Choosing the Starting Point for a Finance Transformation Effort

When discussing potential transformation opportunities with clients, the question that inevitably comes up is "Where do we start?"  Given the myriad of challenges in the typical finance organization, it's a natural question to ask.  And often the answer is not the obvious one people often expect.

Many companies, particularly if they have a benchmark project commissioned as part of a transformation project, will often focus on the areas that offer the greatest cost savings or perhaps meet a critical delivery need that is not currently being addressed.  Under appropriate circumstances, these may not be bad choices.  However, there are other considerations for the leadership group evaluating a portfolio of improvement opportunities.

Generally speaking, the following factors should be evaluated as part of the decisions as to how and where a transformation initiative should be launched.  In my experience, a company should choose an initial transformation project where:

• There is strong executive support for change.  Very little will happen if the senior executives in the area under consideration won't back the project in word and deed.  Transformation teams should find a specific area: a business unit, a region or a specific process, where the executives in charge of that area have publicly recognized the need for change and are clearly willing to support transformation efforts.

• The barriers to successful change are not huge.  Let's face it.  Some transformation opportunities are tougher than others.  It often makes sense to get a transformation program started by choosing an initiative that doesn't have huge obstacles to change.  Typically, transformation programs that involve large technology implementations can take a year or more to fully compete.  Project like that can take too long to build momentum. Or perhaps a particular initiative lacks executive support.  That can make it difficult to get the budget and personnel to make the project successful.  The point is, you and your project team don't have to climb Mt. Everest on your first hike.

• The scope can be clearly defined.  Actually coming up with a proposed scope is typically not the problem.  Far more often the team proposes a scope and then over time the scope increases, typically because management is pushing for the greatest value for as little investment as possible - without a corresponding increases in the budget and project team.  There's nothing wrong with challenging the assumptions in the business case, but projects with constant scope creep after deliver less than expected. It's critical to define the scope in such as way that it is clearly defined and relatively achievable.  Which brings me to the next point.

• The initial project has a strong chance of succeeding and can succeed in a relatively short time frame.  Nothing is more frustration to senior management and to the project team than to be a part of a project that drags out with no discernible benefit to the organization.  I personally believe that first victory should occur within six months.  Any longer than that and you risk grumblings in the company about how money is being poured into a project with no realized benefits.  This first win is critical to prove to the broader organization that the transformation team can in fact deliver value.  Once that occurs, you'll find more managers jumping on the bandwagon.

• The chosen scope of work has a strong project team members behind it who actually have time to be involved.  Few things can stall out a project faster than a "dedicated" project team that in reality is working their day job and performing transformation opportunities on the side.  Your company's first project should have sufficient resources dedicated to the project to virtually ensure success.  Some positions may need to be back filled on a temporary basis, but that is a cost of successful transformation.

• The project chosen can serve as a model for future transformation efforts.  The transformation program should look for a project that can serve as a model for future efforts.  That means the project has to be large enough to make an impact, but not so impossibly large that benefits are delivered late, if at all.  This initiative needs to be your "case study" of how your team can transformation finance and drive real benefits to the organization..

No project has a 100% guarantee of being successful and delivering on the promised value.  However, by following these steps, the project team has a good change of success, driving confidence from future project sponsors that tangle benefits can be realized within a reasonable timeframe.

Supporting Finance Transformation Post Go-Live

In 2012 I created a series of posts around Finance Transformation Gone Wrong, and the ways that transformation leaders and teams can avoid those pitfalls.  Hopefully you've had a chance to incorporate that thinking into your own transformation efforts.  A serious error that I've seen in my years as a consultant is companies who fail to support the transformation program after the "go-live". That go-live could be an actual systems launch, or it could be a redesign of a company's organizational structure.  In any event, changes made during the transformation need to be reinforced post go-live in order for the changes to be firmly anchored in the company's culture.  With that in mind, here are some things to consider as you plan and execute a finance transformation program.

1. Keep the transformation team together for a defined period after go-live.  Too many times companies are eager to get the transformation team personnel back to their "regular" positions.  If the company was smart, they put some of their best people on the project, so the desire to redeploy these individuals is, in part, understandable.  However, dissolving the team prematurely puts all of the hard word at risk.  A "quick strike" team is needed to solve issues that inevitably crop up after a project launch.  Let your experience team be available to assist where needed and reinforce the reality and perception of a successful project.
2. Eliminate the "old way" of doing things.  Once an organization has crossed over the bridge to a new way of life, don't let people fall back into the old way of doing things.  This can range from exerting the organizational authority of a governance council to blocking access to old software applications.  If people are allowed to revert to past behaviors, some portion of people will do so.
3. Reinforce expected behaviors.  People need to be reminded of the new behaviors that are expected.  Any positions that changed materially as part of the transformation should have had updated role descriptions created.  The program leaders should be visible and vocal to ensure that people understand what is expected and how their performance is critical to the transformation initiative.
4. Promote the success of the transformation program.  During the transformation process, the metrics that define success should have been developed.  Post go-live is the time to start tracking the progress of the program and measuring that progress against the key metrics.  Most programs will meet or exceed some goals while requiring adjustment to achieve others.  This is to be expected.  Individuals in the organization should understand the success and opportunities of a newly implemented transformation program, and this requires transparency.  Yes, that can be a little scary at times, but it's required for people to understand how their new behaviors contribute to the program success.

Finance Transformation programs require a great deal of work and sacrifice.  It's critical that the momentum of a transformation program be maintained post go-live to ensure the full success of the program.

Finance Transformation Gone Wrong - Inadequate Change Management

Note: Today's post is part of an ongoing series that looks at various pitfalls in finance transformation and what can be done to avoid them.

All to often, a transformation effort focuses on the process and forgets about the humans.  This is particularly true when a transformation effort is accompanied by an ERP implementation or upgrade.  The engagement team is so focused on the successful go-live of the technology they forget that people are needed to make those processes work effectively.  The most successful engagements focus on not only the technology, but also the people.

My experience indicates that change mangement is an area that is often diminished in the planning and budgeting phase of a tranformation effort.  Typically, executives have sticker shock over the cost of a transformation engagement, particulary where this is a large technology component, that they start looking for ways to cut the budget.  And unfortunately, Change Management is typically one of those areas that gets cut first.

This is a mistake.  Without effective Change Management, the risk that a transformation initiative will fail to live up to expectations is high.  In any large transformation effort, a number of people both inside and outside of the organization will be impacted.  Without proper Change Management, these individuals either won't know how to modify their behavior or they won't care.  An effective Change Management program will clearly lay out the behavioral implications of transformation and provide the support mechanisms to understand required behavioral change and the tools to support that change.  This includes, at a minimum, effective communication and training plans.

When companies invest properly in Change Management, they achieve greater results from their transformation initiative and the required behavioral changes stay embedded in the organizational culture.  When this happens, true transformation occurs. 

Finance Transformation Gone Wrong - Inadequate Technology Investment

Note: Today's post is part of an ongoing series that looks at various pitfalls in finance transformation and what can be done to avoid them.

Many of the challenges in finance transformation, such as lack of senior management support or the lack of stakeholder engagement, must be overcome in order to have an effective transformation program. Technology support is one of those areas that isn't black and white.

I say this because I honestly believe that because there are opportunities to engage in continuous improvement without large expenditures in technology, but I know from experience that companies with significant transformation programs are committed to technology investments that support the transformation strategy.

I once had a client that was developing a shared service center in the Far East to handled a number of countries in that region.  The center would handled a number of transactional processes, such as accounts payable, customer invoicing, fixed assets and general accounting.  Overall it was a successful implementation that met it's goals.  One challenge, however, is that various countries such as Japan require that certain documents like vendor invoices be retained in country.  A scanning and workflow package would have worked very nicely to get the information to the SSC while retaining the original documents in the country.  Unfortunately, this particular client was spending millions to get the SSC in place but wouldn't spring for the relevant technology to scan and route documents.  Instead, they chose to have their people fax the invoices to the SSC.  Yes it worked, but it created an inefficiency in the process when the transformation effort should have been focused on optimizing processes across the value chain.

This is one small example.  Other companies consolidate processes but still operate off of multiple ERP systems.  This isn't insurmountable, and there can still be real benefits to consolidation and shared services without the perfect, one instance, global ERP platform.  But there's no denying that it helps.  So don't stop improving and transforming in ways that don't require large technology investments, but be realistic about what you can achieve over the long-term without a comprehensive strategy of IT enablement that supports the transformation vision.

Finance Transformation Gone Wrong - Inadequate Project Management

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate project management.

Too many transformation initiatives either fail outright or don't achieve all of the goals due to poor project management.  One of the challenges I've seen in a number of organizations is that it's assumed a single person can be both intimately involved in the effort, perhaps as a subject matter specialist, and somehow manage the project "on the side". 

Even a relatively small transformation effort requires a full-time project manager.  Too often I've seen a person who is splitting their time between project manager and team member activities focus on the urgent needs of the project while unintentionally ignoring the important, but longer-term requirements of project management. The project manager must be able to step back from the urgent activities of the day to look at the longer term plan.  They need to see the forest for the trees, so to speak.

A second issue is that a person might be a good general manager in their organization but be a poor project manager.  There is some overlap in the skillset but there are also some key differences.  Most transformation efforts require a full-time project manager who's been down the road before.  The best project managers are the ones who can lead people and manage projects.  It's sometimes difficult to find those two roles in one person, but the project and the organization will be better for it if that type of person can be found.

The last point I should make is that while separate roles for Project Manager and Team Member is ideal, projects can still be successful if both roles are combined into one, which typically occurs on small projects.  When this does happen, however, it's critical that the Project Manager set some time aside each day to look at the longer-term implications of the project and to stay on top of the risks that can derail a transformation initiative.

Finance Transformation Gone Wrong - Inadequate Stakeholder Engagement

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate Stakeholder Engagement

A good way to ensure that a transformation effort will fail is to exclude the stakeholders that will ultimately be impacted by the transformation.  It's rare that stakeholders are completely excluded. It's far more common for there to be token lip service to integrating stakeholders into the project.

An essential act for any engagement is to identify the major stakeholders that are impacted by the proposed change.  Remember that important stakeholders are not only those who have a formal title, but also those individuals who have significant influence on "public opinion" and who can derail a project if their concern are not considered.

The word to remember here is "RACI".  OK, so it's not really a word, but a way of remembering the role of the project stakeholders.  RACI stands for Responsible, Accountable, Consulted and Informed. At the start of a project, the project team should identify the individuals, by name and position, that fall into these four categories.  This will help the team draw the stakeholders into the engagement and ensure that their input is incorporated as the project progresses.

By identifying the significant stakeholders for a project and including them throughout the duration of the project, it's far more likely that the stakeholders will embrace the transformation rather than sabotaging it from the outside.

Finance Transformation Gone Wrong - Lack of Senior Level Support

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Lack of Senior Level Support

Every project has a senior sponsor, at least in name.  But here's the rub - people aren't stupid.  They understand when a project has the backing and support of senior management and when someone's just there for window dressing. 

The Executive Sponsor plays an important role by setting the tone of the engagement and ensuring the project has the right skills and funding to be successful.  A common shortcoming in senior level support is the Sponsor who attends the kick-off, says a few words, and then disappears from sight.  Sure, they may show up at the steering committee meetings once a month, but the regular troops rarely see or hear from the sponsor again.  Real sponsorship is present in word and deed, and is highly visable to the people on the front line engaging in transformation.  What are some of the things an Executive Sponsor can do to ensure a successful transformation initiative?  Glad you asked.

1. Create a compelling vision and effectively communicate that vision.  People need to know where they're going and what value they will be creating.  A lack luster vision usually leads to lackluster results, as it's difficult to sharply focus energy and attention on a vaguely defined mission.
2. Create a guiding coalition.  Yeah, I got this from John Kotter at Harvard University, but he's a pretty smart guy.  An Executive Sponsor can't do it alone.  He or she needs a team of experienced and influential leaders who know how to get things done.
3. Pave the way with resources.  That could mean getting the budget to bring in the proper skills to a project or ensuring that a company's IT systems have what they need to be properly built, tested and deployed.
4. Overcome organizational resistance. In any project there will be those that benefit from the status quo.  The Executive Sponsor should be aware of resistance to the initiaitve and work to overcome it.

This list is by no means exhaustive, but strong project sponsorship can mean the difference between success of failure for transformation initiatives.

Finance Transformation Gone Wrong - Inadequate Project Resources

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate Project Resources

Even projects that are launched with a great deal of planning can fail if the staffing is inadequate.  Sometimes the inadequate part comes from the number of dedicated resources and sometimes it's the quality of the people assigned.  On a really bad engagement it can be both.  Companies that manage projects well understand that a transformation effort should be staffed by the company's best people, not their worst. 

One challenge that companies often have is that it's difficult and expensive to backfill positions.  The willingness of a company to backfill key positions is essential on most projects so that personnel assigned to the project don't also have to perform their "day job".  If backfilling doesn't happen, project staffing plans will have to maintain the fiction that these personnel will devote half a day to the project and half a day to their regular job - 12 hours each.  On major projects, the reality is that there will need to be a core group of individuals who are focused solely on the success of the project. 

In addition to an adequate level of staff who are focused on the project as their primary job, it's essential to choose individuals for both specific capabilities and their ability to lead initiatives.  Many of these project resources will have to use their influence to drive change in the organization, as they won't have direct managerial oversight of the many people required to successfully engage in transformation.  Individuals, particularly at the team lead level or higher, have to be comfortable pushing the envelope and engaging disparate stakeholders.  Companies that don't choose the best people because the departments "can't afford to let these people go" end up paying for it in the long-run (and ocassionally the short-run).  Do yourself a favor and pick the best people for the project and you'll likely be rewarded with an on-time and on-budget project that meets your intended goals.

Global Finance 360 focuses on the world of corporate finance and accounting and how these activities are impacted by globalization. As companies adjust to a changing world, Finance departments must also adapt to the changing environment as they seek to be value-added business partners. From Bangor, Maine to Bangalore, India, we examine the global changes impacting Finance and Accounting.

Finance Transformation Gone Wrong - Unrealistic Project Timelines

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Unrealistic Project Timelines

It's been said that when it comes to project management, you'll want it to be cheap, fast and right.  Unfortunately, you only get to choose two of those dimensions.  It's an unfortunate reality of life that timelines are often chosen for political considerations rather than basing the time frame on the objectives of the engagement, the defined scope and the number and quality of the resources assigned to the project. 

Project timelines should be built from the bottom up, with a detailed analysis of all the tasks that need to be completed, the key interdependencies between phases and tasks and the number of hours estimated to complete each task.  Extra time needs to be added for project management, vacation, and non-project related training.  Additionally, if something comes up during the project that pushes out the critical path, it's imperative that the project be reset, either through extending the timeline or by adding additional resources if that's feasible.

One of the fastest ways for a transformation project to go bad is to improperly prepare for the actual initiative.  Too many times a project is launched and no one wants to "waste time" with all that preparation stuff.  The reality is that preparation is key to a successful project.  And that includes everything from clarifying the objectives in the Project Charter to figuring out where people are going to sit and how they'll gain access to the virtual project team room.

Another challenge I see with tight project timelines is that key resources are often scheduled for multiple tasks that run concurrently.  This should be eliminated as part of the resource leveling exercise, but often these conflicts are dismissed with a "it'll all work out" mentality.  Project timelines are notoriously unrealistic when they double book resources and don't consider activities such as meeting and vacations.

Through proper preparation and realistic consideration of key activities, dependencies and resources, the project team can substantially reduce risk to the project by establishing a realistic project schedule.

Finance Transformation Gone Wrong - Vaguely Defined Project Scope

No one plans for a project to jump the track. They're all launched with the best of intentions. However, somewhere along the way something happens. Often, it's multiple "somethings". I once had someone land on my blog with the search term "Finance Transformation Gone Wrong". I had to laugh, as anyone who's been in the business of transformation has seen good projects turn bad for a variety of reasons.

For those engaged in the art of transformation, this series will discuss some ways a project can head south, along with the appropriate remediation strategies to increase the probability of project success. One of the first ways a project can run into trouble is through vaguely defined project scope.

Vaguely defined scope

There are times when a transformation effort goes wrong before the project even starts. If a transformation project is planned badly, it will be difficult to make up during the actual project. One of the chief culprits is scope. It's one of those things that sounds like it should be easy but in practical terms is difficult to define. The devil, as they say, is in the details. This is an area that should be thought through very carefully during the planning stage, agreed by the major stakeholders, and committed to in writing.

A key to keeping a sharp focus on scope is to keep the project's ambitions manageable. Picking a scope such as "let's revolutionize Finance" is bound to create problems since everyone has a different idea of what it means to revolutionize Finance. Heck, people can have different ideas of what it means to optimize the accounts payable invoice entry process. To boost project success, sharply define project scope and keep it in manageable chunks.

The second point is related. It isn't enough for the Project Manager or Executive Sponsor to have a sharply defined project scope. The important stakeholders who can support or derail a project must also agree on the project scope and its intended impact on the organization. And this is an area where silence definitely does not equal consent. There must be overt agreement of the scope of the transformation effort and its expected results.

A third point to keep in mind is to manage "scope creep". This can kill an otherwise solid project. Scope creep occurs when a project is expanded beyond the original scope as set out in the Statement of Work or other project documents. As the phrase "scope creep" implies, it often occurs in very subtle ways that may seem reasonable at the time but that, with time and volume, can weigh down a project and keep it from coming in on time and on budget. There should should be a very strict change control process in place so that when the inevitable scope issues come up, there is a defined process for managing scope changes. Any proposed change should be supported by a business case that provides a compelling business and/or economic reason for the proposed change. A business case doesn't have to be huge, but if there is a good reason for a scope change, it should be documented and approved according to the project's governance structure.

By creating manageable transformation initiatives, gaining agreement amongst critical stakeholders, and implementing a strong governance process for scope changes, a finance organization can begin the process of successful transformation.

Finance as a Catalyst for a Successful Merger or Acquisition - Program Management

Note: This is the second post in a multipost series.  You can read the Overview here.

As the Finance organization prepares for the effective integration of a merger or acquisition, there are several phases that must be planned.  These phases include:

• Pre-integration planning

• The "Day One" start date

• The continuing effort to merge the two organizations, including IT systems, work forces and governance models.

Any successful integration effort will be led by a strong Program Management Office (PMO) that provides the vision and guidance required.  The PMO is responsible for developing and executing the overall integration plan. The Finance organization can assist the PMO by identifying early on the leaders of the finance integration effort.  Team leads for each focus area within finance (e.g. general accounting, treasury, etc) should have not only relevant technical skills but also a proven track record of leadership.  The choice of individuals sends an important signal to the organization about its commitment to a successful integration.

Pre-Integration Planning

The time before the planned merger or acquisition date should be used to create a comprehensive plan that will guide the finance organization through and after the actual date of combination.  This will be a time when the finance organizations of both companies can exchange information that can assist in the integration planning.  There are a number of laws that govern the exchange of information in a merger or acquisition, the violation of which can lead to civil and criminal penalties.  In all instances the Finance organization should work very closely with their company's legal counsel to minimize the risk of gun jumping, or exchanging competitive information prior to the combination date.

As information is collected, a detailed plan should be developed that covers the activities of the Finance organization.  Subsequent posts will discuss some of these issues in detail, but in general the integration team should plan for the stub accounting period to account for the shortened reporting period (assuming the combination date isn't at the fiscal year-end).  Additionally, the integration team will need to think through critical issues such as notifying external and internal stakeholders of the planned changes (e.g. Where will suppliers send their invoices after the combination date?), how cash between the new and old legal entities will be separated, , how the two Finance organizations will work together, and how accounting information will be collected and aggregated given the disparate accounting systems.

Day 1 Activities

As of the date of the merger or acquisition, the integration team will need to properly value the acquired company or the acquired assets and liabilities.  It is essential that the acquiring company work closely with their external auditors to ensure proper valuation, including an audit of inventory that may be spread out over numerous locations.

The Day 1 activities also include the start-up of the combined operations, when the two companies are operating as one legal entity even though the key elements of the Finance organizations: the personnel and the IT and accounting systems are still separate.  This is where a well thought out plan is worth its weight in gold.  If the integration was properly planned, Day 1 will go well despite the complexities of the integration.

Continuing Merger Integration Efforts

Although the planning and Day 1 activities are essential to an integration, the way in which a company handles the post-merger activities will play a large part in how much and how quickly the anticipated synergies of the merger are realized.  There are different approaches to merger integration.  In some mergers or acquisitions, the acquiring company's business model and IT systems are the default standard and all of the target company's personnel and systems are converted over.  In other mergers, such as the HP-Compaq merger, the best of each company's systems are chosen while a new organizational model is developed.  If a company manages itself as a diversified conglomerate, it might even make sense to leave some or most of the systems "as is" since the acquired company will operate almost independently.  No matter which path is chosen, the efficient execution of the integration plan will in large part determine the success or failure of the merger or acquisition.

Conclusion

The above considerations just scratch the surface of the factors to be considered in a merger or acquisition.  No integration effort will go flawlessly, but if the integration effort includes detailed and realistic planning, an effective Day 1 start-up and effective long-term integration of both companies' work forces and systems, the finance and overall program management teams will greatly increase the odds of a successful integration.

Globalization as a Transformational Lever for Finance

I have a new article posted today about leveraging globalization for finance transformation.  Here's an excerpt:

There is no doubt that globalization has had a profound impact on the way companies operate.  Yet many have successfully leveraged the dynamics of globalization to create sustained competitive advantage.  As a critical partner in the development of corporate strategy, leading finance organizations have made globalization a key component of their service delivery strategy to strengthen analytical insight, manage enterprise risk and achieve a competitive cost structure.

Continue reading Globalization as a Transformational Lever for Finance.

Transforming Finance into a True Business Partner: 7 Lessons from CA Technologies

If you've been involved in a corporate finance or accounting group, chances are you've heard your company's senior leadership discuss the challenges of transforming the finance organization into a value-added business partner.  When executives say that, they typically are thinking about moving the finance group away from the "bean counter" mentality and towards a group that can provide fresh and meaningful insight into the inner workings of their business.

While this transformation is a worthy goal, it is far easier said than done.  Fortunately, there are leaders and finance organizations who have gone down this path.  One example is Nancy Cooper with CA Technologies.  The Treasury and Risk website has a profile on Ms. Cooper and how she helped turn the fortunes of CA Technologies around through a transformation of the finance group.  It's a great story and worth your time to read.  Here are the main points I gathered from the story along with my commentary.  A link to the article is provided at the end of this post.

1. Start with the end in mind.  Every great transformation story starts with a vision of the future.  In this case, Ms. Cooper's goal was to turn accountants into analysts, and fundamentally change the culture of the finance organization from one focused on transaction processing to one that provides actionable insight for the company's managers.  She focused on changing the capabilities and the identity of her finance organization.

1. Create a leadership culture.  No great leader accomplishes meaningful transformation on their own.  They understand that their ability to drive transformational change occurs through other people.  Ms. Cooper focused on getting the right leaders in place to set the stage for transformation.

1. Define your mission.  Any transformation plan should have a clear goal to reach.  A strong focus on a particular mission greatly increases the chance of success.  In Ms. Cooper's case, she defined the ability of creating and providing strategic information to her organization as the goal of transformation.
2. Incorporate organizational development.  As part of the transformation journey, Ms. Cooper had to identify existing Finance skills, determine what the required skills were for the future state vision, and implement a training and development program to bridge the gap.  Every organization undergoing transformation must incorporate organizational development goals to fulfill the vision and reduce risk during the transition process.
3. Enhance the governance structure.  Creating new processes and organizational structures is a necessary but insufficient model for transformation.  The transformation process must be guided and maintained by an appropriate governance structure.  In the case of CA Technologies, Ms. Cooper assembled a governance council comprised of V.P.'s, Senior Directors and Directors to enable oversight and control of the transformation process.
4. Build capacity in the finance organization.  As part of the transformation, Ms. Cooper developed depth in the organization, primarily due to the leadership development program implemented as part of the transformation effort.  The organization today is less dependent on any one person, including Ms. Cooper.
5. Develop an agile organization.  Through the transformation effort, CA Technologies and Ms. Cooper have increased the agility of their finance organization.  Greater leadership at all levels, better defined performance goals, and personnel that have clear expectations and the skills to accomplish their goals enable the company to better respond to the challenges and opportunities that will inevitably be encountered.

What other lessons would you add?  Please use the comment section below to contribute your ideas.

Read the full article at Turning Accountants into Analysts.

If you enjoyed this post, you might enjoy reading the Global Finance 360 article: The CFO as Transformational Leader.

Finance as a Catalyst for a Successful Merger or Acquisition

Editor's Note: This is the first of a multi-post series discussing the impact that Finance can have in a merger or acquisition.

Your company has just announced a pending merger or acquisition, and the Finance organization has a key role in the successful integration of the acquired asset.  As part of integration effort, the Finance organization must develop and execute a plan that effectively integrates the new business while controlling cost and risk.  The decisions Finance makes are critical to realizing the anticipated value creation and its ability to communicate that value to stockholders, creditors and other relevant stakeholders.  

The challenge is bucking the historical trend of mergers and acquisitions.  Studies have shown that many mergers and acquisitions fail to deliver the anticipated increase in shareholder value.  In fact, some mergers and acquisitions have been known to actually destroy shareholder value.  It doesn’t have to be that way.  Thoughtful planning and careful execution of the integration program can increase shareholder value and create the scalable platform necessary to support future growth.

Leadership at all levels of the Finance organization is required to successfully drive the integration effort.  Executive sponsorship will be most effective when it is visible and committed to providing the necessary resources for a successful integration.  Leading companies also commit dedicated leaders to each focus area to ensure that proper attention is given to the integration program while maintaining the leadership and staff necessary to run the existing organization during the integration period.

The table below highlights six focus areas that are essential to any merger or acquisition.  Proper planning and methodical execution are the keys to a successful integration.

Table 1: Top Focus Areas for Finance Integration

  In subequent posts I'll discuss each of these areas in more depth.

Effective Financial Forecasting - Part 2

Note: This is the second post on effective financial forecasting.  You can read Part 1 here.

Given the challenges of forecasting and its importance to organizational management, companies must find better ways to manage forecasting.  Fortunately, leading companies are finding ways to make the insights from the forecasting process more meaningful.  Listed below are five steps a company can take to transform the forecasting process:

• Integrate Forecasts:  The financial forecast will never be accurate if it is developed independently of other forecasts.  Line items in the financial forecast should have direct ties to forecasts and planning assumptions made by Sales and Operations.  All groups should be using a common set of drivers and assumptions regarding the economic outlook and the expected demand for the company’s products or services.  A key benefit will be increased communication between departments.

• Leverage Technology:  Performance Management is one area that has lagged in the area of technology investments and integration.  An effective forecasting process will have an application dedicated to the planning and performance management process to enable web-based data entry and automated roll-ups based on the reporting structure. 

• Reduce the Level of Detail:  Most forecasts could benefit by dramatically reducing the level of detail.  Every forecast should minimize the level of detail needed to forecast revenue and profitability.  Attention should be paid to those key line items that drive changes in the forecast.

• Implement Rolling Forecasts:  Business events do not follow the artificial distinction of a fiscal year end.  An effective forecasting process uses a rolling forecast to project beyond the current fiscal year.  Six quarters is typical but it can vary by company and industry. 

• Drive Cultural Change: Ultimately senior management will set the tone for the forecasting process.  If managers know they are going to face a backlash for telling the truth, they will continue to game the system and submit unrealistic forecasts.  An environment must be created where there is an incentive to create accurate forecasts and where managers have the political support to do so.

Conclusion

By following these best practices, companies will be able to reduce the time and effort required to develop a usable forecast.  With improved forecasting, companies will have an effective tool for executing strategy, allocating resources and communicating expected results with key stakeholders.

Effective Financial Forecasting - Part 1

“Prediction is very difficult, especially if it's about the future."

--Nils Bohr, Nobel Laureate in Physics

Predicting the future has never been easy.  And in today’s dynamic and global environment, it’s harder than ever.  Yet despite the difficulties, an effective forecasting process is essential to properly managing a company.  Numerous stakeholders, both internally and externally, depend on the forecast to evaluate the health and direction of the company.

Despite the importance of an effective forecasting process, many companies continue to struggle with a process that is highly manual and time-consuming, and that yields information that is often inaccurate and quickly obsolete.

There are various challenges that contribute to forecasting difficulty:

• Management Expectations: Most management teams like detail and forecasting is no exception.  Most forecasts are far too detailed, creating a lack of focus on the key drivers that “move the needle” on revenue and profitability.  A large amount of detail in the forecast requires more information, and turns into a data collection exercise instead of focusing on the insights produced by the forecasting process.

• Data Management: The monthly close cycle of many companies prohibits the timely collection of data.  Additionally, the level of granularity provided by the accounting process is often inconsistent with the forecasting requirements of management.  Finally, quality operational data is required to understand the drivers of revenue and cost, yet this is exactly the type of data that is difficult to retrieve from a company’s information systems.

• Disconnects Between Forecasts: Companies have multiple forecasts.  Sales, Operations, Marketing and Finance all have different forecasts with different models, assumptions and time horizons.  When there is a disconnect between the various groups, it is virtually guaranteed that the financial forecast will be inaccurate.

• Technology: Despite the millions of dollars invested in enterprise technology, many companies still rely on Excel spreadsheets to collect, consolidate and report forecasts.  This leads to a highly manual effort that requires substantial time.  The use of spreadsheets makes multiple updates of the forecast difficult and error prone.

• Organizational Culture: All too often managers are castigated for producing results below forecast.  As a result, managers are tempted to “game the system” by forecasting on the low end of expectations with the hope of ending above expectations at month-end.  This can lead to deliberately inaccurate forecasts.

In a subsequent post I'll discuss ways to create a more effective forecast.

Building a Better Budget - Part 3 - Eight Tips for a Better Budget

Note: This is the third post in this series.  You can read Part I and Part 2.

Given the challenges in the budgeting process, leading companies have moved to a new budgeting paradigm that emphasizes speed and flexibility.  Here are eight ideas to incorporate into the budgeting process:

• Establish key linkages between the strategic plan, the Sales & Operations Plan and the financial budget.  The numbers in the financial budget should be the culmination of a planning process that begins with the strategic plan and incorporates demand and supply plans from Operations.
• Scale down the budget.  Reduce the number of line items budgets to focus on the true drivers of revenue and cost.  It isn’t necessary or desirable to create a highly detailed budget.  Focus on key line items that are material and that are derived from supporting operational detail.
• Automate the budget with a dedicated software solution.  Reduce reliance on Excel spreadsheets and manual consolidations.  Invest in a dedicated software solution that provides a web-based interface for users, workflow, security and that automatically rolls up budgets at each level of the organization.  These software packages also facilitate the reporting of actual, budget and forecast data.
• Employ zero-base budgeting.  Don’t use last year’s numbers as a base for the upcoming year.  It’s too easy for managers to simply resubmit their numbers without going through the exercise of determining costs based on estimated activity volume.
• Document budget assumptions (e.g. growth rates, estimated activity volume).  Just as footnotes are an integral part of financial statements, the assumptions made to develop a budget are also critical.  Assumptions must be realistic or the budget will lose credibility.
• Foster dialogue across functions.  The process of budgeting, if done correctly, can add as much or more value as the budget itself.  When departments work together on an integrated budget, they gain a better understanding of the challenges facing the overall organization.  Strong communication leads to more useful budgets.
• Move compensation goals from a static budget to a series of balanced KPIs.  Yes, some will still be financial in nature and a streamlined budget can capture those.  Revenue, Gross Margin, EBIDTA, Return on Invested Capital can all be measured against pre-established targets.  But managers should also be evaluated on non-financial factors such as product innovation, time-to-market, employee satisfaction, customer retention and customer satisfaction ratings.
• Allocate capital based on a dynamic forecast rather than on a static budget. In most industries business events occur too quickly to depend on a static budget for capital allocation.  Leading companies use their forecast to identify emerging market opportunities and enable them to respond more quickly to those opportunities. 

Budgeting still matters, but to obtain the greatest value from the budgeting process, companies need to adjust to the present realities.  By following tips outlined above, companies will produce more meaningful budgets with less effort and cost, freeing up time and management attention to focus on creating value in their businesses.

Building a Better Budget - Part 2 - The Problems with Traditional Budgeting

Budgeting as a tool can be very useful but the traditional budget is a product of a distant past.  During most of the 20thcentury, manufacturing dominated the industrial landscape.  These businesses were hierarchical and capital intensive.  It was the job of managers to oversee the deployment and allocation of capital.  To do so, they needed strict controls over capital allocations and information to understand how closely they were tracking to their financial objectives during the year.  Couple this with a business environment that was minimally impacted by globalization and it’s easy to see how a detailed, static budget was sufficient to provide value to management.

Unfortunately, while the world changed the annual planning cycle remained relatively unchanged, the budgeting process has remained relatively static.  Whereas in the past manufacturing facilities and production volumes helped determine corporate value, companies today are far more likely to create value through product innovation, mass customization and agile supply chains.  Given the new realities, traditional budgeting suffers from the following issues:

• The traditional budget takes too long to prepare.  It isn’t uncommon for a budget to require 4 – 5 months and consume a substantial portion of executives’ time. 
• The budget is too manual.  Many companies prepare and consolidate their annual budget in Excel.  This increases the time necessary to develop the budget and exposes the budgeting process to human error as spreadsheets are manually combined to reflect organizational roll-ups.
• The level of detail is too great.  At some companies the budget is at the same level of detail in the Chart of Accounts.  This creates far more complexity than is necessary.  Instead of facilitating the budget process, it actually becomes a hindrance to the creation and monitoring process.
• The number of iterations is too high.  A typical budget can require 5 - 6 iterations before the numbers are accepted by senior management.  Leading companies focus on minimizing the number of iterations to reduce the time and effort spent on budgeting.
• Budgets are internally focused.  Most of the numbers in the budget are based on previous years’ data.  All too rarely is a budget based on existing and anticipated economic factors that drive volume and cost.  Few companies evaluate their proposed revenue and cost structure based on similar companies in the industry.  Finally, the budget measures internal metrics such as revenue growth, but fails to take into account other levers of value such as customer satisfaction.
• Budgets lock in costs through the year.  While the budget is thought of as a tool to control costs, all too often costs are locked into the budget for the year.  Even if economic conditions vary widely from the assumptions upon which the budget was built, the company’s cost structure resists downward pressure as those costs were budgeted for the year.
• Politics permeates most budgets.  The annual budgeting process has become a high-stakes game of bluffing.  Many managers “pad” their budgets with extra costs so that they end up with something they envisioned after their budget requests have gone through multiple iterations.
• The budget is quickly obsolete.  Given that the budgeting process can start four or more months before the end of the fiscal year, and coupled with a dynamic business environment, it’s no surprise that many budgets are obsolete after the first month of the fiscal year. 

In the third and final post in this series, I'll discuss eight leading practices in the budgeting process.

Building a Better Budget - Part 1 - The Goals of Budgeting

Speak with virtually anyone involved with the annual budgeting process and they’ll tell you that it’s painful: Time consuming, difficult, error prone, and based more on politics than on valid economic assumptions.  The worst part, however, is that the budget is viewed as obsolete almost as soon as it’s complete.  Despite these challenges, most corporations have stuck with the traditional budgeting process as they don’t believe they have anything better to replace it with.

Fortunately there are companies who have scrapped the traditional notion of a budget and have replaced it with something much more useful.  They still have a budget, but their updated budget has been streamlined.  No longer do they put themselves through the long and difficult budgeting process; rather, they focus on creating a budget that is far less detailed but that communicates the key ideas of the planning process.

The Goals of Budgeting

The annual budget and the budgeting process serve a number of goals.  Among them are:

• Link operational plans from multiple departments.  The budgeting process, as opposed to the actual budget, fosters communication and enables the coordination of business unit and departmental activity across the organization to support the achievement of strategic plans.
• Capital allocation.  One of the key aspects of the budget is to decide where a company will employ its resources.  Strategic plans around new products and markets, research and development, production capacity and other dimensions will feed directly into the budget.
• Performance monitoring.  The control of capital and the early detection of deviations from establish plans have also been key elements of budgeting.  Reports comparing the variance of actual results from budget are a standard component of management reporting packages.
• Compensation rewards. Many executives have a portion of their pay linked to the attainment of budget goals.  The targets established through the strategic planning process are incorporated into the budget and ultimately into the annual performance plan for these executives.

In subsequent posts I'll discuss the problems with traditional budgets and the opportunities to create a more effective budgeting process.

Companies not eager to convert to IFRS

A new survey out by KPMG and the Financial Executives Institute reveals that companies don't plan to convert to IFRS until they have to, even if there is an early adoption period.  The survey polled 900 accounting and finance executives.  Here are some of the highlights:

• 75% of companies said they would wait until they were forced to convert before the did so,
• Only about half the respondents expect the SEC to make a decision in 2011, which is the published timeline for making that decision,
• 65% of executives are worried about implementation costs,
• 88% believe the adoption of IFRS by the United States will increase comparability of financial statements around the world,
• 57% say that the convergence of U.S. GAAP and IFRS is the best approach,
• Only 30% would like to see the U.S. establish a specific date for adoption

You can read the full article here: Ready But Not Eager for IFRS