Is the CFO part of the problem?
by jed simms on July 8, 2009
I recently gave a draft business case to a CFO. He immediately thumbed through to see what the cost of the project was. “Aren’t you interested in the value?” I asked. “No, I don’t believe benefits claims!” he replied.
In another case we gave an ex-CFO, now CEO, a document at the end of an assignment. He immediately went to the last page to see what the cost would be. The document had no cost as it was pointing out how the CEO’s performance measurement system negated any attempts to improve the organization and suggesting some changes to allow effective change. He refused to change anything but still expected his staff to embrace change.
When you think about it most investment and project management processes are solely focused on ‘controlling cost’. Until we get away from this myopic concentration on cost we cannot move forward towards maximising value.
In any profession you have a range of skill sets and competencies. Some accountants are only good for adding up numbers; others can run a finance operation and a few are great finance operators. In my experience it is only this last group that are interested in value; the rest are only interested in cost. (Many don’t even seem to understand the concept of ‘value’)
So, how do we change the attitude of a flexible(!) profession like accounting?
Any ideas? Please post your comments below.
© Jed Simms, Australia 2009
4 comments
I think I’ve the exact opposite problem. I’m doing some work with a non-profit organisation whose leaders have come from a teaching/human development background. Consequently, concepts of cost and benefit are very vague, especially since $ is nowhere in sight as the bottom line (the org’s mission is to offer free teaching/mentoring) and volunteers supplement the staff’s efforts. It’s a bit off topic, but anyone have ideas on how a business case would objectively quantify the cost-benefit in such an organization?
by GusFish on July 8, 2009 at 11:31 am. #
Without deeper insight into your actual project and its contribution to the organisation’s mission, I’d be looking at expressing the benefits in terms of how many additional teaching/mentoring resources your project frees up/delivers, for its cost. Express it in hours, or however THEY measure that resource.
You mightn’t want to give them the figure at the initial discussion about this, but to express it in dollar terms, and to check your solution’s real viability, use $700 a day as a cost of those resources – you won’t be far out. And you can always refine it, when they get to wanting a cost.
by johnnoco on July 9, 2009 at 6:32 am. #
Although my blog was focused on CFOs and financial benefits the question raised by GusFish goes to the essence of the Value Equation and its flexibility.
The Value Equation allows you to define your value proposition in terms of
1 The measurable end states/outcomes that it will deliver
2 The benefits these outcomes will enable, support or deliver
3 Any value that can be attributed to these benefits.
It is not uncommon to not get to number three in some cases – eg where there is absolutely no way to come up with a defensible figure
Some years ago I proposed a new Marketing System to a company and told them it would cost 3% of revenue to put in place and that they should only go ahead if they were confident they could recover that figure. (They did go ahead and grew 100% for the next five years – a somewhat good ROI!)
So this is one approach; what is the cost in some measure that they can judge the likely net value (Teaching hours per month?)
But if you define the outcomes and benefits you have introduced the discipline of measurability into the project
Another example for you, a telecomms company was installing a new comms switch. They did not know what revenue it would allow, they just knew capacity would run out soon if they didn’t. However, we required them to define measurable outcomes and benefits while not bothering with indefensible dollar values. We had control over the project without trying the impossible
Hope this helps
JED
by Jed Simms on July 9, 2009 at 4:08 pm. #
Jed,
I recently completed an ROI analysis for a PPM software purchase, which showed how an organisation could save several hundred thousand dollars in efficiencies and attain an ROI in under 8 months. This would make the CFO happy, but what interested the business was that the savings that could be used to do one more strategic project – resulting in millions of extra revenue from new markets, and growing the business.
CFOs tend to be defensive thinkers who favor conservative, low risk ventures. The CEO is very much more focused on top line growth. As a shareholder, it’s good to know that all large companies have this balance of approaches. I don’t think it is a matter of the CFO being a problem, as much as business cases being strong enough to appeal to both perspectives. In a past company, I created Marketing Requirements Documents for projects that had to demonstrate quantifiable value in a defined time-frame before taking to softer, less tangible benefits and risks.
They key with projects is to monitor them after deployment to measure the actual value delivery, that feeds back into a portfolio management function. After a while, project goals become more attainable and the CFO can believe again.
by Pradeep Bhanot on July 21, 2009 at 1:30 am. #