investiledysfunction

The one thing that finance and IT organizations constantly are complaining and moaning about is their inability to focus on strategy or become strategic.  These aspirations are never really well articulated but being strategic or better “a partner to the business” seems to have become the rage so everyone is constantly pursuing this.  It’s not a bad thing, but it doesn’t seem everyone understands why they’re doing this or how to do it. 

And in line with this, CFO Magazine ran an article entitled “Are We Strategic Yet?” which describes a study by our friends at McKinsey which found that 72% of new CFOs wanted to spend time on corporate strategy and 45% on M&A/business development but instead spent a lot of time on FP&A/reporting/performance management (56%) and accounting/audit/compliance (42%).  Typically, I’d be skeptical of research like this because a strategy consulting firm, McKinsey, issued it so it would seem a bit self-serving.  But I speak at numerous conferences and ”how do we become a more strategic partner?” is invariably a topic

For those who read CFO Magazine, it is customary they run an article describing this issue at least 2 or 3 times a year.  And this is not their fault.  It’s just that CFOs and finance organizations continually complain about this but seem to do little to tackle the problem.  They seem to be afflicted with the disease that Rose Macaulay nicely articulated when she stated,

“It is a common delusion that you make things better by talking about them.”

So what seems to be the problem?

• What the hell does strategy mean?  It sounds sexy to be strategic, but you were to ask CFOs and their finance organizations what it actually means, I suspect few would be able to articulate what this means.  I suspect many organizations and people across all functions would have problems articulating this.  So let’s agree on a simple definition of strategy.  Strategy simply is a plan of action to achieve particular objectives.  Feel free to disagree with me on that definition, but as this is not a post about the definition of strategy so I’m being sufficiently expansive. 
• Variance analysis is not strategic - Subtracting two numbers from each other and pointing to the resulting number as good or bad is not strategic.  Creating charts (no matter how pretty) which show a trend (”the bars are getting bigger so that is good”) is not strategic.  These are things that can be done by a college kid or an Excel-savvy middle schooler.  If we go back to our definition of strategy, it is about achieving particular objectives.  This means the finance organization is strategic if they can impact decisions that help achieve these objectives by utilizing data and information.  Just parroting back #s in interesting presentation formats is not strategic unless it helps to enlighten on these objectives.  If it’s just to look smart and busy, it’s a waste of time.
• Let bean counters be bean counters - This may sound terrible at first blush because the term bean counter has gotten such a bad rap.  Basically, not everyone is “strategic”.  What this does mean is that getting the numbers right and reconciling them and ensuring proper controls are in place has a lot of value - immense value actually.  And that the people who are good at those things may not be “strategic” nor do they need to be.  They need to make sure that invoices get paid and receivables collected and that people aren’t stealing money from the corporations coffers.  These are critical functions but not strategic per se.  They’re just required else the company ceases to exist. 

If the finance organization wants to be strategic, at least in part, they should focus on utilizing the information they have to impact resource allocation decisions.  To see an article discussing how to do this (and stop whining about it), please click here.

I’m always amazed and perplexed by companies who somehow believe that they can follow their way to glory.  Basically, they seem content to follow "best practices" instead of becoming the "best practice".  But as everyone has probably realized, there is no such thing as a world class follower, and if everyone is following the same best practice, isn’t everyone just in a race to keep up with each other?

And that is why I find clothing retailer Zara so refreshing.  They pioneered "fast fashion" which essentially lets them get the newest, latest fashions to stores more frequently.  To do this, they made changes to how they manufactured, handled their supply chain, marketed their products, etc.  It was a multi-dimensional approach which worked and made Zara the best practice.  They didn’t listen to the conventional wisdom and did things their own way.

As a result of their success, others followed their established best practice.  And as the Wall Street Journal reported stated, "Inditex (the parent company of Zara) is responding to a predicament shared by other companies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. (Please see related story on page B9.) Low-cost carrier Southwest Airlines Co. is making big changes to fend off rivals that have copied its efficient operating model. Inventory-control methods at Wal-Mart Stores Inc. are being mimicked around the world, and Google Inc. is updating its search engine to keep users loyal."

So now that others are catching up, Zara figured it was time to push ahead again (instead of resting).  And there efforts come at a time of economic uncertainty where many organizations are worried about their performance and cutting costs instead of innovating.  Zara continues to forge ahead with efforts as reported in the Journal including:

• "The company is pressing ahead with its expansion plans even as consumers are slowing down. In the U.S., retailers had their worst monthly sales results in nearly five years in January, and some chains are planning to close stores and cut jobs…In the last 12 months Inditex added 560 stores, including entering new markets in Croatia, Colombia, Guatemala and Oman, to reach 3,691 stores in 68 countries. It plans expansion of a similar scope over the next year."
• "Alarm tags are now attached to garments at the factories. In the past, at a big Zara location such as the four-floor store on Madrid’s Alberto Aguilera shopping street, 10 people spent an average of 12 hours a week putting on the tags. Now, Inditex estimates, those salespeople spend 3% more time serving customers."
• "Store managers also use new hand-held computers that show how garments rank by sales, so clerks can re-order best-sellers in less than an hour — a process that previously took about three hours. These orders arrive, together with new pieces, two days later."
• "Also, each of the company’s various store brands shipped merchandise separately in the past, concerned that mixing even behind the scenes could dilute their images. Combining the brands into larger volumes has allowed Mr. Isla to launch twice-weekly air shipments with Air France Cargo-KLM Cargo. Planes from Zaragoza, Spain, land in Bahrain with goods for Inditex stores in the Middle East, fly on to Asia, and return to Spain with raw materials and half-finished clothes."

• "In another move to cut costs, Mr. Isla [Inditex CEO] installed software in store computers to schedule staff based on sales volume at different times. As a result, more salespeople work at peak times such as lunchtime or the early evening. Inditex says the more flexible schedules shaved 2% off the hours staff work."

Zara’s ability to zig when everyone else zags is commendable and counter to what most organizations do.  And they don’t just innovate hoping for one large intervention which will save the day.  Instead, they make small and large innovations to constantly improve their business. 

If you wake up in the morning to work for an organization that aims to be the best follower the world has ever seen, continue to follow the supposed best practices.  For the rest, Zara’s efforts to innovate and willingness to take risks, big and small, may be worth closer examination.

File this posting in the irreverent file but thought I’d share because this is great.  WSJ’s money blog had a great post called "Great Scott! A New GE Metric" which talked about a great ’study’ by Morgan Stanley stock analysts where they noted a correlation between CEO Jeff Immelt’s use of the word ‘great’ or ‘greater’ and company performance.  Dubbed the greatometer, they found that as the "use of ‘greatness’ rises during the company’s conference calls, so does GE stock".  How great is that?  I know - it’s too great. 

To give you a sense for just how great the Greatometer is, the blog author provides some great statistics which I’d presume were provided by the great guys at Morgan Stanley.

"In the third-quarter 2002 call, Messrs. Immelt and Sherin said "great" more than 20 times. By the second quarter of 2005, the word appeared about 70 times in an hour-long call. Over that period, GE shares rose 37%, to $36.38, from $26.65.

Then, Messrs. Immelt and Sherin cut back on using "great" for a while. In the call following the third quarter of 2006, the word was uttered only 37 times. GE stock fell 10% over the period.

Following the drop came a great rebound. On Jan. 18, when GE reported its results for the fourth quarter of 2007, there were roughly 80 incidences of greatness, including the "great company," the "great quarter," the "great momentum" and the "great risk management," according to a transcript by Thomson Financial.

Shareholders were feeling great, too: GE shares traded at an average of $40.16 in the fourth quarter.

So how should investors play the greatometer in 2008? The eruption of greatness in the most recent call would seem to be a bullish sign.

"If share prices do really correlate with management optimism, then GE’s one-year outlook could be looking up," says Scott Davis, Morgan Stanley’s lead GE analyst."

Given the great fascination with GE and its management practices & metrics, I would also suggest that a consultant deem this a great best practice and begin marketing some sort of great offering around this.   

If you’ve read my blog before, you know that I think M&A is generally a collosal waste of organizational resources (money or equity for the purchase + the time wasted to ‘integrate’ and synergize) and it is driven generally by ego and empire-building visions.  It serves to enrich investment bankers and consultants for the most part. 

And in my view, companies should focus on the more controllable dimensions of growth, e.g, organic growth, innovation, etc. 

But if there is one thing that I am, it is fair (or at least I think so).  And so an article in yesterday’s Wall Street Journal entitled "Yahoo Might Long for M&A Do-Overs" was a bit misguided with its Monday Morning quarterback’ing.  The column basically looked at the bad deals that Yahoo has done over time and offered it’s 20/20 hindsight wisdom.  Let’s take a look.

1. Geocities - Yahoo paid $3B.  Ouch - not ideal.  But then there is a comment that "Had they done things right with GeoCities, there would be no Facebook, YouTube or Myspace."  Really?  I’m not sure the technology was ready back then, nor was the advertising monetization model as prevalent or was social networking all the buzz.  Sure Geocities could have become these, but it seems a bit unfair to expect that Yahoo would have come up with all these innovations.  Facebook and MySpace are possible today because of other advances.  Plus, if you ever used GeoCities, it was pretty terrible as far as I remember. 
2. Facebook - Supposedly Yahoo had made an offer for $850MM which Facebook rejected.  At the time when Zuckerberg rejected a $1B offer, everyone thought he was crazy and the popular media especially.  Now that he has been proven right (given MSFT’s investment), Yahoo has become the idiot.  This is just media fickleness.  And honestly, at this point, who knows if the the social network thing has some legs?  They’re not converting ads (per Google’s last release) and so there is a chance Facebook and MySpace are just other new entrants in the hype cycle.
3. Broadcast.com - So this deal for which Yahoo paid $4.3B gave us colorful Mark Cuban.  Again, this was bubble level prices so a bad deal.  I agree with the WSJ on this one as the biz model of Broadcast.com ("helping conventional radio stations extend their reach by broadcasting their signals over the Internet") was pretty lame.  Wonder who in Yahoo created the deck supporting this one?  Probably some good influencing and PowerPoint skills.
4. YouTube - Google got it for $1.65B which relative to Broadcast looks like a bargain.  But you can’t use Broadcast’s price as an indicator of any kind.  Sure Yahoo coulda, woulda, shoulda gotten YouTube but what would they have done with it?  Bolting on interesting, high growth products with no business model onto an existing business is not a viable long-term strategy.
5. Google - Yahoo could have bought them for $3B and they didn’t.  Idiots?  Not so fast.  Who knows if Google would have become what it is within Yahoo? 

This type of second-guessing is fun perhaps, but not necessarily fair or productive.  Overall, you have to have a real strategy and then these deals could have done somewhat better or maybe they wouldn’t have been done.  The problem is that Yahoo hasn’t evolved its strategy over time.  Just trying to add eyeballs and buying something because its growing quickly and people think it will be worth something is not a reason to buy. 

At the end of the day, if Yahoo had innovated its search platform, it would need none of these.  Look at Google’s profits and revenues.  They’re still wildly dominated by search which was Yahoo’s biz model.  Again, innovating and growing organically would have served them much better than their past M&A activities.  This holds for most industries. 

I just did a post featuring some commentary by Ram Charan in which he talked about the need to not cut back on investments in product development, marketing, innovation, etc when the economy worsens.  Basically, don’t sell your children as they are the future. 

But nevertheless, companies invariably do this.  Spend like crazy during the booms and cut back (somewhat arbitrarily and across the board) during the troughs.  The latest research reports on this seem to validate this phenomenon again. 

Keep an eye on those organizations that think in a contraries manner and actually spend more on R&D now.  They will be positioned for good things down the road. 

More generally, companies should focus on re-engineering non-customer and non-innovation oriented activities all the time so that they can keep investing in those activities which sustain and ultimately grow the franchise - R&D for example.

I’ve written numerous times about how the government needs a portfolio management discipline to evaluate all the resource requests it gets and fund those which provide the most compelling value.  I’ve generally talked about this discipline as it relates to funding, e.g. dollars.  And whenever I write a posting involving the government, I need to make it clear that I’m not taking a political/party viewpoint here.  I’m merely pointing out the inefficiencies apparent and suggesting a solution.

But now it appears, that a resource allocation discipline may also be needed to help our government "leaders" manage their time.  Today, numerous congressmen wasted their time and presumably taxpayer money by questioning Roger Clemens about steroids.  Hmmm…

Let’s think for a little bit: Iraq, sub-prime crisis, Al Qaeda, recession, steroids in baseball.  Which one doesn’t fit?  I presume this was an opportunity for a bunch of old-timers to get on TV and get pictures with a juiced-up (or maybe not) baseball pitcher.

Since most probably know what Roger Clemens looks like, I thought I’d put a picture of the Congress idiots involved in the questioning.  If you recognize any of them as your Congressperson, you know what he/she is spending their time on. 

I still hope portfolio management maybe adopted for project decisions the government undertakes as the only real hope of making better decisions comes from using such a discipline.  Intelligence and the ability to prioritize seems to be in short supply. 

I just posted this note about IT and their role with a company’s Board a few hours ago.  Ade McCormack was nice enough to quickly respond to my posting in his IT Value Stack blog.  To see his response, click here.

Ade McCormack’s column in the February 11, 2008 Financial Times is entitled "Technology Management is a Board Issue" and argues that "a lack of technology wherewithal at the board level is, today, an indicator of poor governance."

Overall, the article had some interesting points but was generally way off-the-mark and perpetuated the "IT as a victim" theme which seems very persistent today.  I’m perplexed by IT organizations and what seems like this pervasive Rodney Dangerfield-esque ‘I get no respect’ philosophy and attitude.  This inferiority complex manifests itself repeatedly with the constant "what is the business value of IT?" efforts that IT organizations seem to undertake.  These generally do little to prove the value and instead serve to make a host of consultants and software vendors who sell various elixirs a bit wealthier.

In the case of the Board, it is not their job to understand and realize the importance of IT, but in fact, it is the CIO’s responsibility to create a compelling case that makes the Board prioritize and want to hear about IT.  This may mean the CIO collaborates and influences the CEO or his/her business partners to raise IT discussions.  Or perhaps they do it via some other means, but the main point is that it is the CIO’s job to raise consciousness on this topic.

The Board should be focusing on strategic and financial considerations which means that the CEO, CFO and business/operations folks will dominate the agenda because they generally speak about these topics in the language of business, e.g., revenue, profit, cashflow, new customers, retained customers, etc.

It is not the job of the Board or the rest of the organization to understand IT, but the job of IT to talk, like other groups, in the language of business.  If they do this in a compelling manner, they’ll earn the requisite spot(s) on the Board agenda.  Merely saying you deserve the time/attention is not enough.

I do agree that many business & Board members maybe ill-informed about technology and its implications, but again, the responsibility falls onto the CIO and his/her organization to provide appropriate education and context to get the Board interested & engaged.  This may mean convincing the CEO or other senior managers of this, but as a high-ranking member of the senior team, I’d presume the CIO would have the capability to "sell" these ideas.  If they cannot syndicate their ideas, the issue maybe with the CIO.

Your point about future board members being likely to have spent part of their career in the IT function maybe true because of the changing demographics within corporations, but again, this is not nor should it be requisite.  A board which is financially and strategically astute and which understands that IT maybe an enabler of certain organizational priorities should be enough.

The folks at the Wall Street Journal’s Business Tech Blog find jargon and babble just as absurd as me, and so they had a great post yesterday about a recent Oracle press release.  It stands alone so I’ll just copy the offending jargon/technobabble and the WSJ’s comments below as written by Ben Worthen.  The ‘quote’ by Torleif Nesheim is classic…too funny.

"If you are looking for a "market offering designed to simplify the lifecycle management of complex IP-based services," we’ve got the product for you!

That description is straight from an Oracle Corp. news release that touts…well, we still aren’t sure. The release is a string of bewildering tech terms and vague verbiage. It refers to whatever it is the company is selling as an "offering" in each of the first three sentences. Is that software, hardware or something you sacrifice to Quetzalcoatl?

Technology that businesses use is marginalized enough without buzz terms that humans can’t understand. One reason many businesspeople avoid information technology is that talking to a techie requires mastering a whole new language.

The one person who seems to know what Oracle means, Torleif Nesheim, the chief information officer at Oslo, Norway-based BaneTele AS, says the "offerings are leading-edge service configuration assurance capabilities that will help us to rapidly deploy high-demand IP services, such as level 3 virtual private networks, multicast and quality of service over our IP/MPLS network." That is from the news release. Mr. Nesheim didn’t respond to messages asking if he really talks like that.

We’re guessing — guessing, mind you — that Oracle’s "offering" is software that helps telecommunications companies track how well their networks are performing. That is a big deal, given the rise of online video, teleconferencing and other services that take up a lot of bandwidth. And a product that helps ensure everything is running the way it is supposed to is probably really important to businesses in this industry.

You would never know it from the release. And we may never find out: An Oracle spokeswoman declined to comment."

When will vendors learn that these types of "news" releases do nothing for them?

Like the terms social network and before it B2B and B2C, the new ‘it’ word in IT/technology circles seems to be all about cloud computing.  Nicholas Carr just wrote about it so you know it must be the buzz. 

In essence, the thought is that small companies looking to do lots of computing in a hurry won’t buy hardware but instead, they will rent it from players like Amazon that already have "vast networks of cheap computers" (Forbes, February 11 - The Death of Hardware).  This network is the "cloud".

And as the Forbes article suggests, "The spreading of this cloud darkens the outlook for traditional hardware makers such as Dell, HP and Sun, which have already been buffeted by fears of a US recession."

So this is small business today because the kinks are still being worked out, but this is the type of disruptive innovation which will eventually take hold.  And so for the hardware makers, it will be necessary to either get on board or get trampled (although this may take a while).  EMC purchased online storage service Mozy in an effort to get on board it seems.

The more interesting question is how will corporate IT groups embrace the "cloud"?  While the "cloud" is not ready for prime-time with large institutions, it will get there and at that point, a lot of the maintenance work tech staffs do will become obsolete.  It will also mean that IT organizations can run a lot cheaper as the pricing that vendors will likely be able to offer as a result of their massive server/processing scale will be more attractive than what can be done in-house.  What do those of you out there think?  Will IT embrace this change or will they fight it to protect turf, people, organizational dynasties, etc?  Outside of the most progressive IT organizations, my bet is that they will fight this.  Some of the fighting maybe warranted in the beginning before the concept is fully vetted, but my gut tells me IT will aim to hold onto the "old school" ways even after the concept is validated.

Thoughts?