By Andy Burrows
Finance Transformation programmes will often include something like the following line in their business case: “Capacity created by automation and process efficiency will be reinvested in value-adding activity.”
Sounds great, doesn’t it? What could possibly be wrong with that?
Well, as an aspiration, it’s got a lot going for it. The trouble is, no one really believes it and it hardly ever happens. In fact, the opposite often happens. The capacity created is turned into cost savings, which leave even less time for “value-adding” activity than before.
So, if you really want a value-adding Finance function, don’t let your Finance Transformation programme become all about cost savings. And be clearer on how Finance adds value.
First, lest you misunderstand me, let me say that automation and process efficiency are good things.
When I look back on the revolution caused by computerisation 20-30 years ago, I was eager to see how the new technology could help me to do more in my job, and to cut out some of the boring bits. I loved the fact that I could now have a spreadsheet template set up to calculate things automatically. I loved the fact that I wasn’t limited by an A3 sheet of analysis paper, but could now do powerful calculations and scenario analysis that I wouldn’t have had time to do before.
And now I’m just as excited about the digital industrial revolution – what they call the fourth industrial revolution. There will be more opportunities to cut out the boring bits. And there’ll be more opportunities to do more – bigger, faster, cleverer, analytics and modelling.
It’s just that I’ve seen how those value-adding aspirations often fail, not just in Finance, but in other change programmes. The way it happens is that…
The truth is, if our change projects and transformation initiatives go like that, any capacity, or improved capability, we find to “add value” tends to be accidental and hard won. The time accumulates during the years when the business is going well, and then gets slashed as soon as the going gets a bit tough. Back to square one.
Or, take for example, BI and analytics projects.
We all know that in larger businesses there can be a lot of value in being able to analyse and present insight from data quicker and more effectively. We talk in public, at conferences, in articles, etc, as if the value is in decision making speed, forecasting accuracy, deeper insight into the business, and so on.
But how do we articulate the benefits of that?
When we come to prepare the business case, what do we do? We major on the cost savings we might get from the automated workflow capabilities, or the fact we won’t have to manually crunch the numbers through a series of interlinked, fragile spreadsheets.
So, what happens? We have to make those savings, which were overestimated. Then we discover that the licence costs from the module that would give us those savings are more than we expected, and so it gets descoped!
And we end up with a fantastic new tool, but no capacity left to use it to its potential for the business!
Also, if we look at projects that save lots of little bits of time (like when we replace the 30-minute job filling in a paper expense claim with a mobile app that takes a couple of minutes), the problem we have with valuing freed up capacity is that we’re used to using the cost of people to give us the answer.
So, for example, if we’re going to save 20% of the time spent by someone who costs the business $50,000, we value that time saving at $10,000.
We all know that we won’t actually save $10,000 on that one person, because we’re not going to put them on part-time hours and reduce their salary. It’s just a way of approximating a value.
And it doesn’t go into the cost/benefit analysis anyway, so it doesn’t really matter, right?
But the cost-focus gets into our minds, and in turn drives us to try and accumulate the capacity by rearranging workload so that we can convert, in the above example, a 20% saving for 5 people into a 100% saving of 1 FTE. And that’s a real cost saving.
And we’re back, then, to a cost saving, rather than value-adding business case.
So, ultimately, the costing approach potentially misses the point.
The problem is that soft benefits like capacity and quality improvements don’t make a convincing business case without a lot of hard work.
Firstly, they’re difficult to measure. And, we haven’t got time to do the required legwork to gather the data, so it’s just easier to hang the business case on cost savings.
This problem can be partly addressed by thinking about a) being very conservative in assumptions; b) starting with smaller scale pilot and proof-of-concept phases. If you commit a small investment, you can set yourself a big target without having to make promises. You learn from experience without a big programme commitment to continue if it doesn’t work out. Then you can scale up when you’re more confident in the lessons you’ve learnt.
But that means slowing down… and who wants to slow down, right? “Deliver at pace” is the aspiration of the age! “Don’t bore us, skip to the chorus!”
But secondly, the value of soft benefits is subjective. And this is where we need to change our mindset about what we do in Finance. (And I guess this applies in other functions too.)
To understand this, we have to unpack the idea of “adding value” a little bit more.
It’s not enough to talk about “value-adding activities” and “non-value-adding activities”, as if some activities add value and some don’t. All employees (unless we’re very wasteful) add value above their cost, otherwise we wouldn’t employ them.
Even repetitive, boring, tasks add value, in the sense that record-keeping and transaction processing is fundamental to being able to manage performance. I wrote about this elsewhere.
The question for us in Finance really is which Finance activities give the greatest bang for our buck, in terms of value to the business?
And it doesn’t matter whether an activity is done by a human or a robot. The fundamental question remains the same – how much value does it add to the business?
And it’s not a question of focusing on automating the “non-value-adding” activities. Why wouldn’t we automate the most value-adding activities as well?
The truth is, if we could automate everything we do in Finance, we would do it, because it would enable us to get the same value at lower cost.
Does that alarm you? It kind of woke me up when I thought about it a bit.
If I could do like they do in sci-fi movies (or even “Knight Rider”!), and just say, “hey Siri (or Cortana or Alexa!), what would happen to our profit over the next 5 years if I changed the price of this product?” that would be really cool. It would save me a huge amount of time building financial models (spreadsheets or otherwise).
The point is, financial modelling is what we’d call one of our “value-add” services, and yet we’d automate as much of it as possible.
So, all activities are value adding, and we should do all activities as cost-effectively as possible.
When you’re considering new activities and new capabilities, the question is whether the value exceeds the costs.
The point is that we want to do more of the things that do most to enhance and improve the performance of the business – whether those are manual or automated tasks.
And my whole point is that if we want to use freed-up capacity to do these things, we have to be clear what they are and how they drive value.
We need the “business case” for doing these things, so that we can use that in the capacity saving project business cases that will give us time to do them.
For example, if we were doing a project that saved a sales person’s time, we could use the traditional approach, and value the capacity created by using the cost of the person. E.g. 7% extra capacity, based on a $100k salary = $7,000 per year benefit.
Or, we could be explicit, and say that we really want to help our sales people generate more leads and sales by giving them more time to spend in lead generation. The value of that extra 7% capacity could then generate $100k in extra revenue from each sales person (based on number of leads per sales person and the % lead conversion).
So, it’s not the capacity we want, per se. It’s what the capacity will be used for.
So, the benefit of the project isn’t the capacity, but whatever you will use it for.
But this is where we always stop in Finance. We’ve reached the “too difficult” part. Whether we push past this and make an attempt to say what value is attached to the things we do, and want to do, in Finance, is an indicator of whether we really believe in the value we can add to the business.
Our “value add” - Finance Business Partnering, business intelligence/insight, decision support, etc – what value do they really deliver? How do they do that? How should we value them?
Rather than just trying to ‘do what we can’ with the freed-up capacity that never seems to come along, those are the real questions we need to be focusing on if we want to convince the business we should be doing them.
Ultimately, when we do a project to free up capacity, we need to know explicitly why we want to do that.
The benefit is not, then, the capacity created, but having more of what we wanted.
If we wanted better work-life balance for employees, aim for that, and measure it.
If we wanted to be able to spend more time drawing strategic insight from analysis, then aim for that, and measure it.
Thinking Strategically About Finance Transformation
Short guide to How Finance Can Drive Business Performance
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