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Can
Your CFO See the Future?
Predicting (and
Preventing) Corporate Decline: A Core Piece of Your Business Strategy
By Tom FitzGerald and
John Collins
The CFO of Greycor,
a manufacturer of consumer goods, had been with the company for three years
and was proud of his achievements: Revenues had grown from $36 million
annually to more than $250 million. He felt that things were going well --
until he got the latest preliminary quarter's results.
When he told his CEO
about the results, the CEO said, "So, you're telling me that our sales have
declined, costs are increasing, and income has declined by 35% since last
quarter? And we’re no longer making cost of capital? Why didn’t you tell me
about this earlier?
The CFO responded,
"We finished the initial cut yesterday, and I spent last night analyzing the
results. I came to you as soon as I knew."
Not good enough. The
CEO wanted to know three things: 1) what happened, 2) why it happened and 3)
why they didn’t know about it before. The CEO and the CFO both have overall
P&L responsibility. Every CEO needs a CFO who helps the company stay in
front of the curve, not one who takes note after the company is sliding down
it.
Unfortunately, the
CFO didn’t have the numbers, even though the signs and symptoms of the
decline were there -- perhaps for many years. What he needed to look for
were the causes of the
decline and the drivers
of corporate performance.
The Phases
of Corporate Decline
As a company declines from its peak performance to its end, it goes through
three well-documented, clearly identifiable phases:
Phase I--The Hidden
Phase,
Phase II--The Subtle Phase, and
Phase III--The Overt Phase.
Each phase has its
own symptoms and characteristics. And in each phase the company loses a full
third of its competitive value.
Phase III
Decline -- The Overt Phase
In the Graycor example, when the CFO presented the financials, he was
careful to tell the CEO that, even though they were still profitable, the
company was no longer making cost of capital, something that would, and
should, trigger intense board
concern. Frequently this stage is referred to as "Early Decline" --
definitely a misnomer. It's really the earliest stage of Phase III Decline;
two-thirds the way down the curve. Their board would know this, too.
By the time the
signs of decline first show in the financial statements, Phase III Decline
has arrived. And with its arrival, two-thirds of a company’s competitive
value has been lost.
Running a company
from the financial statements -- however timely the statements are -- is
like driving a car by looking only in the rearview mirror: By the time
problems show there, the car has already plunged into trouble.
Phase II
Decline -- The Subtle Phase
Things would have been different if the CFO of Graycor had recognized a year
before that it was in Phase II Decline. But Phase II can’t be seen from the
financials, even with the most sophisticated analysis. Detection of Phase II
requires different measures.
Phase II Decline
shows in the Parametrics or Key Performance Indicators (KPIs) -- things like
time-to-market, process metrics, and customer complaints. Like the
financials, these factors are
historic expressions of performance, but at least they are
earlier historic measures.
The KPIs Graycor had
been measuring set the goals of one department against another, particularly
between manufacturing, QA and sales. The proper indicators were difficult
and expensive to measure. They had been on the CFO's wish list for next
year.
The CFO could have
guessed about some of the
proper KPIs, but he was used to measuring only hard numbers and hadn’t asked
senior staff for their opinions.
Yet managing a
company from the KPIs, even proper ones, is no better than driving a car by
looking out the side window. Yes, it’s better than the rearview mirror, but
by the time trouble shows there, the front of the car is at least nose deep
in trouble. Once Phase II shows up, fully a third of a company’s competitive
value has been lost.
What every company
needs is a set of measures that would indicate problems at the earliest
stage possible -- at the very beginning of Phase I.
Phase I
Decline -- The Hidden Phase
The signs and symptoms that show Phase I Decline are attributes of a company
called the performance drivers. Collectively they constitute the operating
dynamic of the company and are entirely within management’s control. They
are the root causes of
performance. And, because no problem can be predicted further ahead than its
cause, these drivers are
the first predictors. They can show trouble months and sometimes even years
ahead.
Performance drivers
fall into three categories: 1) critical functions, 2) performance generators
and 3) performance blockers.
1) Critical
Functions
Critical functions are those functions within a company that have a large
effect on productivity with very little effort. An analogy would be the
accelerator on a car. There are only a handful of these critical functions,
and they can be measured easily. Three that have the most impact are:
-
Talent management,
which refers to purposeful hiring, development and turnover
-
Lean operations,
which refers to goal setting, rigorous follow-up, and rewards related
directly to performance
-
Performance
management,
which includes things like cost containment and lean manufacturing
Quantifying
the Critical Functions
Quantifying talent management, lean operations, and performance management
provides a clear assessment of whether the company, if declining, is in
Phase I, II or III.
Measuring the
critical functions provides a value for the effectiveness of management as a
whole. This measured value is the
full analog of the financial balance sheet. The difference
being, while the financial balance sheet is a historic measure, the
effectiveness of management today is what creates the performance of the
company tomorrow.
2)
Performance Generators
Underlying the critical functions and determining their effectiveness are
the performance generators. While the critical functions are the analog of
the balance sheet, the generators are the analog of the P&L. They show the
trajectory and rate of change of the critical functions.
The top three
generators are:
-
Decisiveness,
which for this exercise, refers to the decisiveness of the company: the
speed with which issues are brought to the table, decided upon, and
executed (not the decisiveness of the CEO or manager)
-
Acknowledgment of
work,
which refers to the amount, frequency, and quality of discussions between
workers, between workers and supervisors, between supervisors and
management, and between the company and clients and suppliers
-
Accountability.
These generators
profoundly determine the effectiveness of the critical functions. For
example, if accountability is deficient, neither talent management nor cost
containment can operate well. These measurements provide the basis for
reward and intervention.
At Graycor, if the
CFO had just thought about it, he would have seen that decisiveness was the
major issue among the generators. Then he could have more easily predicted
how quickly competitive and financial problems were approaching.
3)
Performance Blockers
More than 100 possible factors, called the performance blockers, within an
organization can block or impair the critical functions and the generators.
They have no analogy in the financial statements but they act like brakes on
a locomotive. The profile of blockers is unique to each organization and
even to each unit within. The most common are distrust, complacency, and
bureaucracy.
At Graycor, bureaucracy was the issue. It blocked decision-making, which
crippled all the critical functions.
-
nses together. Have
the subordinate teams confront their issues in separate sessions. A
professional outside business catalyst/intervener is desirable for this.
Note, not all facilitators are catalyst/interveners.
On the Road
to Recovery
Management effectiveness is the root of all performance; current management
performance generates future corporate performance -- both KPI and
financial. Most interesting of all -- a discovery of extraordinary potential
for any CEO -- the factors measured have within them the seeds of their own
improvement.
Without these
measures, both CEO and CFO must travel blind. With them, the CFO can
predict, the CEO can preempt, and together they can change the future.
Tom FitzGerald
is CEO of FitzGerald Associates. John Collins is the CAO of Mid States
Corporate Federal Credit Union and has served as CFO for a number of
companies.
Copyright © 2007 Vistage International. All rights reserved. |
