investiledysfunction

I’ve previously talked about Kraft, P&G, Wells Fargo, Pernod and others whose CEOs have jumped onto the organic growth bandwagon.  Add to the list private equity companies.  Yes, those soulless, blood sucking private equity types who supposedly want to fire everyone in the name of the almighty dollar (or Euro or whatever) actually do care about company performance, and many are actually quite good at driving it according to a new study.  And the centerpiece to their work is good old organic growth.

The September 2008 issue of CFO Magazine has an article entitled, “Let Us Now Praise Private Equity” by Kate O’Sullivan which discusses a new study by Ernst & Young.  Ms. O’Sullivan writes:

“Often viewed as hard-hearted financial engineers who pile up profits by slashing expenses, P-E kingpins are criticized for their lack of transparency, their much-debated tax status, and, of course, their lavish lifestyles. But a new report offers support for the same case that P-E bosses often make for themselves — namely, that they are not only shrewd investors but also talented managers.”

John O’Neill, Americas director of private equity at E&Y, goes onto comment that “We found that probably only a third of that growth is from cost-cutting.  More than 50 percent is organic growth, and the rest is acquisition-related.”

Let’s do the math on that 50+% from organic growth, 33% from cost cutting and less than 12% from acquisitions.  It seems from the numbers that private equity managers know what the heck they are doing and understand that driving efficient organic growth is key to driving value.  And the numbers prove out their reliance on organic growth is well-placed.

“Private-equity-backed businesses outperform public companies in productivity gains, in employment growth, and in business expansion, measured both in terms of enterprise value — the company’s market value plus net debt — and earnings before interest, taxes, depreciation, and amortization” (quoted from the article)

It seems some of the savviest buyers of companies know that organic growth is the way to go.  When will others see the light as well?

CFO Magazine’s May 2008 print issue had a blurb entitled “Political Spending Boosts ROE?” (online the title is a bit better). Basically, 3 business school professors looked at political contributions over a 25-year period and found that an average annual contribution of $23,471 correlated with a $157 million boost in annual compounded returns.

While I’m sure presidential and congressional candidates love statistics like this, this is patently inane as a method to boost ROE. Correlation does not equal causation folks and no matter how impressive statistical window dressing is, it doesn’t mean that you do X action and will get Y result.

I read of another great correlation recently that said that fat people are stupid (I can’t make stuff like this up - look here).

But please be careful when you read about correlations. If you really believe that political spending does boost your company’s ROE, I wanted to share another study that was recently released that said giving money to Anand Sanwal will make you more attractive and add 20 years to your life. For those wanting to send checks, email me and I’ll send you my address.

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.