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Building a Lean Financial Infrastructure!

A lean financial infrastructure presumes the ability of every element in the value chain to preserve and generate cash flow. That is the fundamental essence of the lean infrastructure that I espouse. So what are the key elements that constitute a lean financial infrastructure?

And given the elements, what are the key tweaks that one must continually make to ensure that the infrastructure does not fall into entropy and the gains that are made fall flat or decay over time. Identification of the blocks and monitoring and making rapid changes go hand in hand.

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The Key Elements or the building blocks of a lean finance organization are as follows:

  1. Chart of Accounts: This is the critical unit that defines the starting point of the organization. It relays and groups all of the key economic activities of the organization into a larger body of elements like revenue, expenses, assets, liabilities and equity. Granularity of these activities might lead to a fairly extensive chart of account and require more work to manage and monitor these accounts, thus requiring incrementally a larger investment in terms of time and effort. However, the benefits of granularity far exceeds the costs because it forces management to look at every element of the business.
  2. The Operational Budget: Every year, organizations formulate the operational budget. That is generally a bottoms up rollup at a granular level that would map to the Chart of Accounts. It might follow a top-down directive around what the organization wants to land with respect to income, expense, balance sheet ratios, et al. Hence, there is almost always a process of iteration in this step to finally arrive and lock down the Budget. Be mindful though that there are feeders into the budget that might relate to customers, sales, operational metrics targets, etc. which are part of building a robust operational budget. var
  3. The Deep Dive into Variances: As you progress through the year and part of the monthly closing process, one would inquire about how the actual performance is tracking against the budget. Since the budget has been done at a granular level and mapped exactly to the Chart of Accounts, it thus becomes easier to understand and delve into the variances. Be mindful that every element of the Chart of Account must be evaluated. The general inclination is to focus on the large items or large variances, while skipping the small expenses and smaller variances. That method, while efficient, might not be effective in the long run to build a lean finance organization. The rule, in my opinion, is that every account has to be looked and the question should be – Why? If the management has agreed on a number in the budget, then why are the actuals trending differently. Could it have been the budget and that we missed something critical in that process? Or has there been a change in the underlying economics of the business or a change in activities that might be leading to these “unexpected variances”. One has to take a scalpel to both – favorable and unfavorable variances since one can learn a lot about the underlying drivers. It might lead to managerially doing more of the better and less of the worse. Furthermore, this is also a great way to monitor leaks in the organization. Leaks are instances of cash that are dropping out of the system. Much of little leaks amounts to a lot of cash in total, in some instances. So do not disregard the leaks. Not only will that preserve the cash but once you understand the leaks better, the organization will step up in efficiency and effectiveness with respect to cash preservation and delivery of value.  deep dive
  4. Tweak the process: You will find that as you deep dive into the variances, you might want to tweak certain processes so these variances are minimized. This would generally be true for adverse variances against the budget. Seek to understand why the variance, and then understand all of the processes that occur in the background to generate activity in the account. Once you fully understand the process, then it is a matter of tweaking this to marginally or structurally change some key areas that might favorable resonate across the financials in the future.
  5. The Technology Play: Finally, evaluate the possibilities of exploring technology to surface issues early, automate repetitive processes, trigger alerts early on to mitigate any issues later, and provide on-demand analytics. Use technology to relieve time and assist and enable more thinking around how to improve the internal handoffs to further economic value in the organization.

All of the above relate to managing the finance and accounting organization well within its own domain. However, there is a bigger step that comes into play once one has established the blocks and that relates to corporate strategy and linking it to the continual evolution of the financial infrastructure.

The essential question that the lean finance organization has to answer is – What can the organization do so that we address every element that preserves and enhances value to the customer, and how do we eliminate all non-value added activities? This is largely a process question but it forces one to understand the key processes and identify what percentage of each process is value added to the customer vs. non-value added. This can be represented by time or cost dimension. The goal is to yield as much value added activities as possible since the underlying presumption of such activity will lead to preservation of cash and also increase cash acquisition activities from the customer.

Reality Distortion Field: A Powerful Motivator in Organizations!

The reality distortion field was a confounding mélange of a charismatic rhetorical style, an indomitable will, and an eagerness to bend any fact to fit the purpose at hand. If one line of argument failed to persuade, he would deftly switch to another. Sometimes, he would throw you off balance by suddenly adopting your position as his own, without acknowledging that he ever thought differently.  “

–         Andy Hertzfield on Steve Jobs’ Reality Distortion Field.

Many of us have heard the word – Reality Distortion Field.  The term has been attributed to Steve Jobs who was widely known to have communicated messages to his constituency in a manner such that the reality of the situation was supplanted by him packaging the message so that people would take the bait and pursue paths that would, upon closer investigation, be dissonant from reality. But having been an avid acolyte of Jobs, I would imagine that he himself would be disturbed and unsettled by the label. Since when did the promise of a radiant future constitute a Reality Distortion Field? Since when did the ability of a person to embrace what seemingly is impossible and far-fetched and instill confidence in the troops to achieve it constitute a Reality Distortion Field? Since when did the ability of leadership to share in the wonders of unique and disruptive creations constitute a Reality Distortion Field? Since when did dreams of a better future underpinned with executable actions to achieve it constitute a Reality Distortion Field?

The Reality Distortion Field usage reflects the dissonance between what is and what needs to be. It is a slapstick term which suggests that you are envisioning tectonic dissonance rifts between reality and possibilities and that you are leading the awestruck starry-eyed followers off a potential cliff.  Some people have renamed RDF as hype of Bulls*#t.  They believe that RDF is extremely bad for organizations because it pushes the people outside the comfort zone of physical and logical constraints and is a recipe for disaster. The argument continues that organizations that are grounded upon the construct of reality and to communicate the same are essential to advance the organization. I beg to differ.

So let me address this on two fronts:  RDF label and if we truly accept what RDF means … then my position is that it is the single most important attribute that a strong leader ought to embrace in the organization.

The RDF label:

We all know this to be true: A rose by any other name is still a rose. We just happen to call this rose in this context a RDF. It is presumed to be the ability of a person to cast possibilities in a different light … so much so that the impossibilities are reduced to elements just within the grasp of reality.  Now I ask you – What is wrong with that? For a leader to be able to cast their vision within the inimitable grasp of an organization is a huge proxy for the faith of the leader of the people in the organization. If a project realistically would take 3 months but a RDF is cast to get a project done in 15 days – that is a tall order – but think of the consequences if people are “seduced” into the RDF and hence acts upon it. It immediately unfolds new pathways of collaboration, unforeseen discoveries into super-efficient and effective methods, it creates trench camaraderie, it distills focus into singularity points to be executed against, it instills and ignites a passion and an engagement around the new stakes in the ground, people become keepers of one another for a consequential and significant conquest, it brings out the creative energies and the limitless possibilities, once the goal is accomplished, of disruptive innovation in means and ends.  Of course, one could also counter-argue a plethora of incidental issues in such cases: employees would burn out under the burden of unrealistic goals, employees are set more for failing than succeeding, it would create a disorderly orientation upon groups working together to meet RDF standards, and if one were to fall short …it would be a last straw that may break the camel’s back. So essentially this speaks to the ordinal magnitude of the RDF schema that is being pushed out by leadership.

RDF and the beneficial impact to an organization:

It is the sine qua non of great leadership to be able to push organizations beyond the boundaries of plain convenience.  I have, in my career, been fortunate to have been challenged and on many occasions, forced out of my comfort zone. But in having done so successfully on many occasions, it has also given me the confidence to scale mountains. And that confidence is a perquisite that the organization leadership has to provide on a daily basis.  After all, one of the biggest assets that an employee in an organization ought to have is pride and sense of accomplishment to their work. RDF unfolds that possibility.

We hear of disruptive innovations. These are defined as innovations that leapfrog the bounds of technology inertia.  How does a company enable that? It is certainly not incremental thinking. It is a vision that marginally lies outside our aggregated horizon of sight.  The age today which is a result of path breaking ideas and execution have been a result of those visionaries that have aimed beyond the horizons, instilled faith amongst the line men to align and execute, and made the impossible possible.  We ought to thank our stars for having leaders that emit an RDF and lead us off our tenebrous existence in our diurnal professional lives.

There is absolutely no doubt that such leadership would create resistance and fierce antipathy among some.  But despite some of the ill effects, the vector that drives great innovations lies in the capacity of the organization to embrace degrees of RDF to hasten and make the organizations competitive, distinctive and powerful.

 

Creativity vs. Innovation: The Bridge to Somewhere Relevant.

Creativity is not innovation. Let me say that again – Creativity is not innovation!

However, creativity is an important process toward innovation. There are other components that are just as important in the process, and these may, one might argue, amputate the creative process – but these components are important in increasing orders of magnitude to fuel the innovative cycle. Some of the other key components are focus, discipline, boundaries, and relevance. I will tackle each of these in further detail.

1. Creativity: You begin with an idea. The idea could be different, it could be unique or it could be an existing shift in the way of looking at things. It is novel but perhaps may not be appropriate. It could defy the physical and temporal constraints … it may not be even appropriate for the time and purpose. It elevates a response to a condition that has actually brewed in one’s mind for some time; or a simple realization when the constellation of circumstances seem to be aligned to surface the idea. It is singularly the process of gestating and giving form to an idea and channelizing it, through some medium, for active and passive observation.

2. Focus: The idea is out there … an abstract metaphor perhaps! Or something that is concrete but it is an object that is like an amoeba. It changes, it is malleable, it is psychedelic, it is formless … and so now you have to zero in and seek the relevance. You have to eliminate the irrelevant … you have to peel the onion and get to the core of the creative component. Two people might look at the core in the same creative component and arrive at starkly different results. The core is a mesh of both – objective being and a subjective assessment of its latent value.

3. Discipline: Now that you have zeroed in on the core and you have reflected upon it long enough to allow permanence, the hard task is discipline. This is an act of pushing away all peripheral thoughts that may threaten or distract you from amplifying the core. It is here when you say more no’s to push away the meteoric shower of blinding and provoking possibilities. This is a hard milestone: this is where we now start to think that we can bite more than we can chew; we give ourselves superhuman strength; we believe that a few extras here and there will only add and certainly not take away value from the core. Alas, we would be so wrong if we start thinking that way. If we happen to introduce more variables with the penultimate thought of creating something grand, we would have create immense complexities that would suddenly make the core less relevant. So discipline is to ward off those extraneous thoughts and return with plural judgment toward a singular end.

4. Boundaries: Now you ensure that the core does not spillover beyond its reach … in other words, it does not spread itself so thin that it dilutes its purpose for existence and relevance. You establish boundaries. The scale of such boundaries that you determine are in the context of the existence of the core … ideas that are thinly separable from others but enough to maintain its own identity will have smaller and well defined boundaries versus ideas that swim in the blue ocean wherein one can envision a slightly larger scale with some porous frontiers.

5. Relevance: Once you have gone through all of the above steps, you have to seek relevance or position the core toward relevance. It is a philosophical mindset … if you get this right, the messaging of positioning and execution strategy will be a lot easier and executable.

Innovation is the production and the implementation of the ideas. But innovation must have a payback within a reasonable time frame. It may span seconds to a generation, each of which would have different levels of investment and risks attached to it. Regardless, innovation without payback is a mirage … a delusion … a word that will implode quickly with the passage of time. Creation is easy, innovation is hard! Creation can be a solo effort; innovation by and large requires more players in place, institutional or otherwise. Creation dies with you; Innovation stands the test of time. Creation is the embodiment of the thought – cogito ergo sum; Innovation is the core that lives beyond your times.

So consider the question – Do I want to simply create or do I want to innovate?

The answers may lead you to divergent paths …and, if innovation is the path you choose, get in terms with the social network – the array of people, institutions, value systems, dreams … all of which exist in some cohesive whole. Imagine that the social network is your reference library that you must depend on to forge ahead to enable meaningful and impactful innovations … since innovation cannot ever occur in a vacuum.