the future of finance the williams companies finance forum june 20-21, 2001/tulsa jonathan b. schiff...

The Future of Finance

The Williams Companies Finance Forum

June 20-21, 2001/TulsaJonathan B. Schiff

Schiff Consulting [email protected]

Copyrignt, Schiff Consulting, 2001

Predictions about the Future Science Digest, August 1948: “Landing

and moving on the moon offer so many serious problems for human beings that it may take science another 200 years to lick them.”

Thomas Edison on electricity in the home… “Just as certain as death, (George) Westinghouse will kill a customer within six months after he puts in a system of any size.”


Predictions about the Future

Physicist and mathematician Lord Kelvin (1824-1907), seemed to have a corner on the wrongheaded one-liners of his day…

“X-rays are a hoax.” “Aircraft flight is impossible.” “Radio has no future.”


Signs That Your Company Has Gone Too Far With Cost Cutting… The head of purchasing goes

to employees’ homes and steals back office supplies.

Water coolers are coin operated. To get paid company life insurance, you

have to sell ten policies to relatives. You have to call in sick on a 900 number. Company blood drives are now

considered a profit center!


Today’s Agenda Where are we headed? Winning the New Cost Wars Performance Management for

the CFO Community Actionable recommendations


Dr. Gary Hamel, Harvard Business School Futurist Earnings pressure is here to stay. Earnings management practices are

running out of steam. Diminishing returns from industry

consolidation, typical efficiency programs, and share-buy backs.

M&A is the last breadth of traditional cost cutting! If recent trends of heightened M&A activity continue in 7 years, we will end up with one company!


How will we add value in this New Economy?

From Stewardship to EntrepreneurshipNothing happened on my watch!

End of incrementalism New search for value creation Exponential (quantum) change Role models: Enron, GE Capital, Virgin

Atlantic, Shell Oil, Southwest, & Kohl’s.


Evidence of Exponential Change Spending on children has

increased by 300% during the last 5 years.

Wireless messaging services are changing social patterns.

MN-based Kohl’s comes out of nowhere to revolutionize retail using counter-intuitive innovation.


How do we do it?Old Capital Structural Capital Intellectual

Capital Driven by

incremental thinkers.

New Capital Imagination

Capital Entrepreneurial

Capital Driven by seers,

heretics, and activists.


What’s Needed From Best Practice to New Practice From market share to share of

wealth creation From unbalanced incremental

scorecards and low hurdle rate based EVA to measures that drive innovation

E.g. Company market value/Industry market value


What questions should be asked? What opportunities are being missed? Where are we blind? What are we missing? e is not enough! IT spending has doubled over that last

year (’99-’00) with no new competitive advantage produced for most!

What we need is less follow and more differentiation for distinctive results!


Reality Check Most wealth comes from non-linear,

discontinuous innovation. Innovation and entrepreneurship needs

to be a company-wide capability across the value chain.

…And we certainly don’t want to be The Weakest Link!


What Financial Leaders Should Do… Begin to introduce wealth creation metrics IT spending should challenged to create

unique competitive advantage Push for a portion of capital spending for

“radical” project. Radical does not necessarily equal high risk. New portfolio of experimental capital projects are generally, under $100K each at Enron.


What Financial Leaders Should Do…

Remove inhibiting business practices and activities that are toxic to innovation, reengineer processes between ideas and wealth creation.

At Shell Oil, experimental capital project approval takes just 5 days!

Keep the Good-Grow the Great!

Are You Ready to Win Are You Ready to Win the the New Cost Wars?New Cost Wars?

Replay or Fast Replay or Fast Forward?Forward?


Winning the New Cost Wars…

Impact of the Current Business Environment on the CFO

Increased expectation to do more with less. CFO community and leaders are expected to

deliver ideas, innovations, and solutions. Traditional standards of integrity and

technical acumen are a given. CFO community is expected to align its skills

set with the dynamic needs of the business. Increased competition from within and…


Winning the New Cost Winning the New Cost WarsWarsWhat has not worked... Fragmented, piecemeal approach. Finance and accounting technical focus. Key elements of value-chain scoped out. Top management strategic focus shift. Not walking the talk. Attitude: “The new system will fix

everything.”


Winning the New Cost Winning the New Cost WarsWarsSymptoms that lead to failure...Symptoms that lead to failure... Cost shifting Don Quixote-type leader New information system dependency Consultant engagement model dysfunction Disconnect with top management vision and

strategy Over intellectualization Report production fixation, not results focused Gratuitous complexity


The New Cost WarsThe New Cost Wars

Where we fallen short...Where we fallen short... Global computer maker/No learning

legacy, limited to pockets of excellence. Leading cell phone manufacturer/High-

profile cheerleading, modest wins and low cross-functional interest.

Health insurance giant/Finance-driven initiative, great reports, but actions limited to very low-impact areas.


Winning the New Cost Winning the New Cost WarsWars New Harvard Business School Case:

MiCRUS: Activity-Based Management for Business Turnaround, a collaboration between Bob Kaplan and Jonathan Schiff

The MiCRUS Case was published as Harvard Business Case # N9-101-070 on March 5, 2001 by Harvard Business School Publishing, Boston, MA.


Insights from the MiCRUS Case

Overview Cross-functional, enterprise-wide

application. ABCM is a key element of an

inclusive incentive compensation program to support an aggressive business strategy.

Industry is all about change. Performance and Open-book

management integration.


MiCRUS Corporation MiCRUS Corporation CaseCaseCase background Extremely competitive industry. History of failed initiative

sloganeering. Leadership role. The “burning platform” for change. A unique holistic approach.


MiCRUS Corporation

The Problem New joint venture initiative and new business

model-the virtual fab. Expectations are great. Legacy IBM management practices not in

alignment with current needs-Selective amnesia required.

Global competition heating up, primarily from Taiwan and Korea.

Industry benchmarks for yield and cost readily available. You can run, but you can’t hide!


MiCRUS CorporationThe Solution Establish “stretch” (non-incremental), but

attainable cost and yield (quality) targets. Initiate incentive compensation program for all

employees tied to making the new numbers. Train all employees on development and use

of activity accounting information for process improvement and costing—their power tool.

All functions and processes covered-12 teams Monthly team progress briefings with the CEO.


MiCRUS CorporationResults

MiCRUS won “Fab of the Year” industry award in 1999.

MiCRUS is now a global leader in low cost and high quality.

MiCRUS instituted a variety of process innovations resulting from this initiative.

MiCRUS associates have met and exceeded their stretch goals in 1997-2000!

Show Show Me the Me the Money!Money!


MiCRUS Case SummaryMiCRUS Case Summary

MiCRUSMiCRUSCorporationCorporation

ABMABMInformationInformation

Open BookOpen BookManagemeManagementnt

Inclusive Inclusive IncentiveIncentiveCompensatiCompensationon

On-going On-going LeadershipLeadershipCommitmeCommitmentnt


Winning the New Cost Wars—Winning the New Cost Wars—First Steps…First Steps…

NeedNeed—Cross-functional, top-to-bottom cost leadership, skills, and information readiness assessment.

RealityReality—Most managers do not understand cost, beyond a very simplistic level, a result of the generational legacy of the Raging Bull Market.

GoalGoal—For cost leadership to take hold culturally, it needs a passionate and consistent leadership commitment similar to that often found in diversity, integrity, and in new product development.

Linkage-If not aligned to strategic goals it’s DOA!

If you can’t demonstrate the WIIFMs, don’t start until you can!


What About Performance Management for Finance?

“We chain our best people to their desks and watch their enthusiasm die.”

“I hire MBA/CPAs, throw them into the deep end of the pool and see if they can swim.”

“I have two ulcers to show for it and I’ll be damned if I help those young S.O.B.s learn any faster or better than I did.”


Leadership Voices from the Field

“The Hackett Group told us that we are in the top quartile—but many of our internal customers still think we’re jerks.”—Jim D., Corporate Controller, Auto and Truck Maker.

Schiff Consulting Group

Solutions for Corporate EffectivenessSolutions for Corporate Effectiveness



“Our business in changing daily, if the finance community is not fully aligned with the business, we’re out of business.”—Dennis C., Senior VP-Finance, Telecom Giant.Schiff Consulting Group




“Business unit leaders told us that our finance staff was not invited to team meetings until they had 7-8 years experience with the company.”—C. J., CFO, Global Pharmaceutical Maker.

Schiff Consulting Group



Embracing Change?The June, 2001 issue of the Journal of Accountancy

on page 22 reported that a survey* of more than 3,000 business executives asked: Which departments hindered change the most?

4th-Human Resources (7%) 3rd-IT (9%) 2nd-Legal (16%) 1st-Finance (23%)

*The survey was conducted by the Net Future Institute


Why Now?— Contemporary Effects

Technology potential not fully realized. Need to attract, develop, and retain top people—future leaders. Role transformation from transaction processingto business decision support. The new competitive reality…


The New Competitive Reality

““Taxes. Taxes.

Internal Audit.Internal Audit.

Finance and Accounting.Finance and Accounting.

There must be a reason many of your There must be a reason many of your competitors don’t do them anymore.”competitors don’t do them anymore.” -Text of full page Arthur Andersen advertisement appearing in Fortune,

Business Week, and Forbes magazines.


What Hasn’t Worked and Why?

Massive headcount cuts in Finance.

Working longer hours. New systems that will

“fix everything.” Sloganeering. Blaming IT and HR!


You are sent by the CEO to evaluate a business unit, in which we invested $25MM, with lagging productivity and performance problems. In your review, you find that the general manager, Jim, does not maintain, upgrade, or improve the fixed investment in-line with customer expectations, nor does he demonstrate effective stewardship over these assets.You are asked to rate Jim’s performance from 1 (low) to 4 (high).

What is your rating of Jim’s performance?, Why?


Accelerating Finance Leadership Development

What is the only “economic asset” “owned/managed” by the CFO? It’s not the recessed, ambient overhead

lighting system. It’s not the new, speedy computers. It’s not the thick pile carpeting. It’s not the stylish, ergonomic office furniture.

It’s the people!


How Leading Companies are Responding to this Challenge

Amgen

Glaxo-SfdfdfddmithKline

Home Depot

Intel

Johnson & Johnson

arriott\

Primedia

Liberty Mutual

•Microsoft

•Rapid Tech


New Skills for the New FinanceMicrosoft Finance’s Transformation

Microsoft Finance Transformation from Remedial Scorekeepers to An Engine of Innovation Enabled by Systematic Skills Management.

Situation Analysis: The Problem, Solution, Result, and Enabler.


Situation Analysis: Microsoft-Problem Finance is a business partner

wannabee! From an activity analysis

standpoint, over 80% of their time is spent in transaction processing.

It ain’t fun and work quality is a key in hi-pot staff retention and development.

More


Situation Analysis: Microsoft-Problem

Frustration grows in not being viewed as a value-added service.

Distractions abound as Company stock options increase in value.


Situation Analysis: Microsoft-Solution Bill’s Edict-Go paperless or else! Force Finance to “eat our own dog

food” to create solutions. Improve leverage derived from

SAP implementation. Seek and find “partners.” Organization learning approach.


Situation Analysis: Microsoft-Results Microsoft Finance now spends more than

70% its time in decision support activities. Microsoft Finance has increased in external

customer focus through its innovations to make SAP more user-friendly, reducing cycle times and defects, and improving compliance levels using FinWeb.

The Finance work is becoming almost as interesting as their stock price!


Situation Analysis: Microsoft-Enabler

The key enabler was a detailed skills dictionary with application to job families. This provided new insights into:

Key skill inventories; Job content in terms of skills; Improved matching assignments to

people; & Identifying training priorities. Systematic Skills Management Enabled

Bill G.’s Vision to Come to Fruition

Rapid Tech, Inc.

A CFO Organization Performance Management

Case StudyAdapted from actual

practice


Background $2 Billion global manufacturing

company in the transportation industry

Industry consolidation heating up the competitive environment

New CFO from outside the company


Business ProblemFinance Workforce Not Meeting the Challenges of the New Economy

Chronic Symptoms: Finance “not at the table” with business

leaders during key decision making Financial analysts known for finding

reasons not to pursue new ideas Finance working harder – not smarter Financial analysts complain that it takes

days to extract data that internal clients expect within hours.


Underlying Problems & Cost Drivers

They spend to train and educate, but most often not on the skills required.

Fewer than half the new hires really “work out well.”

High-potential finance managers regularly leave the company.


Business Solution “Retool” finance workforce to meet

the new challenges of industry consolidation

Target limited training & development resources using a competency model/skills management approach


Approach

1. Set a new standard for competence

2. Assess the current state of competence

3. “Retool” to close gaps


Approach1. Set a new standardCreated a detailed Finance

competency model: Tops-down input to balance and

align with vision of future Bottoms-up input to supply job-

level detail and create employee buy-in

Customer input to link to business strategy


Approach2. Assess the status quo

Captured employee self-assessments:

Launched a communication campaign to maximize employee participation

Used a software tool with friendly interfaces for employees

Provided clear definitions of competencies at four levels

FinanceAchieve Personal Skills Profile for:

John Q. Employee

Financial Analysis Techniques

SkillCurrent

LevelRequired

Level

Gap

C-R

Assess

Date

Expert Advanced 13 Nov 00

Cost Mgmt. Knowledge

Spreadsheet Applications

Communication Skills

Management Competencies

Business/Industry Acumen

Software Knowledge

Advanced

Expert

Proficient

Proficient

Conceptual

No Skill

Advanced

Expert

Advanced

Advanced

Proficient

Advanced

13 Nov 00

20 Apr 01

13 Nov 00

13 Nov 00

05 Dec 99

13 Nov 00


Approach3. Retool

Analyzed and acted on skill gaps: Reached consensus on gaps and

created buy-in for actions Offered training quickly to close

easy gaps and create early “wins” Restructured hiring and promotion

practices to address longer term gaps

Skill NameTotalGap

#Employees

w/ GapRank

FinanceAchieve SKILL GAP ANALYSIS REPORT

Industry Acumen

Company Info. Systems Knowledge

1

2

3

4

5

6

7

8

10

9

Selling Skills

Presentation SkillsBusiness Process Reengineering

Internet/Intranet Skills

Change Management

Coaching and Teaching

Database/Data Query Applications

Business Development Skills

-378

-314

-283

-277

-216

-199

-135

-112

-101

-97

216

242

231

229

177

145

96

94

82

97

FinanceAchieve Individual Development Plan for: John Q. Employee This plan is for the period from 14 Sept 2000 to 14 Sept 2001

Skills

Skill Gap: Improve Software Knowledge from No Skill to Proficient

Activity: Attend in Company Systems Seminars Series I & II

Skill Gap: Improve Industry Acumen from Conceptual to Proficient

Activity: Read Transportation World newsletter weekly

Skill Gap: Improve Communication Skills from Proficient to Advanced

Activity: Join local Toastmasters chapter

Skill Gap: Improve Industry Acumen from Conceptual to Proficient

Activity: Assign to Manufacturing Department mentorSkill Gap: Improve Management Competency from Proficient to Adv.

Activity: Attend Advanced Supervisory Skills Course


Results:Finance Perspective Identified critical training needs

that had gone unrecognized Got across the board buy-in on

training & development priorities and funding

Created more career opportunities and better matches between people and jobs

AND


Results:Customer Perspective Finance gained industry acumen

and customer respect Finance recognized and eliminated

outdated “silo thinking” Finance brought new value to the

decision making table


FinanceAchieve ROINew Skills for the New Finance

00.5

11.5

22.5

Re

turn

on

Inve

stm

en

t-

Acc

rua

l Yr. 2 Yr. 4

50%

150%

250%


Situation Analysis: Situation Analysis: SNETSNETThe Problem: Baby Bell under pressure in the

Northeast. Dramatic change rumbling through

the industry. Difficulty in attracting and keeping

talented managers in Finance. Motivation and morale are issues. Low CFO organization productivity.


Situation Analysis: Situation Analysis: SNETSNET

Solution-A root cause approach: Developed a detailed finance

competency model for use in new career pathing software system.

The model design was supported with significant customer input.

Opportunity availability and pathways available to all.


Situation Analysis: Situation Analysis: SNET SNET ResultsResults

Over 80% program participation. New cross-fertilization between traditional finance

silos. Career planning discussions now use a common

language of competencies tied to each job class. “Smoke-filled room” succession planning has been

replaced by a more fact-based meritocracy. Roll-out strategy featured in FEI/IMA Financial

Management Network, in CFO magazine, in The Connecticut Post, and in The Hartford Courant.

And as they in the sports world, let’s go to the videotape…


Thank You!

Schiff Consulting GroupSolutions for Corporate Effectiveness

the future of finance the williams companies finance forum june 20-21, 2001/tulsa jonathan b. schiff...

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