business environment, companies need to adapt agile and new ways of planning. Working together with the other business teams, the finance organization can drive this process and lead its success. Taking advantage of the function’s analytical and risk management skills, finance executives can use scenario planning to help decision makers identify and understand possible future events and their impact on strategy execution and business performance.

Using scenarios will help the organization to manage its business model, industrial and environmental uncertainties. Instead of taking a static view of the future and basing key decisions on gut feel, scenario planning helps business leaders understand their business environment (any significant emerging threats and opportunities), identify the critical drivers of value and correlate their impact on performance, both operationally and strategically.

When conducting a scenario planning exercise, organizations must:

  • Define the purpose and scope of the exercise.
  • Examine the internal and external environment for emerging trends and issues.
  • Identify possible realistic future scenarios and evaluate their impact on the business.
  • Formulate strategic and operational responses to each scenario.
  • Monitor performance related triggers and regularly challenge assumptions

Regardless of your business’s industry sector, scenario planning is useful for getting different views of the future that reflect volatility, uncertainty, and complexity thereby helping you identify gaps in your organization’s ability to respond to threats and opportunities. Once you have identified the blind spots and gaps in your company’s response capabilities, you can then start building a dynamic risk management framework and gain knowledge of the risks you have direct control of or influence and those that you do not have.

Scenario planning is not about predicting the future accurately. Instead, it is about understanding the environments in which your business operates, discovering new insights, and increasing adaptability to changes in these environments. By constantly taking uncertainty into account when making decisions and also encouraging alternative thinking, you will be able test and evaluate the robustness of your company’s strategies against a range of possible futures. This in turn will assist you broaden your perspective and develop robust response plans.

Critical to note is that scenario planning is a continuous process rather than a once-off exercise and must be incorporated into processes for managing the business on an ongoing basis. The macro-economic environment is constantly changing and as such, an ongoing review of the drivers of performance and trigger points is necessary.

You need to constantly ask questions on the social, technological, economic, environmental, political and legal influencing factors and indicators.

Examples of questions that you might ask include:

  • If you are an automaker, what is the impact of autonomous and electrical vehicles on our current business model? Are self-driving cars the future and how should we respond?
  • If you are consumer company, how would the organization respond to growing emerging markets and the rise of the middle class workers?
  • How would the organization respond to unexpected loss of a major contract that has sustained the company for a long time to a competitor?
  • What are the short-term and long-term implications of a major product recall on our market position, reputation and the organization’s ability to meet performance targets?
  • What is the range of likely impacts on our brand, our customers and our other products, if one of our key suppliers files for bankruptcy?
  • What competing products or disruptive forces will have the potential of threatening and forcing us out of business?
  • What is the impact on our quarterly and annual performance targets of material short term changes in key external variables such as commodity prices, inflation rates, interest and exchange rates, GDP and consumer spending?
  • How would the organization respond to unexpected external events such as a major natural disaster, political or regulatory actions, or occurrence of a pandemic?
  • What are the likely advantages and disadvantages of moving our enterprise systems to a cloud-based platform versus retaining them in-house?
  • What are the global business implications of UK leaving the European Union, and how would our organization react to such a move?

By systemically monitoring a series of performance related triggers, the organization will be able to anticipate major trends and changes in the industry or broader business environment, respond dynamically, gain competitive advantage and seize growth opportunities in both developed and emerging markets.

Used properly, scenario planning shifts from being an only business threat analysis tool to also an opportunity identification tool.

Preparing for and Responding to Disruption

Regardless of the nature of your business, you are either already dealing with disruptive forces operating within your industry or are preparing your company for change and disruption. Today’s business environment is different compared to what it was decades ago where everything was predictable and you would operate your business with greater certainty. Things have changed. Businesses across all sectors have to deal with a fast-paced changing environment and the message to current and future business leaders is “Disrupt or be Disrupted”.

Increased regulatory changes, advanced technological developments, a new breed of competitors, increased volatility and uncertainty, among other factors, are all changing the way companies operate and execute their strategies.

Companies that are failing or fail to adapt to this dynamic environment are digging an early grave for themselves. Sooner or later they will join the history books as the once regarded “Too Big To Fail” corporations.

In an era of constant change, uncertainty and increasing complexity, business leaders ought to challenge accepted ways of doing things and reappraise their business models to see if  they are still fit for purpose. Unfortunately, many people are reluctant to adapt and change. Fear of the unknown often causes people to resist change, and this at times, results in far-reaching consequences. What used to work, say five or ten years ago, might no longer work in the current environment.

As a result of this fast changing environment, companies have to adapt a highly disruptive approach to managing almost every aspect of their business. As Marshal Goldsmith nicely puts it – What Got You Here Won’t Get You There. This ever-changing environment requires a new style of leadership and thinking. There is need, on the part of companies, to completely abandon legacy ways of thinking and embrace disruptive solutions.

 

What can companies do to prepare themselves for change and disruption?

 

Acknowledge That Disruption is Inevitable

Although it is difficult to predict the future with greater certainty and confidence, it is critical for organizations to know and understand that they are operating in an environment that is very unpredictable. Surprises are everywhere and these can abound anytime. To make it worse, we now live and function in a globalized and very interconnected world. Just because you are located in certain jurisdiction does not mean that events in another jurisdiction or industry will not have any major implications on your business.

The forces driving disruption within one industry might not necessarily have a direct impact on your business, but rather, indirectly affect the operations and performance of your business. What cross-industry issues are likely to have an impact on your business now and in the future and at what magnitude?

Instead of focusing on the past alone, management and their teams should start looking at the future and anticipate those forces capable of transforming the company’s existence and its operating model. In other words, having sharp risk-sensing tools capable of identifying risks and opportunities. This includes asking tougher questions about issues affecting the future of the organization, and having the right capabilities to respond accordingly.

You must be able to quickly identify any sudden shifts in the business environment that are capable of rendering your company’s broader strategy less relevant than it was in the past. In today’s era of data and analytics, companies can take advantage of these new technologies and use them to help predict the future and make fact-based and confident decisions. The challenge for many companies is having that ability to rise above all the noise out there and obtain the right insights for effective future decision making.

Take social media technology as an example. It has changed and continues to change the relationship between brands and customers. Control of brands has shifted to consumers. Consumers are constantly talking to each other on various social media platforms about different brands – the good, the bad and the ugly. It is no longer a case of the marketing team pushing the company’s products and services to the consumers, but rather listening to them.

Unfortunately, many companies are still reliant on internal sources of data to make key strategic decisions. They have not yet embraced new systems to mine unstructured external sources of data and tap into consumer conversations to hear what is being discussed about their products and services. Companies need to be reminded that managing in this environment requires them to adapt to this transition, get a grip on social media and start holding profitable conversations with consumers.

Given the massive proliferation of data, focusing on the right information is therefore a must.

 

Challenge Current Strategic Thinking

It is one thing acknowledging that forces of disruption are inevitable, and another thing to challenge current strategic thinking. What do you do when you have identified the various forces threatening to disrupt your business? Do you sit down, relax and allow nature to take its course?

Unfortunately, in today’s hyper-competitive and complex business environment, once an organization has identified potential disruption forces, it is critical to review the organization’s strategic choices and find ways of responding to the threats or opportunities presented on the table. This might require you to review your market and product portfolios and select the best candidates for investment. Some of the questions that you might ask yourself are:

  • Given the finite resources at our disposal, what are the strategic choices that  we should focus on and invest in?
  • Which markets, customers and segments should we invest in now to position ourselves for the future?
  • Who are our important stakeholders and how do we plan to satisfy their multiple sets of demands?
  • How best can we realign our value chain in order to optimize our business performance and competitive advantage?

For many companies, their market share is under pressure from intense competition by current and new competitors. In order to survive and not disappear into the thin air, these companies must adapt and transform their business models. Strategies that might have worked for them in the past are now deemed unreliable. As a result, these companies have to respond faster and differently compared to their competition.

What is key is getting everyone within the company on the same journey. For people at the bottom to shed legacy ways of thinking, the tone of message from the top must be right. Leaders have the duty to provide a clear framework and steps required to move the organization from one position to the next. They must clearly communicate the plan to everyone, from top to bottom, and ensure the response plan is aligned with the overall company strategy and easily understood organization-wide.

When there is full buy-in and accountability from the top, there is a higher probability of buy-in from the lower level employees. A command-and-control approach cannot keep pace with a dynamic business environment.

 

Execute the Plan More Effectively

Various research findings have concluded that most companies, irrespective of industry, are good at planning but poor at effectively executing these plans. A lot of work and resources goes into these planning processes, unfortunately, these yield unsatisfactory results.

The difference between success and failure frequently comes down to how the organization implements its strategic plan. So often, there is a misalignment between strategy and implementation, resulting in poor performance. Preparing and responding to disruption requires business leaders to craft a simple to understand, but effective strategy, that is communicated consistently across the organization.

Clear communication of strategy throughout the company is key to creating alignment. Additionally, clear communication  helps establish common goals for the different business unit managers to work collectively toward. On the contrary, poor communication creates barriers to effective execution. Getting everyone to work towards the same objectives improves cohesion.

In order to make sure that you are moving in the right direction, you must design and implement KPIs that measure progress towards achieving strategic goals. This helps set expectations and help identify any problems regarding execution.

Executing the plan effectively also demands the organization to have the right talent in place to implement the strategic choices that have been made. In most cases, lack of talent in key strategic positions has been proved to inhibit business growth. It is therefore imperative for leaders to know and understand that the capabilities required for success today are quite different from those that were needed in the past.

For example, the finance function of the past had chartered accountants as the team members. Today, the function has people with diverse backgrounds. This is because, as the role of the finance function evolves from being a bean counter to a bean grower, managing the function requires very different capabilities.

The onus is therefore on the company to develop and implement an effective talent sourcing strategy that attracts and optimizes talent and resources, and ultimately improve business performance.

Now or later, every business will experience some form of disruption. Business leaders must understand that disruptions will happen, and with each disruption comes risk and opportunity.

Are you prepared for the change and ready to respond?

 

 

 

 

Categories: Strategy Management

Is Your Finance Function Ready For Change?

Last month, CFO Research in collaboration with the business process management firm WNS, released a report on the Finance Function’s Readiness for Change.

The report is worth reading and discusses how finance organizations can prepare themselves for the corporate and market demands of the future, and help their companies realize full value from data and drive business performance.

As the volumes of financial and performance data continue to increase, pressure on the finance organization to help senior managers and decision makers make sense of this data is also increasing. Instead of hiding behind the scenes, CFOs and their teams are being challenged to become strategic business partners and add value to the business.

If the finance organization is to add value, the function has to quickly adapt to the changing business landscape and become agile.

According to the Finance Function’s Readiness for Change report, in order to play a critical role in the future, the finance function has to develop and improve in four areas:

  1. Finance operating model
  2. Automation of finance processes and activities
  3. Governance, risk and control (GRC) structures and processes
  4. Adoption of sophisticated analytics and digitization

Improving the Current Finance Operating Model

Of the surveyed respondents, 60% plan to shift further towards a more centralized and standardized finance operating model. By adopting this shared services center model, finance chiefs are expecting to cut down on complexity, reduce costs of finance and improve the overall control and management of finance processes.

Other benefits indicated by the respondents as accruing from adopting an advanced and centralized finance operating model include improved working capital management, reduced risk from a more controlled and stable operating environment, improved company-wide operations, increased revenue and an overall improvement in business performance.

Shifting from a basic to an advanced operating model requires a well crafted finance strategy and execution abilities. The finance strategy must be aligned to the broader strategy of the organization, and ensure it contributes towards its achievement. You don’t want to have a finance organization that is solely focused on achieving its goals and objectives at the expense of the overall corporate strategy.

Also important to note is that cost reduction should not be the sole purpose of moving towards an efficient finance operating model. Improving finance operations is also about freeing finance from spending more time on routine, non-value adding activities to focusing more on value-add activities. Getting finance involved in the operations of the business and support effective decision-making processes.

 

Automating Finance Processes and Activities

As per the survey results, to be successful in the future, 57% of the surveyed finance executives agreed they will need to boost their current levels of finance process automation.

When asked to consider the potential benefits from achieving advanced automation capabilities, respondents identified two benefits as the most important:

  • Realizing efficiency gains in transactional processes such as order-to-cash, procure-to-pay, record-to-report, and cash management; and
  • Adopting digital performance management tools (e.g., dashboards and visualization; customized management cockpits for planning, budgeting, and forecasting; profitability and cost management).

Depending on the size and scale of the organization, it is worth looking at your finance processes and review the level of manual data intervention processes and activities involved.

Automating your organization’s finance processes and activities will enable you speed up transactional processes and reduce the number of costly errors arising from manual interventions.

How many times have we heard of companies that lost millions and millions of money due to spreadsheet errors?

When it comes to embracing new technologies, it is critical to understand that new technologies are an enabler for decision-making processes. Many senior executives tend to believe that implementing the latest technologies will instantly work magic for their organizations, which unfortunately, is not the case.

Just like the finance strategy above, the IT strategy must also be aligned to the broader strategy of the organization. What solutions are you seeking from the new technology or system? Are you trying to improve your budgeting and forecasting processes? Are you seeking to efficiently collect and organize data in ways that provide management with better decision-making tools? Maybe you want to develop and improve your reporting structures and ensure faster period closing?

More often, when implementing new systems, senior managers tend to go for the household names just because everyone is using the same packages. The result is that you end up embarking on costly implementation projects for a system that is standard to the industry but not specific to your organization’s needs.

It is therefore critical to first conduct a thorough cost-benefit analysis and then shop around for the right technology or system that addresses your needs at the right price.

 

Improving Governance, Risk and Control (GRC) Structures and Processes

The environment in which business is conducted today is very volatile, uncertain, complex and ambiguous (VUCA). As a result, companies are exposed to a wide array of risks, and if these risks are not identified, assessed, managed and monitored properly, there are far reaching consequences on the overall performance of the business.

Surprisingly, two-thirds of the survey respondents view their current GRC structures and processes either at an intermediate level (61%) or at a basic level (5%), whereby there is a huge reliance on non-standard processes and individual judgement-based metrics or mix of standardized and non-standardized processes for global or functional needs, meaning we are still a long way from reaching the ideal position.

The report also mentions that “The primary benefit from improved GRC processes, selected by 48% of respondents, is seen as ensuring compliance and avoiding personal liability”.

I have a problem with the above statement. First, the term “GRC” itself causes a lot of confusion to many people. To some, “GRC” stands for Governance, Risk Management and Compliance. To others, “GRC” stands for Governance, Risk Management and Control.

When the primary benefit of “GRC” is seen as meeting regulatory compliance, definitely there something which is very wrong. “GRC” goes beyond that.

According to OCEG, “GRC” is the integrated collection of capabilities that enable an organization to reliably achieve objectives while addressing uncertainty and acting with integrity.

This definition therefore calls for effective board operations and the alignment of strategy formulation, performance management, risk management, compliance and internal audit processes as well as the other aspects of organizational governance to ensure they are all working towards one common objective.

When “GRC” is aligned to the broader business, high-risk potential areas can easily and quickly be identified, in turn enabling the organization to be more proactive as opposed to being more reactive.

In other words, “GRC” should be seen as supporting effective decision-making processes instead of being seen as a box-ticking exercise that is conducted once or twice per year.

Finance executives have a critical role to play here and ensure that one definition of “GRC” applies through-out the organization and also that “GRC” is promoting the right behaviours and driving business performance.

 

Adopting Sophisticated Analytics and Digitization

New advancements in technology such as analytics, digitization, artificial intelligence and machine learning are disrupting business models and those companies that have thoroughly done their homework and tapped into these new technological developments have already started seeing and reaping the benefits.

Much has been spoken and written about finance becoming the analytics powerhouse of the organization. Unfortunately, this will not happen unless finance makes a firm a decision to change it’s identity and become the real business partner sought after by senior decision makers.

The finance organization is used to reporting on what happened in the past. However, in today’s fast-moving business environment, maintaining a competitive advantage requires the function to become forward-looking, as well as develop a real-time understanding of changing conditions and markets. This can be achieved by adopting more advanced analytics and digitization technologies and tools.

While respondents from the survey plan to implement technological capabilities for advanced data mining and predictive analytics, it important to have a clear strategy and execution plan. You first need to identify your data analytics needs and the questions that you are seeking answers for.

Yes, it is true that these new technologies have the benefits of reducing operational costs, improving operating margins, improving performance reporting and  overall decision making processes. However, the challenge with advanced analytics and digitization projects is selecting and implementing the right tool that will help you achieve all the benefits above.

It is not a matter of just choosing one technology over the other based on gut-feel. You need to conduct a cost-benefit analysis and the value add to the business of the new technologies and tools. Do you have enough resources to allocate to the project?

How familiar are you with the project? If your organization does not have experience of implementing advanced analytics, it is recommended that you start with a pilot project before going full-scale.

How easy is it to integrate the new technology with the current systems and processes?

You have to ask as many questions as you can as this will help you make the right decision.

 

Digitization will be a priority for finance moving forward. Thus finance executives should be prepared to make the case for how digitization can support the advanced analytics that will be necessary to drive future competitive advantage for their organizations.

This is a fine document for preparing the finance function for the future. But are finance professionals ready to adopt the changing new role and drive business performance?

I welcome your views.

 

 

 

 

Rethinking and Elevating the Status of Risk Management

September 13, 2016 Leave a comment

Enterprise risk management (ERM) is at the heart of effective strategic decision making and should be at the forefront of everybody’s thinking within the organization. Today’s risk-filled macroeconomic environment requires front-line employees, middle management, senior executives and the board to take a proactive approach in managing the various risks the business is exposed to.

Risks are increasing and impacting the business at a very alarming level, and as a result, senior management and their teams have to be more prepared to respond quickly than in the past. This means adapting a new view of the risk universe.

Whereas in the past risk management was seen as a compliance and box ticking exercise, this limited view no longer cuts it. Not to say that compliance management is a waste of time, the function still plays a critical role in helping the business achieve its objectives. What is critical and required in today’s VUCA environment is view risk management with a different pair of lenses, assess its role in helping management successfully execute the broader strategy of the business and increase the overall value of the business.

It is no secret that over the past decade the number of corporate crises and scandals the world has witnessed have increased significantly.  From natural disasters, product-related mishaps, supply chain failures, employee fraud, to IT system failures and too-big-to fail company liquidations, the media hasn’t been short of a story to post as a headline. Most of these risk events, maybe apart from natural disasters, would have been mitigated had the management and board played their critical role in the effective identification, assessment, management and oversight of risk management within the organization.

Unfortunately, in many organizations today, senior management and the board are turning a blind eye on important risks and effective risk management.  Risk management is considered an after-thought activity.

Instead of integrating risk management with strategic decision making, the focus is on short-term performance and incentives that are inappropriate and driving the wrong behaviour from the top and all the way down to the least ranked employee of the organization. As I have previously attested in my posts, although the board plays a critical role in ensuring effective risk oversight within the organization, risk management is everyone’s responsibility.

Employees, management and the board should have a clear understanding of the business model, the foundations and assumptions on which this model is based, the risks the organization faces and how they might combine.

Irrespective of which function you are working, there are risks emanating from that particular function and these risks in turn intertwine with the broader business. As a result, it is critical that each employee is aware of what risks are emanating from their line of business, at what frequency and how they fit into the overall risk strategy of the business. If the tone of risk management from the top is rotten, how can the board except the tone below to be different? Remember the fish rots from the head down.

If the leaders are ignorant, then the whole organization will follow suit. It is therefore important that top leadership sets in motion the right organizational risk culture and lead by example.

As a starting point,  this means changing the role and status of those employees and management tasked with implementing the organization’s risk strategy so that they don’t feel inadequate but can confidently report all that they find to the board. One of the challenges facing many businesses is that of complacency.  There is a misguided belief that good times will last indefinitely. As a result, many businesses are failing to recognize the rapid change in the business environment.  Risks change overtime, and it is essential that management and boards are aware of all the important risks capable of derailing their plans.

How competent is your organization when it comes to identifying and analyzing risks emerging from the company’s internal and external environment, as well as from the leaders’ activities and behaviour?

How often are you stress-testing the core of your business model?

To avoid falling into the complacency trap, management and the board must learn to ask questions all the time. For example:

  1. How is your company consistently producing exceptional results?
  2. What are the foundations of the company’s success and how sustainable are these?
  3. Even if the company’s strategy is implemented flawlessly, what other risks could undermine the business?
  4. Does your incentive structure promote any form of inappropriate behaviour?
  5. Are you focusing more on cost-saving and efficiency to the detriment of quality?

Asking the right questions helps management uncover surprises early enough and address these before they become big and damaging to the organization.  It also helps the board understand and evaluate the adequacy of the answers received. In the financial services industry, many institutions are driven by short-term revenue, profit and ROE gains. This massive obsession with achieving short-term performance targets often results in employees bypassing internal controls and management turning a blind eye to risky behaviour.

We have witnessed cases where companies significantly rewarded an employee for making huge profits on behalf of the business, only for management and the board to find out later that these profits were made via questionable and unethical ways. How robust and all-pervading are your company’s internal controls to monitor employee behaviour, even the most senior executives?

When the role and status of risk management is elevated within the organization, there is a free flow of information in all directions. That is up and sideways as well as down and from the very bottom to the top of the organization.

Encouraging free flow of information within the business is key to ensuring that any issues or circumstances and risks that are known within the organization, but not to the leaders, do not remain hidden from the leaders’ sight. Some risks remain unmanaged because employees are afraid of flagging these to their superiors because the manager often refuses to heed warning and advice that something is wrong.

When bosses refuse to listen, risks remain unrecognized and unmanaged for a long time. These Unknown Knowns inherently become dangerous and eventually become detrimental to the organization’s performance and reputation.

It is therefore imperative that when assessing and evaluating risk information, the organization considers all the sources of information at its disposal. Rather than limit their focus to traditional risk areas, companies should take an enterprise-wide approach of risk, and learn from their own experiences as wells as other companies and industries. This helps identify not only challenges that might cause a particular strategy to fail, but also any major risks that might also affect long-term positioning and performance of the business.

Self-deception is often a result of failure to listen to outside perspective, and when this happens, business leaders can only see themselves as in a mirror. This often leads to poor decision-making with far-reaching consequences than would have been the case had the leader listened to outside perspective.

Risk management is not only about looking at the downside, but also at the upside. Thus, in order to take advantage of uncertainty and volatility in today’s environment, maximize gains and create value, it is critical that companies move beyond their corporate structures, and adapt more of an “outside-in” perspective when assessing their strategies, challenges and opportunities.

In an age of Big Data and data analytics, companies can also take advantage of these advanced technological innovations, invest in this modern technology and make sense of the vast information at their finger tips, by sifting through the data,  determining the most important risks and risk indicators and establish an effective strategic risk management model to follow while continuously updating the company’s strategic risk profile.

Effective decision-making demands the business leaders to have a more comprehensive picture of the challenges that are in front of the company. This requires integrating ERM into the overall business strategy and planning process, and changing the approach to managing enterprise risks. ERM must effectively support the development and execution of business strategy. However, if risk management is considered a cost and not a value-adding process, there is a big risk that the business will fail to execute its strategy successfully.

Effectively implemented and aligned to the business, ERM can become an important source of information to the board as well as the business via its executives. For example, it can help them become aware of the new risks created by their strategies, evaluate the strategic impact of new technologies and identify investments that are necessary for managing risks and exploiting new opportunities.

On the contrary, if the internal audit and risk management teams are given a very low status and never listened to, they become less effective resulting in the company being exposed to unnecessary risks.

What level of status are you giving to your organization’s internal audit and risk management teams?

How does risk inform your company’s broader business strategy?

Data Analytics and the FP&A Function

September 5, 2016 Leave a comment

Technological advancements in Big Data and Analytics are having a significant impact on the business’s operating model and strategic performance. Many companies are already exploring how best they can adopt big data and analytics technologies to improve their businesses,  reduce costs, streamline processes,  improve marketing initiatives, and pursue future profits. In the majority of these organizations,  the marketing function and supply chain are leading the pace in applying these new analytic capabilities and serving the customers. Unfortunately, finance is lagging behind and still holding on to its legacy systems and primitive technologies.

All is not yet lost, there is still hope for finance to embrace advanced analytical technologies and help drive business performance. In addition to helping marketing and supply chain functions, Big Data and Analytics can too play a critical role in supporting the finance function fulfill its FP&A role in today’s dynamic business environment. In a world awash with large volumes of data, unstructured and structured, being able to identify patterns, anomalies and derive strategic insights is key for effective decision making. Having this ability to access, synthesize and monetize data requires the FP&A function to invest in new skills and data tools and take advantage of the potential uses of new data types.

It is therefore imperative for the CFO to consider the implications of investing in Big Data and Analytics technologies as well as the impact of using data for effective decision making. Modern technologies are not the domain for the CIO only but also for the CFO. Finance must learn to partner with the business, understand the language of IT and develop an ability to identify and evaluate the various ways data analytics technology can help the FP&A function. CFOs should be asking themselves, how best can they leverage Big Data and Analytics technology to help improve the organization’s budgeting, planning and forecasting processes? How best can they enrich operational and financial forecasts with the most reliable data and make them more accurate?

While everyone is talking about Big Data and Analytics these days and how they have the potential to transform the organization and create a competitive advantage, it is easier for management and executives to join the “Big Data Dream” without first formulating a clear and coherent data strategy. In the end, these executives end up collecting large volumes of data, most of it being worthless, resulting in the business incurring significant data costs and suffering from ineffective decision making.

The value in data is found when the organization is able to collect, synthesize, analyze and retrieve strategic insights from that piece of data and improve decision-making process. Key to consider prior making significant investment in data analytics technologies is the alignment of data strategy with the broader strategy of the organization, data access and governance issues, new skills requirements, and implementation road map.

One of the challenges facing many FP&A functions is assessing the relevant data to analyze, identifying trends and gaining valuable strategic insights. When preparing forecasts and analyzing business performance, there is need, for example, to synthesize data across operational, financial and customer information. How can all this data be integrated and used for decision support purposes? Unfortunately,  not many finance professionals possess this ability to manage this new data and new data types in a way that creates visibility across the organization and benefit other functions. Thus, it is crucial for the FP&A function in today’s economy to develop data mining and analysis capabilities to ensure relevant data is being used for strategic and performance improvement decision making processes.

There is a need therefore for the organization to radically change its data approach and evaluate how it fits well within the overall strategy of the business. Ensure effective KPIs, measures and metrics are designed and implemented to help managers run the business. This approach will ensure that information requirements as well as investments in advanced technologies are not managed in silos but rather, in a deliberate and organized fashion that aligns and supports the broader strategy of the business. Furthermore, as data becomes a strategic asset to the organization,  it is crucial that the CFO collaborates with other senior executives of the organization and engage them in planning conversations and collaboratively find ways of improving business performance.

In today’s economic environment, data is found everywhere, both internally and externally and this data can only be accessed if finance decides to leave its comfort zone and begin engaging with the business. Unfortunately, many finance professionals have a strong technical background and are weak when it comes to soft skills. Walking around the business, initiating conversations with other functions and asking smart questions doesn’t come naturally to many finance professionals. However, as the role of finance continue to evolve, the finance organization must learn to adapt and acquire new soft skills to avoid being left behind in the back office.

Today’s finance professional is required not only to have data skills, but also the ability  to communicate with the broader organization, have a strategic mindset and a deeper understanding of the operational areas of the organization as well as the ability to identify opportunities and help the business grow by  reducing costs, evaluating and increasing top-line revenues. FP&A must be able to ask smart questions and identify the relevant business needs that can be addressed by data analytics. How can the business benefit from technology, make smarter and faster decisions and also become more efficient? How can an investment in data and analytics technology help the business identify emerging or unknown risks areas and manage these risks intelligently?

By taking advantage of data analytics technologies, the FP&A function will be able to identify business performance leading indicators based on the data available, adjust forecasts and drive that information into operations. Uncertainty and volatility in the global economy  are on the rise and because of this, many business executives are worried and cautious about where to make large capital expenditures. As the support function with a larger visibility across the organization,  the FP&A function can help address this uncertainty.

By embracing modern technologies, the function can transition from business intelligence and reporting on what happened, to data mining and understanding why something happened, to predictive analytics and determining what is likely to happen and when. This will in-turn help  management and executives put contingency plans in place and become proactive.

Taking a phased approach is necessary when implementing data analytics technologies.  Instead of going full force with the implementation,  the organization can start small and use a specific business unit as the basis for the pilot project. Results from this experimentation can then be used to evaluate technology performance in terms of ease of use, speed and benefits. If the results are satisfactory,  the next business unit or region is selected and the process continues until there is a complete roll-out across the entire organization.

 

Finance Transformation: From History Keepers to Future Story Tellers

The traditional role of the finance function is that of ensuring accurate processing, accounting and reporting of financial transactions. However, in today’s volatile, uncertain, complex and ambiguous economic environment, reporting on the past is no longer enough. New advanced technologies are disrupting business models at the speed of lightning. For example, digital innovations such as artificial intelligence, machine learning, collaborative technologies and advanced analytics are already transforming the traditional role of the finance professional. Routine accounting operations and transaction processes are getting automated freeing up time for finance professionals to focus more on value-adding activities.

In this second machine age, finance professionals have to adapt and embrace the opportunities brought by this new wave of technologies. Digital technologies have the potential of transforming the finance organization into an analytics powerhouse capable of deriving strategic insights from large data sets and improve decision-making processes. Gone are the days of producing reports that are backward-looking and performance variance reports that are lacking actionable insights and recommendations. In order to drive business performance and help inform decision-making, the finance function has to improve and increase its influence across the business. One way of doing this is initiating conversations with others in the business, ask the right questions, identify root causes of existing problems and provide solutions in a collaborative way.

In many organizations, the majority of senior finance professionals have an accounting background and because of the article-ship training they went through, most of them are inclined to a rules-based thinking. Everything has to add up and the level of risk taking is significantly low. Unfortunately, this mind-set is a hindrance to breakthrough performance.  In addition to their technical skills, today’s finance professionals must also develop a strategic mind-set. Successfully playing the business partnering role requires the finance professional to support the broader business strategy as opposed to focusing on narrow accounting objectives alone. in other words, finance has to drive business outcomes rather than simply report them.

To transition from history keepers to future story tellers, it is imperative that finance professionals have a clearer understanding of all the numbers they are reporting on. The value of analysis provided by finance is only as good as the business’ ability to interpret and act on it. If decision makers and other stakeholders lack trust and have no or minimal confidence relying on information supplied by finance to support decision-making, it means finance is failing to play its role. Finance needs to get deep into the numbers to really understand the various performance drivers of the business and ensure it manages the right things and sets the right goals.

Big Data and analytics are playing a critical role in helping organizations make sound decisions, improve performance and gain a competitive advantage. However, some organizations have been delusional to think that by collecting and storing huge data sets, they have found a killer recipe for success. Unfortunately, this is just wishful thinking. There is value in data when the right type and amount of data is collected, correctly stored, properly analyzed and insights gathered to inform strategic decision-making. By acquiring new analytical skills, finance professionals will be able to mine and analyze large data sets, bring out a story out of this analysis, provide an explanation of what has happened, what is driving the numbers, and how they affect the future.

If finance is to succeed in this storytelling role, the function has to definitely move from away from the practice of providing one view of the future. It is embarrassing, to say the least, that in today’s ambiguous and continually changing environment, some organizations are still relying on the annual budgeting process to manage and monitor performance.  The annual budget is static and cannot be relied upon. Using rolling forecasts and scenario planning can help the finance function overcome this problem. Finance ought to gain complete visibility into the performance of the business, be a problem solver and provide solutions to these questions:

  1. What happened?
  2. Why did it happen?
  3. What is going to happen?
  4. What should we do about it?

In other words, finance must be able to anticipate alternative performance scenarios by performing what-if-analysis, identify the triggers of each scenario, evaluate the business impact of each scenario and execute a contingency plan. Performing this exercise will help identify new business opportunities and the ways the business can profit from them, as well as weigh the potential risks and their financial,  operational and strategic implications.

There is nothing wrong in looking at history, since history also provides a platform for learning and a baseline for planning.  Although it is difficult to predict the future with certainty, decision makers cannot afford to run the business by ignoring future risks. Naturally, most finance professionals are risk averse and have a low appetite for risk. The problem with looking at only the downside of risk is that the business is bound to miss on strategic investment opportunities.

Finance professionals need to increase their appetite for risk, at the same time ensure this is not detrimental to the successful running of the business.  Instead of saying no most of the time, finance professionals have to embrace strategic risk taking and evaluate what opportunities are bound to be missed if the organization fails to align its risk and business strategies.

Having finance professionals who are storytellers requires a different talent acquisition and retention strategy. As most routine accounting operations continue to get automated, the organization needs to map out its current skills, document future finance skills need and identify the gap, design an effective talent strategy and execute on the plan. Also, the organization must strive to build a team around people with diverse backgrounds. For example, including people with social and behavioural skills can help the organization model changes in customer and competitor behaviour and describe the financial implications.

Is your finance organization doing enough to help you navigate through this VUCA environment?

 

5 Ways Finance Can Help Improve Company Profitability

Businesses in various industrial sectors are undergoing a fundamental transformation as a result of the effects of globalization, advancement in new technologies and increasing digitalization.  Apart from presenting a wealth of opportunities to help the organization soar to greater heights, these changes are also presenting a variety of challenges on the business model.

They are altering customer behaviours, placing increased pressure on existing markets and impacting financial performance.  In these trying times, the finance function is being called upon to help steer the organization in the right direction and improve profitability.

Popularly known as bean counters, accountants are now required to support business growth initiatives and help grow the beans within their organizations. The modern finance function has evolved from being a “just numbers” back-office function to a “strategic partnering” front-office role providing deeper insights and a clear direction for translating the numbers into effective actions for those operating on the front lines of the business.

Whereas in the past the finance professional spent his day behind the scenes, glued to his computer, producing and reporting the numbers, today’s finance professional is involved in the business interacting with the other organizational functions and helping drive business performance. There is a joke about an accountant without a spreadsheet being described as “lost”. In the past, this could have been true, but not today. The bean grower of today is a strategist, a motivator, a leader, a team player, a change agent, completely understands the drivers of business performance and drives improvements in respect of new revenue and value-producing opportunities.

It is no secret that the finance function is the custodian of the business profit and loss. In times of economic downturn when cost control is critical, the finance professional is called upon to help identify areas where the organization can scale back in order to improve overall profitability. In good times, finance helps senior management identify new opportunities (new markets, new products, potential acquisition targets, new services etc.) that need exploiting. Disrupt or be disrupted is the mantra in today’s ever-changing business environment. The business has to evolve with times.

The challenge on the finance function is to deliver more with less. This has led to many organizations to embark on ad-hoc cost-cutting programs hoping to improve the bottom-line. Unfortunately, cost control alone is not sufficient or effective enough to enable the organization realize the targeted gains. You can only cut costs up to a certain level. This is because each cost initiative reaches a point of diminishing return, after which, the company has to explore new ways of improving profitability. In order to grow its influence on company profitability, the finance function must:

  1. Understand the Drivers of Business Performance.  To be effective bean growers, accountants need to move beyond numbers and get an understanding of the company’s product s and services and how they affect the profitability of the business. This means finance teams lifting their heads up from their financial reports and obtaining a better view of the business itself. Instead of focusing only on where the business has previously failed, finance should provide strategic insights, competitive intelligence and analysis that enable effective decision-making by the senior management team. For example, finance should be able to provide data, metrics and analysis that helps transfer the function’s own understanding of the drivers of profitability to others throughout the organization, in order to ensure that profitability develops into a basis for action.
  2. Help Identify New Pathways Toward Profitability. When it comes to profitability improvement initiatives, many at times the focus is on the bottom-line. As mentioned earlier on, eliminating fat from the bottom line works up to a certain extent. Cost reduction is a short-term fix but not sustainable in the long-term, especially if the company is looking to grow. Management become misguided and believe that by laying-off people to contain salary costs or postponing capital investments they are placing the organization in a better competitive position. The opposite is true.  In fact, cost cutting by itself is counterproductive as it can lead to inefficiencies, missed opportunities and higher operational costs. There is nothing wrong in getting the business lean, but getting lean has to be linked to the business strategy, done the right way, at the right time and for the right reasons. Attention should also be focused on the revenue side of the business, for example, diversifying the business, internally growing existing business units, making additional productivity improvement, improving existing product or service offerings and making major business purchases.
  3. Invest in Modern Technologies. As the amount of data generated continues to grow, an enormous demand is being placed on finance to make meaning of this data, identify trends and develop the most effective responses that will help protect and improve company margins. Finance must know what information will have the greatest impact on profitability since having the right information is at the core of improving company profitability. Equally important is placing this information in the right hands. Relying on spreadsheets alone will not cut it. Finance must invest and make use of modern Business Intelligence and Analytics technologies in order to be able to identify accurate, reliable and relevant information and place it in the hands of the right people at the right times. These modern technologies help transform finance into a more flexible, responsive and forward-looking function. The modern finance function must have the ability to use technology to gain a more detailed understanding of the metrics underlying the company’s profitability.
  4. Develop Effective Pricing Capabilities. The sales organization is normally rewarded on revenue made and this sometimes results in the sales team being interested only in closing the deal at the expense of profitability. Not all customers are equally profitable to the organization; therefore sales should be tailored to optimize profitability. Getting the pricing wrong has negative consequences on the overall profitability of the company. Finance need to have an advanced understanding of the company’s different customer and product portfolios. By performing customer profitability analysis and product profitability analysis, finance will be able to understand the customer costs-to-serve and use these costs to segment customers, fine-tune pricing and manage profitability by helping direct efforts towards growing profitable product and customer combinations. Sales personnel can then use this cost-to-serve in negotiations as well as forward-looking analyses to drive effective decision-making.
  5. Collaborate With the Rest of the Organization. Although finance plays a central role, maintaining and improving company profitability is a team effort – it should be everyone’s concern. It is imperative that finance professionals work directly with their colleagues outside of finance (Sales, Marketing, Operations and R&D.) and develop a list of actionable items which impact profitability. For example, working more closely with the sales organization will ensure that sales personnel have all the information and tools they require to make decisions that support profitability goals, otherwise they will be ill-equipped to make the best decisions. Getting the buy-in and commitment of the C-Suite is also critical since the C-Suite is involved in setting the direction of the company. The C-Suite’s involvement will in turn lead to the establishment of a common goal and set of metrics shared with the front lines of the business through synergies with their finance teams. Remember Individuals don’t win, teams do.

If the organization is to succeed in maintaining and improving its margins, finance’s involvement is important. Finance helps make meaningful and measurable profitability improvements.  Look at the bigger picture and beyond quick fixes such as rapid cost reductions. Develop a more detailed understanding of the full set of your business’s profitability drivers and take full advantage of new technologies capabilities to uncover the organization’s key profitability levers and challenges.

Transforming Finance Into A Strategic Function

There has never been an interesting time to be in finance than now. The role of finance has significantly transformed over the past years from being a back office function responsible for reporting past performance to more of a front office strategic role responsible for delivering strategic insights that enable effective decision making.

Although some high performing organizations have managed to transform their finance teams into value-adding strategic partners, the story is different in many organizations. In these entities,  finance is still regarded a back office function responsible only for preparing reports and reporting on past performance. In order to successfully transform their finance teams into strategic business partners; finance needs to build new capabilities,  get involved in the operational side of the business and take the lead in corporate strategy and business stewardship.

Although cost management and financial performance still remain crucial , in today’s increasingly uncertain and competitive business environment, the finance organization is required to take a more strategic role, provide solutions to the numerous challenges facing the business, manage risks effectively and efficiently, create sustainable value and steer the business in the right direction.

In his book Good to Great, Jim Collins talks about first getting the right people on the bus and the wrong people off the bus. Great vision without great people is irrelevant. It is therefore critical for CFOs to attract, retain and develop talent capable of building an effectively and efficiently well run and valued finance function. It is all about having a balanced skill set within the finance function. For example, some people are good at cost control while others are good at treasury management, management reporting and analytics, strategic planning and forecasting, performance measurement and management etc. The CFO ought to have the ability to match the right individual with the right job and resources.

To be an effective catalyst for change within the organization and transition to a value-adding business partnering role, the finance function of today must move and act beyond financials, in other words, resist focusing on numbers alone to drive business performance. This in itself does not mean that the function must lose its corporate stewardship role. Producing business financials with the highest possible level of integrity still remains a critical role of the function. Perhaps it would be ideal for the CFO to hire a strong financial controller so that he or she is freed to focus more on strategic issues. In order to be able to provide strategic advice that helps steer the organization through times of uncertainty and complexity,  finance needs to obtain deeper insights of the industry in which the business operates, assess and redesign the operating model and respond with agility and innovation.

Today’s business environment is increasingly characterized by ongoing disruption which requires management and their organizations to respond quickly with smart effective strategies. Failure to do so is a sure recipe for disaster. Take for instance digitization. Digital transformation is arguably one of the most disruptive forces organizations are facing today. Digital has revolutionized entire business models and sectors and at the same time transformed a number of businesses from market leaders to nobodies in a very short space of time.

To survive and flourish in these extraordinary times ( achieve top-line growth and business model innovation), it is imperative that CFOs and their teams are constantly challenging the status quo. It is so sad that in many organizations people have gotten used to working and producing results the same way over and over again. Continuous improvement is very unheard of and it is a taboo to suggest new ways of delivering performance. This culture must be changed and create one that is always looking for better ways to achieve excellence.

Digital transformation is a great enabler of strategy execution and business performance improvement. It is high time that CFOs leverage new digital technologies within the finance function instead of operating on yesterday’s business models and outdated technologies. As a CFO or finance professional you need to understand how digital ( Cloud Computing, Analytics, In-memory Computing, IoT etc) can help you exploit growth opportunities and create new sources of value. Is your organization’s business strategy fit for the digital world? Playing catch-up in a competitive environment is by no means a successful strategy. Digital has rewritten the rules of competition and blurred traditional sector boundaries. Because of technological disruption, barriers to entry have significantly been removed in almost every sector. This has significantly intensified the level of competition.

To avoid lagging behind competitors, finance plays a critical role in helping the organization adapt to digital within the core economic business model. Leveraging its analytical capabilities; finance can help evaluate a range of new risks and opportunities for the organization,  measure and balance the risk and return of any changes to help inform the right approach and develop proactive strategic responses that enable the management team to make better and faster decisions that improve business performance,  manage risks and protect the company’s reputation and brand. By ensuring effective risk management and embedding enterprise risk management in strategic planning and performance reporting, new opportunities and threats can quickly be identified. This will in turn challenge senior management to ask the right strategic questions and rethink the business operating model as a whole.

As the role of the finance function continues to transform into more of a strategic one, in addition to developing and executing strategy,  there is also need on the part of CFOs to have the ability to measure performance against strategy. Effective performance measurement and management looks beyond financial. As well as traditional financial measures , the organization must measure and manage non-financial metrics that matter. Thus scorecards need to include metrics relating to performance against the purpose of the organization.

The starting point in getting this right is for CFOs to consider the needs of the difference audiences. Many at times the focus of performance measurement is on growing shareholder value at the expense of various stakeholder experiences. For example, by listening to the voices of its customers, measuring customer experience and assessing that experience,  the organization will be able to identify areas of improvement, build trust and loyalty, reduce churn, increase sales and improve bottom-line value. How much time are you currently spending on broader strategic issues that relate to the organization’s overall performance than on financial management?

Measuring performance against strategy also requires CFOs and their teams to balance hindsight with foresight.  It is good to know where you are coming from but great to know where you are going. In many organizations,  the majority of performance measurement programs are backward looking. Management are spending a greater part of their time and resources on the past. There is little focus on the future. In today’s world of analytics, the finance function need to have the ability to mine performance data for forward-looking information and interpret the data so that executives do not miss strategic opportunities. The FP&A team must be able to generate real-time insights on what the business should do and not do in order to manage performance in the future. This kind of analysis also requires finance to keep pace with big data technology capabilities.

The modern finance professional is also required to help the business grow and create sustainable value. Exploiting growth opportunities can be achieved organically or through M&A activities. The former involves expanding the business through increased output, increased customer base or new product development.  The later involves acquiring new businesses by way of mergers, acquisitions and take-overs to increase business growth and sales. Because of the disruptive impact of new digital technologies,  many companies are now making use of M&A to create new business models and a technology-driven competitive advantage.

Thus in analyzing potential M&A targets, the CFO must have the ability to analyze exactly areas of value creation within the transaction as well as how the transactions align with the other growth drivers of the business. Today’s finance function must possess the right skills, knowledge and capabilities to develop and execute the organization’s M&A strategy.

As the role of the finance function continues to evolve,  in order to create value in today’s VUCA economic environment,  organizational CFOs need to balance control with growth opportunities and focus on business model transformation rather than only on cost management. Ask the right strategic questions and always review the business operating model. This will help you identify any areas of the operating model that are not aligned with the corporate strategy, identify the implications of change in one aspect of the operating model on another, redesign the business model and execute strategy successfully.

Embracing Risk for Improved Business Performance

September 10, 2015 Leave a comment

Barings Bank rogue trader (1995), LTCM hedge fund failure (1998), Enron bankruptcy (2001), Parmalat accounting fraud (2003), AIG accounting scandal (2005), Lehman Brothers bankruptcy(2008), Bennie Madoff ponzi scheme (2008), Toyota unintended acceleration recalls (2009) , BP Deepwater Horizon oil spill (2010), Fukushima tsunami and nuclear accident (2011), Libor-fixing scandal (2012), JP Morgan $14.6 billion regulatory fines (2013), Rana Plaza collapse (2013) and General Motors recalls (2014) are a few examples of risk management failures we have witnessed over the years.

Although the number of risks affecting the business and list of risk management failures continue to grow year-on- year, organizations are not doing enough to reduce exposure to negative events. This fact has also been highlighted in a recent 2015 Report on the Current Sate of Enterprise Risk Oversight: Update on Trends and Opportunities published by the ERM Initiative at North Carolina State University. Of the surveyed respondents, only 25 percent have mature enterprise-wide risk management process in place, 30 percent have only a partial process, addressing some but not all risk areas and 45 percent have no enterprise-wide risk management process in place. These findings are worrying, especially in today’s volatile, uncertain, complex and ambiguous business environment.

Management of risk is a fundamental and essential element in decision-making at all levels across the organization. Organizations need to rethink the way they look at risk. Instead of only looking at the downside of risks, there is also need to look at the upside of risks. This means moving beyond financial controls and regulatory compliance and spending time assessing, managing and monitoring operational and strategic risks for improved business performance. Risk management is not only about protecting the business but also about enabling business performance. Risk management must therefore be integrated with organization’s performance management activities. There is a positive correlation between financial performance, risk management and performance management. For example, a study by EY found out that companies with more mature risk management practices integrated with strategic planning processes outperform their peers financially.

Implemented properly, enterprise risk management (ERM) helps organizations create value and reduce costs. Today’s volatile economic environment is not making it easy for CFOs. They are being challenged by the board to do more with less, help the business survive and achieve targets. Faced with this challenge, the CFO has no other option but to find cost efficiencies. By implementing robust risk management practices, CFOs will be able to improve the organization’s cost structure. For example, ERM helps management to assess, manage and monitor enterprise risks holistically. Such an approach in turn helps reduce costs by eliminating duplicate risk activities and the savings gained from risk management activities can be used to fund strategic corporate initiatives and create value.

In order to embrace risk for better business performance, organizations must:

  1. Strengthen the Organization’s Risk Governance and Oversight

Enhancing risk strategy enables organizations to more effectively anticipate and manage risks proactively. In order to enhance the organization’s risk strategy, the board or the management committee must strengthen its risk governance and oversight and increase transparency and communication with stakeholders. Developing a risk governance structure includes establishing the organization’s risk appetite, defining the risk universe, determining how the business would measure risk and establishing enabling technology to help manage risk. If the board or management committee is unable to clearly define risk management objectives, this will automatically make it difficult to adopt and implement a common risk framework across the organization. Risk must be aligned to strategy. This helps identify and understand the risks that matter, invest in the risks that are mission-critical to the organization and effectively assess risks across the business and drive accountability and ownership.

  1. Make Risk Management an Everyday Part of the Business

To successfully achieve strategic and operational objectives, organizations must embed risk management practices into their business planning and performance management processes. Current information about risk issues must be included into the organization’s business planning and strategic planning cycles. By linking risk to the business planning and strategic planning cycle, the organization is able to prioritize and link the key risks to its operations and performance indicators.

  • Do you understand how the different parts of your organization fit together and the risks inherent? Risk is everywhere within the organization. You must be able to identify the connection between business, technology, processes, people and risk strategies and coordinate all the risk functions.
  • Is there a formal method of defining acceptable risk limits within the organization? Stress tests must be used to validate risk tolerances
  • How committed to embedding risk management is the organization’s leadership team? Leadership must drive the adoption of the risk management program across the organization and ensure it is effective.

Unfortunately in some organizations risk conversations are done once in a while. Risk is not embedded as part of the organization’s DNA. This must change if the organization is to become agile and respond effectively and efficiently to materialized risks.

  1. Coordinate Risk Activities Across All Risk Functions

Organizations go through various changes during their lifecycle. Some grow and diminish at an alarming rate and others remain stagnant for considerable periods. During the growth phase, various activities (risk, control and compliance) often become fragmented, siloed, independent and misaligned. The result is a negative impact on both the governance oversight and the business itself. Very often, because of this lack of coordination, costs spiral out of control and there is duplication and overlap of risk activities. When this happens, management must act promptly and address these problems to reduce risk burden, lower total costs, expand coverage and drive efficiency.

  • Monitoring and control functions must be aligned to the risks that are mission-critical to the organization.
  • Risk technology must be integrated to create visibility to risk management activities across the organization and eliminate or prevent redundancy.
  • Individuals must receive risk-related training in order to enhance their skills and promote efficiency. You need to continuously evaluate the skills gap in your organization and invest in skills development.
  • Risk consistent monitoring and reporting methods and practices must be applied across the organization to ensure all the risk functions are speaking the same language.
  1. Improve Financial Controls and Processes

Management must build optimal controls and processes that that balance cost with risk. These controls must be optimized to improve effectiveness, reduce costs and support increased business performance. If the environment is over-controlled (costs of control are too high) this hinders finance’s ability to effectively respond to changes in the competitive landscape. In this case, a review of current controls is necessary. This helps highlight duplicate and ineffective legacy controls. Investing in technology is also assisting organizations minimize the use of manual detect controls, automate controls and drive a more efficient, effective and paperless controls environment.

  1. Change the Organization’s Risk Culture

Effective risk management requires the right tone from the top. If there is no commitment or drive from the executives to create a risk aware culture, the program is bound to fail. A risk champion is required to change the way people view risks – from business protection to business support. The chosen individual must have great people and influential skills to ensure successful buy-in. During the change process, a decision might arise to invest in new technology for maximum benefits. Care must be taken that the change process or risk initiative is not technology-driven. The chosen technology must act as an enabler of change and the IT strategy must be aligned with the broader risk and business strategies.

It is critical that executives operating in today’s volatile economic environment periodically evaluate existing risk investments, move beyond compliance and focus more on strategic issues that will increase or decrease the value and performance of the business.

Differentiating Your Business’s Product or Service Offering

Have you ever wondered why your customers keep on buying your products or requesting your services? Why they are willing to pay more for some of the products and services and less for the others? Could it because you are the only supplier in the area? If so, suppose a new company in the same line of business as you opens up a shop in the area, would your existing customers still continue to buy from you or they would defect?

There are various reasons why your customers keep on coming back to do business with you but one of the most significant one is driven by the value that you are offering them. Value is the core driving force underlying every business decision.

Although managers talk of value when determining pricing strategies, unfortunately, very few understand the true meaning of value, what it is, why it is so important, how it should be communicated and its critical role in pricing products and services. To many of us, value means different things. As a test, ask your colleagues what it is that they refer to when they talk of value? Chances are high that you will hear different definitions. For example:

  • Some people equate value to expectations. To them, value is getting more than what they paid for, be it for an item or service delivery. In today’s information and social media age, perception alone is driving purchases. Prior acquiring certain products or services, customers are communicating with each other on various platforms about the organization’s product and service offerings. By the time the customer makes a purchase, he or she in his or her mind has already built up expectations on what the offering will be able to actually deliver. Only at a later stage after completing the transaction is the customer able to reflect and conclude that his or her expectations have been met.
  • Other people view value as a fair transaction. They look at the limited resources at their disposal and how best they can use them to meet their expectations. When purchasing an item, a lot of sacrifice has to happen. One has to set aside time to search for the right item and choose from among options, evaluate the cost of money to purchase, the price itself and any associated psychological risk factors. This sacrifice goes beyond looking at the monetary costs and also reflects on the time and efforts invested in seeking out the good in question. In this instance, value is therefore viewed as the worth of the item purchased at least being equal to and certainly not less than the sum of the sacrifices made in acquiring it.
  • While others view value as expectations and fair transactions, others see value as an improvement of the current situation. Customers are looking for investments that are capable of improving their lives significantly. Likewise, business managers are not keen on throwing money and resources at investments that will deliver a poor return and put the business in dire situations. Instead, they are looking for investments that enhance the business’s competitive advantage. If any investment derives a return that surpasses expectations and genuinely improves the current situation, then value is said to have been delivered.

The challenge on business managers is to look beyond pricing and make sure that their products and services are delivering value to the customer or to the end-user consumer. Making pricing decisions based on cost and competitors’ prices alone will not cut it through in today’s business environment. Customers possess the buying power and can easily defect to new suppliers if they are not happy with the current offering. Businesses therefore need to keep on reinventing themselves, re-examine the reality of the value they are offering to their customers and find ways to enhance the value they deliver.

Focusing on value helps business managers to understand the actual needs of its customers and find unique and differentiated ways of meeting those needs effectively and efficiently. When we talk about differentiation, it is not just about doing something different. It is about doing something different in a way that really matters to your customer and not just offering price cuts. So many at times, when confronted with a customer challenge on price, the sales response is often to discount which often leads to early product commoditization. Of course, your product may be heading toward commoditization. If this is the case, a thorough assessment and evaluation of the product and its relevance in the market is necessary. This will help you craft a strategy to reposition the product in the mind of your customers and prolong its lifespan.

Focusing too much on price prevents useful discussion of the real value of the offer. As a result, the buyer fails to distinguish the merit of what he or she has acquired and fails to gain, through lack of awareness, the full benefits from the products and services purchased. You need to challenge any claim that your product or service is just like everyone else’s. How are your products or services positively changing the customer’s overall product or service experience? Communicating your differentiated solution in a clear, compelling and persuasive manner is vital to persuading the customer do business with you.

Differentiating the organization’s total customer offer from competition means that this difference delivers real value that the customer can identify, understand, acknowledge and be willing to invest in. Unfortunately, this is not the case for many businesses. What these organizations are referring to differentiation are merely differences in specification and nothing more. There are no critical differences between their offering and those of the competitors. For instance, many are making changes that are resulting in easier production of the product or easier delivery of the service just because they have the technology or know-how to do so but not a differentiation from the customer’s perspective. What impact is the change you are making on your product or service having on the customer’s business, in terms of both economic and emotional considerations?

In today’s copy-cat environment, it is easier for competitors to emulate your products and services and surprise you. Despite this, many organizations are still of the assumption that their differentiation will make the competition irrelevant. Never underestimate your competitors’ abilities to shock you. You need to find unique ways of influencing the relative value the customer perceives, make the customer choose your product and service and remain with you. How good are you when it comes to listening and fully understanding the customer’s context, value-adding processes and pain and pleasure points? Are you able to consolidate this information and create a product or service that offers real differential advantage from that customer’s perspectives?

Gone are the days of pushing products and services to the market. To do well, the business has to be a good listener of its customers. You need to possess intelligent consumer and product insights that are capable of leading you to new ways of differentiation. You can differentiate your service by ensuring that your customers receive consistently great service. Consistency is key to having dependable and reliable customers.

Convenience and customization are also key to successful differentiation. By improving the convenience to your customers of using your product or service through using methods that are difficult for your competitors to imitate, you may be able to lock them in. With regards to customization, you need to deeply understand your customer’s value adding processes or production operations. Having this deep understanding will enable you to identify where your company’s unique skills can be applied for the benefit of both the client and the service provider. By fully understanding the real needs and motivations of your customers and timely responding to them, you can differentiate your total customer offer and reap great benefits.

Although there are various ways the organization can choose to differentiate itself from competition, regardless of how it decides to do so, learning and understanding as much possible about the customer, her company and market is vital. Where are the sources of pain and problems he or she is experiencing that no one else seems to be addressing? As a business, how can we leverage our unique capabilities, contacts, technologies or other resources to address the customer’s problems in a way that is difficult for our competitors to copy but at the same time make it easy for the customer to buy and remain with us?

You need to deeply know and understand your customer in order to build a powerful, persuasive and compelling value proposition. In this day and age of plenty information, you can never know too much about your customer. Every single piece of information you collect goes a long way in helping you understand your customer’s business, context, strategy or desires. Value is different for every customer and even for the same customer under different circumstances. This value comes from knowing all the critical details about your customer. Learn everything about their value drivers. In addition to understanding your customer, know your differentiation – how and why you are different from your competitors. This will help you identify your competitive advantages and disadvantages, develop effective business and pricing strategies and enhance customer value.

If you are unable to justify totally the value-adding elements of your product or service proposition, your total customer offer is highly likely to be rejected by your target market.